FINAL REPORT - San Bernardino Superior Court

Executive Summary
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 using approximately $45 million 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 to repay the balance of these
loans. 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.
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.
Based on these findings, 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.
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Harvey M. Rose Associates, LLC