 The third, and last, level of appeal is to have the appeal presented to the Superior

Additional Recommendations 6

These recommendations are not explicitly linked to specific findings.

• R1
  The monthly costs of services based on hourly rates. The rates, as defined in the agreement were $150 per hour for “Consultant” staff and $250 per hour for “Senior Consultant” staff. The contract notes that the City would not be billed for the services of Mr. Buck Johns, the President of Inland Energy. Harvey M. Rose Associates, LLC 3-7 Section 3: Power Plant Developments
• R2
  Inter-fund Loans and Use of Restricted Funds  Despite repeated recommendations from independent auditors and members of City management as early as February of 2009, the City of Victorville did not adopt a formal Inter-fund Loan policy until May 3, 2011. The adopted policy contains significant weaknesses, including the lack of guidelines and required analysis to determine: (1) the borrowing and lending funds’ solvency; (2) timeframes for analysis and approval prior to June 30 of each fiscal year to prevent backdating of loans; and, (3) financial planning and monitoring of the repayment of the loans. Without such guidelines, approval of inter-fund loans could weaken the financial condition of lending funds, result in permanent contributions from the lending fund to the borrowing funds, and complicate or misrepresent the financial condition of all funds involved.  As of June 30, 2011, the City had at least $69.7 million in outstanding inter-fund loans. A review of these loans demonstrates that a majority of the borrowing funds have not made any repayment toward the loans, and internal controls are not formalized to ensure repayment. Additionally, $38.1 million, or 54.7 percent of the borrowed funds were provided to the Southern California Logistics Airport Authority (SCLAA) or the Victorville Municipal Utility Services (VMUS), two entities with significant debt obligations, structural cash flow difficulties, and revenue concerns. The ability of these two entities to repay the inter-fund loans is highly questionable.  The California Constitution imposes restrictions on the use of fees imposed for water delivery, sewer services, and garbage collection. Specifically, revenue from property related fees or charges should not exceed the amount required to provide such services, or be used for any purpose other than what the fee or charge is intended. The Constitution does not prohibit investments or short-term loans from restricted funds. However, given that the financial condition of VMUS makes it likely that the $22.1 million in outstanding inter-fund loans from the Victorville Water District (VWD) could go unpaid, making it a permanent contribution to VMUS operations, then the City is at risk of violating the Constitution. Notably, the City Manager asserts that the City will use approximately $45 million of $52 million in judgment proceeds from a suit against a prior engineering contractor to repay the loans.  In September 2008, the Local Agency Formation Commission (LAFCO) adopted a resolution to dissolve the Sanitary District and designate the City of Victorville as the Successor Agency. Subsequent to the dissolution, the City transferred $15 million in property tax revenue from the Sanitary District to the General Fund. To date, the City has not provided sufficient documentation for the reason why only $15.0 million of the $17.8 million in property tax revenue was transferred to the General Fund. More importantly, however, the transfer of such funds violates the conditions set forth in the LAFCO resolution, which states that all Sanitary District funds shall be maintained in a separate enterprise account. Additionally, use of the property tax revenue for purposes other than for Sanitary District services would also be in direct violation of the California Constitution. Harvey M. Rose Associates, LLC 2-1 Section 2: Inter-fund Loans and Use of Restricted Funds Inter-fund Loan Policy Adopted, but Contains Weaknesses According to City management, the City has been engaging in inter-fund loans when various funds draw a negative cash balance, or expenditures exceed cash on hand, for several years. Despite recommendations from several parties to formalize these inter-fund loans through loan documents, the City has inconsistently formalized loan documents for inter-fund loans. Additionally, it is not clear what standards and criteria the City has used to guide its inter-fund loans until a policy was adopted by the City Council on May 3, 2011. Improvements should be made to the Inter-fund Loan Policy to ensure that inter-fund loans do not: (a) significantly weaken the financial condition of a lending fund and its ability to pay obligations; (b) become a permanent contribution to the borrowing fund; or, (c) misrepresent the financial condition of all funds involved. City was Slow to Adopt Inter-fund Loan Policy In February 2009, Caporicci and Larson, the independent auditors for the 2007 financial statements, recommended that formal agreements should be obtained between funds providing and borrowing cash. In May and June of 2009, the former Director of Finance submitted a draft and a revised draft of an Inter-fund Loan Policy to City management. The former Director of Finance recommended approval by the City Council prior to June 30, 2009, in anticipation of inter-fund loans that were proposed to be a part of Fiscal Year (FY) 2008-09. Current City management reports that they do not know why the Inter-fund Loan Policy was never adopted in 2009 under the former City Manager, though several members of the existing City management were recipients of the draft Inter-fund Loan Policy. In its audit of the 2008 financial statements, Mayer Hoffman McCann P.C. also recommended that the City formally approve and document inter-fund loans that were approved as long-term advances between funds. As a result, the City approved formal loan documentation for two inter- fund loans on September 15, 2009: loans between (1) the Victorville Water District and VMUS, and (2) the Victorville Redevelopment Agency and SCLAA, which are discussed later in this Section of the report. Subsequent to the auditors’ recommendations, several inter-fund loans have been formalized, while others have not. This is also further discussed later in this Section. Since the draft Inter-fund Loan Policy submitted to City management in 2009 was never adopted, it is not clear what criteria and guidelines were used to identify lending agencies and repayment terms of the loans approved prior to May 3, 2011, when the City Council adopted its current Inter-fund Loan Policy. Vague Inter-fund Loan Policy The Inter-fund Policy states that loan documents in the form of a Promissory Note must be prepared by the City Attorney and approved by the City Council when the following conditions are met: Harvey M. Rose Associates, LLC 2-2 Section 2: Inter-fund Loans and Use of Restricted Funds  A fund has insufficient cash in the bank to pay for incurred expenditures, or has a cash shortfall;  Temporary borrowing of funds from another fund is needed to meet expenditure requirements prior to the close of the fiscal year; and,  The loan or advance of funds cannot be repaid in the current fiscal year, but will be repaid within five years. Financial Analysis Prior to Loan Documentation The existing policy only vaguely states that a periodic analysis is done to identify a fund that has significant expenditures that cause the borrowing need and that a proposed lending fund is identified. According to City management, the periodic analysis is currently a quarterly report on cash balances prepared by the Finance Department and presented to the City Council, though the goal is to make the reports monthly. However, the Inter-fund Loan Policy does not provide guidelines nor require an analysis of the borrowing and lending funds’ solvency, or ability to pay obligations. For example, if the lending fund is in a poor financial condition, then the lending fund may not have sufficient funds to pay for salaries, operations, or debt service after providing funds to the borrowing fund. Similarly, if the borrowing fund is in a poor financial condition and is unable to repay the debt within the terms set for the inter-fund loan, the inter-fund loan could become a permanent contribution to the borrowing fund. In certain circumstances, as discussed in more detail later in this section, this would be a violation of the California Constitution. The Inter-fund Loan Policy should be revised to include an analysis of the financial condition of each fund involved in the inter-fund loan. To the extent possible, only funds in a relatively stable financial condition should be included in the inter-fund loan. Key factors to review for determining each fund’s ability to continue to pay obligations such as the cost of ongoing operations; principal and interest payments for long-term debt, whether it’s commercial debt or inter-fund loans; and other legal obligations specified in agreements or contracts with third parties, include:  Annual revenues and expenditures: do revenues match or exceed annual expenditures, or is the fund consistently spending more money than it receives, resulting in the use of reserve funds or reliance of inter-fund loans to address cash shortfalls;  Annual assets and liabilities: does the fund have so much debt that its total liabilities annually exceed its assets, indicating that the fund may have obligations with a higher priority of repayment than an inter-fund loan, such as bonded indebtedness; and,  Potential sources of revenue: will the fund see a predictable increase in revenue, such as an increase in property, sales and franchise taxes with a rebounding economy; additional rent revenue from existing and/or new airport tenants; increases in user fees and charges; or significant proceeds from the sale of property or other assets? Harvey M. Rose Associates, LLC 2-3 Section 2: Inter-fund Loans and Use of Restricted Funds Clear and Reasonable Timeframe for Analysis and Approval According to the staff report to the City Council when the Inter-fund Loan Policy was approved, a promissory note will be submitted for approval to the City Council prior to the close of the books for any given fiscal year. Therefore, the promissory note could be submitted for approval two to three months after the end of the fiscal year because revenue collection still occurs after June 30, the last day of the previous fiscal year. In other words, the existing Inter-fund Policy permits the backdating of inter-fund loans. The backdating of inter-fund loans, generally, is not fiscally prudent and should be avoided except in unique circumstances. Approving an inter-fund loan months after determining a need to enter into one to close cash shortfalls identified on June 30 of the fiscal year, and then backdating that loan, is like taking a car home from a dealership, then waiting to receive additional commission or a raise in the next couple of months before returning to get approval for a loan to pay for the car. With adequate tools such as financial reports on cash balances, expected revenue and projected expenditures, the City should be able to determine an appropriate amount for a loan and approve the loan prior to June 30 of the fiscal year. Should revenues collected after June 30 be more than expected, then the borrowing fund could repay the inter-fund loan more quickly. Financial Planning and Monitoring of Repayment Although the Inter-fund Loan Policy makes some reference to repayment terms, City management has reported that it currently does not have any internal controls to ensure that the borrowing fund meets the repayment terms specified in the loan documents. The policy only states that the loan documents should include: (a) the maturity date on which all principal together with all accrued and unpaid interest will be due and payable; (b) an applicable interest rate; and, (c) that the borrowing fund has a right to make full prepayment at any time without penalty. However, according to the Government Finance Officers Association (GFOA), prudent measures should include documentation of a financial plan reflecting a repayment schedule. To prevent inter-fund loans from becoming permanent contributions or transfers to the borrowing fund, the City should include financial plans in its loan documentation for approval by the City Council. The financial plans could include specific amounts in the repayment schedule, starting with low payment amounts and then increasing throughout the term of the inter-fund loan. Alternatively, financial plans could specify that a percentage of surplus revenue at the end of every year in the term of the loan should be made toward the payment of the loan, with the total balance due by the maturity date. The financial plan could also document any anticipated increases in revenue, such as the completion of revenue generating projects, or the sale of assets. At a minimum, City management should be monitoring a borrowing fund’s ability to make payments throughout the term of the loan. City management reports that during the budget process, the Finance Department conducts an informal analysis of surplus funds that could be used to pay off some of the inter-fund loan. This process should be formalized and tied to any financial plans included in loan documentation. Harvey M. Rose Associates, LLC 2-4 Section 2: Inter-fund Loans and Use of Restricted Funds Outstanding Inter-fund Loans Exceed $69 Million As shown in Table 2.1 below, the City had at least $69,666,316 in outstanding inter-fund loans as of June 30, 2011, including original loan amounts and accrued interest. The inter-fund loans included in Table 2.1 are those transactions included in the City’s FY 2010-11 financial statements as “Advances to/other funds,” which should have had loan documentation executed by June 30, 2011. Note that all of the loans below were executed on or after June 30, 2009 because, according to City management, this is when the City began to formalize inter-fund loans from one entity to another in response to independent auditors’ feedback. Harvey M. Rose Associates, LLC 2-5 Section 2: Inter-fund Loans and Use of Restricted Funds Table 2.1 Inter-fund Loans for the City of Victorville as of June 30, 2011 Borrowing Lending Original Date of Balance as Fund1 Fund Amount Loan of 6/30/11 Purpose RDA - Project Area Bear Redevelopment activities on SCLAA Valley $10,000,000 9/15/2009 $10,114,922 SCLA,2 such as the fuel farm RDA - Redevelopment activities on Low and SCLA, prior years' capital Moderate improvements, and project SCLAA Housing 1,700,000 10/20/2009 1,715,210 expenses General Inter-fund borrowing due to SCLAA Fund 2,314,8513 6/30/2011 2,314,851 negative cash balances Inter-fund borrowing due to SCLAA VMUS 1,230,671 6/30/2011 1,230,671 negative cash balances Wastewater Enterprise Inter-fund borrowing due to SCLAA Fund 589,949 6/30/2011 589,949 negative cash balances Subtotal for SCLAA 15,835,471 15,965,603 Capital improvements, general administrative and operating expenditures from VMUS VWD 20,000,000 6/30/2009 20,229,844 prior years Capital improvements, general administrative and operating expenditures from VMUS VWD 2,700,000 11/09/2009 1,878,724 prior years Subtotal for VMUS 22,700,000 22,108,568 RDA - Low Land acquisitions associated and Moderate with the Old Town Project Housing SCLAA 6,906,148 7/21/2009 6,978,386 Area Wastewater Treatment VWD SCLAA 20,000,000 7/23/2009 22,711,781 Facility on SCLA General Fund /Development Land acquisitions associated Impact Fund SCLAA 1,895,090 9/21/2010 1,901,978 with the public library Total $67,336,709 $69,666,316 Source: City of Victorville Financial Statements 1 Borrowing/lending funds include: Southern California Logistics Airport Authority (SCLAA), Victorville Redevelopment Agency (RDA), Municipal Utility Services (VMUS), and Victorville Water District (VWD). Southern California Logistics Airport (SCLA) is the physical airport property. The City Manager had stated that these funds were provided to SCLAA as “a short term advance” and have since been repaid. The City Manager has further stated that this amount “may exist again at the end of this fiscal year.” Harvey M. Rose Associates, LLC 2-6 Section 2: Inter-fund Loans and Use of Restricted Funds Table 2.1 does not include inter-fund loans made between the Low and Moderate Income Housing Fund and other Victorville Redevelopment Agency (RDA) funds. The balance of inter- fund loans within the RDA was an additional $9,813,531 as of June 30, 2011. Terms and Repayment With a few exceptions, the inter-fund loans listed in Table 2.1 have a term of five years and have an interest rate equivalent to the Local Agency Investment Fund (LAIF) rate of return. As of December 2011, the LAIF rate of return was 0.38 percent. These terms and interest rates appear to be consistent with the City’s inter-fund loan policy, which requires repayment within five years and at an appropriate interest rate. Unlike the other inter-fund loans, the inter-fund loan between the Victorville Water District (VWD) and SCLAA for $20,000,000 was originally for a two year term with a seven percent interest rate. According to City management, the loan was originally set for two years because the City anticipated funds from the EB-5 program, which would have secured foreign investor money for planned development projects. However, after the EB-5 program was terminated, the City requested an extension of the inter-fund loan between VWD and SCLAA to five years. Additionally, the interest rate for this loan is seven percent, because the source of funds for the loan is unencumbered funds from SCLAA Housing bonds, which, according to the indenture, must be set at a market rate interest rate. Based on internal work papers provided by City management, most of the borrowing funds have yet to make a single payment toward the repayment of the inter-fund loans. However, there was a payment made from VMUS to the VWD and the outstanding balance is now $1,878,724, as of June 30, 2011. It is not clear why payment installments were not made on both outstanding inter- fund loans between VMUS and VWD. As previously mentioned, City management does not have any formal internal controls to ensure that the inter-fund loans are repaid within five years. Financial Condition of Borrowing and Lending Funds As previously discussed, an adequate inter-fund loan policy should include an analysis of the financial condition of the borrowing and lending funds. A review of the annual revenues, expenditures, assets, liabilities, and potential sources of revenue for the borrowing funds listed in Table 2.1 suggest that SCLAA, VMUS, and the General Fund may have insufficient financial capacity to repay the inter-fund loans within the terms of the loans. Additionally, SCLAA and VMUS have significant bonded indebtedness, which have a higher priority of repayment based on conditions established in the bond indentures, including penalties if the borrowing entities miss scheduled payments or default on other debt obligations. The financial condition of SCLAA, VMUS, and the General Fund are further discussed in Section 1 of this report. Three of the inter-fund loans listed above, between SCLAA and other funds, do not have any formal loan documentation. According to City management, appropriate lending funds still need to be identified prior to requesting approval from City Council, because the current funds listed in the financial statements—the General Fund, VMUS, and Wastewater Enterprise Fund – are in a weak financial state. Harvey M. Rose Associates, LLC 2-7 Section 2: Inter-fund Loans and Use of Restricted Funds Backdating of Loans The inter-fund loans made to SCLAA from VMUS and the Wastewater Enterprise Fund4 in 2011, which have still not received City Council approval as of the date of this report, are examples of inter-fund loans that will be backdated, or approved, after they first appear in the City’s accounting records or audited financial statements. As previously noted, the Inter-fund Loan Policy allows City management to submit loan documentation two to three months after the end of the fiscal year because revenue collection still occurs past June 30, otherwise known as backdating loans. However, the suggested timeframe for backdating loans has significantly passed. As discussed in Section 1 of this report, the City should identify lending funds and formalize loan documentation as soon as possible. As shown in Table 2.2, there have been other instances where inter-fund loans are first mentioned in the financial statements, but are not presented to City Council for consideration until months after the date of the loan. Table 2.2 Backdated Inter-fund Loans for the City of Victorville Date First Appeared, or Date on Referenced in Promissory Note, Borrowing Lending Original Financial or City Council Fund Fund Amount Statement Approval SCLAA RDA $10,000,000 6/30/2009 9/15/2009 VMUS VWD 20,000,000 6/30/2009 9/15/2009 VMUS VWD 2,700,000 4/13/2009 11/9/2009 Source: City of Victorville Financial Statements In addition, the City has noted one lending fund and amount in its financial statements, but then approved a different lending fund or amount in backdated loans. For instance, the FY 2009-10 financial statement notes that $5,073,220 was loaned from the General Fund to the Golf Course fund. However, when documentation of the inter-fund loan was requested, City management provided documentation of the approval of $6,335,780 in total funds loaned to the Golf Course fund from the Solid Waste Management Fund ($2,300,000), Source Reduction and Recycling Fund ($2,935,780), and Landfill Mitigation Fund and ($1,100,000). According to City management, the amount included in the loan document for the inter-fund loans to the Golf Course fund will not reconcile with the figures in the financial statement because the advances were “simply used to document positive balance coverage of negative balances.” In other words, the amount documented in the audited financial statements represents the amount needed at the close of the fiscal year. However, as time passes between June 30 of a 4 As previously mentioned, the City Manager has stated that the $2.3 million advance from the General Fund has been repaid, but may appear again at the end of the current fiscal year. Harvey M. Rose Associates, LLC 2-8 Section 2: Inter-fund Loans and Use of Restricted Funds fiscal year and when a loan is finally presented to City Council, additional revenue may have been collected or expenditures incurred, resulting in a different amount requested in the loan. Because the amount and sources of the inter-fund loan in the formally approved loan documentation are different from when the inter-fund loan first appeared in financial statements, the City may not have fully represented the financial state and condition of (1) the Golf Course Fund, because more funds were needed than originally anticipated and (2) the General Fund, because the General Fund financial condition is weak and should not be lending funds to other City operations, as previously discussed in this report. While the City of Victorville is trying to improve and update its policies, procedures and practices, the backdating of loans, as opposed to conducting thorough analysis, discussion and approval prior to transactions, could result in non-disclosure of important financial information to the City Council prior to the use of borrowed funds. Further, internal controls that ensure that borrowing entities have sufficient funds to repay the loans or advances are weak. Therefore, strict adherence to a revised Inter-fund Loan Policy that includes full analysis and advance approval of loans prior to June 30 of every year should prevent further backdating of loans. Documentation of Inter-fund Loans in Financial Documents As demonstrated with the Golf Course inter-fund loan, the backdating of loans could lead to inconsistent information listed in audited financial statements and internal documents, particularly when the loan amount or the lending fund changes from the first time the loan is mentioned in a financial statement to when the loan is finally approved by City Council. However, all approved inter-fund loans should be consistently documented in all relevant financial statements and internal documents, which City management has failed to do. Examples of the inconsistent documentation of loans in financial statements include:  Loan between SCLAA and General Fund: The FY 2010-11 financial statement and inter-fund loan spreadsheet provided by City management note that the General Fund borrowed funds from SCLAA for the purchase of land, in the amount of $1,895,090. However, the loan documentation provided by City management states that the loan for the purchase of land was for $1,903,000; and,  Loan between SCLAA and RDA: The FY 2010-11 City financial statement states that SCLAA borrowed funds from the RDA, while both the RDA and SCLAA financial statements are consistent with loan documentation, stating that it was the RDA that borrowed funds from SCLAA. Additionally, this loan was approved by City Council on July 21, 2009, but was not documented in the RDA, SCLAA or the City’s FY 2009-10 financial statements. The City should make every effort to accurately reflect inter-fund loans in its financial statements and internal documents to avoid misrepresenting the financial condition of funds. Harvey M. Rose Associates, LLC 2-9 Section 2: Inter-fund Loans and Use of Restricted Funds Risks and Harm of Inter-fund Loans The lack of payments made by borrowing funds to lending funds and the weak financial condition of the borrowing funds suggest that the inter-fund loans listed above are at risk of becoming permanent contributions by the lending funds to the borrowing funds. Additionally, the ongoing use of inter-fund loans, particularly when they occur almost annually, misrepresents the financial state of the borrowing funds. Of the $69,666,316 in outstanding inter-fund loan balances, $38,074,171, or 54.7 percent of the borrowed funds were for SCLAA and VMUS, two entities with significant cash flow issues, an inability to bring in sufficient revenues, and significant debt obligations. The City Manager has asserted that a majority of the inter-fund loans, approximately $45 million, will be repaid upon receipt of approximately $52 million5 in judgment proceeds from the City’s suit against Carter and Burgess (now Jacobs Engineering), an engineering firm that the City contracted with for the development of a power generation facility in the Bear Valley Redevelopment Area.6 The City Manager anticipates the suit, which is currently under appeal by Jacobs Engineering, to be completed in FY 2012-13. Nevertheless, the City should develop a financial plan for each of the existing inter-fund loans to ensure that payments are made to the lending funds with or without judgment proceeds. The financial plan should include steps to building up a reserve of funds available for repaying the loan, such as reducing operating expenditures or the identification of one-time or ongoing resources, such as the sale of assets, additional tenants, or increases to rents and/or user fees and charges. Additionally, the plan should include payment targets and schedules. If a set dollar amount cannot be included in a payment schedule through the end of the term of the inter-fund loan, the loan should be designated to be at risk and reported to the City Council with alternative justification for authorizing the loan. If the City cannot establish firm payment schedules, it should set annual targets as a percentage of surplus funds available after paying other obligations, such as debt service, and consider extending the terms of the loans. Use of Restricted Funds There are some City funds that are designated for specific uses and purposes, whether by local, State, or federal laws and policies. Any use of those funds for other than those restricted purposes would constitute a violation of laws. Therefore, the City of Victorville should analyze any potential violations of law from existing inter-fund loans and include such analysis prior to approving future inter-fund loans. This is particularly important when considering loans from City enterprises that rely upon property related taxes or fees to fund operations. Under a reimbursement agreement with BNP Paribas, the City has designated that $22 million of anticipated judgment proceeds be provided to VMUS to pay the VWD. VWD would then immediately pay SCLAA for amounts owed under outstanding inter-fund loans. Section 3 of this report provides a more detailed summary of the development of the Foxborough Power Plant in the City’s Bear Valley Redevelopment Area. Harvey M. Rose Associates, LLC 2-10 Section 2: Inter-fund Loans and Use of Restricted Funds In November 1996, California voters passed Proposition 218 (Prop 218), which restricts the use of fees imposed on property owners for services that are available to the public at large, such as water delivery,7 sewer service, and garbage collection. Prop 218 added Article XIII D Sec. 6 (b) to the California Constitution, which states that: “A fee or charge shall not be extended, imposed, or increased by any agency unless it meets all of the following requirements: (1) Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service. (2) Revenues derived from the fee or charge shall not be used for any purpose other than that for which the fee or charge was imposed. (3) The amount of a fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of service attributable to the parcel. (4) No fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. (5) No fee or charge may be imposed for general governmental services including, but no limited to, police, fire, ambulance or library services, where the service is available to the public at large in substantially the same manner as it is to property owners.” Water District Funds and Potential Violations of Prop 218 As shown in Table 2.1 above, VMUS had a total of $22,700,000 in inter-fund loans from the VWD. As of June 30, 2011, there was an outstanding balance of $22,108,568 still owed to the VWD. According to loan documentation and financial statements provided by City management, the two loans from the VWD are to fund VMUS “capital improvements, general administrative and operating expenditures from prior years.” Additionally, City management reports that the sources of funds for the loan are water fees and charges accumulated over several years. A review of the language in the loan documentation and that of Prop 218 suggests that the City of Victorville may be at risk of violating State law by providing VWD funds collected for the delivery of water services to VMUS, which were used for delivery of electrical and power utility services. It should be noted that VWD provides services to residential water customers in the City of Victorville, whereas VMUS currently does not serve residential customers, only industrial and commercial customers. While Prop 218 does not prohibit VWD from making investments or short-term loans, if the borrowed funds are not repaid, they could become a permanent contribution toward the operation of VMUS. Therefore, the City is exposed to potential litigation from taxpayers’ associations for the improper use of restricted water service funds for electrical and power utility capital improvements and operations. Bighorn-Desert View Water Agency v. Kari Verjil and EE.W. Kelley. Harvey M. Rose Associates, LLC 2-11 Section 2: Inter-fund Loans and Use of Restricted Funds Although City management has asserted that these water fees and charges may include amounts that are not subject to Proposition 218, such as connection fees or capacity fees, the City has not conducted any type of review or analysis to determine the amount that is or is not subject to the restrictions of Proposition 218. Additionally, City management has asserted that the City is anticipating that approximately $45 million of the loans will be repaid upon receipt of approximately $52 in judgment proceeds from a suit against a former engineering contractor. City management has stated that these proceeds will be used to re-pay the VWD. The fact that the VWD funds are inter-fund loans intended to be repaid does not mitigate the following concerns regarding violations of Prop 218: (1) case law suggests that even transfers of funds from user fees and charges to another fund are restricted; (2) the ability to have enough reserved funds from years of water fees and charges to loan to another fund suggests that the water fees and charges “exceed the funds required to provide the property related service;” and, (3) the solvency of VMUS and its ability to repay the inter-fund loan is of great concern. Case law such as Howard Jarvis Taxpayers Association v. Roseville and Howard Jarvis Taxpayers Association v. Fresno suggest that transfers from utility accounts into an agency’s general fund must be justified as repayment of a loan to the utility by the general fund or as reimbursement to the general fund of the cost of services provided to the utility. Though the transfer of VWD funds was not to the general fund, similar analysis can be applied for the justification of the inter-fund loan between VWD and VMUS. Because the transfer of funds to VMUS was not to repay a loan previously made to VWD or for services provided directly by VMUS to VWD, the City could be exposed to similar litigation from taxpayers. An ability to lend over $20 million to VMUS using water fees and charges suggests that the Water District may be inappropriately charging high fees to water customers. The City should reevaluate its fees and charges and adjust them accordingly to ensure that revenue from the fees and charges do no exceed the funds required to provide the service, and that the fees and charges imposed to a single person or parcel does not exceed the proportional cost of service attributable to the parcel. Finally, as discussed extensively in Section 1 of this report, the ability of VMUS to repay the inter-fund loan, due to its inability to collect enough revenue to pay all of its operating costs and significant debt obligations, is of concern. Accordingly, tax payers’ associations could argue that the inter-fund loan may never be repaid and that revenue from water fees and charges would not be used for water delivery services to rate payers. Instead, the transfer of funds from VWD to VMUS could be classified as a permanent contribution to another utility service. As previously discussed in this Section of the report, the City should develop a plan to return loaned funds to the Victorville Water Districts, as soon as possible, in order to comply with State laws and regulations and avoid costly potential litigation by taxpayers. Sanitary District Funds and Violations of LAFCO Resolution The use of restricted funds has not been limited to inter-fund loans executed by the City, but has also occurred through the transfer of monies from one fund to another fund. The difference Harvey M. Rose Associates, LLC 2-12 Section 2: Inter-fund Loans and Use of Restricted Funds between the inter-fund loan and a transfer is that there is no expectation of repayment for a transfer, so any violation of state or local laws would have a greater exposure to the risk of backlash from rate payers, constituents, or other government entities. The transfer of Sanitary District Funds to the General Fund is an example of this risk exposure. Dissolution of Sanitary District and Transfer to General Fund The Sanitary District provides wastewater collection facilities to the residents of the City of Victorville. Revenues for the District consist of sewer user fees and property taxes. After a review of services, the San Bernardino County Local Agency Formation Commission (LAFCO) adopted Resolution No. 3021 on September 11, 2008 to officially dissolve the Sanitary District. The resolution contained 13 conditions as part of the dissolution and designated the City of Victorville as the Successor Agency. Subsequent to the dissolution of the Sanitary District, the City transferred $15,000,000 from the Sanitary District Fund to the General Fund on June 30, 2009. According to City management, the $15,000,000 represents a portion of the property taxes received by the District since its inception in 1964 through 2008. Based on financial statements provided by the City, the Sanitary Districted collected a minimum of $17,768,648 in property taxes since 1964. The City could not verify the property tax revenue collected for at least 14 fiscal years. Calculation of Residual Property Tax Revenue When questioned why only $15,000,000 of the $17,768,648 in verified property tax revenue was transferred to the General Fund, City management asserted that they were required to leave funds raised for capital improvement with the Sanitary District Fund, per the LAFCO resolution. However, when asked specifically how the City estimated the $2,768,648 designated for capital ($17,768,648 less $15,000,000), members of City management provided conflicting responses. The Finance Department stated that $2,768,648 was “ball-parked” to be a sufficient amount for capital improvements, despite the fact that there were no official capital improvement plans guiding the estimate. In contrast, the City Manager noted that there were specific guidelines to determine the portion of the user fees designated for capital improvements. Despite several requests to provide work papers for how the City estimated $2,768,648, sufficient documentation has not been provided. In response to the most recent request, the City provided a resolution adopted by City Council on September 16, 2008 which raised the sewer user fees from $14.72 to $19.95. A portion of the increase in sewer user fees, or $3.24, was to raise funds for repairing or replacing the existing infrastructure to improve the sanitary collection system. However, the City has still not provided sufficient work papers to show how the $3.24 fee for infrastructure improvement resulted in the estimate of $2,768,648. The $3.24 portion of fees designated for infrastructure improvement is approximately 16 percent of the total sewer user fee of $19.95. Similarly, $2,768,648 is approximately 16 percent of the total estimated $17,768,648, so the estimate appears to be reasonable. Harvey M. Rose Associates, LLC 2-13 Section 2: Inter-fund Loans and Use of Restricted Funds Nonetheless, the $2,768,648 is a portion of property tax revenue collected for the Sanitary District, which is a separate source of revenue from sewer user fees. Therefore, provision of the sewer user fee rates is still nonresponsive to requests for work papers to show how $2,768,648 in property tax revenue was estimated for capital improvements. Violation of LAFCO Resolution The transfer of property tax revenue collected for the Sanitary District to the General Fund is in violation of Condition No. 8 of the LAFCO resolution. Specifically, Condition No. 8 states that: All assets including, but not limited to, cash reserves, buildings and other real property, water production equipment (pumps, storage tanks, etc.), transmission lines and rights-of-way, rolling stock, tools, and office furniture, fixtures and equipment, all lands, buildings, real and personal property, and appurtenances held by the Victorville Sanitary shall be transferred to the City of Victorville, as Successor Agency as of the effective date of this dissolution [Government Code Section 56886(h)] and shall be maintained and accounted for separately as an enterprise activity. (emphasis added) The City of Victorville continues to maintain a separate account for the Sanitary District Fund as an enterprise activity. However, the $15,000,000 in property tax revenue should have remained in the separate Sanitary District Fund and should not have been transferred to the General Fund, in accordance with Condition No. 8. Additionally, by transferring the $15,000,000 to the General Fund, the City is unable to transparently account for the use of the $15,000,000 and ensure that the funds are used for the direct benefit of property owners paying a sewer usage fee. Using the funds for any other purpose would be in violation of Article XIII D Sec. 6 (b) of the State Constitution. Similar to the funds loaned from the Water District to the Municipal Utility Services, the transfer of Sanitary District funds to the General Fund puts the City at risk of legal action by taxpayers. City management has asserted that Condition No. 5 and Condition No. 9 of LAFCO Resolution 3021 permit the City to place the Sanitary District funds into the General Fund, making the transfer exempt from the cited State law. However, this assertion ignores the vague nature of Condition No. 5, which does not state where the successor agency shall place such funds. Further, Condition No. 9 is consistent with Condition No. 8 in that it states that: Upon the effective date of this dissolution, any funds currently deposited for the benefit of the Victorville Sanitary District which has been impressed with a public trust, use or purpose, including but not limited to Sewer Connection Fees, charges for services, etc. shall be transferred to the City as the successor agency and the successor agency shall separately maintain such funds in accordance with the provision of Government Code Section 57462. (emphasis added) City management has further asserted that property taxes by definition are general in nature, not restricted and therefore are not subject to the restrictions of Condition No. 9. However, property taxes that are collected by a special district must be designated to the function of that district. Harvey M. Rose Associates, LLC 2-14 Section 2: Inter-fund Loans and Use of Restricted Funds To remain in compliance with the LAFCO resolution and Prop 218, the City should continue to maintain fees and revenue for the Sanitary District in a separate enterprise account. However, the City should also develop a plan to return the $15,000,000 in property tax revenue specifically generated for the Sanitary District to the enterprise fund, as soon as possible. If the threat of pending litigation is imminent, the General Fund may have to return funds that it does not currently have, resulting in a negative cash balance, operating deficits, and/or negative fund balances. Conclusions Although the City of Victorville finally adopted an Inter-fund Loan Policy on May 3, 2011, after repeated recommendations from independent auditors and City management dating back to 2009, the policy contains significant weaknesses. These weaknesses include a lack of guidelines and required analysis to determine: (1) the borrowing or lending funds’ solvency, or ability to pay obligations; (2) timeframes for analysis and approval of the loan prior to June 30 of each fiscal year to prevent backdating of inter-fund loans; and, (3) financial planning or monitoring of the repayment of inter-fund loans. Therefore, the Inter-fund Loan Policy as it currently exists, does not ensure that inter-fund loans do not: (a) significantly weaken the financial condition of a lending fund and its ability to pay obligations; (b) become a permanent contribution from the lending fund to the borrowing fund; or, (c) complicate or misrepresent the financial condition of all funds involved. Analysis of existing inter-fund loans revealed that the City had $69.7 million in outstanding inter-fund loans as of June 30, 2011, which includes the original loan amount and accrued interest. Though each of the loans has a five year term, a majority of the loans have not had any payments made toward the outstanding balance and internal controls are not formalized to ensure timely repayment. Further, the repayment of $38.1 million, or 54.7 percent of the $69.7 million in outstanding inter-fund loans is highly questionable. This is because these loans were made to the SCLAA and VMUS, two entities with significant debt obligations, structural cash flow difficulties and revenue concern. However, the City Manager has asserted that the City anticipates that approximately $45 million will be repaid upon receipt of approximately $52 million in judgment proceeds in FY 2012-13, resulting from a suit against a former contractor that was responsible for engineering work on the failed Foxborough Power Plant project. The suit is currently under appeal. Finally, a review of the inter-fund loans made from the Victorville Water District (VWD) to VMUS and the transfer of funds from the Sanitary District to the General Fund suggest that the City may have violated State laws and local resolutions restricting the use of revenue collected for the delivery of property-related utility services. In particular, water fees and charges collected by the VWD were loaned to VMUS to support capital improvement and operation of electrical and power utility services. While the California Constitution does not prohibit investments or short-term loans, the financial state of VMUS and its inability to pay obligations may result in the inter-fund loan becoming a permanent contribution to VMUS, exposing the City to the risk of violating the Constitution. Similarly, restricted property tax revenue was transferred to the General Fund, without assurance that the revenue would be used for Sanitary District purposes. Harvey M. Rose Associates, LLC 2-15 Section 2: Inter-fund Loans and Use of Restricted Funds Further, the transfer of Sanitary District funds to the General Fund violates the LAFCO resolution which states that all Sanitary District assets should remain in a separate enterprise account. Recommendations The Victorville City Council should: 2.1. Revise and improve the Inter-fund Loan Policy to include the following requirements, which should also be applied to existing inter-fund loans, to the extent possible: a. Analysis of the financial condition of each fund involved in the inter-fund loan prior to approval, including a review of revenues, expenditures, assets, liabilities, and potential sources of revenue. The analysis should be used to determine the funds’ ability to pay obligations such as ongoing operations, principal and interest payments for long-term debt, and agreements or contracts with third parties. To the extent possible, only funds with an ability to still meet all expenditure and debt obligations should be included in an inter-fund loan. b. A clear and reasonable timeframe for the financial analysis to be conducted prior to approval of an inter-fund loan, which should ideally be approved before June 30 of each fiscal year. c. Financial planning and monitoring of repayment for each inter-fund loan. A financial plan could include a repayment schedule, targeted payment amounts based on a percentage of surplus revenues at the end of each fiscal year, and identification of potential revenue sources. Internal controls for monitoring repayment of inter-fund loans should be developed, approved, and formally documented. 2.2. The City should accurately reflect inter-fund loans in its financial statements and internal documents to fully represent the financial condition of funds. 2.3. Evaluate the appropriateness of existing water fees and charges to ensure that revenues do not exceed funds required to provide water delivery services. 2.4. Develop and implement a plan to return restricted funds from water fees and charges to the Victorville Water District, which were loaned to the Victorville Municipal Utility Services, but are at risk of becoming permanent contributions to the borrowing fund. This should be done as soon as possible in order to comply with State laws and regulations regarding the use of such property-related fees. 2.5. Continue to maintain any revenues and assets associated with the Sanitary District in a separate enterprise fund in order to comply with the Local Agency Formation Commission (LAFCO) Resolution dissolving the District and designating the City of Victorville as the Successor Agency, as well as ensure compliance with State laws and regulations regarding the use of such property-related fees. Harvey M. Rose Associates, LLC 2-16 Section 2: Inter-fund Loans and Use of Restricted Funds 2.6. Develop and implement a plan to return $15 million in restricted funds from property tax revenue to the Sanitary District, which were inappropriately transferred to the General Fund. This should be done as soon as possible in order to comply with the LAFCO Resolution dissolving the District. Costs and Benefits The costs associated with these recommendations would include staff time to: (a) prepare the revised policies and procedures for consideration and approval by the City Council; (b) develop financial plans and monitoring of repayment of loans, including loans or transfers or restricted funds; and, (c) evaluate existing water fees and charges for their appropriateness. Improving the Inter-fund Loan Policy and conducting thorough analysis prior to the approval of inter-fund loans would reduce the risk of inter-fund loans (1) significantly weakening the financial condition of a lending fund and its ability to pay obligations, (2) becoming a permanent contribution or gift to the borrowing fund, (3) misrepresenting the financial state of funds and (4) misusing restricted funds and violating statutory laws. Further, returning borrowed restricted funds to the source of the funds would bring the City of Victorville in compliance with State laws. However, as a tradeoff of returning restricted funds, the General Fund and/or fund that borrowed the restricted funds may endure negative cash balances, operating deficits, and/or negative fund balances. Changes would then likely need to be made in management and operations to bring the General Fund and/or other borrowing fund back to positive cash balances and avoid operating deficits and/or negative fund balances. Harvey M. Rose Associates, LLC 2-17
• R3
  Power Plant Developments  The City of Victorville and the Southern California Logistics Airport Authority (SCLAA) initiated large, high risk electrical generation-related capital projects in the mid 2000’s without proper pre-project risk assessments or project controls. The analysis supporting such decision making was based on recommendations from contractors who have had an interest in the projects. Further, this decision making has not been transparently presented to the public. The subsequent failure of these projects resulted in substantial losses and contributed to a heavy long-term debt burden for the City and the airport.  In September 2005 the Victorville City Council, acting as the SCLAA Board, entered into a no-bid professional services agreement with Inland Energy, Inc. for the development of a 500 megawatt power plant, later known as Victorville Power Plant #2 (Victorville 2). The Victorville 2 project was initiated by City officials based on an evaluation and recommendation from Inland Energy, a firm with a significant financial interest in having the City build a large power plant. The project was initiated without a clear project plan, project goals or understanding of risks involved.  Notably, the City’s agreement with Inland Energy includes a provision giving the company a right to five percent of net operating profits in perpetuity. This clause created a conflict of interest for the company and may be hampering the City’s efforts to sell development rights to the project. The agreement with Inland Energy also includes a provision that provides the City Manager with broad authorization to procure additional services unrelated to the Victorville 2 project.  In December 2007 the City also entered into a high risk $182 million agreement with General Electric for the procurement of turbines for the Victorville 2 power plant. City officials entered into this agreement without an independent risk assessment or secured financing to pay General Electric. The lack of funds resulted in the City defaulting on its obligation to General Electric, which ultimately cost SCLAA over $50 million in losses, with over $76 million invested in the project to date. Further, the City Council adopted this agreement in closed session, possibly violating the Brown Act.  On another project, the City procured no-bid services from a consultant firm, Carter and Burgess, Inc., beginning in June 2004. This firm was retained to design, develop, and construct a cogeneration power plant to service the energy needs of tenants at the Foxborough Industrial Park in the City’s former Bear Valley Redevelopment Area. The project was undertaken by the City without a thorough assessment of risks or sufficient controls. Through a series of mishaps the project was never completed, wasting tens of millions of dollars of public funds. Ultimately, the City was awarded $52 million as a result of civil litigation against Carter and Burgess and its successor, but the City’s costs for the failed project, over $91 million, are nearly double the amount initially awarded. Harvey M. Rose Associates, LLC 3-1 Section 3: Power Plant Developments Contrary to industry best practices, the City of Victorville, and by extension the SCLAA, have initiated large high-risk capital projects without conducting proper due diligence or ensuring proper controls. Rather than conducting a competitive process for awarding major development contracts, City management has executed contracts to companies and individuals with previous experience or familiarity with the City. Rather than conducting transparent risk assessments and establishing clear project plans, City management has failed to fully assess potential risks and has not established project plans with clearly stated goals, budgets, milestones, or performance measures. Instead of establishing clear and effective controls, policies, and procedures, City management has allowed contractors to operate without close oversight and has not consistently enforced contract terms. The absence of fully assessed risks, established project plans, and instituted controls has contributed to substantial failures of at least two power generation projects that required considerable financial investment. These two projects, which have ultimately resulted in substantial financial losses for the City and for SCLAA, are the Victorville Power Plant #2 Project and the Foxborough Power Plant Project. Victorville 2 Project Poorly Planned and Managed In September 2005, the City initiated a project to develop a 500 megawatt power plant, known as Victorville 2. The Victorville 2 project was never completed and ultimately cost the Southern California Logistics Airport over $50 million in losses with over $76 million invested to date. City management did not conduct proper due diligence before initiating the project or entering into an onerous and open-ended agreement with Inland Energy Inc., an outside contractor. Further, City management did not enforce all contract terms and did not formally manage the use of an open-ended provision in the agreement. Project Initiated Based on Inland Energy Evaluation and Recommendations On October 10, 2003 the cities of Victorville and San Marcos became the founding members of the California Clean Energy Resources Authority (Cal-CLERA), a Joint Powers Agency (JPA). The idea behind founding this JPA was the concept that cities in California needed to develop new, publicly owned and privately operated power generating facilities in order to protect their residents from pricing abuses and power shortages that had occurred during the State’s energy crisis in 2000 and 2001. Cal-CLERA had aggressively pursued other jurisdictions to become member cities in order to fund the development of up to four new power plants. After a 16 month campaign, Cal-CLERA was unsuccessful in recruiting any additional member cities due to their unwillingness to make financial commitments. However, based on acknowledgments from officials of cities contacted by Cal-CLERA that new generation was needed, Victorville officials decided to have Inland Energy conduct an evaluation of developing a 500 megawatt electric generating facility at the Southern California Logistics Airport. Harvey M. Rose Associates, LLC 3-2 Section 3: Power Plant Developments In its March 2005 evaluation, Inland Energy concluded that the City should “commit to undertaking the development of a 500 megawatt hybrid plant at Southern California Logistics Airport without delay.” This recommendation was based on (1) predictions by energy experts of a looming electric generating shortfall; (2) the City’s “unique blend of positive political, economic, and infrastructure factors that favor the development of such a plant;” and, (3) the fact that the Cal-CLERA effort had “stalled.” Inland Energy’s evaluation downplayed the financial risk to the City stating that, The City’s economic risk is mitigated by the fact that such a fully permitted plant at the SCLA site could likely be sold or transferred in 2007-2010 for far more than it cost, if the City elected not to proceed with the plant’s construction. The Inland Energy Evaluation also noted that the City could initiate the project without a definitive plan stating: This approach appears to be the best way for the City to control its own energy destiny- a number of options will be available to the City in 2007 when the permits are in place but all of them would allow the City to secure reliable electricity for the needs of its constituents at a competitive price, regardless of the state of crisis that the rest of Southern California’s energy market may find itself in. Lack of Due Diligence on Victorville 2 Project City management did not conduct proper due diligence before initiating the Victorville 2 project. Specifically, management did not conduct a thorough independent analysis of risks prior to recommending that the Council approve the development agreement with Inland Energy and, notably, a subsequent agreement to purchase expensive turbine equipment from General Electric. Such analyses could have highlighted the significant financial, construction, and operational risks that the City and SCLAA were taking on with both contracts. Neither City management nor Inland Energy established a formal business plan for the project and never established a project budget. Without such planning, the City and SCLAA proceeded without clearly defined goals, milestones, or performance measures. For instance, throughout the project and even after the City had committed over $182 million to General Electric for fuel generation equipment and related services, it was still unclear whether the City would own the plant or if it would be sold to a third party operator. No Risk Assessment City management did not prepare an independent risk assessment and there is no evidence that potential risks were formally discussed by the City Council. The staff report prepared for the City Council for the approval of the Inland Energy agreement contains a brief (three paragraph) narrative. The staff report contains no detailed discussion or analysis of the project or agreement, including the terms, compensation, potential fiscal impacts, or policy considerations. Harvey M. Rose Associates, LLC 3-3 Section 3: Power Plant Developments No Formal Business Plan Although no formal business or project plan was established, it is apparent from interviews with City officials and from a review of the Inland Energy agreement that the initial goal of the project was to make the necessary preparations so that the project could be “build ready.” Essentially, the goal was to design the plant, obtain the requisite permits, and procure land so that another firm could construct and operate it. According to the Inland agreement, the process to fully permit the plant would take approximately 24 months to complete. A developer, such as an energy firm, could then theoretically purchase the development rights, build the plant, and either operate it or allow another firm or the City, through Victorville Municipal Utility Services, to operate it. As the project evolved from the initial goal of preparing the plant for a “build ready” status, there was no formal reevaluation by City management or by Inland Energy regarding the potential changes to risks and costs. No Formal Budget Established City management and the City Council never formally established a budget for the Victorville 2 project. The closest approximation of a project budget can be found in the Inland Energy contract, which is discussed in detail below. However, this budget, which estimates $5.5 million in costs over a two year period, was simply for the “permitting” of the power plant and did not include the cost of land purchases; potential borrowing costs, such as bond issuances; and, staff time. Further, as the project evolved and grew from the initial goal of obtaining permits to constructing the power plant, there was no attempt to reevaluate or establish cost estimates. Contract with Inland Energy Poorly Constructed and Implemented Project and Contract Based on High Desert Power Plant Project The City entered into the no-bid contract with Inland Energy based on a proposal from the company. City management and City Council members appear to have entered into the agreement with Inland Energy based on the company’s experience in helping to develop the High Desert Power Plant,1 which was widely seen as a lucrative success for the private interests involved. While the City did not commit public funds to construct the High Desert Power Plant, officials assumed that the City would see similar benefits by either: (1) selling the development rights (and retaining rights to a certain portion of the power generated) or (2) retaining ownership of the plant and, through private operation of the plant, selling electricity via power purchase agreements. There is no evidence that City management or City Council members formally evaluated or discussed the risks involved in using public funds to develop a large power plant. The High Desert Power Plant is an 840 megawatt plant that went online in 2003 at the Southern California Logistics Airport. The plant, which is privately owned and operated, generates power for the state grid by selling electricity through power purchase agreements. While the plant does not generate power for the airport or the City, it does provide tax increment revenue to SCLAA. Harvey M. Rose Associates, LLC 3-4 Section 3: Power Plant Developments The development agreement with Inland Energy was based on a previous agreement between Inland Energy and Constellation Energy for development of the High Desert Power Plant. The agreement was written by attorneys representing Inland Energy using the High Desert Power Plant contract as a template. Although the City Attorney reviewed and provided comments on a draft contract, it does not appear that the City Attorney or other City managers actively negotiated the terms of the agreement to be substantively more beneficial to the City than the template contract it was based on. In fact, the agreement that the City entered into appears to be significantly more generous to the developer than the template agreement. Inadequate Review of Contract Terms City management did not conduct adequate research, in 2005, to determine if the agreement was consistent with other municipal power plant development agreements and in the best interests of SCLAA. When asked for briefing materials that went to City councilmembers prior to the adoption of the agreement, the City Attorney provided two memorandum that were issued in late August and early September 2005. As discussed later in this section, these two memoranda, which review Inland Energy’s right to five percent (5%) of project operating profits in perpetuity, are vague and provide cursory analyses, given the financial risk that the City undertook. Further, one of these memoranda was provided as a response to a request from Inland Energy executives while the second memorandum is dated two days after the contract was executed. Agreement Vaguely Defines and Poorly Controls Provision of Services The agreement with Inland Energy allows for the company to be compensated for two types of services: (1) “development services” and (2) “supplemental services.” While development services relates directly to the development of the power plant, supplemental services may include unrelated tasks. Development Services The agreement defines “development services” as including: negotiating any agreements necessary to implement the Project, and securing those permits and approvals required to entitle the Project for development, including any task having the purpose of improving or enhancing the value of such entitlements. These services were the core of Inland Energy’s role in the Victorville 2 project and included the permitting of the plant. These services were eventually expanded to include assistance with the construction of the plant. Inland Energy was paid approximately $12.2 million from 2005 to 2010 for development services related to the Victorville 2 project. Supplemental Services The agreement broadly defines “supplemental services” as including: any on-going technical or management task deemed necessary by the City Manager of Victorville including supervisory, administrative, consulting, advisement and other management services. Harvey M. Rose Associates, LLC 3-5 Section 3: Power Plant Developments While these services, to an extent, may have been related to the Victorville 2 project, the supplemental services clause has been used to justify services completely unrelated to the project. Specifically, the City has paid over $607,000 to Inland Energy through May 2010 under this clause for other, consistently unsuccessful, projects. These expenditures have included:  Over $166,000 for consulting services related to the City’s unsuccessful efforts to obtain federal grant funding under the U.S. Department of Homeland Security’s Immigrant Investor Program, also known as “EB-5;”  Over $182,000 for consulting services related to the City’s unsuccessful attempt to develop and construct a power plant at the Foxborough Industrial Park in the Bear Valley Redevelopment Project Area. Additionally, Inland Energy was paid over $258,000 for consulting services related to the City’s efforts to investigate the possibility of becoming a community choice aggregator.2 While this service was related to the Victorville 2 project, it ultimately provided no tangible benefits to the project, the City, or SCLAA. The supplemental services clause provides broad authority to the City Manager to procure additional services for “any on-going technical or management task” from Inland Energy without prior approval from the City Council. In fact, there is no evidence that the City Council formally approved the no-bid procurement of supplemental services from Inland Energy. City Manager Curtailed Relationship with Inland Energy in 2009, but Firm Continues to Bill In March 2009 the former City Manager formally notified Inland Energy that the City would no longer be procuring services outside of the Victorville 2 project beyond April 1, 2009. Subsequently, in July 2009, the successor City Manager informed Inland Energy that the City would no longer pay invoices for any work. However, under an informal and undocumented agreement with the City, Inland Energy may continue to provide services “at-risk,” meaning that the company may continue to bill, but compensation is unlikely to occur until the City is able to sell development rights for the project to a third party. Inland Energy has continued to invoice the City for services provided on the Victorville 2 project under this informal agreement.. Community Choice Aggregation, under State law, permits cities and counties to offer procurement service to electric customers within their boundaries. Community Choice Aggregation is the process cities and/or counties must go through to establish publicly owned electric utility services. Harvey M. Rose Associates, LLC 3-6 Section 3: Power Plant Developments Inland Energy Invoices Poorly Documented In May 2009, about four years after the commencement of the Victorville 2 project, the former City Manager formally notified Inland Energy that the firm’s invoices to the City were not sufficiently documented. Specifically, the former City Manager noted that all of the invoices submitted by Inland Energy and 11 sub-consultants lacked “significant supporting documentation that report tangible details of services rendered.” The former City Manager requested stronger documentation from Inland Energy and its subcontractors and gave a list specifying details that would have to be included in separate written reports on all future invoices. In June 2009 the former City Manager sent another letter to Inland Energy reiterating the documentation required for payment of future invoices from Inland Energy. In the June 2009 letter, the City Manager indicated that Inland Energy failed to comply with these documentation requirements. The current City Manager has indicated that invoices submitted by Inland Energy under the informal “at risk” agreement since July 2009 have been just as poorly documented as the previous invoices. Inland Energy Compensated for Victorville 2 Project Services Prior to Contract Execution The City began compensating Inland Energy for work on the Victorville 2 project prior to the execution of the development agreement. Although the development agreement was executed on September 7, 2005, the City disbursed approximately $123,000 for “consultant services” related to the Victorville 2 project on June 29, 2005 and approximately $33,000 for services provided in July 2005 on the date that the contract was executed. Compensation Structure is Generous, Broadly Defined, and Has Lasting Financial Implications The compensation structure, as established in the development agreement is generous, broadly defined, and has lasting financial implications for the project and for SCLAA. The compensation structure of the development agreement with Inland Energy provides for two methods of compensation to the contractor: (1) a monthly management fee, and (2) a portion of “Project Operating Profit.” While the monthly management fee reflects a common method for compensating purveyors of professional services, the fee appears to cover most of the costs that the company would incur and there is no cap to the amount that can be billed. The Project Operating Profit clause appears to be an unusual form of compensation and potentially troublesome for the effective sale and operation of the plant. A detailed description of these two types of compensation is provided below. Monthly Management Fee The monthly management fee, as defined in the development agreement, consists of:
• R4
  A 10% premium on all reimbursable costs. This fee is presumably to compensate Inland Energy for time spent on (1) administrative matters, including negotiating and administering contracts of subcontractors; (2) billing or reviewing the invoices of subcontractors; and, (3) administering accountancy requirements associated with subcontractor matters.3 Project Operating Profit In addition to the conventional compensation structure established by the monthly management fee clause, the development agreement contains an “Additional Compensation” clause that provides Inland Energy with the “right to receive five percent (5%) of ‘Project Operating Profit.’” The contract states that Inland Energy is entitled to this portion of the profit from the plant in “recognition of the unique value of the experience and expertise which Inland [Energy] commits to the performance of [development] services.” The additional compensation clause in the development agreement provides a much larger and more sustained form of compensation to Inland Energy than the monthly management fee and yet is only loosely tied to the consultant services provided by the company. In fact, the company’s 2008 projections for the operational expenses of the 500 megawatt plant, includes this compensation, which was estimated to be $4.5 million per year by Grand Jury sources. Further, the development agreement contains no clauses to limit this compensation to a defined period of time (e.g. two years) or a capped amount (e.g. $10 million). Assuming that the plant was built and then operated for 30 years, Inland Energy would be entitled to compensation of approximately $135 million over the life of the plant (without adjusting for inflation). Under this scenario, Inland Energy would be compensated with an additional $135 million over 30 years for what was estimated in the agreement as 24 months of design, development, and permitting work. Little Precedent to Support Project Operating Profit Clause There is little precedent to support the five percent (5%) of Project Operating Profit included in the development agreement. No other City or SCLAA contract includes such a clause. Further, at the time the contract was considered, City officials knew of no other similar public contract that provided five percent of operating profit for development and permitting work. We have assumed that the 10 percent fee would cover these administrative costs, since the contract specifically states that the 10% fee may be charged provided that the labor covered by the hourly fees does not include administrative tasks. Harvey M. Rose Associates, LLC 3-8 Section 3: Power Plant Developments Although City management has asserted that previous management based the profit clause on a 1999 agreement between Inland Energy and other private entities for the High Desert Power Plant Project, there is little evidence to support the relevance of this “template” agreement as a basis or justification for the fee. Under the “template” agreement, Inland Energy was providing similar services to two commercial entities4 that it had previously been sharing membership interest with in the High Desert Power Project. Conversely, Inland Energy never had an ownership interest in Victorville 2; it was simply providing development services to the City. Further, under the “template” agreement Inland Energy’s only form of compensation for such services was this percentage of operating profits and it was only 2.5 percent or half of what is provided for in the development agreement with the City. Conversely, the City agreed to pay Inland Energy a management fee based on hourly billings and five percent of operating profit for the life of the plant. City Did Not Perform Sufficient Due Diligence of Project Operating Clause Prior to Adoption of Agreement with Inland Energy As previously mentioned, the City did not conduct adequate research and due diligence in 2005 to determine if the agreement was consistent with other municipal power plant development agreements and in the best interests of SCLAA. Specifically, City management relied on two memoranda, both of which provide vague and cursory justification for the five percent project operating profit to be paid in perpetuity. First Memorandum Written by a Firm at the Request of Inland Energy Executives The first of these two memoranda was written by an attorney at the request of Inland Energy executives, not by City staff or by agents purported to represent the City’s interests. This memorandum made a broad assumption that the hourly management fees would not cover the costs and expenses of Inland Energy. The memorandum does not provide further analysis or
• R5
  SCLAA Bond Expenditures  The Victor Valley Economic Development Authority (VVEDA) Joint Exercise of Powers Agreement stipulates the uses of tax increment that is raised on parcels of the former George Air Force Base (GAFB), as well as the tax increment from the member jurisdictions’ territories. The VVEDA JPA specifically requires that tax increment revenues, which are to be allocated to GAFB shall only be used for purposes that directly benefit redevelopment of GAFB. The VVEDA JPA also delegates the authority of the management and operation of the GAFB parcels, including budgeting authority, redevelopment authority, and all management and operational authority to the Victorville City Council, “which shall act on behalf of the [VVEDA] Commission on all such matters.”  The Victorville City Council, acting as the Southern California Logistics Airport Authority (SCLAA) Board of Directors, and City management mishandled SCLAA bond funds in three separate instances.  In late 2005 and early 2006 the City, through its Redevelopment Agency, inappropriately purchased several parcels near city hall for the purpose of constructing a library using nearly $2 million of SCLAA bond funds that were restricted for the development and redevelopment of GAFB and not disclosed in the bond’s official statements. Attempts to correct the inappropriate use of such funds have been inadequate.  In June 2005 the City purchased land for the I-15/Nisqualli Road interchange project using approximately $3.3 million of SCLAA bond funds. Although this project was listed in the bond disclosures, the expenditure was weakly justified. Further, the City has no controls to ensure that funds restricted to GAFB were not used for this expenditure.  From June 2005 through 2010, the City procured professional services, land, and power generating equipment for the Victorville Power Plant 2 (Victorville 2) project using over $76 million of SCLAA bond funds that were restricted for the redevelopment of GAFB. City management has asserted that the power plant, which was to be built on parcels near GAFB, would benefit the redevelopment of GAFB by helping to attract commercial tenants with competitively priced electricity. However, official documentation of the project shows that it was primarily for the purposes of providing the City a revenue stream and to secure competitively priced electricity for its constituents and potentially for other jurisdictions in Southern California. Harvey M. Rose Associates, LLC 5-1 Section 5: SCLAA Bond Expenditures VVEDA JPA Stipulates the Development and Redevelopment of GAFB and the Surrounding Redevelopment Project Area The Victor Valley Economic Development Agency (VVEDA) was created in 1989 through a JPA between Victorville, Hesperia, Apple Valley, and the County of San Bernardino1 in response to the economic repercussions of the imminent closing of GAFB. In 1993 the VVEDA members established the original boundaries of the Victor Valley Project Area consisting of portions of each member’s jurisdictional boundary within an eight mile radius of GAFB. The VVEDA currently operates under the Fourth Amended and Restated JPA, which provided for the inclusion of the City of Adelanto in 2000. The current JPA enables each member entity to enter into transactions and execute agreements within their respective portions of the VVEDA project area without approval of the full VVEDA Commission, provided that any pledged tax increment revenue would be allocable to that member. The VVEDA JPA provides for the delegation and assignment of the member jurisdictions’ voting rights with respect to all issues directly affecting the operation and redevelopment of the former George Air Force Base to the Victorville City Council acting as the SCLAA Board. The responsibilities delegated to the City Council for SCLAA include: (1) all budgeting authority; (2) all redevelopment authority; and, (3) all operational and management authority affecting the GAFB parcels. Essentially, the Victorville City Council, acting as the SCLAA, has the authority to redevelop, operate, and manage all aspects of the former GAFB, now known as the Southern California Logistics Airport (SCLA). Notably, the City of Victorville fulfilled the responsibilities for the treasury function of VVEDA (separate from its responsibilities over SCLAA finances) until 2009, when the VVEDA Board transferred such responsibility to the City of Apple Valley. VVEDA JPA Stipulates the Allocation of Tax Increment Revenues The VVEDA JPA sets out how tax increment revenues are to be divided and allocated between the redevelopment of the former GAFB and the surrounding project area. The VVEDA JPA also places restrictions on certain portions of the tax increment revenues to be set aside for low and moderate-income housing and for eligible annual reimbursements to member jurisdictions for outstanding balances of prior contributions. As illustrated in Chart 5.1 and Chart 5.2 below, the VVEDA JPA sets specific restrictions on the allocation of tax increment revenues raised on and off the GAFB parcels to comply with State redevelopment law and to ensure that there are sufficient resources to develop and redevelop the former air force base. The County of San Bernardino Redevelopment Agency was the authorized recipient of tax increment accrued within unincorporated areas of the Victor Valley Project Area. Harvey M. Rose Associates, LLC 5-2 Section 5: SCLAA Bond Expenditures Restrictions on Use of Tax Revenue Raised on GAFB Parcels As illustrated in Chart 5.1 below, the VVEDA JPA requires that all tax increment revenues from the GAFB parcels be allocated for use on GAFB with the understanding that Victorville, acting as the SCLAA Board, shall set aside 20 percent of these revenues for low and moderate-income housing purposes. Restrictions on Use of Tax Revenue Raised in Member Jurisdictions’ Territories As illustrated in Chart 5.2 below, the VVEDA JPA places several stipulations on the allocation of tax increment revenue that is raised within individual member jurisdictions’ territories of the VVEDA project area. The VVEDA JPA specifically states that:  The first 20 percent of participating jurisdictions’ tax increment revenues shall be set aside for low and moderate income housing purposes and will be allocated for use by each member jurisdiction in its own portion of the VVEDA project area. VVEDA JPA Stipulations on Use of “Net Revenues” As illustrated in Chart 5.2 below, the VVEDA JPA states that the tax revenues raised from within individual member jurisdictions’ territories, after the first 20 percent is allocated to low and moderate income housing, shall be referred to as the “net revenues.” The VVEDA JPA places the following stipulations on net revenues:  40 percent of net revenues shall be allocated solely for use on the GAFB parcels;  40 percent of net revenues shall be allocated for use in the originating member’s territory within the VVEDA project area;  20 percent of net revenues shall be placed into a separate reimbursement fund of the VVEDA and shall be paid out annually at the commencement of each fiscal year for eligible reimbursements to each member in proportion to the outstanding balance of any prior contributions. After such reimbursements are made, such moneys may be used to reimburse member contributions. Harvey M. Rose Associates, LLC 5-3 Section 5: SCLAA Bond Expenditures Chart 5.1 Allocation of VVEDA Tax Increment Revenue from GAFB (SCLA) Parcels TAX REVENUE FROM GAFB (SCLA) PARCELS 20% LMI Housing 80% GAFB Redevelopment (SCLA) Harvey M. Rose Associates, LLC 5-4 Section 5: SCLAA Bond Expenditures Chart 5.2 Allocation of VVEDA Tax Increment Revenue from Member Jurisdictions (Outside of GAFB/SCLA) TAX REVENUE FROM MEMBER JURISDICTIONS 40% to Original Member’s 20% Territory LMI Housing 40% to GAFB (SCLA) 80% “Net Revenues” 20% to Other Reimbursement Fund Upon full reimbursement of each member’s contribution, the remainder goes to: 50% to Original 50% to GAFB Member’s Territory (SCLA) Restrictions on Use of Pledged Revenues The VVEDA JPA also places restrictions on the use of proceeds of SCLAA debt issuances. Specifically, the VVEDA JPA states that: Victorville, the Victorville RDA, or the SCLA Authority may pledge that portion of Participating Member’s Tax Increment Revenues which is to be allocated to GAFB along with any GAFB Tax Increment Revenues, to secure the issuance of tax increment bonds or similar indebtedness, provided, however, that the proceeds of any such debt issuance shall only be used for the purposes of causing the redevelopment and development of GAFB. SCLAA Redevelopment Project Priorities Delegated to Victorville The VVEDA JPA delegates authority over the prioritization of development and redevelopment projects to the City of Victorville, subject to the restrictions as previously described. Specifically, the VVEDA JPA states: Harvey M. Rose Associates, LLC 5-5 Section 5: SCLAA Bond Expenditures With respect to the GAFB Parcels, Victorville shall determine the priority as to which projects should be undertaken on the GAFB Parcels provided that such projects will be consistent with the provisions of the Redevelopment Plan and the intent of this Agreement. (emphasis added) City Poorly Managed Expenditure of SCLAA Bond Funds in Several Instances The Victorville City Council, acting in its delegated authority as the Board of Directors of SCLAA, and City management repeatedly mishandled SCLAA bond expenditures. In at least three instances the SCLAA Board and City management mishandled SCLAA bond funds by either: (1) poorly justifying expenditures; (2) failing to properly identify funding sources and accounting for Victorville’s pledged amount to SCLAA; or, (3) potentially expending funds allocated to GAFB on parcels outside of GAFB and not primarily or directly for the redevelopment of GAFB. These instances include expenditures on: (1) the purchase of several parcels near city hall for the construction of a city library; (2) the purchase of land for the I- 15/Nisqualli Road interchange project; and, (3) for professional services, land purchases, and the procurement of power generation equipment for a City-owned power plant. Each of these instances is described below. Purchase of Parcels for a Library Constituted Inappropriate Use of SCLAA Bond Funds; Attempts to Correct the Mistake are Inadequate In November 2005 and February 2006, the City inappropriately used approximately $1.9 million of SCLAA Tax Allocation Parity Bonds (Series 2005 Schedule A) for the purchase of land parcels near city hall. These expenditures were an inappropriate use of SCLAA bond funds since they: (1) were not spent on the development and redevelopment of the GAFB parcels; (2) involved using bond proceeds that were to be repaid from tax increment from other VVEDA members for a City-owned asset without sufficient justification or accounting of revenues pledged from Victorville’s portion of the VVEDA project area; and, (3) the official bond statements did not disclose that the bond proceeds would be used for a City-owned library facility. City Management Intended to Repay SCLAA Bond Fund According to two memorandum drafted around the time the properties were purchased, it was the intension of a previous City Manager to repay the 2005 SCLAA Bond Fund for the funds used to purchase the library parcels. Although it isn’t clearly stated why the Victorville Redevelopment Agency would be repaying the bond fund, both SCLAA and Victorville Redevelopment Agency resolutions point out that the costs, “shall be paid from funds derived from the City’s portion of the VVEDA Project Area.” However, there has been no formal accounting of SCLAA bond fund expenditures which delineate between funds that are derived from revenues allocated to the airport versus revenues derived from the City’s portion of the VVEDA project area that had been pledged to the airport. Harvey M. Rose Associates, LLC 5-6 Section 5: SCLAA Bond Expenditures Loan Documentation Not Established as Intended in 2005 and 2006 In 2010 it came to the attention of City management that no loan documentation had been put in place to repay the 2005 SCLA Bond Fund as intended in late 2005 and early 2006. According to a September 21, 2010 staff report from the City Attorney (and SCLAA Counsel), “at the time the properties were acquired, through inadvertence, the loan documentation was not completed.” Accordingly, in October 2010, the City Council adopted a resolution approving a loan agreement in the amount of $1,903,000 between the City and SCLAA. October 2010 Loan Agreement Permits Unlimited Deferral of Payments to SCLAA The promissory note established in October 2010 allows the City to defer payment back to SCLAA for an unlimited amount of time. Although the note has a term of only six months, the note states that “the term of this note shall be automatically renewed until there are sufficient funds in the Development Impact Fee Fund to fully repay all amounts due…” As of March 2012, the City had made no payments under the loan agreement. Loan Agreement Set Up in an Incorrect Fund for an Incorrect Amount The loan agreement established in October 2010 was set up for an incorrect amount and under the incorrect fund. Although all documentation associated with this loan, including the promissory note, Council resolution, and associated City Attorney staff report state that the loan is to be repaid from Development Impact Fee funds, the loan was booked onto the City’s General Fund. Although the loan documentation established by the City Council and signed by the Mayor states that the loan amount is $1,903,000, the loan was booked at $1,895,090. There is no explanation offered in the financial statements for the discrepancy. Loan Agreement Does Not Require Payment of Back Interest to SCLAA Although the funds were borrowed from the SCLAA by the City in late 2005 and early 2006, the loan documents established in 2010 did not take into account funds owed for past unpaid interest. Rather, according to the financial statements, the loan has only accrued interest for part of the 2010-11 fiscal year. If the City were to pay SCLAA interest for the entire length of time that the funds had been made available, the actual amount of interest owed would be approximately $250,000. City management should adjust the loan amount to reflect the amount of interest owed since funds were disbursed for use by Victorville in late 2005. Purchase of Parcels for La Mesa/Nisqualli Interchange Project Were Not Well Justified or Accounted For In June 2005 the City expended $4,306,295 in SCLAA bond funds2 for the purchase of land related to the La Mesa/Nisqualli Interchange Project, which is unrelated to the development or redevelopment of the former GAFB. While City management has asserted that Victorville’s portion of the VVEDA tax increment has been pledged to pay a portion of the bond issuance, 2 SCLA Tax Allocation Parity Bonds Series 2005 Schedule A Harvey M. Rose Associates, LLC 5-7 Section 5: SCLAA Bond Expenditures there has been no accounting or analysis to show that the Victorville pledge is sufficient to pay for this project and there are no apparent controls to ensure that other JPA members’ tax increment is not used for projects that are not for the development or redevelopment of the former GAFB. Project Expenditures Poorly Justified in Official Bond Documents The City has pledged tax increment revenue raised within its portion of the VVEDA project area that would have otherwise been designated for projects within Victorville’s territory (see “40% to Original Members Territory” in Chart 5.2) to SCLAA for the purpose of issuing tax increment revenue bonds. City management has asserted that this pledge justifies the City’s use of SCLAA bond proceeds for the interchange project, which is unrelated to the development and redevelopment of the former air force base, even though the bond’s official statement proclaims that the SCLAA “will use the proceeds of the sale of the Bonds to (i) finance certain public capital improvements benefiting the Southern California Logistics Airport, (ii) fund a Reserve Account for the Bonds, and (iii) pay cost of issuance of the Bonds.” (emphasis added) While the expenditure of SCLAA bond proceeds on the Interchange Project is unlikely to be illegal, it was poorly justified in official bond documentation. Although these expenditures were listed on official bond documents as “public capital improvements benefiting the SCLA,” the expenditures were not on GAFB parcels and there is no direct link to the development and redevelopment of the former air force base. Rather, the parcels purchased are approximately a 10 mile drive from the Southern California Logistics Airport and do not have a direct benefit to the Airport. The description of the project in the official statement of the bonds is brief and gives only a cursory explanation of the project and its benefit to the VVEDA project area. The description concludes that the Interchange “project has been determined as a benefit to the VVEDA project area.” (emphasis added) Weak Controls for Use of SCLAA Bond Funds The use of tax increment from Victorville’s portion of the VVEDA project area for the interchange project by and of itself does not appear to be inappropriate. Rather, the pledging of this tax increment revenue to SCLAA and the subsequent use of such funds for a purpose that is inconsistent with the purpose of the SCLAA bonds without strong justification and proper controls is troubling. Interviews with several members of City management revealed that no controls have been put in place over SCLAA bond proceeds to ensure that tax increment revenue designated for GAFB redevelopment (see “40% to GAFB (SCLA)” in Chart 5.2) is used by Victorville for non-GAFB purposes. Even if the Victorville pledged revenues are sufficient to pay for the interchange project expenditures, City management should establish stronger controls over expenditure of SCLAA bond funds to ensure that such funds are not used inappropriately. . Victorville 2 Power Plant Expenditures Appear to Have Disproportionally Benefitted City of Victorville From June 2005 through December 2010, the City expended over $76.2 million in SCLAA bonds for the development of the Victorville Power Plant 2 (Victorville 2) project. The use of Harvey M. Rose Associates, LLC 5-8 Section 5: SCLAA Bond Expenditures SCLAA bond funds for this project appear inappropriate because it: (1) was not an investment in the GAFB parcels; (2) did not have a primary purpose of directly benefitting the development and redevelopment of the GAFB; and (3) had a disproportionate benefit to the City of Victorville. As detailed in Section 3 of this report, the purpose of the Victorville 2 Project was to acquire land and permits for a 500 megawatt power plant. Once the plant had been “entitled,” or in a “build ready” state, the City would have the option of either (1) selling the development rights to a third party for the construction and operation of the plant, or (2) constructing and operating the plant itself through a municipal utility service. Funds Were to Primarily Benefit City of Victorville, Not SCLAA or other JPA Members Official documentation relating to the Victorville 2 Project shows that, contrary to assertions made by City management, the power plant was being developed primarily to benefit the City, not SCLA. This documentation includes a March 2005 evaluation of the project by Inland Energy; the Development Agreement between the City and Inland Energy; the contract for the purchase of power generation equipment from General Electric and related Council and SCLAA resolutions; and, a City press release dated November 29, 2007 announcing the execution of the contract with General Electric. March 2005 Evaluation of Victorville 2 Project An evaluation of the proposed 500 megawatt power plant, prepared by Inland Energy, Inc. in March 2005 for City officials, made no mention of any benefit to the efforts of redeveloping the former GAFB. Contrary to assertions from City management that the power plant was being built to service the current and future tenants of SCLA, there is no mention of their current or estimated future power needs or analysis showing that tenants would receive less expensive power. Rather, the evaluation only mentions the potential benefits that the City may see from the project including the potential for “the City to control its own energy destiny.” Inland Energy Development Agreement with City The Inland Energy contract makes no mention of the SCLAA as having any interest in or receiving a direct benefit from the Victorville 2 project. Rather, the contract speaks to the interests of the City in building a 500 megawatt power plant. The contract specifically states, the Victorville Municipal Utility Services was formed for the purpose of, among other things, providing electricity to its constituents, accomplishment of which purpose may include development and entitlement of power plant facilities for the generation or transmission of electrical energy for public or private uses within the state of California. Agreement between City and General Electric The City’s contract with General Electric is further evidence that the Victorville 2 Project was not initiated to primarily serve the interests of SCLAA. Specifically, SCLAA is not a party to the contract. Rather, the Authority’s involvement in the purchase is limited to providing funds for the security agreement and purchase of the equipment. SCLAA Resolution 07-008, adopted in Harvey M. Rose Associates, LLC 5-9 Section 5: SCLAA Bond Expenditures December 2007 to authorize the security agreement with General Electric for the purchase of Victorville 2 power generation equipment, provides only a vague justification for the use of SCLAA bond funds. Specifically, the resolution states that SCLAA is: empowered to raise revenues by the issuance of bonds secured by incremental financing proceeds collected within the Project Area in order to finance redevelopment activities within and benefitting the Project Area. While the resolution does not define or specify the “Project Area,” the City generally refers to the Project Area as the parcels outside of the GAFB that have been designated as part of the VVEDA Redevelopment Project Area. While the Victorville 2 project does fall within this project area, it is not within the powers of the SCLAA to cause the redevelopment outside of the former GAFB parcels or than for improvements “adjacent to and directly benefitting the GAFB Parcels.”3 (emphasis added) City Press Release Announcing Agreement with General Electric On November 29, 2007 the Victorville Director of Public Information posted a press release announcing that the City had entered into a contract with General Electric for power generation equipment. The press release is additional evidence that the Victorville 2 project used SCLAA bond funds for the primary benefit of the City of Victorville. Specifically, the press release touts that the “project is going to change Southern California’s energy supply picture and place Victorville on the global energy map.” The document also confirms that the project is owned by the City, not by the SCLAA. Specifically, the press release states that the City could sell the development rights to the plant or: the City could retain ownership [of the power plant] and use the project as the centerpiece of a Community Choice Aggregation entity, which would allow its member communities to receive the benefit of lower priced electricity. The Community Choice Aggregation entity mentioned in the quote above refers to a joint powers agency that the City had formed with the City of San Marcos and described in Section 3 of this report. Specifically, the JPA with San Marcos formed the California Clean Energy Resources Authority (Cal-CLERA). City officials had previously considered the potential of Cal-CLERA as a vehicle for selling power to other jurisdictions from the Victorville 2 Plant. The only mention of the airport in the press release states that the project will be built at the Southern California Logistics Airport and that it will be a “major milestone in the complex.” The actual parcels designated for this project are outside of the former GAFB approximately two miles north of the airport. Unclear Tax Increment Benefit to SCLAA Although City management has asserted that questioning the benefit of the Victorville 2 power plant ignores the benefits received by the previously built High Desert Power Plant, it is unclear that SCLAA would see the same benefits with this second plant. Specifically, the High Desert Power Plant provides increased tax increment financing to SCLAA. However, the Victorville 2 3 Fourth Amended and Restated VVEDA JPA Section 8 (Delegation of Authority). Harvey M. Rose Associates, LLC 5-10 Section 5: SCLAA Bond Expenditures plant would be located approximately two miles outside of the former GAFB parcels on purchased land. Given that these parcels are not within the former GAFB, but rather within the Victorville portion of the VVEDA project area, it is unclear whether tax increment derived from such property would be designated to SCLAA or to the City of Victorville. Delegated Governance and Management of SCLAA Creates a Potential Conflict of Interest for City of Victorville The delegated authority that the VVEDA Commission has given to Victorville for the governance and management of SCLAA creates a potential conflict of interest for the City. Even if the projects discussed in this section were deemed as appropriate by all members of the VVEDA, there remains an appearance that decisions made by Victorville City Council and Victorville management may have been biased in favor of the City’s interests, instead of the interests of all of the members of the JPA. The poorly justified use of SCLAA bond funds illustrates the potential conflicts of interest that the City Council and City staff have between representing the interests of the City and representing the interests of all JPA members in redeveloping the former GAFB. The JPA members of the VVEDA Commission should consider a review of the delegated authority provided to the City of Victorville for governance and administration of SCLAA to ensure representation of each individual jurisdictions’ interests in the governance and administration of redevelopment activities. Conclusions The VVEDA JPA stipulates the uses of tax increment raised on parcels of the former GAFB as well as tax increment from the member jurisdictions’ territories. The VVEDA JPA specifically requires that tax increment revenues which are to be allocated to GAFB should only be used for purposes that directly benefit the redevelopment of GAFB. The VVEDA JPA also delegates the authority of the management and operation of the GAFB parcels, including budgeting authority, redevelopment authority, and all management and operational authority to the Victorville City Council, “which shall act on behalf of the [VVEDA] Commission on all such matters.” The Victorville City Council, acting as the SCLAA Board of Directors, appears to have repeatedly mishandled SCLAA bond expenditures. In at least three instances the SCLAA Board and City management mishandled SCLAA bond funds by either: (1) poorly justifying expenditures; (2) failing to properly identify funding sources and accounting for Victorville’s pledged amount to SCLAA; or, (3) potentially expending funds allocated to GAFB on parcels outside of GAFB and not primarily or directly for the purpose for the redevelopment of GAFB. Recommendations The City Council should: 5.1. Revise the loan agreement between SCLAA and the City so that it incorporates back interest that should have accrued between 2005 and 2010 based on the State Pooled Money Investment Account average annual yields for the Local Agency Investment Fund. Harvey M. Rose Associates, LLC 5-11 Section 5: SCLAA Bond Expenditures 5.2. Review and amend the City’s financial statements so that the loan agreement between the City and SCLAA for the purchase of library parcels reflects the terms of the agreement. Specifically, that the loan is placed in the City’s Development Impact Fee fund. 5.3. Direct the City Manager to conduct an evaluation of the use of SCLAA bond funds for the Victorville 2 Power Plant project including an analysis of the amount of funds specifically allocated to SCLAA (less the Victorville pledge) that were used for the project. At the completion of such analysis, establish a loan agreement between the City and SCLAA for the repayment of the amount of SCLAA bond funds expended on the Victorville 2 Power Plant Project less the net amount4 pledged by Victorville for repayment of the bonds. The SCLAA Board should: 5.4. Direct the City Manager to establish an accounting system for all expenditures of SCLAA bond funds. Such a system should include an estimate of the amount of expenditures that are unrelated to the redevelopment of the former GAFB and would therefore require use of the Victorville pledge of funds from its own territory. 5.5. Direct the City Manager to establish a policy requiring the SCLAA Board of Directors to justify the use of SCLAA bond funds when used for projects outside of GAFB parcels. Such a policy should require a detailed justification for how the expenditures directly benefit the redevelopment of the former GAFB before the issuance and expenditure of future tax increment bonds. 5.6. Review current contracts for potential conflicts of interest. This would help ensure that the SCLAA Board of Directors makes decisions in the interest of the SCLAA. The VVEDA Commission should: 5.7. Consider a review of the delegated authority provided to the City of Victorville for governance and administration of the SCLAA to ensure representation of each individual jurisdiction’s interests in the governance and administration of redevelopment activities. Costs and Benefits The costs to the City of implementing these recommendations would include staff time and approximately $250,000 for the revision of the loan agreement for the library parcels and up to $76.2 million (but likely less after subtracting the amounts pledged by Victorville that would have otherwise been allocated to its own territory) to pay back the funds expended for the Victorville 2 Power Plant Project. The benefits of implementing the recommendations would include improved financial health of SCLAA. Implementation of governance recommendations would ensure that full, fair and proportionate representation of each jurisdictions’ interests would be represented on the Board. After the funds spent on the Interchange Project are considered. Harvey M. Rose Associates, LLC 5-12 N T Y OF SAN BERN A R D O U IN C O G R Quaerite Veritate m R Y A ND J U COMPLAINTS COMPLAINTS 2011-2012 San Bernardino County Grand Jury Final Report COMPLAINTS COMMITTEE The Grand Jury receives citizen complaints throughout the year. Every complaint is reviewed by the Grand Jury and a determination is made regarding the jurisdiction of the Grand Jury and each particular complaint. If jurisdiction is confirmed and the complaint warrants investigation, it is assigned to an appropriate committee. At times, an ad hoc committee is formed to investigate specific complaints. The complaint would then be investigated and the outcome reported to the Grand Jury. The process to submit a complaint is to obtain a Confidential Citizen Complaint Form from either the Grand Jury website or by calling the Grand Jury office. Once completed and signed, the form is returned to the office. Although the Grand Jury normally does not investigate unsigned complaints, depending on the issue, it may conduct an investigation from an anonymous source. The 2011-2012 Grand Jury received 38 new complaints and two were referred from the 2010- 2011 Grand Jury. Of those 40 total complaints, 14 were assigned and investigated, with the outcome of four of those investigations included in this Final Report. Nineteen complaints were not within the jurisdiction of the Grand Jury and the additional seven are being referred to the 2012-2013 Grand Jury. N T Y OF SAN BERN A R D O U IN C O G R Quaerite Veritate m R Y A ND J U COUNTY COMMITTEE COUNTY COMMITTEE COUNTY COMMITTEE Back row: Darrell Freeland, Rodney Desmeuchet, Ernesto Armenta, Louis Chavez Front row: Roger Trussell, Floydia Wilson, Felix Diaz, Sandra Shahan (chair) 2011‐2012 San Bernardino County Grand Jury Final Report COUNTY COMMITTEE Introduction This committee is concerned with, among other things, the offices of County government. It reviews agendas and notices of public hearings. Whenever possible, random attendance at those meetings ensure that the interest of public citizens is represented and that Government Code sections regarding open meetings laws are followed. Committee members attended Board of Supervisors meetings and reported items of interest to the Grand Jury. Committee members also attended Audit Committee Meetings. The following public officials and departments are within the purview of the County Committee:  Assessor/Recorder  Auditor/Controller/Treasurer/Tax Collector  Board of Directors  Board of Supervisors  Central Collections  County Administrative Office  County Airports  County Executive Officer  General Services  Facilities Management  Fleet Services  Human Resources  Information Services Department  Mail Services/Printing/Purchasing  Public Works  Real Estate Services  Registrar of Voters  Risk Management The following departments and agencies were visited and reviewed:  Adult Protective Services  Animal Control  Board of Supervisors  Charter Schools  County Airports  Fleet Services  Grand Jury Work Environment 12 2011‐2012 San Bernardino County Grand Jury Final Report  Helendale Community Services District  Inmate Integration  Purchasing  Registrar of Voters  San Manuel Amphitheater Final reports were issued on the following:  Devore Animal Shelter  Fleet Management Department  Grand Jury Work Environment  San Bernardino County Board of Supervisors 13 2011‐2012 San Bernardino County Grand Jury Final Report DEVORE ANIMAL SHELTER
• R12-19
  The BOS conduct a detailed statewide study of County Supervisors’ salaries and duties.