By Wayne Lusvardi

A recent lawsuit filed by the Securities and Exchange Commission alleged Victorville city officials and bond underwriters defrauded bondholders of $13.3 million in 2008 due to failure to disclose actions and risks of “inflated property values” backing redevelopment bonds.  SEC prosecutors alleged Victorville and its bond underwriters failed to disclose these risks to bond investors in the bond prospectus. 

Another charge made by the SEC is that Victorville undertook a so-called “ill conceived” gas-fired power plant project financed with redevelopment bonds.

The president of Inland Energy Tom Barnett, developer of the proposed Victorville 2 Hybrid Power Plant, had his personal bank account records subpoenaed on Jan. 26, 2013 to peek into his political campaign contributions. 

Victorville: Texas West

Victorville is a community of about 115,000 people in the high desert area of inland Southern California. It is about 100 miles east of Los Angeles. It has a Texas-like feel to it due to its desert topography, former military residents, libertarian newspaper and pro-growth policies.

Victorville was the second fastest growing area in the U.S. in 2008.  Its economy is dependent on the conversion of the former George Air Force Base into a cargo transport airport, rail transport hub and warehousing center for wholesale goods.

In 2006, California mandated a shift to 33 percent green power by 2020 under AB 32, the Global Warming Solutions Act of 2006.  Victorville poised itself to benefit from this shift toward cleaner power.  In 2008, Victorville and Inland Energy had obtained permits to build a 563-megawatt hybrid natural gas-solar power plant on the land near the former George Air Force Base, now called the Southern California Logistics Airport.

In 2007, BNSF Railway Company, the largest railroad company in the U.S., had also tentatively picked Victorville for the site of a new regional transport hub.

The boom in Victorville took about 5 years to emerge but only about a month to bust. 

Inflated or deflated property values?

At the heart of the SEC’s complaint is that Victorville and its consultants inflated property values on four airport hangars that served as collateral for redevelopment bonds.  However, prior to issuance of the bonds during a worsening credit market, the bond markets demanded a higher debt coverage ratio of 1.25 from the 1.10 ratio of prior bonds issues.  A debt coverage ratio is the amount of the prospective future rental income from the four hangars above the amount of bonds issued.  It serves as a cushion in the event of an unanticipated downturn in the economy.

As a result of the higher debt coverage ratio, Victorville hardly had any resources left to continue redevelopment activities. So it borrowed $35 million, of which $13.3 million was to be paid back in debt (e.g., bonds).  The $13.3 million bond was secured by the $65 million value in four airport hangars.  The SEC claims the value of the hangars was only about $28 million.  But the bond underwriter — Kinsell, Newcomb and DeDios — claims it spent $56 million just to build the four hangars, let alone the value of the land.  But did the underwriter inflate the value or did market values plummet?

Reportedly, the County Assessor’s office assessed value for property tax purposes fell far short of $65 million for the hangars.  A sufficient assessed value was needed to issue tax increment bonds used in redevelopment.  The assessor’s low valuation ran against Rule 6 (a) of the State Board of Equalization’s “Assessor’s Handbook 410, Assessment of Newly Constructed Properties,” which states on p. 19:

 “The reproduction or replacement cost approach to value is used in conjunction with other value approaches and is preferred when neither reliable sales data nor reliable income data are available and when the income from the property is not so regulated as to make such cost irrelevant.  It is particularly appropriate for construction work in progress and for other property that has experienced relatively little physical deterioration….” 

How could the bond underwriter have reasonably foreseen that the assessed value would fall 57 percent less than $65 million? The state’s own assessment rules would have indicated a much higher value based on the cost to construct the hangars.   And the assessor’s valuation reportedly did not come until after the bonds were issued.

Moreover, Standard and Poor’s bond rating service originally rated Victorville’s $13.3 million tax increment redevelopment bond BBB.  This is considered a borderline non-investment speculative grade bond (“junk bond”). Victorville’s subordinated bonds involved in the lawsuit were given a “CC-” rating by Moody’s bond rating service in 2009 (on a scale of Aaa1 is best and C worst).

Backdrops and contexts

A backdrop totally ignored in the SEC lawsuit was the effect of the sudden collapse of credit, bond and real estate markets in 2008.  What drives land values in Victorville’s import-based economy is the amount of incoming goods at the Ports of Los Angeles and Long Beach.  Container counts at the Port of Los Angeles dropped from 8.4 million in 2007 to 6.7 million by 2009.  That had a ripple effect that could be felt 100 miles away in Victorville.  Demand for wholesale warehouse space and a regional air and rail hub suddenly vanished.

With the deep depression also came an unplanned decline in the consumption of electricity in California.  Electricity use dropped by 19,564 gigawatts from 2007 to 2011.  A gigawatt is enough to supply the demand of about one million average homes.  California used 264,234,911 gigawatt hours in 2007, but only 250,384,248 by 2010.  Demand for the 563-megawatt Victorville 2 hybrid power plant vanished almost at the flip of a switch. A megawatt is 1/1,000th of a gigawatt.

Power plants in California are not built “on spec.”  The California Energy Commission and the California Independent System Operator schedule new plants to fill growing demand and the loss of power from the decommissioning of older, dirtier power plants.

The California Energy Crisis of 2001 was partly caused by not issuing enough permits for new power plants and banning power plant operators from coordinating power demands during the crisis. How could Victorville’s proposed power plant have been “ill-conceived,” as the SEC alleges, when the market for new power plants is so highly regulated?

Probable cause for prosecution? 

There remain a lot of questions about the SEC action.

For example, why has the SEC singled out Victorville, a Republican-run city, and not bond deals in the Democratic-leaning City of Stockton with its $59.6 million in nearly defaulted redevelopment bonds?

Or why has the SEC not delved into the widely known conflicts of interests involved with the California Communities Development Authority and its creation of Public Financing Authorities that are being copied throughout the country?  California State Treasurer Bill Lockyer has opened a conflict-of-interest probe.

But the SEC seems obsessed with $2.3 million in “management fees” used by Victorville’s bond underwriter Kinsell, Newcomb, and DeDios.  The SEC is concerned that a 10 percent bond-underwriting fee is excessive. But even Investopedia.com says 10 percent is a typical fee for issuance of a revenue bond.

The attorney representing Victorville and the Airport Authority is Terree Bowers, a former U.S. Attorney for the Central District of California. He said, “It’s a mistake for the SEC to treat municipalities the same way they treat corporations.”  Bowers added, “These actions [the SEC lawsuit] are somewhat questionable given the city’s emerging recovery from the Great Recession.  It is certainly worth debating whether this lawsuit is in anyone’s best interest.”

The SEC’s case could be rendered unneeded by the same forces that brought about the bondholder’s losses.  Port of Los Angeles container volumes are up significantly in 2013.  But redevelopment bonds are no longer available after Gov. Brown shut down redevelopment agencies in Feb. 2011.  Victorville’s 2007 and 2008 bonds were reported by the SEC to be currently trading in bond markets around 45 cents to the dollar in value.  Perhaps a settlement could be reached with bondholders?

The SEC wants to protect bondholders from further losses. But given the backdrop of the Obama-administration’s IRS scandal, and the circumstances surrounding Victorille’s $13.3 million redevelopment bond loss, the public will surely be debating whether there is any merit to the SEC’s case.

Songs and books have been written about the importance of living every day as if it will be your last. While a seemingly noble concept, living out each day indulging in special moments and treats instead of addressing responsibilities could be seen as a little self-indulgent.

However, living as a liberal would be much more accepted and easier, far more self-satisfying and approved by the mass media.

Being a conservative in California is just too much work.

But before I fully tap into my inner liberal, I will need to practice dropping the f-bomb in casual conversation more frequently, brush up on making stinging personal attacks against people I dislike or disagree with and watch more vile television programs like “Two and a Half Men.”

Living like a liberal is going to be easy and fun, but the To-Do list is long.

It’s Time To Demand A Free Education

Because California needs one more smarmy, liberal lawyer, I plan on signing up for law school. To pay for tuition and books, as well as my considerable personal expenses while I attend, I will need massive student loans and all of the Cal-Grants I can get my hands on.

In order to qualify for the grants, I will have to dump my husband and quit my job. Life will be more enjoyable going to school instead of working, while maintaining a well-deserved and very active social life. The divorce will help seal the necessary indigence requirement for loan and grant qualification, since I am not considered part of a protected minority class.

Meet Your New Neighborhood Nanny

Because I know what’s best for all of my neighbors, friends and family, I will practice being everyone’s neighborhood nanny, beginning with turning in all of the fireplace-users and water violators in my neighborhood.

Next, I will lead the fight for water meter installation on every home in the city, usage limiters on the heating and air conditioning systems in each of the 6,000 homes in my neighborhood, as well as the requisite solar systems on the rooftops, and home water storage and recycling systems.

Every neighbor should be composting, as well.

While I will work to make sure that tiny, white twinkle lights are still allowed on homes during the generic winter holiday, no Nativity scenes, plastic Santas or Frostys will be allowed.

This neighborhood nanny will work to ban all political signs from neighbors’ lawns, because isn’t everyone who matters already liberal?

It’s All About ‘Green’

I will buy a Chevy Volt — no, I’ll buy a Tesla. I am worth the best. I will just add the $109,000 onto my student loans. The carbon offset credits from the purchase should cover me until 2050.

I will shame my “ex-husband” into dumping his SUV. He can drive a Prius like everyone else in the neighborhood.

The Journalist In Me

I will subscribe to the New York Times and the Washington Post, and start out every day listening to NPR for daily liberal talking points, and voting tips.

I will no longer need to do my own research on important economic trends, energy independence, social issues or global warming.  Like all other liberals, I will be able to get up every morning and get my fill of liberal politics fed to me as I eat my daily ration of organic multi-grain cereal with pesticide-free banana slices.

Tapping My Inner Vegan

Since I am already a vegetarian, it’s time to force my righteously healthy eating habits on everyone I encounter. It is not enough to make a scene in a restaurant when demanding special preparation of my food orders, it’s time to demand that restaurants feed everyone the way I eat.

Dreamy Social Issues

As a soon-to-be-liberal-lawyer-in-training, I plan on practicing manipulation of the law, and will demand that the government take care of everyone who wants or needs all social services.

The environment — especially the coast — will take precedence over the people of California.  We must save the ocean, save the whales, save the spotted owl, save the desert tortoise, save the Delta Smelt, save the Redwoods and Sequoias and save Malibu and Carmel while we’re at it.

Animals and prisoners have rights too. And state employees deserve their own Bill of Rights.

The Occupier In Me

Note to self: Meet up with local Occupiers to protest for a free education, free healthcare coverage, a free home, free transportation and free coffee from Starbuck’s.

Removal of the Conservative Outer Layer

The need to liberate my stodgy, conservative self is overpowering. I vow to give away my sensible dresses and slacks in exchange for more grungy, man-of-the-people clothes. Then I will stop wearing makeup, nail polish and hair products that are tested on laboratory animals. I will replace my fascist gold earrings with grommets. I’ll pierce my nose, lip, and cheek and get a sleeve of tattoos on my left arm … because I am left-handed.

The best part of this fashion change is that I won’t have to do laundry as frequently, and jewelry changes will be nil.

Liberal Mom Redux

I am going to need to talk my son into quitting the Navy. I don’t know how a kid who attended Montessori School in kindergarten found his way into the Navy.

I must have fed him too much meat when he was a child.

Rebirth As A Feminist

Becoming a card-carrying feminist should be the most fun part of being liberal: 1) Always play the victim; 2) Attack conservative women for their lofty morals and disciplined work ethic; 3) Be mean to other women; 4) Be meaner to men; 5) Hate myself for having a uterus; 6) Turn my boy children into wimps; 7) Replace husband with a girlfriend.

Tax The Rich

As an angry, activist, feminist lawyer, I will pursue changes to the tax code requiring the 1 percenters to pay more than their fair share of taxes. The rich have been enjoying their money for too long, and need to spread some of that love around.

Crass Is Cool

Lastly, I am going to contact talk radio hosts across America, and convince them to become comedians — or at least call themselves comedians. Once everyone knows they are comedians, they can say anything they want — crass, gross, disgusting, distasteful and vulgar things — and get away with it. They wouldn’t even have to be funny.

As a liberal, I’ll be able to talk like a sailor anywhere I want. I might even start watching Bill Maher without recoiling in disgust.

Rebirth as a liberal is going to be fun and easier. And maybe, just maybe, some of my old friends and dinner party acquaintances will start talking to me again. Sometimes I miss being part of the über-popular crowd.

— Katy Grimes