SAN FRANCISCO — A long-awaited California
In California, civil grand juries sit for a year and are charged with investigating specified local governments to recommend improvements.
In the case of Victorville, the San Bernardino County grand jury completed an investigation started by a previous grand jury in 2009 by commissioning a performance audit from consultants Harvey M. Rose Associates.
“An analysis of the city of Victorville financial statements, as well as those of the agencies for which the city has fiduciary responsibility, reveal that the city’s solvency, capacity to provide current services and ability to repay large debt obligations is a growing concern,” the consultant wrote in its report to the grand jury.
City manager Doug Robertson said the city has disputed parts of the report, saying it would have been more timely three or four years ago.
“The major work we’ve done is to balance the general fund budget with a small surplus,” Robertson said. “We implemented many of the recommendations in the report several years ago.”
Robertson noted the grand jury’s investigation did not result in any allegations of corruption, fraud or any other crimes. But that doesn’t mean the government is out of the woods; the Securities and Exchange Commission has been investigating city bond issues.
Victorville, with a population of 111,000, is located about 80 miles away — and across a mountain pass — from Los Angeles. Its population almost doubled between 2000 and 2010.
The city’s financial record-keeping appears to have gone amiss as the government embarked on ventures to convert the mothballed George Air Force Base into an air cargo hub, and to construct a power plant.
Signs of trouble have accumulated. Standard & Poor’s pulled its ratings on Victorville’s debt in April 2009 after auditor Caporicci & Larson declined to certify the city’s financial statements for 2007.
In May 2009, the city hired auditors Mayer Hoffman McCann, which issued an audit report last year that said Victorville was facing insolvency.
The Harvey M. Rose review examined a long list of questionable financial practices, the most serious of which appears to be the misuse of bond proceeds and several related inter-fund transfers between city funds used to cover shortfalls, some of which may have violated state law and city statutes.
Many of the financial concerns related to bondholders came out of the city’s Southern California Logistics Airport Authority, a redevelopment agency overseen by Victorville, and Victorville Municipal Utility Services.
The city, its RDA, the SCLAA and its related enterprises reported more than $480 million of long-term debt and certificates of participation in the city’s fiscal 2011 certified audited financial statement.
The grand jury report said the airport and utility enterprises, which are both under the purview of the City Council, are facing serious financial problems due to an excessive debt load and an inability to make debt service payment because of insufficient revenues and reserves.
The airport authority has averaged more than $11 million deficit for the last four years and the municipal utility has averaged $7 million, leading the city to use other funds to support it, according the grand jury report.
The SCLAA has already defaulted on debt payments. In January, Moody’s Investors Service downgraded $51 million of SCLAA subordinate tax-allocation revenue bonds to B3 from B1 after it missed a $535,000 Dec. 1 debt service payment.
Robertson said the SCLAA paid off the default in March and made a full payment on the bonds in June. He said the authority’s reserves are still short.
According to its 2011 audited financials, debt service on the SCLAA’s non-housing bonds was 125% of pledged revenues. The authority has a net asset deficit of more than $100 million while the utility has $76 million.
According to the Rose report, the SCLAA “repeatedly mishandled bond expenditures” at least three times, which included spending bond proceeds on development projects outside its scope and dedicated area.
The authority loaned bond money to other city funds and used redevelopment bond proceeds to buy city properties, including to build a new city library, without getting proper approval, the report said. It also detailed poor financial management of SCLAA money by overspending $103 million to build four aircraft hangers and losing more than $50 million on a power plant project.
The majority of the debt owned by the city’s utility, which provides electricity and natural gas to an industrial park and the SCLAA area, is $83 million of 2007 variable-rate lease revenue bonds, according to the report. Money from the bonds was used to refund earlier bonds that were sold to buy equipment at the airport and a nearby industrial park.
The consultant said those bonds may be in default because of possible violations to the indentures with BNP Paribas. It said the utility has failed to submit annual financial statements, failed to pay debt of more than $1 million and failed to have annual statements audited.
Because the utility has been operating at a deficit, it has borrowed $22 million from the city’s water district.
The report found Victorville had $69.7 million of outstanding inter-fund loans as of June 30, 2011, and more than half of the loans may never get paid back because they were made to the struggling SCLAA and the utility.
City officials have said they plan to use money they expect to obtain from a lawsuit to pay off SCLAA and utility inter-fund loans.
The city may have violated state laws by making the inter-fund loans from the Victorville Water District to the utility and by transferring funds from its sanitary district to the general fund, according to the report.
The state constitution prohibits using anything but short-term loans between funds, but the consultant said the utility’s financial problems are so bad it may be unable to repay the loan.
The report found that restricted property taxes were also transferred to the general fund from the sanitary district, which may violate a city resolution that says all district assets should remain separate.
Victorville did adopt an inter-fund loan policy in May 2011.
The grand jury report also included various recommendations for the city.
Robertson said many of the recommendations have already been implemented. He noted that Harvey M. Rose Associates are neither a certified accountants nor attorneys.
Even with the various problems with the SCLAA and the utility, the Victorville City Council passed a balanced budget for the fiscal year that started July 1 that included a small surplus.
“As other cities wrestle with possible bankruptcy, Victorville’s swift action in 2009 to cut more than $10 million from the general fund followed by multi-million dollar cuts in each of the next two years resulted in the stability the grand jury report recommends, on the eve of the published report,” Robertson said in a statement.
The city has started to see a recovery, according to Robertson, mainly in sales taxes, but he said anecdotal evidence has also pointed to a recovery in the housing market and thus property taxes.
Robertson said the SEC review of Victorville bond sales is still ongoing and the city has no idea when it will be completed.
