The city of Victorville on Friday was accused of sloppy fiscal practices resulting in millions of dollars in losses and possible violations of state law.
A lack of controls allowed the city to enter into high-risk power plant and hangar projects at Southern California Logistics Airport that ended in failure and cost the city millions, including $13 million the city was unable to account for, the San Bernardino County Grand Jury said in its annual report released Friday.
The 23-member Grand Jury took an unprecedented three years to complete its investigation. The FBI and Securities and Exchange Commission are also investigating the city, officials said.
The Grand Jury report, which included a performance audit, touched on five areas scrutinized by the panel of volunteer civil servants: the city's financial condition, its use of interfund loans and restricted funds, failed power plant projects, hangar construction and airport bond expenditures.
The city responded with a statement Friday saying that while the report was highly critical of past practices by city officials and the city's current financial condition, it did not indicate any evidence of corruption, fraud or other crimes.
"Certainly the findings and conclusions are cause for concern. Many of the recommendations were implemented previously and the city is committed to making every effort to continue to implement recommendations, which will continue to ensure the economic stability of the city," the statement read.
The statement said the city takes issue with some of the Grand Jury's findings and conclusions, calling them inaccurate and inflammatory. In addition, the report focuses on city transactions that are five or more years old and occurred under management the city no longer employs.
"Many of the findings and recommendations would have been better timed for release in 2008 or 2009 as significant progress has been made since then," the city's two-page statement said.
As of June 30, 2011, the city's general fund balance was $3.1 million. Several years of expenditures exceeding revenues led to an operating deficit and the use of reserves to meet obligations, according to the Grand Jury. In addition, money from the general fund was loaned or transferred to other city funds, as subsidies, to support the operations of entities that receive the majority of their funds from restricted sources, according to the report.
The airport, Victorville Municipal Utility Services and the Green Tree Golf Course are vexed by operating deficits, and the airport and utility agency have been unable to make debt service payments as a result, the report said.
Additionally, restricted funds generated by water fees and charges may have been illegally loaned to the utility agency for power projects because the agency was on shaky ground and unable to pay its debt load, according to the report.
Though the city adopted an interfund loan policy in May 2011 after repeated prompts by auditors and city management dating back to 2009, the policy lacks teeth, according to the Grand Jury.
An interfund loan is an authorized short-term loan from one fund to another.
Analysis of the city's existing interfund loans revealed that the city had $69.7million in outstanding interfund loans as of June 30, 2011. A majority of the loans had no payments made toward the outstanding balance, and internal controls were not formalized to ensure timely repayment.
The Grand Jury questioned a $38.1million city payment toward its loan balance because the loans were made to the airport and utility agency, both of which have significant debt obligations, structural cash flow difficulties and revenue concerns.
Power plant projects
The city and the airport initiated large, high-risk power plant projects in the mid-2000s without proper risk assessments or project controls, relying instead on the recommendations of contractors that had an interest in the projects, the Grand Jury said.
In addition, the city lacked transparency in its decision-making process, and the subsequent failure of the projects resulted in substantial losses and a heavy debt burden to the city and the airport, the Grand Jury determined.
Among the projects are Victorville 2, or VV2, a 500-megawatt power plant at the airport initiated by the city and Newport Beach-based Inland Energy Inc. in 2005, and a cogeneration power plant at the Foxborough Industrial Park, in which the city began procuring no-bid professional services from Fort Worth, Texas-based engineering firm Carter & Burgess in 2004.
VV2 was never completed and ultimately cost the airport millions in losses. Further, city management did not enforce all contract terms, and an agreement with General Electric for the purchase of equipment was done in closed session, a possible violation of the Brown Act, the Grand Jury concluded.
The city undertook the Foxborough project without a thorough assessment of the risks, a formal business plan or budget or sufficient controls in place, the Grand jury said. The project ultimately was abandoned, and cost the city tens of millions of dollars.
Hangar development
In September 2005, the city entered into a no-bid agreement with CBS Aviation Development LLC for the construction of four hangars. The agreement was based solely on a recommendation by the owner of the aviation company.
Though the agreement called for CBS Aviation to fully fund the project, the airport wound up spending roughly $54 million on the project and nearly $50 million more for another company to complete it.
"The hangar development project may have ultimately cost (the airport) approximately $103 million to complete four aircraft hangars," the Grand Jury said in its report.
The airport board and city management mishandled airport bonds by either poorly justifying expenditures or failing to properly identify funding sources.
The Grand Jury has recommended, among other things, that the airport direct the city manager to establish an accounting system for all expenditures of airport bond funds.
In its statement, the city stressed that the auditors who provided the information from which the bulk of the Grand Jury's findings was based are neither qualified as certified public accountants nor attorneys, and have made several questionable interpretations of the law.
"Nevertheless, the public deserves a full and complete response to the report and one will be completed prior to the Sept. 29 deadline," according to the city statement.
A closer look
What is the Grand Jury?
It's basically a citizen watchdog group of 19 or 23 members, based on county population.
But its role is beefed up by its ability to conduct investigations into government affairs.
Grand Jury committees, in cooperation with the departments and agencies of the county, look into their affairs. And the Grand Jury itself can get advice from the county's presiding judge, the district attorney, county counsel or even the state attorney general.
The Grand Jury's duties come in two forms: investigating and reporting criminal and civil matters.
In San Bernardino County, each Grand Jury performs both functions for a one-year term, July 1 to June 30.
By law, at the end of its year, the Grand Jury submits a final report to the county's presiding judge.
And that becomes public.
Thus, we bring it to you.
Recent high-profile county Grand Jury findings and indictments
June 2011: The civil Grand Jury finds that San Bernardino International Airport has engaged in questionable practices in its finances, construction management and the awarding of developer contracts, and calls for better oversight. The civil Grand Jury commissioned the audit of the airport following complaints it received in July 2009 of irregularities there.
May 2011: A nearly three-year corruption probe into San Bernardino County's landmark $102 million settlement with Rancho Cucamonga developer Colonies Partners LP culminates with a criminal Grand Jury indictment against a developer, a former county supervisor and two others linked to the settlement.
March 2011: A special criminal Grand Jury indicts seven San Bernardino County sheriff's deputies on felony charges connected to alleged falsifying of training documents to get unjustified increased compensation.
Source: San Bernardino County Grand Jury
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