$200M claim filed against city

Filing includes RICO corruption allegation; top Victorville officials named

BY BROOKE EDWARDS
VV Daily Press STAFF WRITER 5-1-09

    VICTORVILLE
• A business owner has filed a $200 million claim against the city as part of a bankruptcy case in Arizona courts, alleging a pattern of corruption that involves handshake deals, altering documents, conspiracy and more.
    A slew of city officials h ave a l s o been named in the claim including Councilmen Terry Caldwell, Mike Rothschild and Rudy Cabriales, former city manager Jon Roberts, City Attorney Andre De Bortnowsky and the city’s investment banker Jeff Kinsell.
    The claim involves a dispute that’s been brewing for nearly three years over the construction of four hangars at Southern California Logistics Airport — the same four hangars that were depreciated by $36 million during the city’s last audit , over protest from some city officials.
In the case, Will Graven, owner of CBS Aviation Development, claims he was initially brought in on a handshake in 2005 to build the hangars so that the city could evade the bidding process and avoid paying prevailing wage, saving some $20 million on the project.
    The plan, he said, was for him to construct the hangars — totaling some 350,000 square feet — under a “build to suit for lease” agreement, leasing them back to the city for $1.25 per square foot.
    The city then signed agreements to lease the hangars out to Pratt & Whitney, Victorville Aerospace and Leading Edge at 45 cents per square foot, Graven said, with Victorville willing to take a loss in the interest of generating jobs and tax revenue.
    While the city tells an entirely different story, Graven claims he’d invested some $50 million total and came close to completing all four hangars. He then said the city was unable to get promised bonding for the rest due to its poor credit rating — represented to him as a true AA but, documents show, was actually a BBB.
    He said the city later used “extortion,” threatening to foreclose on the hangars unless he agreed to sign them over to Kinsell’s company, KND. Court documents allege this settlement agreement with KND was manipulated by the city attorney’s office to cheat him out of the $8.4 million he says he’s still owed for his investment into the project.
    These actions — backed by similar claims popping up in other litigation against the city — led Graven to add civil RICO claims to his case, under the federal Racketeer Influenced and Corrupt Organizations Act, he said.
    “I have not read Will Graven's lawsuit so I don't know what he’s alleging,” Caldwell said. “But it’s really easy to file a lawsuit, especially a lawsuit that is not verified.”
    Rothschild deferred to spokeswoman Yvonne Hester for comment.
    “I really can’t comment other than I wasn't involved with him at all other than through the City Council,” Cabriales said regarding Graven.
    De Bortnowsky also declined to comment, as it’s pending litigation and he said there’s a confidentiality clause in the settlement agreement.
    However city officials told the Daily Press in 2006 that Graven was simply a private developer when contractors who were owed millions for work on the hangars stormed a council meeting demanding payment. Officials said Graven had little to show for $25 million Victorville had loaned him, and that the city was not responsible for his inability to finance the remainder of the project.
    Once ownership of the hangars was transferred, the city loaned KND another $63 million to finish the construction, according to Victorville’s 2006-2007 audit report.
    De Bortnowsky said he believes the hangars now belong to the city.
    The case is scheduled for discussion in closed session during Victorville’s council meeting Tuesday night.

General Electric terminates contract
Victorville faces $50 million loss, plus $108 million fee or loss of VV2
BY BROOKE EDWARDS
Daily Press STAFF WRITER 4-18-09


    VICTORVILLE
• General Electric terminated its contract with Victorville for $173 million in power plant equipment after five months of payment extensions, officials confirmed Friday.
    “We’re asking for full and immediate payment, per the terms of the contract,” said GE spokespman Tom Rumsey.
    Those terms allow GE to keep Victorville’s $50 million deposit on the equipment , plus either demand a $108 million termination fee or take control of the Victorville 2 power plant.
    The city’s attorneys are fighting the termination, citing a provision in the contract that allows for a 30-day resolution period between senior management following a notice of dispute before moving the battle to court.
    Rumsey said he couldn’t comment on any specifics of the ongoing negotiations, but said GE is still working with the city to determine what impact the termination will have.
    The city doesn’t have $108 million, officials have clearly said, with the possibility of bankruptcy even mentioned if GE were to demand payment.
    With little likelihood of GE being able to get the termination fee from the struggling city, the company is leaning toward taking control of VV2 instead.
    Signing over the plant would mean losing upwards of $50 million the city has invested into permits, engineering and land acquisition, plus the potential for a $20 million developer’s fee the city hoped to get selling VV2 to a private company.
    If GE gets VV2 and doesn’t move forward with its development, the city will also lose what developer Inland Energy has estimated to be a $6 to $8 million annual revenue stream.
    Councilman Terry Caldwell — then city mayor — signed the GE contract unanimously approved by the council in December 2007, months before the plant had even been permitted for construction. Caldwell told the Daily Press then that the city recognized the risk involved, but said it was worth it to lock in a lower price on the equipment and to save time down the road.
    Tom Barnett, executive vice president of In l a n d E n e rg y a n d project manager on the plant, told the Daily Press in 2007 that there was an escape clause in the GE contract and that the termination fees were “relatively small” compared with the value of the equipment.

Victorville credit ratings suspended
S&P downgrades bonds to junk status
BY BROOKE EDWARDS
STAFF WRITER VICTORVILLE Daily Presss 4-19-09

Defaults, too much debt, a depleted general fund and too many inter-fund loans led Standard & Poor to suspend credit ratings for several Victorville bonds.
    Standard & Poor’s Rating Services also downgraded bonds from the city’s Redevelopment Agency and Southern California Logistics Airport Authority to “junk” status this week to match the rating for the bonds’ insurer Syncora Guarantee Inc.
    Bonds for both agencies were dropped to a CC Negative, meaning they may face further downgrades. Another dipped to a C and both of these bonds will be at a rating S&P says are typically used “to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.”
    The suspension came after S&P reviewed Victorville’s financial status and found what it considers “significant unfunded obligations outstanding and a practice of making inter-fund loans and transfers,” according to a report from the New York-based company.
    Inter-fund loans totaled $17.3 million as of the last audited budget end- ing June 2007, with the sanitary district loaning money to the general fund and the general fund loaning money to the city’s utility department.
    “We believe these transfers raise questions about the liquidity in the agency, authority and district’s funds, and whether they remain sufficient to support debt service payments,” the report states.
   Another major concern for the agency is the city’s $83 million outstanding bond for the failed Foxborough power plant, which is now in default. As a result, the report states, “the bank could require full payment at any time.”
    S&P also cites the city’s $126 million liability to General Electric and an impairment loss of $36 million for hangars at SCLA.
    “We believe that this variety of loans and losses make it even more important that we have access to and are able to review up-to-date and accurate financial statements in order to properly assess financial flexibility and strength of the city...” the report says.
    With the 2008 audit now nearing four months late and the auditors issuing no opinion on the 2007 finances, S&P said the bonds will be listed as “NR,” or no rating, until reliable financial statements are available.

Residents, business will suffer under city's meltdown
BY BROOKE EDWARDS
Daily Press STAFF WRITER 4-19-09

Brooke Edwards may be reached at 955-5358 or at bedwards@ VVDailyPress.com.


    VICTORVILLE
 Halting city projects, discouraging new businesses and bigger bills for taxpayers are a few implications of Victorville’s poor credit rating. “This is a huge scarlet letter on the city,” said Doug Johnson, a fellow with The Rose Institute of State and Local Government at Claremont McKenna College.
“For the most part, it will stop any possibility of new projects,” he said, with no financing available — the exception being if the city turns to private placement notes, otherwise known as junk bonds.
 These notes trade at a higher interest rate and are not tax deductible. And they are exactly what Victorville is being forced to use to finance its planned wastewater treatment plant, needed to meet contractual obligations with Dr Pepper Snapple Group.
 The council recently approved a plan to use $55 million in five-year notes with an up to 12 percent interest rate to build the plant. This is as much as double the rate of an investment-grade bond, potentially doubling the total cost of the plant.
  “The next Dr Pepper is going to be very reluctant to come with this over their heads,” Johnson said.
  Though residents won’t feel the impact of the credit crunch right away, Johnson pointed out that the rating problems are only a symptom of the city’s bigger budget concerns. With defaults, a depleted general fund and other substantial problems, he said it’s likely only a matter of time before roads aren’t getting paved and sewers aren’t getting upgraded — and residents are truly feeling the fallout.