Victoria's financial watchdog will investigate revelations that more than $1 billion of taxpayers' money was used to finance major projects spruiked by the former Labor government as privately funded, including the Royal Children's Hospital, Southern Cross Station and the Royal Women's Hospital.

The probe by the Auditor-General follows a report in The Age on Wednesday showing the former Brumby government lent money to the ongoing Royal Children's Hospital redevelopment, despite telling the public that the project was privately funded.

Kevin Rudd with then premier John Brumby at Southern Cross Station. Credit:Jason South

In November 2007, the government-owned Victorian Funds Management Corporation purchased $1.2 billion of bonds issued by the hospital's project syndicate, Children's Health Partnership.

Ratings agency Standard & Poor's has downgraded $58 million worth of the bonds bought by VFMC to "junk" status, warning that rents at the hospital are under pressure.