The Securities and Exchange Commission is intensifying its now 18-month long inquiry into accusations of fraud and misuse of bond money by the city of Victorville and its former redevelopment agency.
In August 2010, the SEC launched an investigation of Victorville’s various bond offerings totaling more than $475 million. In complying with subpoenas, city officials have provided over 70,000 pages of documentation relating to representations to bond holders and how the bond money was actually spent.
On February 9, 2012 the SEC requested even more documentation from Victorville, widening its inquiry into the issuance of more than $700 million in bonds.
It is known that proceeds from bonds issued for redevelopment purposes as well as the civilian makeover of the former George Air Force Base into the Southern California Logistics Airport were diverted to other purposes. Moreover, Victorville has engaged in a host of questionable financial practices exacerbated by accounting irregularities, leading to other investigations by the FBI, the county grand jury and the district attorney’s office.
An audit by the accounting firm of Mayer Hoffman McCann released in March of 2011 indicated “substantial doubt about the city’s ability to continue as a going concern.”  Mayer Hoffman McCann questioned whether Victorville can remain solvent, and 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. Mayer Hoffman McCann said that as of March 2011 the city’s utility fund was $78 million upside down and that 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.
In 2004, the city earnestly set about to construct the Foxborough power station on east Nisquali Road. City officials confidently predicted that for $22 million to be appropriated out of the redevelopment agency budget they could build a 14-megawatt capacity electrical generating plant that would bypass the state power grid.
The Foxborough project failed to meet its April 2006 target opening date and in October 2006, construction on the project, the price tag for which had escalated to over $54 million, was abruptly halted.
After the city restarted work on the project there were further construction delays and cost escalations as changes in state law went into effect that mandated that at least 20 percent of all energy produced in California by 2010 come from renewable sources. In an effort to comply with that standard, the city jettisoned earlier plans for gas-fired combustion turbines, the pricey components for which were already purchased.
The city then found itself in the position of having to buy even more costly generators capable of running on biodiesel, while looking for purchasers of the never utilized gas turbines. That obsolete equipment had to be sold at a fire sale price because it was considered “used.”
The hemorrhaging of red ink on the project  increased each year thereafter, such that it had reached an annual operating  deficit of  $8 million by fiscal 2007-08.  In 2007, the city began borrowing from its general fund to shore up the project.
With good money being thrown after bad, the city council, as quietly as it could get away with, issued $90 million in bonds to cover the entire cost of Foxborough.
In April 2008, all of the bond money had been eaten up by the Foxborough power plant project and another $5 million beyond that was consumed, bringing the total cost on the facility to $95 million even before the facility’s permanent turbines had begun to generate electricity. Further insult was wrought when city officials, attempting to salvage something from the debacle, declared their intention to connect the plant to the state power grid, in absolute contravention to the original intent for the plant, which was to bypass the grid, thereby avoiding the surcharge the state levies on electricity carried over the system, to provide low-cost energy to attract industry and jobs to the city’s industrial parks.
Eight years after the project was undertaken, the city has failed to see that project through to fruition and the city council abandoned it altogether last year, after having sunk $126 million into the project.
The city was simultaneously pursuing the development of another, much larger power plant, dubbed Victorville 2. The city was assisted in developing that plant by Newport Beach-based Inland Energy, which had successfully developed the 830-megawatt High Desert Power Plant with Baltimore-based Constellation Energy Group a decade ago. The High Desert Power Plant is now referred to as Victorville 1.  Inland Energy had also served as a consultant with regard to the development of the Foxborough plant, receiving more than $5 million for that work.
In November 2007 the Victorville city council authorized a $173 million purchase of natural gas-fired turbines from General Electric for the 563-megawatt Victorville 2 plant.
The city, which owed $126 million to General Electric for equipment for the Victorville 2 power project, fell into arrears on its payments to General Electric and in May of 2010, simply surrendered a $50 million deposit it had made with the company for components. The Victorville 2 project was originally scheduled to include a 513-megawatt natural gas-fired generating plant on 133 acres coupled with an adjohining 250-acre solar power field capable of producing 50 megawatts of electricity. The solar component of the project has since been entirely abandoned and the remainder of Victorville 2 shelved, although in recent months some discussion has taken place between the city and Massachusetts-based QGEN about that company taking on the completion of the project.
More than $80 million of the $300 million in outstanding bonds floated specifically for airport operations actually funded city of Victorville operations or projects off Southern California Logistics Airport property, including $1.8 million utilized to acquire land for a city library. According to Mayer Hoffman McCann, at least $21.8 million was not spent in accordance with the bond covenants. Other airport money was used to further work on the Victorville 2 power plant. The city also loaned $20 million in 2007 airport bond proceeds to the water district to help build a wastewater treatment plant. Those expenditures were made without informing or getting the consent of the bonds’ insurer, Radian.
The Southern California Logistics Airport Authority (SCLAA) has accumulated debt of  $102 million, twice the burden  it had in 2009-10.
One issue repeatedly raised by Mayer Hoffman McCann is that staff has not properly documented and sought city council approval for its numerous interfund loans. The city had nearly $90 million in outstanding interfund loans as of last June. But only $30 million in loans had been formally approved by the council, according to the audit report.
For example, the report states staff did not properly document $20 million loaned between the city’s development impact fee funds, representing the city’s road developer impact fee account as having more than $20 million cash when essentially all of that money was spent through the public buildings developer impact fee account to construct City Hall and Green Tree Clubhouse.
And when SCLAA ended 2009-10 with an $11 million cash overdraft, the audit report states Victorville brought the cash balance to zero by borrowing money “for a term greater than one year” from its solid waste, rail authority and storm drain and street lighting funds. The city’s redevelopment authority, which was decommissioned by state action last year, also loaned the airport more than $11 million to keep the fund afloat.
The depth and breadth of the grand jury’s probe of Victorville is substantial. At the end of the 2009-10 grand jury term in June 2010, six of the grand jury’s members were requested to remain in place to serve on the 2010-11 grand jury for the purpose of completing that investigation. In the spring of 2011, the grand jury questioned then-city manager Jim Cox; former city deputy city manager and now city manager Doug Robertson; economic development director Keith Metzler; city attorney Andre de Bortnowsky and deputy city attorney Joan Stevens Smyth. The 2011-12 Grand Jury has continued the inquest into Victorville’s finances.
The FBI has been investigating Victorville since 2010. In October 2011,  word leaked out that a special task force devoted to Victorville operations involving FBI agents and investigators from the district attorney’s office had formed and that a number of grand jury members who had served in the 2009-10 and 2010-11 terms had been sworn in as special task force members.
City officials have denied any untoward activity and explained away a portion of the multimillion losses sustained in the running of the utility division as a consequence of unforeseen state environmental regulations that went into effect after the city had committed to the project and purchased the gas turbines, entailing costly design changes.  The city claims that many of the expenditures of proceeds from bond money issued for improvements at the airport which provided infrastructure outside the airport, such as the wastewater treatment facility, will serve the airport property.
Robertson said he and city staff are now working to comply with the SEC’s subpoenas