FINAL REPORT - San Bernardino Superior Court

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.
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Harvey M. Rose Associates, LLC