June 29, 2012 1:11 PM
Brooke Edwards Staggs

The San Bernardino County Grand Jury issued a 100-page report Friday blasting Victorville for decisions that have jeopardized the city’s solvency, including mishandling bond funds, losing track of $13 million and potentially breaking the law by financing failed energy ventures with restricted money. Read more about the report here and read the entire report here.

Here are the five areas of concern cited by the grand jury. Click on the headlines below each section to read related background stories:

Financial condition

The report expresses concern about the future of Victorville, stating “…the city’s solvency, capacity to provide current services and ability to repay large debt obligations is a growing concern.”

Auditors suggest Victorville “could reduce the risk of costly bankruptcy proceedings” by further cutting costs, such as staffing and services, while looking for ways to replenish fund reserves.

Reserves were last estimated to be at $3.1 million, or just 6.4 percent of the city’s general fund — some 61 percent below the recommended amount.

Though the city on Thursday passed a narrowly balanced budget for 2012-13, the report points out that absorbing the city’s dissolved redevelopment agency and its “insolvent” utility district — which carries a $83 million in bond debt for a plant that was never built — continue to threaten the stability of the general fund. So do hefty debt payments, after Victorville defaulted in December.

Overspending puts Victorville’s solvency into question

City’s cash reserve foggy

Audit paints bleak picture of city finances

Victorville gets two default notices from the bank

Inter-fund loans and use of restricted funds

For several years the city has had serious cash flow issues, the report points out, leading to some $69.7 million in inter-fund borrowing.

Half of that borrowing has been from restricted water and sanitary district funds, auditors state, which means Victorville “may have violated State laws and local resolutions.” The report urges the city to return some $15 million in sanitary fees and $20 million in water charges paid by local residents back to those districts, so they can be reinvested back into maintaining Victorville’s sewage and water systems as law dictates.

Some short-term borrowing is common for cities, since tax revenue may come in after debt payments are due, for example. “However,” the grand jury report states, “inter-fund loans where repayment is expected beyond one year, without a clear repayment plan, are a sign of financial distress.”

Victorville hasn’t made any payments on the majority of the inter-fund loans, though they are all due within five years. Auditors also question whether Victorville will ever be able to repay 54 percent or some $38 million of that borrowing, which could lead to a violation of the California Constitution.

Despite repeated recommendations from independent auditors, the report notes Victorville was slow to adopt a policy governing inter-fund loans — and then finally adopted a flawed one.

The city also neglected to document many of those inter-fund loans for years, leading to misleading financial statements. It’s begun backdating the approval of those formalized loans but still has three outstanding borrowings that haven’t been documented.

City double-books $51M to boost balance sheet

City looks to gamble, borrow to get out of bind

City borrows from water district

Power plant developments

The report calls out the staggering losses Victorville has accumulated — and tried to hide from the public — in its efforts to venture into the electricity business, also questioning the city’s close relationship with the Newport Beach-based firm Inland Energy and its battles with design firm Carter and Burgess.

Between the failed Foxborough power project and the shelved Victorville 2 power plant, the city has lost an estimated $173 million. It has the potential to recover a portion of that sum through a $52 million settlement from Carter and Burgess.

The grand jury attributes the failure of both projects largely to Victorville’s failure to perform due diligence before committing to spend tens of millions in taxpayer dollars. And the decision to take those risky ventures was based largely on recommendations of contractors such as Inland Energy that had a vested interested in the projects.

The grand jury states Inland Energy “downplayed the financial risk to the city” and encouraged Victorville to move forward on the Victorville 2 project without a budget, business plan or risk assessment in place.

The report also calls out a vague and generous contract discussed in the Daily Press in July 2009 that guaranteed Inland Energy an estimated $5 million annually in perpetuity and has scared away potential buyers of the plant. Auditors point out that City Attorney Andre de Bortnowsky reviewed that contract and apparently didn’t attempt to negotiate more favorable terms for Victorville.

$95 million fumbled at Foxborough

Victorville struggling to recoup its losses

City OKs $173 million for power plant

City late on $122 million payment

GE terminates contract

True cost of failed GE contract: $193 million

Power play: $13 million to Inland Energy as power projects dim

SCLA hangar development

A handshake contract and a missing $13 million are among the concerns the grand jury pointed out regarding four hangars built at Southern California Logistics Airport.

Without going out to bid or doing due diligence, the City Council agreed to let CBS Aviation build the hangars in 2005 and gave the company $54 million to do so. After Victorville “lost confidence” in CBS for failing to pay subcontractors, it shifted the project to Jeff Kinsell’s KND Affiliates and gave that firm another $50 million to finish the project. (Kinsell is currently under investigation by the Securities and Exchange Commission for a potentially improper financial relationship with an Inland Energy associate.)

The project was undertaken “without proper controls to prevent cost overruns, the misuse or loss of public funds, or fraud,” the report states. And when $13 million reportedly spent on the hangars couldn’t be accounted for, the auditors stated Victorville chose “not to pursue the matter further.”

$200M claim filed against Victorville

SCLA Bond funds

How the city has spent some $300 million in bond funds taken out through the Southern California Logistics Airport Authority has been the subject of a dozen Daily Press stories, it’s the focus of the SEC’s ongoing inquiry and it’s the final area discussed in the grand jury’s report.

“The Victorville City Council … appears to have repeatedly mishandled SCLAA bond expenditures,” the report states, either by poorly justifying the use of the funds, not properly documenting the spending or using funds intended to benefit the airport on other projects.

As reported in the Daily Press in 2010, the grand jury questioned these bond expenditures:

• $76.2 million for the Victorville 2 power plant, which is located just off former Air Force base parcels and is on hold indefinitely.

• $3.3 million in 2005 for work on the La Mesa/ Nisqualli interchange.

• $2 million in 2005 for land across from Victorville City Hall for a city-owned library that was never built.

Auditors suggest that the regional Victor Valley Economic Development Authority consider taking control of SCLA, so that all local cities and San Bernardino County can benefit from redeveloping the former Air Force base.

VV reveals improper use of bond funds

A.V., Hesperia, S.B. County property owners on the hook for Victorville projects

Tensions escalate between local cities

Timeline of grand jury investigation

April 2009: Daily Press first reports grand jury’s probe into Victorville. Several council members and city department heads questioned over coming months.

December 2009: Investigation heats up, with all five council members and senior city staffers interviewed.

January 2010: Mayor Ryan McEachron leads charge to have grand jury conduct forensic audit of Victorville’s books to look for evidence of fraudulent activity.

May 2010: San Bernardino County Board of Supervisors approves $195,000 to hire forensic auditor Kessler International to review Victorville’s financials.

July 2010: For first time in county history, six citizens held over from 2009-10 grand jury to continue serving with 2010-11 watchdog group.

August 2010: City Council agrees to open more records to grand jury and its forensic auditor. Daily Press first reports that Securities and Exchange Commission is looking into how bond funds were spent.

December 2010: McEachron calls for end to grand jury and SEC probes, stating that responding to inquires from the agencies have cost Victorville more than $300,000 in staff time and attorney fees.

March 2011: Daily Press reports that the FBI is investigating Victorville. Annual audit released, raising concerns over Victorville’s solvency.

April 2011: Grand jury subpoenas two of Victorville’s attorneys and three senior staff members for testimony.

June 2011: After drum roll to its release, the 2010-11 grand jury report is published with no mention of Victorville.

October 2011: Daily Press reports the FBI formed a special task force with former grand jury members. City receives notice that new grand jury is picking up the investigation, retaining a firm to audit Victorville’s operations.

April 2012: City Manager Doug Robertson is given a draft of the grand jury’s report to review.

June 2012: Grand jury report is released.

Get complete stories every day with the “exactly as printed” Daily Press E-edition, only $5 per month! Click here to try it free for 7 days. To subscribe to the Daily Press in print or online, call (760) 241-7755, 1-800-553-2006 or click here.