VICTORVILLE—In what some observers are saying represents a major progression in  Victorville’s inevitable slide  toward bankruptcy, the city has defaulted on two bond issuances with a total value of $173 million.
The city was unable to cover $7.5 million of a $10.6 million payment due on December 1 after Bank of New York Mellon balked at the city seeking to utilize restricted funds for a $535,000 principal payment.
The default could trigger action by bondholders that would complicate Victorville’s already bleak financial picture. The city’s options in reversing the default also carry implications that will reduce the amount of investment, reserve and operating capital available to it.
At issue in the latest instance is the city’s propensity for interfund borrowing, a practice that always carries with it some degree of long term financial risk and in some cases entails skirting the law or bending financial protocols.
In 2007 and 2008, Victorville issued $173 million in bonds to cover the cost of a number of municipal programs, including $90 million to be used toward the escalating cost of the Foxborough power plant. Because the Foxborough plant was not completed, city officials were unable to repay the bondholders with proceeds generated from the Foxborough enterprise. Moreover, the staggering local economy has also impacted property values, decreasing property tax revenue to the city in recent years. To meet its bond debt obligations, the city instead rerouted money from the redevelopment agency and other funds to make those interest payments.  The city was unable this year to use redevelopment money for debt service because the California legislature sharply curtailed the charters of county and municipal redevelopment agencies up and down the state.
On December 1 a $10.6 million interest and principal payment on eight separate bond issuances made between 2005 and 2008 came due. In November,the finance department had scraped together $3.1 million to be used toward that payment, but was yet $7.5 million short. When they moved to tap into $7.5 million in reserves on deposit with the Bank of New York Mellon to cover the gap, the bank, which serves as a trustee on those funds for the city and does so in accordance with strictly defined guidelines laid out in federally regulated security filings, declined to make the transfer. Instead, it issued a notice to the city, dated December 16, informing city officials the reserve funds cannot be used to cover principal payments. When the payment to the bond holders was not received, Victorville was declared to be in default.
At press time, neither the bondholders, the underwriters nor the city had determined which of their options they would pursue.
The bondholders could sue for immediate payment of the money and attempt to have such a suit fast-tracked through the courts. They could also adjust the terms of the bond issuance to allow the city to use reserve funds to make a principal payment. They could also hold a forum and demand payment in full of the outstanding $173 million in bonds and/or seize whatever assets the city has in terms of collateral worth that amount used to secure the bonds.
The city has the option of sequestering its payment, that is, utilizing the $3.1 million that did not come from its reserves toward making that portion of the $10.6 million remittance which pertains to principal on the bonds and routing the $7.5 million toward payment on the interest. The city could also borrow money from some other source – perhaps by again issuing bonds – to raise the capital to make the payment. That would entail further debt down the road.
Questions about the fiscal health of Victorville have existed for some time, together with suggestions of mis- and malfeasance on the part of city officials and consultants and contractors working with the city.
An audit of city finances by Mayer Hoffman McCann released in March of this year indicated those problems have worsened, and its authors expressed “substantial doubt about the city’s ability to continue as a going concern.”
The audit uncovered tens of millions of dollars in internal loans that were never approved, three funds that were $180 million in the hole and dwindling cash reserves. As of March, according to the audit, the city’s utility fund was $78 million upside down, while cash in the water district had dropped from $15 million in 2009 to $8 million as of June 30, 2010 despite a $20 million loan made to the district from the Southern California Logistics Airport Authority, the agency devoted to converting the former George Air Force Base into a civilian airport.
That red ink, major losses approaching $200 million in the city’s effort to establish electricity generating plants, and apparent diversions of other funding intended for the development of the airport or infrastructure there to uses elsewhere in the city have captured the interest of the county grand jury, as well as the FBI.
Another federal oversight agency, the Securities and Exchange Commission, is probing Victorville’s questionable use of bond funding. The Securities and Exchange Commission more than 15 months ago subpoenaed documentation from the city relating to its bond issuances and expenditures. The commission has yet to release a report on its findings. The city’s attempt to breach protocol by using its reserves to make the December 1 payment could fall within the Securities and Exchange Commission’s scrutiny, as well.
City officials this week did not return calls from the Sentinel seeking comment on New York Mellon’s action or the default.
A number of Victorville residents, including longtime City Hall critic Ed Nemechek, suggested the default represents either a major step toward, or an indication of, the city’s insolvency.