Report 2014-132 Recommendation 8 Responses

Report 2014-132: Apple Valley Area Water Rates: Differences in Costs Affect Water Utilities' Rates, and One Utility May Have Spent Millions of Ratepayer Funds Inappropriately (Release Date: April 2015)

Recommendation #8 To: Victorville Water District

To address the excess interest expense resulting from loans to the city of Victorville and the building of the wastewater plant, Victorville should seek reimbursement from the city for its unrecovered costs. Victorville should work with the city to prepare and submit to the water district board and the Victorville city council by October 2015 a formal repayment plan including specific dates and payments to be made to ensure that the water district and its ratepayers are made whole. When the water district board approves such a plan, it should take steps to ensure compliance with the repayment plan.

Annual Follow-Up Agency Response From December 2020

The Victorville Water District's response has not changed.

Loans made to the City by the Victorville Water District (VWD), which for clarification purposes you refer to as "Victorville", were made at the Local Agency Investment Fund (LAIF) rate. This is the same rate those funds would have received if invested as all of the City's, District's, and other agency funds are invested, and the rate VWD received from LAIF prior to being loaned to the City. LAIF is a conservative, safe, fully guaranteed investment option. As discussed in your report, loans between the City and VWD have been fully repaid; however, it appears the California State Auditor is confused. There was an unforeseen issue with a difference in interest rates caused by advice from bond counsel, as discussed in your report. The interest differential resulted in $4,658,120.05 in additional costs to the District associated with the building of the wastewater treatment plant. This loan did not involve the City, it involved the VWD and Southern California Logistic Airport Authority (SCLAA). It would be inappropriate and potentially an illegal use of funds for the City to repay a loan by and between VWD and SCLAA. This additional interest was included in a first amended promissory note (loan) by and between the VWD and the VWD Wastewater Enterprise Fund which was approved by the VWD Board on April 7, 2015. This document was referenced in your investigative audit; however, misunderstood based on this recommendation. It will ensure repayment of any water delivery or connection fees loaned by VWD to build the wastewater treatment plant. This was corrected in April 2015, prior to the publishing of the investigative audit so there is no need for further action.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

The State Auditor was not confused in its recommendation. The difference in interest that harmed the water district was the result of loans between the water district and the city and between the water district and SCLAA. As the city council is the board of directors for all three bodies, it would be most practical to work with the city to ensure the water district is adequately repaid, whether it is from the city or SCLAA. Further, Victorville's response ignores the amount the city owes the water district for building its wastewater plant, an amount it acknowledges in the repayment plan mentioned above.

As we note on page 35 of our report, Victorville did approve a 21-year repayment plan after we brought these matters to its attention. However, we disagree that there is no need for further action. As we state in our recommendation, the Victorville Water District should take steps to ensure compliance with the plan, especially because it does not fully account for the amount owed to the water district.

1-Year Agency Response

Victorville did not submit a 1 Year response.

California State Auditor's Assessment of 1-Year Status: Will Not Implement

We contacted Victorville and it stated that it will not be changing its statement from the 60-day response. Please see its 60-day response and our assessment of that response below.

6-Month Agency Response

Victorville did not submit a 6-month response.

California State Auditor's Assessment of 6-Month Status: Will Not Implement

We contacted Victorville and it stated that it will not be changing its statement from the 60-day response. Please see its 60-day response and our assessment of that response below.

60-Day Agency Response

Loans made to the city by the Victorville Water District (VWD), which for clarification purposes you refer to as "Victorville", were made at the Local Agency Investment Fund (LAIF) rate. This is the same rate those funds would have received if invested as all of the city's, district's, and other agency funds are invested, and the rate VWD received from LAIF prior to being loaned to the city. LAIF is a conservative, safe, fully guaranteed investment option. As discussed in your report, loans between the city and VWD have been fully repaid, however, it appears the California State Auditor is confused. There was an unforeseen issue with a difference in interest rates caused by advice from bond counsel, as discussed in your report. The interest differential resulted in $4,658,120.05 in additional costs to the district associated with the building of the wastewater treatment plant. This loan did not involve the city, it involved the VWD and Southern California Logistics Airport Authority (SCLAA). It would be inappropriate and potentially and illegal use of funds for the city to repay a loan by and between VWD and SCLAA. This additional interest was included in a first amended promissory note (loan) by and between the VWD and the VWD Wastewater Enterprise Fund which was approved by the VWD Board on April 7, 2015. This document was referenced in your investigative audit, however misunderstood based on this recommendation. It will ensure repayment of any water delivery or connection fees loaned by VWD to build the wastewater treatment plant. This was corrected in April 2015, prior to the publishing of the investigative audit so there is no need for further action.

California State Auditor's Assessment of 60-Day Status: Will Not Implement

The State Auditor was not confused in its recommendation. The difference in interest that harmed the water district was the result of loans between the water district and the city and between the water district and SCLAA. As the city council is the board of directors for all three bodies, it would be most practical to work with the city to ensure the water district is adequately repaid, whether it is from the city or SCLAA. Further, Victorville's response ignores the amount the city owes the water district for building its wastewater plant, an amount it acknowledges in the repayment plan mentioned above.

As we note on page 35 of our report, Victorville did approve a 21-year repayment plan after we brought these matters to its attention. However, we disagree that there is no need for further action. As we state in our recommendation, the Victorville Water District should take steps to ensure compliance with the plan, especially because it does not fully account for the amount owed to the water district.

All Recommendations in 2014-132

Agency responses received are posted verbatim.