Questionable Use Of College Bond Funds Leads To State & Local Investigations

(September 3)  The San Bernardino County District Attorney’s Office is examining whether Victor Valley College diverted bond money to cover college operations costs, which are outside the legally permissible uses to which the money could be put.
In 1997, Victor Valley College issued $53 million in certificates of participation, a type of sale and leaseback arrangement to finance capital improvements.
The certificates were purchased by investors, who see a return of a fixed percentage of the value of the securities over a 35 year period. The proceeds from the certificate sales were supposed to be used to defray the cost of building college facilities, such as lecture halls, classrooms, labs and administration/faculty quarters. The debt to the certificate holders is serviced by assessments on property located within the college district, collected as part of each homeowner’s or parcel owner’s property tax bill.
In 2008, $139 million in bonds were issued on behalf of the college district after voters approved Measure JJ as a funding mechanism for campus improvements and expansion.
About $53 million of the $139 million in bonds sold under Measure JJ were used in 2009 to pay off Certificates of Participation originally issued in 1997 for campus construction projects, according to college records. Those projects included the building of the VVC Student Activities Center and a remodel of the campus’ counseling and administration buildings.
A total of $3 million of the $53 million in certificate of participation money collected in 1997 was paid into the General Fund, according to the “Summary of Expenditures” posted at
Measure JJ undertaken pursuant to Proposition 39, was authorized strictly to pay for capital improvements.
In addition there were two previous issuances of certificates of participation, in 1994 in which at least $40 million went into an investment account, designated as the GIC.  Subsequently, auditors with the states Junior College Accrediting Commission traced $20 million transferred to the college’s general fund, where it was spent on payroll and operating expenses.  The remaining $20 million is now sitting in the investment account.
Two members of the  Citizens Bond Oversight Committee, Marshall Kagen and Larry Hoover, sensing the  college district had run afoul of the law, Proposition 39 and the terms of the bond sale, dug into the issue.
Kagan and Hoover, after achieving access to more  data, determined that about $20 million in bond funds had been diverted to payroll and operating expenses, and that another $20 million in an investment account was being drained each year to ongoing deficits.”
They contacted the committee chairman, Richard  Greenwood to put the matter on the committee agenda. Greenwood refused, and instead, at the next meeting, referred the matter to the district’s bond attorney, who advised that there was a 60 day statute of limitations on bond validation actions, and that therefore there was no reason to place Kagan and Hoover’s findings on the agenda.
When  Kagan retorted that they were not questioning the  validity of the bond issuance, but the spending of bond proceeds, two entirely different matters, Greenwood remained unmoved, and refused to place the item on the agenda. Greenwood cancelled the next meeting at which Kagan and Hoover planned to again raise the issue.
“The question here is timing,” Kagan told the Sentinel. “If at the moment, the $53 million, was used to payoff the 1997 certificate of participation debt, it was determined that it had not been incurred for capital projects, then the people involved, would be guilty of embezzlement of public funds, and since there is no statute of limitations for that crime, somebody goes after them. However, a better interpretation, might be that if  eventually the $53 million is spent on capital projects, then all is well. Thus the $20 million now in the investment account, should be transferred to the capital projects fund and used to build those classrooms, and other projects. The $20 million that was transferred to the general fund, and spent on payroll and operating expenses should be considered as an advance. And as an advance, it should be repaid to the investment account, and then to capital projects.”
All of this is playing against a backdrop that suggest the college has not always been mindful of legal financial protocol.
Five years ago, the state’s community college accrediting commission placed Victor Valley College on probation, with a possible loss of accreditation. While there were multiple issues in the state’s action or issues that  could be and were corrected with a modicum of effort, the major issue was the college’s deficits. The commission insisted the deficits be ended. The college wrestled with the financial issue and ultimately pushed last winter to pass a resolution pledging to reduce faculty salaries sufficiently, as Kagan had suggested, to balance the budget. The college notified the accrediting commission, which took the college off probation.
The borrowings from the capital improvement funds consisting of bond money were never returned, however, leading Kagan and Hoover to approach the San Bernardino County District Attorney’s Public Integrity Unit. The duo filed an official complaint. After a cursory examination of the matter, the district attorney’s office informed Kagan it would not proceed with any action.
Kagan, resolute in his belief that something was amiss, contacted Brooke Self, a reporter with the Victorville Daily Press, cluing her in to much of the ground he and Hoover had covered. When Self contacted the district attorney’s office, the office abandoned its earlier position that the complaint had been shelved and stated that the complaint remained under review.
Kagan told the Sentinel that the diversion of the funds to unauthorized accounts is not a mere technical violation but one that has had a deleterious impact on the quality of education offered at the college.
Kagan, a retired accountant with a degree from Yale, enrolled his daughter at the college, driving her to her first assigned class. The class was being held in a dilapidated, modular classroom, designed for elementary school children, rented from the Hesperia School District.  Kagan, who is accustomed to better surroundings, was  shocked. He recalled, “On my property tax bill, there were taxes for a 2008 bond issue, that I, and all property owners paid, to provide funding for capital projects at the college. Why was there still a shortage of classrooms?”
His next shock came when his daughter tried to enroll in a class, and couldn’t. “Even the waiting lists were full!” Kagan intoned.  Talking to other parents, he found out that  this was a common situation, going back several years.
“As a result, students have to stretch their time in college for one or more years, to obtain credits needed for graduation, or drop out,” he said. School officials told him this was due to a lack of classroom space, and money.
Joe Brady, a Victor Valley College board member, told the Sentinel “While I appreciate anyone that believes there are  government misdoings coming forward to have the issue fully investigated, I believe that both Larry and Marshall, being new members to the bond oversight committee should have vetted this through the committee. The committee is composed of very well known and respected people and this lack of vetting can only hurt an institution no matter what the outcome. The committee has more than people.”
Brady said “I feel quite confident in the work that the prior  committees preformed after measure JJ was proposed.”
Whatever the district attorney’s office’s finding will entail, Kagan and Hoover’s scrutiny of the situation has already resulted in the state reinstating the colleges probation after the information they uncovered was sent to Sacramento.

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