4-6-11 Sj Ccfd

NEW ISSUE – BOOK ENTRY ONLY RATINGS: Moody’s: “A2” S&P: “A-” See “RATINGS.” In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the 2011 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the 2011 Bonds is not a specific preference item for purposes of the federal individual and corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the 2011 Bonds. See “LEGAL MATTERS - Tax Matters.” $107,425,000 CITY OF SAN JOSE SPECIAL HOTEL TAX REVENUE BONDS, SERIES 2011 (Convention Center Expansion and Renovation Project) Dated: Date of Delivery Due: May 1, as shown on inside cover Authority for Issuance. The bonds captioned above (the “2011 Bonds”) are being issued by the City of San José (the “City”) under Chapter 14.32 of the Municipal Code of the City of San José (the “Chapter”) and an Indenture, dated as of April 1, 2011 (the “Indenture”), by and between the City and U.S. Bank National Association, as trustee (the “Trustee”). The City Council (the “City Council”) and the eligible landowner voters in the “Convention Center Facilities District No. 2008-1, City of San José, County of Santa Clara, State of California” (the “Convention Center Facilities District”) have authorized the issuance of the 2011 Bonds. See “THE 2011 BONDS – Authority for Issuance.” Use of Proceeds. The 2011 Bonds are being issued to (i) finance the acquisition, expansion, construction, reconstruction, rehabilitation, replacement and upgrade of the San José McEnery Convention Center, (ii) fund a reserve fund for the 2011 Bonds and (iii) pay the costs of issuing the 2011 Bonds. See “ESTIMATED SOURCES AND USES OF FUNDS” and “IMPROVEMENTS TO BE FINANCED BY THE CONVENTION CENTER FACILITIES DISTRICT AND WITH PROCEEDS OF THE 2011 BONDS.” Security and Sources of Payment. The 2011 Bonds are payable solely from (i) revenues derived from the levy of a special tax (the “Special Tax”) on hotel properties within the Convention Center Facilities District according to the rate and method of apportionment of special tax approved by the City Council and the eligible landowner voters in the Convention Center Facilities District, and (ii) moneys deposited in certain funds held by the Trustee under the Indenture, including a Revenue Stabilization Reserve. A portion (the “Available T.O.T.”) of the moneys received by the City as a result of the levy of the City’s transient occupancy tax (the “T.O.T.”) may be deposited into the Revenue Fund established under the Indenture and used to pay debt service on the 2011 Bonds, but the City Council has no obligation to appropriate the Available T.O.T. for this purpose. See “SECURITY FOR THE 2011 BONDS.” Additional Bonds Payable on a Parity Basis. Subject to the conditions set forth in the Indenture, the City may at any time issue a series of bonds payable from the Special Taxes on a parity with the 2011 Bonds (“Additional Bonds”). See “SECURITY FOR THE 2011 BONDS – Additional Bonds.” Subordinate Bonds. Concurrently with the issuance of the 2011 Bonds, the City will cause the issuance of a series of lease revenue bonds (the “Series 2011A Lease Revenue Bonds”) to provide additional financing for the San José McEnery Convention Center project. The Series 2011A Lease Revenue Bonds will be payable from lease payments made by the City and from Special Taxes on a subordinate basis to the 2011 Bonds, and the City is authorized to cause issuance of additional bonds payable from Special Taxes on a subordinate basis to the 2011 Bonds. See “SECURITY FOR THE 2011 BONDS – Subordinate Obligations.” Bond Terms. Interest on the 2011 Bonds is payable on November 1, 2011, and semiannually thereafter on each May 1 and November 1. The 2011 Bonds will be issued in denominations of $5,000 or integral multiples of $5,000. The 2011 Bonds, when delivered, will be initially registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”), New York, New York. DTC will act as securities depository for the 2011 Bonds. See “THE 2011 BONDS – General Bond Terms” and “APPENDIX D – DTC and the Book-Entry Only System.” Redemption. Prior to their maturity, the 2011 Bonds are subject to optional redemption and mandatory sinking fund redemption. See “THE 2011 BONDS - Redemption.” The 2011 Bonds are limited special tax obligations of the City and the interest on and principal of and redemption premiums, if any, on the 2011 Bonds are payable solely from the proceeds of the Special Tax, all amounts in the Revenue Fund, and any investment earnings thereon, and the City is not obligated to pay the interest on and principal of and redemption premiums on the 2011 Bonds except from the proceeds of the Special Tax and such other funds. The general funds and assets of the City are not liable and the full faith and credit of the City is not pledged for the payment of the interest on or principal of or redemption premiums, if any, on the 2011 Bonds, and no tax or assessment other than the Special Tax shall ever be levied or collected to pay the interest on or principal of or redemption premiums, if any, on the 2011 Bonds. The 2011 Bonds are not secured by a legal or equitable pledge of or charge, lien or encumbrance upon any property of the City or any of its income or receipts except the proceeds of the Special Tax and such other funds as provided in the Indenture, and neither the payment of the interest on or principal of or redemption premiums, if any, on the 2011 Bonds is a general debt, liability or obligation of the City. The Available T.O.T. (as defined in this Official Statement) is not pledged for the payment of the interest on or principal of or redemption premiums, if any, on the 2011 Bonds. The 2011 Bonds do not constitute an indebtedness of the City within the meaning of any constitutional or statutory debt limitation or restriction, and neither the City Council nor the City nor any officer or employee of the City will be liable for the payment of the interest on or principal of or redemption premiums, if any, on the 2011 Bonds otherwise than from the proceeds of the Special Tax and the other funds as provided in the Indenture. ______MATURITY SCHEDULE ______(see inside cover)

This cover page contains certain information for quick reference only. It is not a summary of the issue. Potential investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. Investment in the 2011 Bonds involves risks that may not be appropriate for some investors. See “BOND OWNERS’ RISKS” for a discussion of special risk factors that should be considered in evaluating the investment quality of the 2011 Bonds. The 2011 Bonds are offered when, as and if issued and accepted by the Underwriters, subject to approval as to their legality by Orrick, Herrington & Sutcliffe LLP, Bond Counsel, and subject to certain other conditions. Certain legal matters will be passed on for the City by its City Attorney. Jones Hall, A Professional Law Corporation, San Francisco, California is acting as Disclosure Counsel to the City. Hawkins Delafield & Wood LLP is acting as counsel to the Underwriters. It is anticipated that the 2011 Bonds, in book-entry form, will be available for delivery on or about April 12, 2011. BofA Merrill Lynch Citi Wells Fargo Securities Dated: March 30, 2011

MATURITY SCHEDULE (Base CUSIP†: 798180)

$21,425,000 Serial Bonds

Maturity Principal Interest (May 1) Amount Rate Yield Price CUSIP† 2014 $ 400,000 3.000% 2.450% 101.607% AA3 2015 330,000 3.500 3.170 101.244 AB1 2015 1,350,000 5.000 3.170 106.906 AR6 2016 255,000 4.000 3.740 101.185 AC9 2016 1,500,000 5.000 3.740 105.750 AS4 2017 1,840,000 5.000 4.050 105.052 AD7 2018 255,000 4.000 4.370 97.772 AE5 2018 1,680,000 5.000 4.370 103.786 AT2 2019 300,000 4.250 4.660 97.270 AF2 2019 1,730,000 5.000 4.660 102.258 AU9 2020 2,130,000 5.000 4.930 100.503 AG0 2021 2,235,000 5.250 5.110 101.086 AH8 2022 2,350,000 5.000 5.330 97.267 AJ4 2023 2,470,000 5.250 5.490 97.900 AK1 2024 2,600,000 5.500 5.630 98.805 AL9

$5,630,000 5.500% Term Bond due May 1, 2026 – Price 96.331%; Yield 5.870% CUSIP† AM7

$17,240,000 6.125% Term Bond due May 1, 2031 – Price 97.907%; Yield 6.310% CUSIP† AN5

$23,385,000 6.500% Term Bond due May 1, 2036 – Price 98.057%; Yield 6.660% CUSIP† AP0

$39,745,000 6.500% Term Bond due May 1, 2042 – Price 97.014%; Yield 6.730% CUSIP† AQ8

† CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein are provided by CUSIP Global Services, managed by Standard & Poor’s Financial Services LLC on behalf of The American Bankers Association. These data are not intended to create a database and do not serve in any way as a substitute for the CUSIP services. Neither the City nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth above.

GENERAL INFORMATION ABOUT THIS OFFICIAL STATEMENT

No Offering May Be Made Except by this Official Statement. No dealer, broker, salesperson or other person has been authorized by the City to give any information or to make any representations with respect to the 2011 Bonds other than as contained in this Official Statement, and, if given or made, such other information or representation must not be relied upon as having been given or authorized by the City or the Underwriters. Use of this Official Statement. This Official Statement is submitted in connection with the sale of the 2011 Bonds described in this Official Statement and may not be reproduced or used, in whole or in part, for any other purpose. This Official Statement does not constitute a contract between any owner of the 2011 Bonds and the City or the Underwriters. Preparation of this Official Statement. The information contained in this Official Statement has been obtained from sources that are believed to be reliable, but this information is not guaranteed as to accuracy or completeness. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. Copies of Documents. Copies of documents referred to herein and information concerning the 2011 Bonds are available from the City of San José – Finance, Debt Management, 200 East Santa Clara Street, 13th Floor, San José, California 95113, Phone: (408) 535-7010. The City may impose a charge for copying, mailing and handling. Estimates and Forecasts. When used in this Official Statement and in any continuing disclosure made by the Authority or the City, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “forecast,” “expect,” “intend” and similar expressions identify “forward looking statements.” Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is subject to such uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. This Official Statement speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice. Neither the delivery of this Official Statement nor any sale of the 2011 Bonds will, under any circumstances, create any implication that there has been no change in the affairs of the City, the Convention Center Facilities District or any other party described in this Official Statement, since the date of this Official Statement. Document Summaries. All summaries of documents contained in this Official Statement are made subject to the provisions of such documents and do not purport to be complete statements of any or all such provisions. Each reference in this Official Statement to a document is qualified in its entirety by reference to such document, which is on file with the City. No Unlawful Offers or Solicitations. This Official Statement does not constitute an offer to sell or a solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. No Registration with the SEC. The issuance and sale of the 2011 Bonds have not been registered under the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, and the Indenture has not been qualified under the Trust Indenture Act of 1939, as amended, in both cases in reliance upon exemptions provided thereunder. Public Offering Prices. The Underwriters may offer and sell the 2011 Bonds they are underwriting to certain dealers, institutional investors and others at prices lower than the public offering prices stated on the inside cover page of this Official Statement, and such public offering prices may be changed from time to time. IN CONNECTION WITH THE OFFERING OF THE 2011 BONDS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2011 BONDS IT IS UNDERWRITING AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. City Website. The City maintains a website. However, the information presented there is not a part of this Official Statement and should not be relied upon in making an investment decision with respect to the 2011 Bonds.

CITY OF SAN JOSE

City Council

Chuck Reed, Mayor

District 1: Pete Constant, Member District 2: Ash Kalra, Member District 3: Sam Liccardo, Member District 4: Kansen Chu, Member District 5: Xavier Campos, Member District 6: Pierluigi Oliverio, Member District 7: Madison Nguyen, Vice Mayor District 8: Rose Herrera, Vice Mayor District 9: Donald Rocha, Member District 10: Nancy Pyle, Member

City Officials

Debra Figone, City Manager Richard Doyle, City Attorney Dennis D. Hawkins, CMC, City Clerk Scott P. Johnson, Director of Finance

City Staff

Ed Shikada, Assistant City Manager Julia H. Cooper, Assistant Director of Finance Patricia A. Deignan, Chief Deputy City Attorney Arn Andrews, Treasury Division Manager Charlene Sun, Debt Administrator Peter Detlefs, Financial Analyst

PROFESSIONAL SERVICES

Bond Counsel

Orrick, Herrington & Sutcliffe LLP San Francisco, California

Disclosure Counsel

Jones Hall, A Professional Law Corporation San Francisco, California

Financial Advisor

Stone & Youngberg LLC San Francisco, California

Trustee

U.S. Bank National Association, San Francisco, California

TABLE OF CONTENTS

Page Page INTRODUCTION ...... 1 Projected Special Tax Revenues and ESTIMATED SOURCES AND USES OF Available T.O.T...... 40 FUNDS ...... 5 Projected Debt Service Coverage ...... 44 IMPROVEMENTS TO BE FINANCED BY BOND OWNERS' RISKS...... 47 THE CONVENTION CENTER Limited Obligation of the City to Pay Debt FACILITIES DISTRICT AND WITH Service ...... 47 PROCEEDS OF THE 2011 BONDS...... 6 Levy and Collection of the Special Tax.... 47 THE 2011 BONDS...... 7 Cyclical Nature of Hotel Tax Revenue General Bond Terms...... 7 Stream...... 47 Authority for Issuance...... 7 Factors Affecting Hotel Tax Revenues .... 48 Debt Service Schedule...... 9 Concentration of Tax Base...... 50 Redemption...... 11 Payment of Special Tax is not a Personal Registration, Transfer and Exchange ...... 13 Obligation of Property Owners...... 50 SECURITY FOR THE 2011 BONDS ...... 13 Natural Disasters...... 50 General ...... 13 Natural Gas Transmission Pipelines...... 52 Special Taxes ...... 14 Hazardous Substances ...... 53 Rate and Method...... 15 Other Possible Claims Upon the Value of Teeter Plan ...... 18 Hotel Property...... 54 Revenue Fund ...... 18 Exempt Properties and Exemptions from Redemption Fund...... 19 the Special Tax...... 54 Reserve Fund ...... 20 Depletion of Reserve Fund...... 55 Subordinate Revenue Fund ...... 21 Depletion of Revenue Stabilization Revenue Stabilization Reserve ...... 21 Reserve ...... 55 Transfer of Available T.O.T...... 22 Bankruptcy and Foreclosure Delays...... 56 Additional Bonds ...... 24 Disclosure to Future Purchasers ...... 58 Subordinate Obligations ...... 25 No Acceleration Provisions ...... 58 Covenant to Foreclose ...... 28 Loss of Tax Exemption...... 59 Limited Obligation ...... 29 Voter Initiatives...... 59 No Acceleration...... 29 Secondary Market ...... 60 THE CITY ...... 29 CONTINUING DISCLOSURE...... 60 THE CONVENTION CENTER FACILITIES LEGAL MATTERS...... 61 DISTRICT ...... 32 Legal Opinions ...... 61 Description of the Convention Center Tax Matters ...... 61 Facilities District...... 32 Absence of Material Litigation ...... 63 Hotel Sector in the City...... 32 RATINGS ...... 63 Largest Hotel Properties...... 36 FINANCIAL ADVISOR...... 64 Historical T.O.T. Revenue and Historical UNDERWRITING ...... 64 Special Taxes ...... 37 PROFESSIONAL FEES ...... 65

APPENDIX A – The City of San José – Demographic, Economic and Financial Information APPENDIX B - Rate and Method of Apportionment of Special Tax APPENDIX C – Summary of the Indenture APPENDIX D – DTC and the Book-Entry Only System APPENDIX E – Form of Continuing Disclosure Certificate APPENDIX F – Form of Opinion of Bond Counsel APPENDIX G – Hotel Tax Revenue Report

OFFICIAL STATEMENT

$107,425,000 CITY OF SAN JOSE SPECIAL HOTEL TAX REVENUE BONDS, SERIES 2011 (CONVENTION CENTER EXPANSION AND RENOVATION PROJECT)

INTRODUCTION

This Official Statement, including the cover page and attached appendices, is provided to furnish information regarding the bonds captioned above (the “2011 Bonds”) to be issued by the City of San José (the “City”) with respect to its “Convention Center Facilities District No. 2008-1, City of San José, County of Santa Clara, State of California” (the “Convention Center Facilities District”).

This introduction is not a summary of this Official Statement. It is only a brief description of and guide to, and is qualified by, more complete and detailed information contained in the entire Official Statement, including the cover page and attached appendices, and the documents summarized or described in this Official Statement. A full review should be made of the entire Official Statement. The offering of the 2011 Bonds to potential investors is made only by means of the entire Official Statement.

The City. The 2011 Bonds are being issued by the City. See “THE CITY.”

Authority for Issuance of the 2011 Bonds. The 2011 Bonds are issued under the following:

• Chapter 14.32 of the Municipal Code of the City of San José (the “Chapter”), which includes by reference, to the extent they are not amended by the specific terms of the Chapter, the provisions of the Mello-Roos Community Facilities Act of 1982 as they existed on August 26, 2008 (the date of adoption of the ordinance placing the Chapter into the Municipal Code of the City of San José) (the “Act”), • certain resolutions adopted by the City Council of the City, and • an Indenture, dated as of April 1, 2011 (the “Indenture”), by and between the City and U.S. Bank National Association, as trustee (the “Trustee”). See “THE 2011 BONDS – Authority for Issuance.”

The Convention Center Facilities District. The Convention Center Facilities District was established by the City under the Chapter, pursuant to (i) the Resolution of Formation adopted by the City Council (as defined in “THE 2011 BONDS – Authority for Issuance”) and (ii) an election held on June 9, 2009, at which the then-qualified electors of the Convention Center Facilities District authorized the Convention Center Facilities District to incur bonded indebtedness and approved the levy of special taxes. See “THE 2011 BONDS – Authority for Issuance.”

Commencing July 1, 2009, all owners of parcels classified as Hotel Property within the boundaries of the Convention Center Facilities District are subject to the Special Tax. There are two zones in the Convention Center Facilities District, and each zone is initially subject to a different Special Tax rate (see “SECURITY FOR THE 2011 BONDS – Rate and Method”):

Zone 1: All properties within the Convention Center Facilities District on which a hotel/motel is located within a two-and-one-quarter-mile (2.25 mi) radius of the San José

Convention Center, 150 W. San Carlos Street, San José, CA 95113. There are currently 28 taxable Hotel Properties in Zone 1.

Zone 2: All properties within the City that are not within Zone 1. There are currently 49 taxable Hotel Properties in Zone 2.

The only significance of the zone distinction is that, while Zone 1 has had a 4% Base Special Tax Rate since fiscal year 2009-10, the Zone 2 Base Special Tax Rate is currently 3% and will adjust to 4% beginning in fiscal year 2011-12.

When it formed the Convention Center Facilities District, the City Council identified all property that may be developed for hotel purposes (as defined in the City’s Municipal Code) anywhere within the City or within the City’s sphere of influence, as determined by the Local Agency Formation Commission of the County of Santa Clara, and which becomes annexed to the City as “territory proposed for annexation in the future”. This means that all existing hotels are within the District and future hotels in the City can annex into the Convention Center Facilities District if the property owner executes a written consent to the annexation, and no further proceedings or hearings are required. The City has not adopted a development entitlement requirement for future hotel properties to annex into the Convention Center Facilities District, and the City can provide no assurances that any such requirement, if adopted, would be upheld by a court as a reasonable regulation under applicable California and federal law.

Purpose of the 2011 Bonds. Proceeds of the 2011 Bonds will be used to (i) finance the acquisition, expansion, construction, reconstruction, rehabilitation, replacement and upgrade of the San José McEnery Convention Center (the “Improvements”), (ii) fund a reserve fund for the 2011 Bonds and (iii) pay the costs of issuing the 2011 Bonds. See “ESTIMATED SOURCES AND USES OF FUNDS” and “IMPROVEMENTS TO BE FINANCED BY THE CONVENTION CENTER FACILITIES DISTRICT AND WITH PROCEEDS OF THE 2011 BONDS.”

Security and Sources of Payment for the 2011 Bonds. The 2011 Bonds are secured by a pledge of all revenues as received by the City as a result of the levy of a Special Tax (as defined in the Indenture) on taxable property in the Convention Center Facilities District (the “Special Tax”), and all amounts in the Revenue Fund established and held by the Trustee under the Indenture and any investment earnings on amounts in the Revenue Fund. The Indenture defines “Special Tax” as the special tax levied pursuant to the “Rate and Method,” which is defined in the Indenture as the “Rate and Method of Apportionment of Special Tax” adopted by the City Council as part of the Resolution of Formation, and approved by the qualified electors. The term “Special Tax” encompasses a “Base Special Tax” and an “Additional Special Tax.” See “SECURITY FOR THE 2011 BONDS – Rate and Method”.

The City has covenanted in the Indenture to implement the enforcement mechanism of Section H of the Rate and Method against any parcel whose owner/operator does not pay the Special Tax and, if the City’s efforts prove ineffective, to cause foreclosure proceedings to be commenced and prosecuted against that parcel. For a more detailed description of the foreclosure covenant, see “SECURITY FOR THE 2011 BONDS - Covenant to Foreclose.”

Revenue Stabilization Reserve. The Trustee will establish a “Revenue Stabilization Reserve” under the Indenture. Concurrently with issuance of the 2011 Bonds, the City will deposit $8,000,000 of Special Tax Revenues into the Revenue Stabilization Reserve. Thereafter, as described in “SECURITY FOR THE 2011 BONDS – Revenue Fund,” the City will deposit certain moneys into the Revenue Stabilization Reserve. Moneys in the Revenue Stabilization Reserve may

be used to pay debt service on the 2011 Bonds and any Additional Bonds and for the other purposes described in “SECURITY FOR THE 2011 BONDS – Revenue Stabilization Reserve.” It is important to note that moneys in the Revenue Stabilization Reserve may also be used to pay debt service on the Series 2011A Lease Revenue Bonds (as defined below) and any other Subordinate Bonds, as described in “Subordinate Obligations” below, and that the City plans to apply the moneys in the Revenue Stabilization Reserve to pay debt service on the Series 2011A Lease Revenue Bonds if Special Tax revenues are not sufficient. See “BOND OWNERS’ RISKS – Depletion of Revenue Stabilization Reserve.”

Available T.O.T. The City has been collecting a transient occupancy tax (“T.O.T.”) since at least 1966. The current T.O.T. rate is equal to 10% of the rent charged by hotel operators throughout the City. Of the current T.O.T. rate, 4% is a general tax that is deposited into the City’s General Fund. The remaining T.O.T. is deposited into a special fund and allocated to various specified purposes. One of the specified purposes is the funding of a convention and visitors bureau, including a rental subsidy of City facilities for convention purposes. The City has historically appropriated 1.5% of the rent charged by hotel operators in the City (15% of T.O.T. revenues) to convention uses; it is this portion of the T.O.T. that constitutes the “Available T.O.T.” as defined in the Indenture.

See “SECURITY FOR THE 2011 BONDS - Available T.O.T” for a summary of the provisions of the Indenture relating to the Available T.O.T. Investors should note that the City is not obligated to continue to appropriate 1.5% of the rent charged by hotel operators in the City (15% of T.O.T. revenues) for convention uses.

Authority to Issue Additional Bonds Payable from Special Taxes on a Parity with the 2011 Bonds. In addition to the 2011 Bonds, and subject to the conditions set forth in the Indenture (see “SECURITY FOR THE 2011 BONDS – Additional Bonds”), the City may at any time issue a series of bonds payable from the Special Taxes on a parity with the 2011 Bonds (“Additional Bonds”; together with the 2011 Bonds, the “Bonds”). See also “Subordinate Obligations” below.

The City currently has no plans to issue Additional Bonds.

Subordinate Obligations. Concurrently with the issuance of the 2011 Bonds, the City of San José Financing Authority (the “Authority”) is issuing its Lease Revenue Bonds, Series 2011A (Convention Center Expansion and Renovation Project) (the “Series 2011A Lease Revenue Bonds”) to provide additional financing for the Improvements. The Series 2011A Lease Revenue Bonds are payable from Base Rental Payments made by the City under a Facility Lease (Convention Center Expansion and Renovation Project) dated as of April 1, 2011 (the “2011 Lease”). Pursuant to the Indenture, the City will make payments to the trustee for the Series 2011A Lease Revenue Bonds (the “2011A Lease Revenue Bond Trustee”) from the Revenue Fund (“Subordinate Revenues”) and the Revenue Stabilization Reserve to pay debt service on and to replenish the debt service reserve account for the Series 2011A Lease Revenue Bonds, subject to satisfaction of certain conditions. See “SECURITY FOR THE 2011 BONDS – Revenue Fund.”

In addition to the Series 2011A Lease Revenue Bonds, the Indenture authorizes the City to issue two types of obligations that are payable from Special Taxes on a subordinate basis to the 2011 Bonds (see “SECURITY FOR THE 2011 BONDS – Subordinate Obligations)”:

(i) Additional “Subordinate Bonds,” i.e., lease revenue bonds in addition to the Series 2011 Lease Revenue Bonds (“Lease Revenue Bonds”) and any other bonds with claims to Subordinate Revenues and to the Revenue Stabilization Reserve on a parity with those of the Series 2011A Lease Revenue Bonds.

(ii) “Super-subordinate bonds” that are subordinate in all respects to the use of the Special Tax to pay the Bonds and have no right to money in the Revenue Stabilization Reserve.

The City currently has no plans to issue either Subordinate Bonds (other than the Series 2011A Lease Revenue Bonds) or Super-subordinate bonds.

Risk Factors Associated with Purchasing the 2011 Bonds. Investment in the 2011 Bonds involves risks that may not be appropriate for some investors. See “BOND OWNERS' RISKS” for a discussion of certain risk factors which should be considered, in addition to the other matters set forth in this Official Statement, in considering the investment quality of the 2011 Bonds.

Professionals Involved in the Offering. The following professionals are participating in this financing:

• Orrick Herrington & Sutcliffe LLP, San Francisco, California is serving as Bond Counsel to the City.

• Stone & Youngberg LLC, San Francisco, California, is serving as financial advisor (the “Financial Advisor”) to the City.

• Merrill Lynch, Pierce, Fenner & Smith Incorporated, San Francisco, California, Citigroup Global Markets, Inc., and Wells Fargo Bank, N.A., are acting as the underwriters of the 2011 Bonds (the “Underwriters”).

• Willdan Financial Services, Temecula, California, acted as Special Tax Consultant with respect to the Convention Center Facilities District.

• Jones Hall, A Professional Law Corporation, San Francisco, California, is acting as Disclosure Counsel to the City.

• U.S. Bank National Association, San Francisco, California, will serve as the Trustee under the Indenture.

• Hawkins Delafield & Wood LLP, San Francisco, is acting as Underwriters’ Counsel.

• Horwath Hospitality & Leisure LLC (“Horwath HTL”), San Rafael, California, prepared a report summarizing the City’s hotel market and forecasting future taxable hotel revenues.

ESTIMATED SOURCES AND USES OF FUNDS

The proceeds from the sale of the 2011 Bonds will be deposited into the following funds and accounts under the Indenture:

Table 1 City of San José Special Hotel Tax Revenue Bonds, Series 2011 (Convention Center Expansion and Renovation Project) Estimated Sources and Uses of Funds

SOURCES

Principal Amount of Bonds $107,425,000.00 Less: Net Original Issue Discount (1,945,944.10)

Total Sources $105,479,055.90

USES

Reserve Fund (1) $ 8,213,062.50 Costs of Issuance Account (2) 785,000.00 Project Fund 95,903,757.24 Underwriter’s Discount 577,236.16

Total Uses $105,479,055.90

(1) Equal to the Reserve Requirement with respect to the 2011 Bonds as of the date of delivery of the 2011 Bonds. (2) Includes, among other things, the fees and expenses of Bond Counsel, Disclosure Counsel, Financial Advisor, and the City Attorney, the cost of printing the Preliminary and final Official Statements, fees and expenses of the Trustee, the fees of the Special Tax Consultant and the fees and expenses of Horwath HTL.

IMPROVEMENTS TO BE FINANCED BY THE CONVENTION CENTER FACILITIES DISTRICT AND WITH PROCEEDS OF THE 2011 BONDS

General. The Convention Center Facilities District is authorized to finance the expansion, construction, reconstruction, rehabilitation, replacement and upgrade of the San José McEnery Convention Center (defined as the “Improvements” in the Indenture).

2011 Bonds. The Improvements, which are expected to be financed with proceeds of the 2011 Bonds and the Series 2011A Lease Revenue Bonds, include:

• An expansion of approximately 120,000 gross square feet of program space, which includes a 35,000 square foot ballroom and approximately 25,000 square feet of meeting rooms, a plating kitchen, pre-function and circulation space, and a lobby. The estimated cost of the expansion work is approximately $66 million.

• A renovation of the “front of house” of the existing building including new carpet, paint, ceilings, movable walls, signage and wayfinding, restrooms, and accessibility improvements. The estimated cost of this work is $20 million.

• A new fire alarm, building management system and closed circuit television system; the estimated cost of this work is $13 million.

• A new central utility plant for the existing building and new construction including all new boilers, chillers, cooling towers, pumps and pipes. The estimated cost of this work is $14 million.

• Reimbursement of City expenditures in respect of the Improvements of approximately $7 million.

The building’s structural systems will be constructed to the 2010 California Building Code.

The current schedule anticipates completion of the first phase of the Improvements within 24 months of start of construction. The City has negotiated a Design-Build contract with Hunt Construction that will be awarded following issuance of the 2011 Bonds.

Improvements are not Security for the 2011 Bonds. The Improvements financed with proceeds of the 2011 Bonds are not security for the 2011 Bonds and the obligation of the taxable property in the Convention Center Facilities District to pay the Special Tax is not contingent upon construction of the Improvements.

THE 2011 BONDS

General Bond Terms

Dated Date, Maturity and Authorized Denominations. The 2011 Bonds will be dated their date of delivery and will mature in the amounts and on the dates set forth on the inside cover page of this Official Statement. The 2011 Bonds will be issued in fully registered form in denominations of $5,000 each or any integral multiple of $5,000.

Interest. The 2011 Bonds will bear interest at the annual rates set forth on the inside cover page of this Official Statement, payable semiannually on each May 1 and November 1, commencing November 1, 2011 (each, an “Interest Payment Date”). Interest will be calculated on the basis of a 360-day year composed of twelve 30-day months.

DTC and Book-Entry Only System. DTC will act as securities depository for the 2011 Bonds. The 2011 Bonds will be issued as fully-registered securities registered initially in the name of Cede & Co. (DTC’s partnership nominee). So long as Cede & Co. is the registered owner of the 2011 Bonds, as nominee of DTC, references in this Official Statement to the “Owners” will mean Cede & Co., and will not mean the Beneficial Owners of the 2011 Bonds. See APPENDIX D – “DTC and the Book-Entry Only System.”

Method of Payment. Principal, premium, if any, and interest on the 2011 Bonds are payable directly to DTC by the Trustee in lawful money of the United States of America. Upon receipt of payments of principal, premium or interest, DTC is to remit such principal, premium or interest to the “DTC Participants” (as defined in APPENDIX D) for subsequent disbursement to the Beneficial Owners of the 2011 Bonds. See APPENDIX D – “DTC and the Book-Entry Only System.”

Authority for Issuance

Convention Center Facilities District Proceedings. The 2011 Bonds will be issued under the Chapter and the Indenture. As required by the Chapter, the City Council of the City has taken the following actions with respect to establishing the Convention Center Facilities District and authorizing issuance of the 2011 Bonds:

Chapter: On August 26, 2008, the City Council adopted its Ordinance No. 28387, which placed the Chapter into the City’s Municipal Code.

Boundary Map: On September 30, 2008, by its Resolution No. 74604, the City Council approved the boundary map of the Convention Center Facilities District and the boundary map was recorded on November 4, 2008, in the Book of Maps and Assessment and Community Facilities Districts maintained by the County Recorder of the County of Santa Clara in Book 44 at Pages 32-46, as instrument number 20037072. On January 13, 2009, the City Council, by its Resolution No. 74758, ratified its approval of the boundary map.

Resolutions of Intention: On February 3, 2009, the City Council adopted Resolution No. 74783 (the “Resolution of Intention”) and Resolution No. 74784, stating its intention to establish the Convention Center Facilities District, to authorize the levy of a special tax therein and to issue bonds for the Convention Center Facilities District in an amount not to exceed $750 million.

Resolution of Formation: Immediately following a noticed public hearing, on March 10, 2009, the City Council adopted Resolution No. 74826 (the “Resolution of Formation”), which established the Convention Center Facilities District and authorized the levy of a special tax within the Convention Center Facilities District.

Resolution of Necessity: On March 10, 2009, the City Council adopted Resolution No. 74827, declaring the necessity to incur bonded indebtedness in an aggregate amount not to exceed $750 million within the Convention Center Facilities District and submitting that proposition to the qualified electors of the Convention Center Facilities District.

Resolution Calling Election: On March 10, 2009, the City Council adopted Resolution No. 74828, calling an election within the Convention Center Facilities District on the issues of the levy of the Special Tax, the incurring of bonded indebtedness and the establishment of an appropriations limit.

Vote of the Qualified Electors and Declaration of Results: On June 9, 2009, a mail ballot election was held in which the qualified electors within the Convention Center Facilities District approved a ballot proposition authorizing the issuance of up to $750 million in bonds to finance the acquisition and construction of the Improvements, the levy of a special tax and the establishment of an appropriations limit for the Convention Center Facilities District. On June 16, 2009, the City Council adopted Resolution No. 75000, under which the City Council approved the canvass of the votes and declared the Convention Center Facilities District to be fully formed with the authority to levy the Special Taxes, to incur the bonded indebtedness and to have the established appropriations limit, all with respect to the Convention Center Facilities District.

Special Tax Lien and Levy: A Notice of Special Tax Lien was recorded in the real property records of the County of Santa Clara (the “County”) on June 30, 2009, as document number 20320458.

Ordinance Levying Special Taxes: On June 16, 2009, the City Council introduced Ordinance No. 28605 levying the Special Tax within the Communities Facilities District beginning with fiscal year 2009-10 (the “Ordinance”), which Ordinance was adopted by the City Council on June 23, 2009.

Validation Proceedings: On June 16, 2009, the City Council adopted Resolution No. 75001, authorizing the filing of a validation action related to the Bonds and the Convention Center Facilities District pursuant to the provisions of Sections 860 et seq. of the California Code of Civil Procedure. On July 29, 2009, the City filed a complaint in the Superior Court of the State of California for the County of Santa Clara seeking judicial validation of the transactions relating to the issuance of the 2011 Bonds, and certain other matters (City of San José vs. All Persons Interested, etc., Case No. 109 CV 148458). On March 30, 2010, the court entered judgment to the effect, among other things, that formation of the Convention Center Facilities District was valid and that the City has the authority to issue the Bonds. On September 23, 2010, the California Court of Appeal, Sixth Appellate District, dismissed an appeal of the judgment and, on November 23, 2010, the judgment became final for all purposes.

In issuing its approving opinion, Bond Counsel has relied, among other things, upon the above-described validation of proceedings.

Resolution Authorizing Issuance of the 2011 Bonds: On March 15, 2011, the City Council approved issuance of the 2011 Bonds in an amount not to exceed $120,000,000. Concurrently, the City Council authorized the issuance of the Series 2011A Lease Revenue Bonds in an amount not to exceed $50,000,000 with a combined aggregate principal amount of the 2011 Bonds and the Series 2011A Lease Revenue Bonds of not to exceed $150,000,000.

Debt Service Schedule

The following table presents the semi-annual debt service on the 2011 Bonds (including sinking fund redemptions), assuming there are no optional redemptions.

Table 2 City of San José Special Hotel Tax Revenue Bonds, Series 2011 (Convention Center Expansion and Renovation Project) Debt Service Schedule Date Principal Interest Semi-Annual Payment Fiscal Year Total 11/1/11 $ 3,617,799.27 $ 3,617,799.27 5/1/12 3,272,381.25 3,272,381.25 $ 6,890,180.52 11/1/12 3,272,381.25 3,272,381.25 5/1/13 3,272,381.25 3,272,381.25 6,544,762.50 11/1/13 3,272,381.25 3,272,381.25 5/1/14 $ 400,000 3,272,381.25 3,672,381.25 6,944,762.50 11/1/14 3,266,381.25 3,266,381.25 5/1/15 1,680,000 3,266,381.25 4,946,381.25 8,212,762.50 11/1/15 3,226,856.25 3,226,856.25 5/1/16 1,755,000 3,226,856.25 4,981,856.25 8,208,712.50 11/1/16 3,184,256.25 3,184,256.25 5/1/17 1,840,000 3,184,256.25 5,024,256.25 8,208,512.50 11/1/17 3,138,256.25 3,138,256.25 5/1/18 1,935,000 3,138,256.25 5,073,256.25 8,211,512.50 11/1/18 3,091,156.25 3,091,156.25 5/1/19 2,030,000 3,091,156.25 5,121,156.25 8,212,312.50 11/1/19 3,041,531.25 3,041,531.25 5/1/20 2,130,000 3,041,531.25 5,171,531.25 8,213,062.50 11/1/20 2,988,281.25 2,988,281.25 5/1/21 2,235,000 2,988,281.25 5,223,281.25 8,211,562.50 11/1/21 2,929,612.50 2,929,612.50 5/1/22 2,350,000 2,929,612.50 5,279,612.50 8,209,225.00 11/1/22 2,870,862.50 2,870,862.50 5/1/23 2,470,000 2,870,862.50 5,340,862.50 8,211,725.00 11/1/23 2,806,025.00 2,806,025.00 5/1/24 2,600,000 2,806,025.00 5,406,025.00 8,212,050.00 11/1/24 2,734,525.00 2,734,525.00 5/1/25 2,740,000 2,734,525.00 5,474,525.00 8,209,050.00 11/1/25 2,659,175.00 2,659,175.00 5/1/26 2,890,000 2,659,175.00 5,549,175.00 8,208,350.00 11/1/26 2,579,700.00 2,579,700.00 5/1/27 3,050,000 2,579,700.00 5,629,700.00 8,209,400.00 11/1/27 2,486,293.75 2,486,293.75 5/1/28 3,240,000 2,486,293.75 5,726,293.75 8,212,587.50 11/1/28 2,387,068.75 2,387,068.75 5/1/29 3,435,000 2,387,068.75 5,822,068.75 8,209,137.50 11/1/29 2,281,871.88 2,281,871.88 5/1/30 3,645,000 2,281,871.88 5,926,871.88 8,208,743.76 11/1/30 2,170,243.75 2,170,243.75 5/1/31 3,870,000 2,170,243.75 6,040,243.75 8,210,487.50 11/1/31 2,051,725.00 2,051,725.00 5/1/32 4,105,000 2,051,725.00 6,156,725.00 8,208,450.00 11/1/32 1,918,312.50 1,918,312.50 5/1/33 4,375,000 1,918,312.50 6,293,312.50 8,211,625.00 11/1/33 1,776,125.00 1,776,125.00 5/1/34 4,660,000 1,776,125.00 6,436,125.00 8,212,250.00 11/1/34 1,624,675.00 1,624,675.00 5/1/35 4,960,000 1,624,675.00 6,584,675.00 8,209,350.00 11/1/35 1,463,475.00 1,463,475.00 5/1/36 5,285,000 1,463,475.00 6,748,475.00 8,211,950.00 11/1/36 1,291,712.50 1,291,712.50 5/1/37 5,625,000 1,291,712.50 6,916,712.50 8,208,425.00 11/1/37 1,108,900.00 1,108,900.00 5/1/38 5,995,000 1,108,900.00 7,103,900.00 8,212,800.00 11/1/38 914,062.50 914,062.50 5/1/39 6,380,000 914,062.50 7,294,062.50 8,208,125.00 11/1/39 706,712.50 706,712.50 5/1/40 6,795,000 706,712.50 7,501,712.50 8,208,425.00 11/1/40 485,875.00 485,875.00 5/1/41 7,240,000 485,875.00 7,725,875.00 8,211,750.00 11/1/41 250,575.00 250,575.00 5/1/42 7,710,000 250,575.00 7,960,575.00 8,211,150.00 Total $107,425,000 $142,848,199.28 $250,273,199.28 $250,273,199.28

Redemption

Optional Redemption. The 2011 Bonds maturing on or before May 1, 2021 are not subject to redemption prior to their maturity dates. The 2011 Bonds maturing on or after May 1, 2022 are subject to optional redemption by the City prior to their respective maturity dates, as a whole on any date or in part on any Interest Payment Date, on or after May 1, 2021 from money derived by the City from any source other than Mandatory Sinking Account Payments upon mailed notice as provided herein.

Mandatory Sinking Payment Redemption. The 2011 Bonds maturing on May 1, 2026, are subject to mandatory redemption by the City prior to their maturity date in part on any May 1 on or after May 1, 2025, to and including May 1, 2026, as set forth in the following table, from money derived by the City from the 2026 Mandatory Sinking Account Payments deposited in the 2026 Sinking Account, at the principal amount thereof together with accrued interest thereon to the date of redemption:

Redemption Date (May 1) Sinking Payments

2025 $2,740,000 2026 (maturity) 2,890,000

The 2011 Bonds maturing on May 1, 2031, are subject to mandatory redemption by the City prior to their maturity date in part on any May 1 on or after May 1, 2027, to and including May 1, 2031, as set forth in the following table, solely from money derived by the City from the 2031 Mandatory Sinking Account Payments deposited in the 2031 Sinking Account, at the principal amount thereof together with accrued interest thereon to the date of redemption:

Redemption Date (May 1) Sinking Payments

2027 $3,050,000 2028 3,240,000 2029 3,435,000 2030 3,645,000 2031 (maturity) 3,870,000

The 2011 Bonds maturing on May 1, 2036, are subject to mandatory redemption by the City prior to their maturity date in part on any May 1 on or after May 1, 2032, to and including May 1, 2036, as set forth in the following table, solely from money derived by the City from the 2036 Mandatory Sinking Account Payments deposited in the 2036 Sinking Account, at the principal amount thereof together with accrued interest thereon to the date of redemption:

Redemption Date (May 1) Sinking Payments

2032 $4,105,000 2033 4,375,000 2034 4,660,000 2035 4,960,000 2036 (maturity) 5,285,000

The 2011 Bonds maturing on May 1, 2042, are subject to mandatory redemption by the City prior to their maturity date in part on any May 1 on or after May 1, 2037, to and including May 1, 2042, as set forth in the following table, solely from money derived by the City from the 2042 Mandatory Sinking Account Payments deposited in the 2042 Sinking Account, at the principal amount thereof together with accrued interest thereon to the date of redemption:

Redemption Date (May 1) Sinking Payments

2037 $5,625,000 2038 5,995,000 2039 6,380,000 2040 6,795,000 2041 7,240,000 2042 (maturity) 7,710,000

The amounts in the foregoing tables will be reduced to the extent practicable so as to maintain substantially the same debt service profile for the 2011 Bonds, as a result of any prior partial redemption of the 2011 Bonds as described in “Optional Redemption” above.

Selection of 2011 Bonds to be Redeemed. If less than all the Outstanding 2011 Bonds are to be redeemed pursuant to the optional redemption provisions of the Indenture, the City will select the maturity dates from which the 2011 Bonds will be redeemed, and if less than all the Outstanding Bonds of any one maturity date are to be redeemed at any one time, the City will notify the Trustee in writing at least 15 days prior to the date fixed for the selection of any such 2011 Bonds for redemption and the Trustee will select the 2011 Bonds or the portions thereof of such maturity date to be redeemed in integral multiples of $5,000 by lot in any manner that it deems appropriate.

Notice of Redemption. The Trustee shall mail by first class mail a notice of redemption, not less than 30 days nor more than 60 days prior to the date fixed for redemption, to the owners of all 2011 Bonds selected for redemption in whole or in part and to the MSRB’s EMMA System and to any other securities depositories and securities information services selected by the City to comply with custom or the rules of any securities exchange or commission or brokerage board or otherwise as may be determined by the City in its sole discretion and to the original underwriters of the 2011 Bonds, but neither failure to receive any such mailed notice nor any immaterial defect contained in a notice will affect the sufficiency or validity of any such proceedings for redemption.

The redemption notice will state the date of the notice, the 2011 Bonds to be redeemed, the date of issue of the 2011 Bonds, the redemption date, the redemption price, the place of redemption (including the name and appropriate address of the Trustee), the CUSIP number of the maturity or maturities and, if less than all of any such maturity, the numbers of the 2011 Bonds of such maturity to be redeemed and, in the case of 2011 Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed, and will give notice that further interest on such 2011 Bonds or the portions thereof to be redeemed will not accrue from and after the redemption date, and will require that the 2011 Bonds to be redeemed be then surrendered for redemption at the Principal Corporate Trust Office of the Trustee; provided, that neither the City nor the Trustee will have any responsibility for any defect in the CUSIP number that appears on any Bond or in any redemption notice with respect thereto, and any such redemption notice may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience of reference and that neither the City nor the Trustee will be liable for any inaccuracy in such numbers.

The Indenture allows the Trustee to provide a conditional notice of redemption and to rescind, cancel and annul a noticed redemption by giving notice of such rescission, cancellation and annulment at least seven days prior to the date fixed for redemption to the same persons and in the same manner as the original notice of redemption.

Effect of Redemption. If notice of redemption has been duly given as required by the Indenture, and has not been rescinded as permitted by the Indenture, and money for the payment of the principal of and redemption premiums, if any, on, together with interest to the redemption date on, the 2011 Bonds or portions thereof so called for redemption is held by the Trustee, then on the redemption date designated in such notice such 2011 Bonds or such portions thereof will become due and payable, and from and after the date so designated interest on the 2011 Bonds or such portions thereof so called for redemption will cease to accrue and the owners of such 2011 Bonds shall have no rights in respect thereof except to receive payment of the principal or such portions thereof and the redemption premiums, if any, thereon and the interest accrued thereon to the redemption date.

Registration, Transfer and Exchange

The provisions regarding the exchange and transfer of the 2011 Bonds summarized in “APPENDIX C – Summary of the Indenture,” apply only during any period in which the 2011 Bonds are not subject to DTC’s book-entry system. While the 2011 Bonds are subject to DTC’s book-entry system, their exchange and transfer will be effected through DTC and the Participants and will be subject to the procedures, rules and requirements established by DTC. See “APPENDIX D – DTC and the Book-Entry Only System.”

SECURITY FOR THE 2011 BONDS

General

The 2011 Bonds are generally payable from three sources of funds described in this Official Statement:

(i) Revenues generated by the levy of the Base Special Tax (see “ – Special Taxes” and “ – Rate and Method” below).

(ii) Revenues generated by the levy of the Additional Special Tax (see “ – Special Taxes” and “ – Rate and Method” below).

(iii) Available T.O.T., to the extent appropriated by the City Council for this purpose (see “ – Transfer of Available T.O.T.” below).

In addition, the City is funding two accounts to provide additional sources of payment for the 2011 Bonds:

(i) A debt service reserve fund that will be funded by the City with proceeds of the 2011 Bonds. The Reserve Fund will initially be funded in an amount equal to the “Reserve Requirement.” See “- Reserve Fund” below.

(ii) A Revenue Stabilization Reserve that will be funded by the City with other available moneys. See “ – Revenue Stabilization Reserve” below. The Indenture establishes two measurements of amounts in the Revenue Stabilization Reserve:

(A) “Revenue Stabilization Reserve Maximum”: the lesser of (1) aggregate Maximum Annual Debt Service on the Outstanding Bonds and the Outstanding Subordinate Bonds, and (2) the maximum permitted by the Code for the preservation of the tax-exempt status of the Bonds.

(B) “Revenue Stabilization Reserve Requirement”: 75% of the Revenue Stabilization Reserve Maximum.

The Indenture provides that all Special Tax revenues as received by the City, and all amounts in the Revenue Fund (including any Available T.O.T. appropriated for the Convention Center Facilities District), and any investment earnings thereon, are pledged to, and constitute a trust fund for, the payment of the principal of and interest on the 2011 Bonds and any Additional Bonds. So long as the principal of and interest on the 2011 Bonds and any Additional Bonds remain unpaid, the Special Taxes, the funds and accounts established to hold Special Tax proceeds under the Indenture, and any investment earnings thereon will not be used for any other purpose, except as otherwise permitted by the Indenture, and will be held in trust for the benefit of the owners of the 2011 Bonds and any Additional Bonds and will be applied pursuant to the Indenture.

“Special Tax” is defined in the Indenture to mean the special tax as set forth in the Rate and Method.

“Rate and Method” is defined in the Indenture as the “Rate and Method of Apportionment of Special Tax” adopted by the City Council as part of the Resolution of Formation. See “- Rate and Method” below.

Special Taxes

The following are summaries of covenants in the Indenture with respect to the levy of the Special Tax:

Base Special Tax. The City covenants in the Indenture that, so long as any 2011 Bonds are Outstanding, it will continually levy the Base Special Tax against all Hotel Property in the Convention Center Facilities District and make provision for the collection of the Base Special Tax. The Indenture defines “Hotel Property” as all land within the Convention Center Facilities District taxable under the Chapter in accordance with the proceedings for the authorization of the issuance of the Bonds and the levy and collection of the Special Tax. See “ – Rate and Method” below for a description of the Base Special Tax and its levy.

Additional Special Tax. With respect to the Additional Special Tax, the City covenants in the Indenture as follows:

(a) If, on any May 2 in a Fiscal Year in which the Additional Special Tax is not being levied, the amount in the Revenue Stabilization Reserve is less than the Revenue Stabilization Reserve Requirement, the City will levy the Additional Special Tax for the following Fiscal Year.

(b) If, on any May 2 in a Fiscal Year in which the Additional Special Tax is being currently levied, the amount in the Revenue Stabilization Reserve is less than the Revenue Stabilization Reserve Maximum, the City will levy the Additional Special Tax for the following Fiscal Year.

See “ – Rate and Method” below for a description of the Additional Special Tax and its levy.

Because the annual Special Tax levy is limited to the maximum annual Special Tax rates set forth in the Rate and Method and because the amount of the annual Special Tax levy is tied to the amount of Rent (as defined below) charged and received by operators of Hotel Properties in the Convention Center Facilities District, no assurance can be given that, in the event of Special Tax delinquencies or reductions in the Rent, the receipts of Special Taxes will, in fact, be collected in sufficient amounts in any given year to pay debt service on the 2011 Bonds and any Additional Bonds. See “BOND OWNERS' RISKS,” for a discussion of factors that could impact the amount of Special Taxes collected by the City and the amount, if any, to be realized by owners of the 2011 Bonds as a result of a foreclosure sale.

Rate and Method

The following is a summary of certain provisions of the Rate and Method, and is qualified by more complete and detailed information contained in the entire Rate and Method attached as Appendix B. The meaning of the defined terms used in this section that are not defined below have the meaning set forth in Appendix B.

General. The Special Tax is levied and collected according to the Rate and Method, which provides the means by which the City or its designee may annually levy the Special Taxes within the Convention Center Facilities District on all Assessor’s Parcels that are not exempt from the Special Tax pursuant to law or the Rate and Method (“Taxable Property”). See “ – Exemption” below.

Term of the Special Tax. The authority of the City Council to levy the Base Special Tax on all Assessor’s Parcels classified as Hotel Property within the Convention Center Facilities District is perpetual. The Additional Special Tax may only be levied during a period when Bonds (as defined in the Rate and Method) are outstanding as described in “Method of Apportionment of the Special Tax” below. “Bonds” is defined in the Rate and Method as “any binding obligation to pay or repay a sum of money, including obligations in the form of bonds, notes, certificates of participation, long-term leases, loans from government agencies, or loans from banks, other financial institutions, private businesses, or individuals, or long-term contracts, or any refunding thereof, to which the Special Tax has been pledged.”

Certain Definitions. Certain definitions set forth in the Rate and Method are excerpted below. Other definitions not provided below can be found in Appendix B.

“Exempt Property” is defined in the Rate and Method as any parcel that is not classified as Hotel Property.

“Hotel Property” means an Assessor’s Parcel of Taxable Property which consists of one or more buildings or structures situated in the City that has, on file with the Director of Finance, a transient occupancy registration certificate, including, but not limited to, any hotel, inn, tourist home or house, motel, studio hotel, bachelor hotel, guesthouse, bed and breakfast inn, apartment house, dormitory, public or private club, mobilehome or house trailer at a fixed location, or other similar

structure or portion thereof situated in the city, which is occupied or intended or designed for Occupancy by Transients for dwelling, lodging or sleeping purposes.

“Hotel Transient Unit” means a room within Hotel Property as to which the Special Tax may be levied in that it is used for Transient Occupancy.

“Occupancy” means the use or possession, or right to the use or possession of any Hotel Transient Unit, or portion thereof.

“Operator” means the person who is proprietor of the Hotel Property, whether in the capacity of owner, lessee, sublessee, mortgagee in possession, licensee, or any other capacity. Where the operator performs his functions through a managing agent of any type or character other than an employee, the managing agent shall also be deemed an operator, and shall have the same duties and liabilities as his principal.

“Owner” means the landowner, owner of land, or property owner of Hotel Property, except that if the fee owner of the Hotel Property is a government entity, “Owner” means the lessee of the government entity.

“Rent” means the consideration charged for the Occupancy of Hotel Transient Units valued in money, whether to be received in money, goods, property, labor, service, or otherwise. For purposes of this definition, Rent charged to: 1) a federal or state employee when on official business, or 2) any officer or employee of a foreign government, who is exempt by reason of express provision of federal law or international treaty, shall be excluded from the Base Special Tax and Additional Special Tax calculations defined in accordance with the Rate and Method.

“Revenue Stabilization Reserve” means the Revenue Stabilization Reserve established under the Indenture.

“Revenue Stabilization Reserve Requirement” means the minimum balance required in the Revenue Stabilization Reserve, as specified in the Indenture. See “ – Revenue Stabilization Reserve” above.

“Transient” means a person who exercises occupancy or is entitled to occupancy by reason of concession, permit, right of access, license, or other agreement for a period of 30 consecutive calendar days or less, counting portions of calendar days as full days.

“Zone” means one of the two mutually exclusive geographic areas defined below.

• “Zone 1” means all territory in the City located within a two and one quarter mile (2.25) radius of the San José McEnery Convention Center.

• “Zone 2” means all territory within the City that is not within Zone 1.

Base Special Tax Rate. Commencing on July 1, 2009, each Assessor’s Parcel classified as Hotel Property within the Convention Center Facilities District was subject to a Base Special Tax. The Base Special Tax rate for each Assessor’s Parcel classified as Hotel Property within Zone 1 or Zone 2 equals the percentage of all Rent charged as identified in the following table for each respective zone.

BASE SPECIAL TAX RATES

Term Zone 1 Zone 2 July 1, 2009 – December 31, 2009 4% 1% January 1, 2010 – June 30, 2010 4 2 Fiscal Year 2010-2011 4 3 Fiscal Year 2011-2012 and thereafter 4 4

Additional Special Tax Rate. Each Assessor’s Parcel classified as Hotel Property in either zone of the Convention Center Facilities District will be subject to an Additional Special Tax equal to 1% of all Rent charged.

See “- Special Taxes” above for a description of the City’s covenant in the Indenture with respect to the levy of the Additional Special Tax. The City must mail written notice of the imposition of the Additional Special Tax to all Owners, or Operators on behalf of Owners, at least 30 days before the imposition of the Additional Special Tax may commence. See “- Special Taxes” above for a description of the City’s covenant in the Indenture with respect to the Additional Special Tax.

Method of Apportionment of the Special Tax. Commencing with Fiscal Year 2009-2010, and for each subsequent Fiscal Year, the City Council will levy Special Taxes as described below:

Step One: The Base Special Tax shall be levied on each Assessor’s Parcel classified as Hotel Property up to the rates specified in Base Special Tax Rate above.

Step Two: The Additional Special Tax shall also be levied on each Assessor’s Parcel classified as Hotel Property if authorized, and as provided in, “Additional Special Tax Rate” above.

Special Taxes associated with Rent that is charged for Transient Occupancy will be considered levied and due in the calendar month the Transient ceases Occupancy of the Hotel Transient Unit(s), except that Special Taxes associated with Rent that is paid by credit card will be deemed levied and collected on the date that the credit card is presented for payment to the Operator.

Exemption. No Special Tax will be levied on any Assessor’s Parcel not classified as Hotel Property.

Collection of Special Tax. The Special Tax will be collected monthly by the City in the same manner as the T.O.T. See “- Transfer of Available T.O.T.” below.

Failure to Submit Special Tax. If any Owner, or Operator on behalf of Owner, fails or refuses to pay the Special Tax levied, the Director of Finance will proceed in such manner as he may deem best to obtain facts and information on which to base his estimate of the Special Tax. As soon as the Director of Finance procures such facts and information as he or she is able to obtain upon which to base the Special Tax for such Assessor’s Parcel classified as Hotel Property, the Director of Finance will proceed to determine the amount of such Special Tax due plus any penalties and interest, as described below. In case such determination is made, the Director of Finance will give a Determination of Special Tax Due by serving it personally or by depositing it in the United States mail, postage prepaid, addressed to the Owner or Operator on behalf of the Owner at its last known place

of address. Such Owner, or Operator on behalf of the Owner, may file an appeal as described in “Appeals” below.

Any Operator who fails to remit the Special Tax levied within the time required will be subject to a penalty of 10% of the amount delinquent in addition to the delinquent Special Tax. Delinquent Special Taxes will incur an additional 1% penalty (applied to the amount originally levied without compounding) on the first day of each month which is more than six months after the date when the delinquent Special Tax was levied.

See “ – Covenant to Foreclose” for a description of the City’s covenant to foreclose on delinquent property.

Special Tax Audit. It is the duty of the Owner, or Operator on behalf of the Owner, for each Assessor’s Parcel classified as Hotel Property that is subject to the Special Tax to keep and preserve, for a period of three years, all records as may be deemed necessary by the City (and that will, at a minimum, include a record of all Rents collected) to determine the Special Taxes levied upon such Hotel Property by the City Council. The City has the right to inspect such records at all reasonable times.

Appeals. Any Owner or Operator on behalf of the Owner, claiming that the amount or application of the Special Tax is not correct, may appeal to the City Council by filing a notice of appeal with the City Clerk within 15 calendar days of the serving or mailing of the Determination of Special Tax Due. The City Council will fix a time and place for hearing such appeal, and the City Clerk will give notice in writing to such Owner and Operator at their last known place of address. The findings of the City Council will be final and conclusive, and will be served upon the appellant in the manner prescribed above for service of notice of hearing. Any Special Tax found to be due will be immediately due and payable upon the service of the City Council findings. If the City Council decision requires that the Special Tax for an Assessor’s Parcel be modified or changed in favor of the Owner, or Operator on behalf of Owner, a cash refund will not be made, but a credit will be given against future Special Taxes on that Assessor’s Parcel.

Prepayment of Special Tax. The Rate and Method does not permit prepayment of the Special Tax.

Teeter Plan

Although the County of Santa Clara (the “County”) has implemented the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the “Teeter Plan”), as provided for in Section 4701 et seq. of the California Revenue and Taxation Code, it has done so only with respect to property taxes on the secured tax roll. Special taxes and assessments are not included in the Teeter Plan, and the Special Taxes in the Convention Center Facilities District are not collected on the secured tax roll, and as a result, the amount of the Special Tax levy received by the City will reflect actual collections. Substantial delinquencies in the payment of Special Taxes could impair the City's ability to pay debt service on the 2011 Bonds.

Revenue Fund

General. The Trustee will establish and hold in trust under the Indenture a fund to be known as the “City of San José Convention Center Facilities District Revenue Fund” (the “Revenue Fund”).

Deposits into the Revenue Fund. The City agrees and covenants in the Indenture that it will, on or before the 15th of each month, beginning May 15, 2011, transfer to the Trustee for deposit in the Revenue Fund all Special Taxes it has collected. The City will also transfer any amount of the Available T.O.T. that has been appropriated for the Convention Center Facilities District. See “- Transfer of Available T.O.T.” below.

Allocation of Money in the Revenue Fund. The Trustee will transfer all money in the Revenue Fund, when and as received, to the following funds in the following order of priority. The requirements of each fund must be completely satisfied before the Trustee may transfer any money to the next fund in order.

(i) Redemption Fund. See “- Redemption Fund” below.

(ii) Reserve Fund. See “- Reserve Fund” below.

(iii) Subordinate Revenue Fund. See “- Subordinate Revenue Fund” below.

(iv) Expense Fund. The Trustee will establish and maintain the Expense Fund. After making the deposits to the Redemption Fund, the Reserve Fund and the Subordinate Revenue Fund, the Trustee will, from the then remaining money in the Revenue Fund, transfer to and deposit in the Expense Fund a sum equal to the amount required by the City for the payment of Expenses to be incurred on or before the next May 1, as well as any amounts required to reimburse the City for its payment of unscheduled Expenses previously incurred. All money in the Expense Fund will be used and withdrawn by the Trustee only to pay scheduled Expenses (or to reimburse the City for the payment of unscheduled Expenses).

(v) Revenue Stabilization Reserve. See “-Revenue Stabilization Reserve” below.

(vi) Reimbursement to the City. The Trustee will, after making the deposits described in paragraphs (i) through (v) above, transfer to the City any funds still remaining in the Revenue Fund for any lawful use. Upon transfer to the City, these funds will be released from the pledge of the Indenture.

Redemption Fund

General. The Trustee will hold the Redemption Fund, and within the Redemption Fund the Series 2011 Sinking Account.

Deposits into the Redemption Fund. The Trustee will, from the money in the Revenue Fund, deposit into the Redemption Fund an amount of money equal to the aggregate amount of interest becoming due and payable on or before the next succeeding May 1.

The Trustee will also, from the then remaining money in the Revenue Fund, deposit into the Redemption Fund an amount of money equal to the aggregate amount of principal becoming due and payable on all Outstanding Serial Bonds on the next succeeding May 1 plus the aggregate of the Mandatory Sinking Account Payments required by the Indenture and by all Supplemental Indentures to be made on such date into the Sinking Accounts; provided, that all of the Mandatory Sinking Account Payments will be made without priority of the payment of any one Mandatory Sinking Account Payment over the payment of any other Mandatory Sinking Account Payment, and in the event that the money in the Redemption Fund on any May 1 is not equal to the amount of principal to become due and payable on the Outstanding Serial Bonds on such May 1 plus the principal of and

redemption premiums, if any, on the Outstanding Term Bonds required to be redeemed or paid at maturity on such May 1, then such money will be applied pro rata in such proportion as such Serial Bonds and the portion of such Term Bonds then required to be redeemed or paid at maturity bear to each other, after first deducting for such purposes for such Term Bonds any of such Term Bonds that have been redeemed or purchased during the twelve-month period ending on such May 1 and commencing on the immediately preceding May 2.

Application of Moneys in the Redemption Fund. All money in the Redemption Fund will be used and withdrawn by the Trustee solely to pay the interest on the Bonds as it becomes due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity) plus the principal of the Bonds as they mature or upon their prior redemption, except that any money in any Sinking Account may only be used to purchase or redeem or retire the Term Bonds for which the Sinking Account was established as provided in the Indenture or in any Supplemental Indenture.

Reserve Fund

General. The Reserve Fund is established for the benefit of the 2011 Bonds and any Additional Bonds.

General Account. A “General Account” is established within the Reserve Fund. Amounts in the General Account shall be available only to pay the 2011 Bonds and any Additional Bonds for which the General Account is made available pursuant to the Supplemental Indenture providing for the issuance of the Additional Bonds.

Additional Accounts. Pursuant to any Supplemental Indenture providing for the issuance of Additional Bonds, the Trustee may establish a separate account within the Reserve Fund available only for the payment of that series of Additional Bonds and which account will have its own Reserve Requirement. If such a separate account is created, the Additional Bonds will not have any claim on the General Account of the Reserve Fund.

Deposits into the Reserve Fund. In order to further secure the payment of principal of and interest on the 2011 Bonds, certain proceeds of the 2011 Bonds will be deposited into the Reserve Fund in an amount equal to the Reserve Requirement (see “ESTIMATED SOURCES AND USES OF FUNDS”). “Reserve Requirement” is defined in the Indenture to mean, for any Series of Bonds, the amount required to be maintained in the reserve fund or account, if any, for such series of Bonds pursuant to the Supplemental Indenture authorizing the issuance of such series of Bonds. The Reserve Requirement for the 2011 Bonds (and any Additional Bonds issued on a parity therewith and secured by the General Account within the Reserve Fund pursuant to the Indenture) will be, as of any date of calculation, an amount equal to the lesser of (a) Maximum Annual Debt Service on such Bonds, (b) 10% of the proceeds (within the meaning of Section 148 of the Code) of such Bonds or (c) 125% of Average Annual Debt Service on such Bonds.

The Trustee will, after making the deposits into the Redemption Fund described in “- Redemption Fund” above, from the then remaining money in the Revenue Fund, deposit into the Reserve Fund the amount of money that is required to maintain in each account in the Reserve Fund a balance equal to the applicable Reserve Requirement.

In the event that moneys in the Revenue Fund are insufficient on any date to make all of the required deposits to all of the accounts within the Reserve Fund, the Trustee will apply moneys available for that purpose to each account in proportion to the amount by which each account

contains less than the Reserve Requirement with respect to the Outstanding Bonds payable from such account.

Application of Money in the Reserve Fund. Moneys in each account of the Reserve Fund may be used and withdrawn by the Trustee solely for the purpose of paying the interest on or principal of the Bonds for which such account within the Reserve Fund is available in the event there is insufficient money in the Redemption Fund and Revenue Stabilization Reserve available for this purpose. If it is determined that the amount of money in any account within the Reserve Fund exceeds the Reserve Requirement for that account, the Trustee will, unless otherwise required by the terms of a Supplemental Indenture, withdraw the excess amount from the account and will deposit the excess in the Revenue Fund.

See “APPENDIX C – Summary of the Indenture” for a more complete summary of the provisions of the Indenture relating to the Reserve Fund. See also “BOND OWNERS’ RISKS – Depletion of Reserve Fund” below.

Subordinate Revenue Fund

General. The term “Subordinate Revenue Fund” is defined in the Indenture as (i) for the Series 2011 Lease Revenue Bonds, the Lease Revenue Fund established under the Trust Agreement for the Series 2011 Lease Revenue Bonds (the “Lease Revenue Bonds Trust Agreement”), which includes an Interest Account, a Principal Account and a Lease Revenue Reserve Account and (ii) for all other Subordinate Bonds, the equivalent fund or funds, account or accounts, established in the bond documents governing those Subordinate Bonds that are used to pay interest and principal on those Subordinate Bonds and to provide a debt service reserve for those Subordinate Bonds. Moneys in the Subordinate Revenue Fund are not available to pay debt service on the 2011 Bonds.

Deposits into the Subordinate Revenue Fund. After making the required deposits from the Revenue Fund into the Redemption Fund and the Reserve Fund (see “ – Revenue Fund” above), the Trustee will deposit into the Subordinate Revenue Fund the amounts necessary to pay principal of and interest on the Subordinate Bonds on the next May 1 and the following November 1 and to replenish the amount in the Subordinate Bonds Reserve Account to the required amount.

Revenue Stabilization Reserve

General. The Trustee will establish and hold the Revenue Stabilization Reserve under the Indenture.

Deposits into the Revenue Stabilization Reserve. The City will make an initial deposit of Special Tax Revenues into the Revenue Stabilization Reserve in the amount of $8,000,000 on or before the date of issuance of the 2011 Bonds. Thereafter, after making prioritized deposits described in “SECURITY FOR THE 2011 BONDS – Revenue Fund,” the City will deposit from moneys in the Revenue Fund into the Revenue Stabilization Reserve the amount of money that is required to restore the Revenue Stabilization Reserve to an amount equal to the Revenue Stabilization Reserve Maximum.

Upon the issuance of the 2011 Bonds and the Series 2011A Lease Revenue Bonds, the Revenue Stabilization Reserve Maximum is $10,258,950 and the Revenue Stabilization Reserve Requirement is $7,694,212.50.

Application of Money in the Revenue Stabilization Reserve. All money in the Revenue Stabilization Reserve will be used and withdrawn by the Trustee for the following purposes:

First, for the purpose of paying the interest on, principal of, and premium (if any) on, the Bonds (including the 2011 Bonds and any Additional Bonds) to the extent there are insufficient amounts in the Redemption Fund for those purposes.

Second, money in the Revenue Stabilization Reserve will be withdrawn by the Trustee and transferred to the Subordinate Revenue Fund for the purpose of paying the interest on, principal of, and premium (if any) on, the Subordinate Revenue Bonds to the extent there are insufficient amounts in the Subordinate Revenue Fund for those purposes, including, as of any May 1, the amount needed to make up a shortfall in moneys in the Subordinate Revenue Fund required to pay the immediately succeeding November 1 interest payment.

Third, if it is determined that the amount of money in the Revenue Stabilization Reserve exceeds the Revenue Stabilization Reserve Maximum, the Trustee will withdraw the amount of money representing such excess from the Revenue Stabilization Reserve and will transfer such amount to the City for any lawful use under the Chapter.

See “BOND OWNERS’ RISKS – Depletion of Revenue Stabilization Reserve” below.

Transfer of Available T.O.T.

General. In addition to the Special Tax on Hotel Properties, the City has been collecting a transient occupancy tax (“T.O.T.”) since at least 1966. Unlike the Special Tax which is imposed on the Hotel Properties, and secured by a lien on the hotel parcel, the T.O.T. is a tax on the hotel customer. In order to ease administration of the Special Tax for both the City and the hotels however, the calculation and collection of the Special Tax mirrors the T.O.T. The hotels are permitted, but not required to pass the Special Tax through to their customers.

The current T.O.T. is equal to 10% of the rent charged by hotel operators in the City. Of that amount, a 4% rate is a general tax that is deposited into the City’s General Fund. The remaining T.O.T., pursuant to San José Municipal Code 4.72.065, is deposited into a special fund and allocated to various specified purposes. One of the specified purposes is the funding of a convention and visitors bureau, including a rental subsidy of City facilities for convention purposes. Although the formula set forth in SJMC 4.72.065 provides substantial discretion to the City Council in allocating revenues between the funding of the convention and visitors bureau and cultural and fine arts programs, the City has historically appropriated 1.5% of the rent charged by hotel operators in the City (15% of T.O.T. revenues) to the convention uses. It is this 15% portion of the T.O.T. revenues, referred to herein as the “Available T.O.T.” and described in more detail below, that the City, subject to annual appropriation at the discretion of the City Council, will transfer and deposit in the Revenue Fund, as needed.

The City covenants in the Indenture that if, on any May 2 in a Fiscal Year in which the Additional Special Tax is being levied, the amount in the Revenue Stabilization Reserve is less than the Revenue Stabilization Reserve Requirement, then the City Manager will formally request the City Council to appropriate, in its annual budget for the following Fiscal Year, the Available T.O.T. for transfer to and deposit in the Revenue Fund. The Indenture provides that a failure of the City Council to appropriate such funds will not be a violation of this covenant or a default under the Indenture.

The City has not covenanted to continue the historical allocation of 1.5% of the rent charged by hotel operators in the City (15% of T.O.T. revenues) to convention uses and can provide no assurances that the Available T.O.T. will be available for deposit into the Revenue Fund. See “BOND OWNERS’ RISKS - Limited Obligation of the City to Pay Debt Service.”

Applicable Provisions of the San José Municipal Code. Chapter 4.72 of the San José Municipal Code governs the special fund portion of the T.O.T. Section 4.72.065 specifies how proceeds of the T.O.T. can be spent, and Section 4.72.065.B.3 allows the T.O.T. to be used for “Funding of the city's operating subsidy to the convention and cultural facilities of the City of San José, including a rental subsidy of city facilities for convention purposes.” San José Municipal Code Section 4.72.065.C limits the amount available for the operating subsidy to the convention and cultural facilities.

Section 4.72.065 as of the date of this Official Statement is set forth in its entirety below:

“4.72.065 Use of tax revenue - Deposit in special fund.

A. Notwithstanding Section 4.72.060, commencing July 1, 1990, the city council shall expend monies as hereinafter provided.

B. All of the taxes collected under this chapter shall, subject to the provisions hereinafter set forth, be expended for the following: 1. Funding of a convention and visitors bureau for the City of San José, including a rental subsidy of city facilities for convention purposes. 2. Funding of the cultural grant program and fine arts divisions programs, including: a. Funding of cultural grants, including the San José Symphony and the San José Museum of Art, and a rental subsidy for cultural use of city facilities; and b. Funding the expenses of the fine arts division of the convention and cultural department, including but not limited to personal, nonpersonal, and equipment expenses, fringe benefits, and overhead. 3. Funding of the city's operating subsidy to the convention and cultural facilities of the City of San José.

C. The amount of moneys currently allocated to activities described in Subparagraphs B.1. and 2. shall serve as the base year funding for purposes of calculating the amounts set forth in this paragraph. In subsequent fiscal years, beginning in 1981-82, the amount of tax receipts used to fund the activities described in Subparagraphs B.1. and 2. herein, shall be the base year funding plus fifty percent of the dollar increase in tax receipts over the base-year tax receipts. Available funds shall be apportioned between the activities described in Subparagraphs B.1. and 2. according to the annual decision of the city council. The remaining fifty percent shall be used for the funding of the activity described in Paragraph B.3. In the event of a decrease of revenues, the decrease will be apportioned on the same 50- 50 basis, fifty percent to the activities described in Subparagraphs B.1. and 2. in a proportion to be decided by the city council, and fifty percent to be the activities described in Subparagraph B.3.”

Collection of the T.O.T. The San José Municipal Code requires each operator of a Hotel Property to collect the T.O.T. at the same time as the rent is collected from every transient. Then, each operator is obligated, on or before the last day of each calendar month, to prepare a tax return to the City’s Director of Finance detailing the total rents charged and received and the amount of tax collected for transient occupancies for the preceding calendar month. At the time the tax return is filed, the full amount of tax collected for the preceding month must be remitted to the Director of

Finance. Operators whose annual T.O.T. debt to the City is less than $100,000 may elect to pay the T.O.T. on a quarterly basis, and must submit a return along with the tax, on or before the last day of the month following each calendar quarter.

Any operator who fails to remit its T.O.T. within the time required by the San José Municipal Code is levied a first penalty of 10% of the amount of the delinquent tax. Any operator who fails to remit any T.O.T. collected on or before 30 days after its due date is levied a second penalty of 10% of the amount of the delinquent tax.

See “THE CONVENTION CENTER FACILITIES DISTRICT – Historical T.O.T. Revenue and Historical Special Taxes” for historical T.O.T. revenue and Available T.O.T.

Additional Bonds

General. In addition to the 2011 Bonds, and subject to the conditions set forth in the Indenture, the City may at any time issue a series of bonds payable from the Special Taxes on a parity with the 2011 Bonds (“Additional Bonds”; together with the 2011 Bonds, the “Bonds”).

The conditions include the following, among others:

(a) The principal payment date for the Additional Bonds must be May 1 and the interest payment dates must be May 1 and November 1.

(b) The City must be in compliance with all agreements, conditions, covenants and terms contained in the Indenture and in all supplemental indentures (the “Supplemental Indentures”) required to be observed or performed by it, and no default under the Indenture may have occurred and be continuing.

(c) The Revenue Stabilization Reserve must contain at least the Revenue Stabilization Reserve Requirement, calculated as if the proposed Additional Bonds were outstanding, as evidenced by a certificate of the City or an independent, nationally recognized, municipal finance consultant on file with the Trustee.

(d) Either:

(i) The Special Tax revenue available to the City if the Special Taxes (including the Additional Special Tax) were to be levied and collected at the maximum rate and amount in accordance with the Rate and Method on all Taxable Properties in the Convention Center Facilities District during each Fiscal Year that the 2011 Bonds and any Additional Bonds will be Outstanding based on a projection of future hotel revenues subject to the Special Tax (i.e., “Rent,” as defined in the Rate and Method), would produce a sum equal to at least 150% of the Maximum Annual Debt Service on the Bonds (assuming the series of Additional Bonds will be Outstanding); all as shown by a certificate of an independent, nationally recognized expert in the projection of municipal revenues derived from the hotel industry on file with the Trustee; or

(ii) The Special Tax revenue received by the City during any 12- month period lying entirely within the last 18 months (including the Additional Special Tax if it was being levied or, if the Additional Special Tax was not levied, the amount of Additional Special Tax that would have been received if

the hotels actually paying the Base Special Tax had also paid the Additional Special Tax), produced a sum equal to at least 150% of the Maximum Annual Debt Service on the Bonds (assuming such Series of Additional Bonds will be Outstanding); all as shown by a certificate of the City on file with the Trustee.

(e) The Supplemental Indenture for a Series of Additional Bonds must provide for a deposit into the Reserve Fund as follows:

(i) If the Supplemental Indenture providing for the issuance of a Series of Additional Bonds provides that the Series of Additional Bonds will be secured by the General Account of the Reserve Fund, the Supplemental Indenture must require that the Reserve Fund be increased, if and to the extent necessary, immediately upon the receipt of the proceeds of the sale of the Series of Additional Bonds, to an amount at least equal to the Reserve Requirement for the General Account; and

(ii) If a series of Additional Bonds will not be secured by the General Account of the Reserve Fund, the Supplemental Indenture must specify the amount to be deposited in the separate account in the Reserve Fund for the Series of Additional Bonds.

See “APPENDIX C – Summary of the Indenture.”

Refunding Bonds. If the City issues additional bonds payable on a parity with the 2011 Bonds and any Additional Bonds for the purpose of refunding any outstanding Bonds (“Refunding Bonds”), the City may do so without complying with certain provisions for issuance of Additional Bonds, including the 150% debt service coverage requirement. However, under the Indenture, (i) the final maturity date of the Refunding Bonds may not be later than the final maturity date of the Bonds being refunded and (ii) the total interest cost to maturity on the Refunding Bonds plus the principal amount of the Refunding Bonds must not exceed the total interest cost to maturity on the Bonds to be refunded plus the principal amount of the Bonds to be refunded.

Subordinate Obligations

Series 2011A Lease Revenue Bonds. Concurrently with issuance of the 2011 Bonds, the City of San José Financing Authority (the “Authority”) is issuing its Lease Revenue Bonds, Series 2011A (Convention Center Expansion and Renovation Project (the “Series 2011A Lease Revenue Bonds”). The Series 2011A Lease Revenue Bonds are payable from “Revenues”, which are defined to include:

(i) Amounts transferred to the trustee for the Series 2011A Lease Revenue Bonds (the “2011A Lease Revenue Bond Trustee”) from the Revenue Fund and amounts transferred from the Revenue Stabilization Reserve (collectively, “Subordinate Revenues”). See “- Revenue Fund” and “- Revenue Stabilization Reserve” above.

(ii) Base Rental Payments made by the City under a Facility Lease (Convention Center Expansion and Renovation Project) dated as of April 1, 2011 (the “2011 Lease”).

Pursuant to the 2011 Lease, on any date upon which a Base Rental Payment installment is due, the City’s obligation to pay the Base Rental Payment installment will be deemed satisfied to the extent that Subordinate Revenues are available to pay the Base Rental Payment. The City currently plans to use Subordinate Revenues (including draws on the Revenue Stabilization Reserve, if

necessary), to the extent available, to pay debt service on the Series 2011A Lease Revenue Bonds before appropriating moneys from its general fund to pay Base Rental Payments. As a result, the City can provide no assurances that, in the event Special Taxes are insufficient to pay debt service on the 2011 Bonds, there will be amounts in the Revenue Stabilization Reserve to make up the deficiency.

Additional Subordinate Bonds. Under the Indenture, the City may issue additional Subordinate Bonds (in addition to the Series 2011A Lease Revenue Bonds) in the following circumstances. “Subordinate Bonds” are defined in the Indenture as the Lease Revenue Bonds (which includes the Series 2011A Lease Revenue Bonds) and any other bonds with claims to Subordinate Revenues and to the Revenue Stabilization Reserve on a parity with those of the Lease Revenue Bonds.

The conditions to issuance of additional Subordinate Bonds established by the Indenture include the following:

(i) The Additional Subordinate Bonds can only be issued to provide funds to finance or refinance the acquisition and construction costs (or the reimbursement for) the Improvements, including related incidental expenses.

(ii) The principal payment date for the additional Subordinate Bonds must be May 1 and the interest payment dates must be May 1 and November 1.

(iii) The City must be in compliance with all agreements, conditions, covenants and terms contained in the Lease Revenue Bonds Trust Agreement providing for the issuance of Bonds or Subordinate Bonds required to be observed or performed by it, and no default thereunder may have occurred and be continuing.

(iv) The Revenue Stabilization Reserve must contain at least the Revenue Stabilization Reserve Requirement, calculated as if the proposed additional Subordinate Bonds were outstanding, as evidenced by a certificate of the City or an independent, nationally recognized municipal finance consultant on file with the City.

(v) Either:

(A) The Special Tax revenue available to the City if the Special Tax (including the Additional Special Tax) were to be levied and collected at the maximum rate and amount in accordance with the Rate and Method on all Taxable Properties in the Convention Center Facilities District during each Fiscal Year that any bonds of such Series of Additional Subordinate Bonds will be Outstanding based on a projection of future hotel revenues subject to the Special Tax (i.e., “Rent,” as defined in the Rate and Method), would produce a sum equal to at least 130% of the aggregate maximum annual debt service on the Outstanding Bonds and the Outstanding Subordinate Bonds (assuming the proposed Series of Subordinate Bonds will be Outstanding); as shown by a certificate of an independent, nationally recognized expert in the projection of municipal revenues derived from the hotel industry on file with the Trustee; or

(B) The Special Tax revenue received by the City during any 12-month period lying entirely within the last 18 months (including the Additional Special Tax if it was being levied or, if the Additional Special Tax was not levied, the amount of Additional Special Tax that would have been received if the hotels actually paying the

Base Special Tax had also paid the Additional Special Tax), produced a sum equal to at least 130% of the aggregate maximum annual debt service on the Outstanding Bonds and the Outstanding Subordinate Bonds (assuming the proposed Series of Additional Subordinate Bonds will be Outstanding); as shown by a certificate of the City on file with the Trustee.

(vi) If a Supplemental Trust Agreement providing for the issuance of a Series of Additional Subordinate Bonds provides that the Series of Additional Subordinate Bonds will be secured by the General Subaccount of the Subordinate Bonds Reserve Account, the Supplemental Trust Agreement must require that the amount in the General Subaccount of the Subordinate Bonds Reserve Account be increased, if and to the extent necessary, forthwith upon the receipt of the proceeds of the sale of the Series of Additional Subordinate Bonds, to an amount at least equal to the Lease Revenue Reserve Requirement for such General Subaccount; and if the series of Additional Subordinate Bonds will not be secured by the General Subaccount of the Subordinate Bonds Reserve Account, the Supplemental Trust Agreement must specify the amount to be deposited in the separate subaccount in the Subordinate Bonds Reserve Account for the Series of Additional Subordinate Bonds, which deposit in either case may be satisfied from such proceeds or any other source, as provided in the Supplemental Trust Agreement. The term “Lease Revenue Reserve Requirement” is defined in the Lease Revenue Bonds Trust Agreement as an amount equal to the lesser of (a) maximum annual Debt Service (relating to the outstanding Lease Revenue Bonds), (b) 10% of the proceeds (within the meaning of Section 148 of the Code) of such Lease Revenue Bonds or (c) 125% of average annual Debt Service on such Lease Revenue Bonds.

(vii) If a series of Additional Subordinate Bonds will not be secured by the General Subaccount of the Subordinate Bonds Reserve Account, the document providing for the issuance of the Additional Subordinate Bonds must specify the amount to be deposited in the separate reserve fund, account or sub-account within the Subordinate Bonds Reserve Account, if any, for the Series of Additional Subordinate Bonds, which deposit may be satisfied from such proceeds or any other source, as provided in the document.

Super-Subordinate Bonds. Under the Indenture, the City may at any time issue a series of bonds payable from the Special Tax if:

(i) the claims to the Special Tax to pay debt service on such bonds will at all times be subordinate to the claims of the Bonds and the Subordinate Bonds,

(ii) such bonds will not be payable under any circumstances from money in the Revenue Stabilization Reserve, and

(iii) such bonds will not cause the bond authorization of the Convention Center Facilities District to be exceeded.

Refunding Subordinate Bonds. The City may issue an additional Series of Subordinate Bonds without complying with the requirements described in paragraphs (iv) and (v) under “Additional Subordinate Bonds” above if, after the issuance and delivery of the Series of Subordinate Bonds, none of the Subordinate Bonds previously issued will be Outstanding. In addition, the City may issue a Series of Subordinate Bonds without complying with the requirements described in paragraphs (iv) and (v) under “Additional Subordinate Bonds” above if, after the issuance and delivery of the Series of Subordinate Bonds, the annual Debt Service on all Subordinate Bonds to be Outstanding after the

issuance of the Series of Subordinate Bonds in each Fiscal Year thereafter will not be increased by reason of the issuance of such Series of Additional Subordinate Bonds.

Covenant to Foreclose

General. The City’s obligation under the Indenture to initiate foreclosure in the event of Special Tax delinquencies is described below. It is important for investors to understand that the obligation to pay Special Taxes is a function of Rent rather than a fixed maximum amount that is correlated to debt service on the 2011 Bonds and any Additional Bonds. As a result, it is possible that Special Tax revenue will be insufficient to pay debt service on the 2011 Bonds and any Additional Bonds even though there are no or nominal delinquencies and, in this situation, the City will have no right to initiate foreclosure of any properties in the Convention Center Facilities District.

Sale of Property for Nonpayment of Taxes. The City covenants in the Indenture to periodically monitor the collections of the Special Tax and, on the basis of such monitoring, the City will require the Assistant Director of Finance of the City to implement the procedures of Section H of the Rate and Method (see Appendix B) to seek the payment of the Special Tax as to the delinquent parcel. If the procedures described in Section H of the Rate and Method prove unsuccessful, the City will institute foreclosure proceedings as authorized by the Chapter against the parcel that is delinquent in the payment of the Special Tax in order to enforce the lien of all delinquent installments of the Special Tax as to that parcel, and will diligently prosecute and pursue the foreclosure proceedings to judgment and sale; provided that any actions taken to enforce delinquent Special Tax liens shall be taken only consistent with Sections 53356.1 through 53356.7, both inclusive, of the Act. The proceeds of all foreclosure actions, after payment from those proceeds of all foreclosure expenses, are Special Tax revenues and will be transferred by the City to the Trustee for deposit to the Revenue Fund.

Sufficiency of Foreclosure Sale Proceeds; Foreclosure Limitations and Delays. No assurances can be given that the real property subject to a judicial foreclosure sale will be sold or, if sold, that the proceeds of sale will be sufficient to pay any delinquent Special Taxes. The Act does not require the City to purchase or otherwise acquire any lot or parcel of property foreclosed upon if there is no other purchaser at such sale. See “BOND OWNERS' RISKS”.

Section 53356.6 of the Act requires that property sold pursuant to foreclosure under the Act be sold for not less than the amount of judgment in the foreclosure action, plus post-judgment interest and authorized costs, unless the consent of the owners of 75% of the outstanding 2011 Bonds and any Additional Bonds is obtained. However, under Section 53356.6 of the Act, the City, as judgment creditor, is entitled to purchase any property sold at foreclosure using a “credit bid,” where the City could submit a bid crediting all or part of the amount required to satisfy the judgment for the delinquent amount of the Special Tax. If the City becomes the purchaser under a credit bid, the City must pay the amount of its credit bid into the redemption fund established for the 2011 Bonds and any Additional Bonds, but this payment may be made up to 24 months after the date of the foreclosure sale.

Foreclosure by court action is subject to normal litigation delays, the nature and extent of which are largely dependent on the nature of the defense, if any, put forth by the debtor, and dependent upon the Superior Court calendar. In addition, the ability of the City to foreclose the lien of delinquent unpaid Special Taxes may be limited in certain instances and may require prior consent of the property owner if the property is owned by or in receivership of the Federal Deposit Insurance Corporation (the “FDIC”). See “BOND OWNERS' RISKS - Bankruptcy and Foreclosure Delays.”

Limited Obligation

The 2011 Bonds are limited special tax obligations of the City and the interest on and principal of and redemption premiums, if any, on the 2011 Bonds are payable solely from the proceeds of the Special Tax, all amounts in the Revenue Fund (including any Available T.O.T. appropriated for the Convention Center Facilities District), and any investment earnings thereon, and the City is not obligated to pay the interest on and principal of and redemption premiums on the 2011 Bonds except from the proceeds of the Special Tax and such other funds. The general funds and assets of the City are not liable and the full faith and credit of the City is not pledged for the payment of the interest on or principal of or redemption premiums, if any, on the 2011 Bonds, and no tax or assessment other than the Special Tax shall ever be levied or collected to pay the interest on or principal of or redemption premiums, if any, on the 2011 Bonds. The 2011 Bonds are not secured by a legal or equitable pledge of or charge, lien or encumbrance upon any property of the City or any of its income or receipts except the proceeds of the Special Tax and such other funds as provided in the Indenture, and neither the payment of the interest on or principal of or redemption premiums, if any, on the 2011 Bonds is a general debt, liability or obligation of the City. The Available T.O.T. is not pledged for the payment of the interest on or principal of or redemption premiums, if any, on the 2011 Bonds. The 2011 Bonds do not constitute an indebtedness of the City within the meaning of any constitutional or statutory debt limitation or restriction, and neither the City Council nor the City nor any officer or employee of the City will be liable for the payment of the interest on or principal of or redemption premiums, if any, on the 2011 Bonds otherwise than from the proceeds of the Special Tax and the other funds as provided in the Indenture.

No Acceleration

The principal of the 2011 Bonds are not subject to acceleration under the Indenture as a result of a default relating to the Indenture or the 2011 Bonds.

THE CITY

General. Information in this Official Statement relating to the City is included only for the purpose of supplying general information about the City. The 2011 Bonds are not payable from any of the City’s revenues or assets other than the revenues described in “SECURITY FOR THE 2011 BONDS” above. See, in particular, “SECURITY FOR THE 2011 BONDS – Limited Obligation.”

See “APPENDIX A – The City of San José: Demographic, Economic and Financial Information.”

Update to “APPENDIX A – The City of San José: Demographic, Economic and Financial Information.” The information in “APPENDIX A – The City of San José: Demographic, Economic and Financial Information” is as of March 21, 2011. The following are updates to the information provided in Appendix A. The headings and subheadings correspond to those used in Appendix A.

Budget—State Budget

FY 2011-12 State Budget. On March 29, 2011, Governor Brown halted negotiations with members of the State Legislature related to his budget proposal for Fiscal Year (“FY”) 2011-12, including voter approval of tax extensions at a special election in June, 2011 and the elimination of redevelopment agencies. It is unknown at this time whether negotiations will resume or whether the elimination of redevelopment agencies ultimately will be enacted. See “Major General Fund Revenue

Sources—Revenue from Local Agencies” for a discussion of the impact that the elimination of redevelopment agencies could have on the City.

Budget—City Budget

Mayor’s March Budget Message. On March 22, 2011, the City Council approved the Mayor’s Budget Message with one clarification related to the City’s General Purpose Parking Fund. The City Council also directed that a City Council study session specific to pension reform for current and future employees be held in May, 2011 in connection with the City Council’s study sessions on the City’s Budget for FY 2011-12.

Labor Relations—Status of Current Negotiations

On March 22, 2011, the City Council approved the agreement with the International Association of Firefighters, Local 230 as described in Appendix A.

On March 23, 2011, the City reached tentative agreement with three unions (Association of Engineers and Architects, IFPTE Local 21, units 41/42 and 43, Association of Maintenance Supervisory Personnel and City Association of Management Personnel) representing approximately 623 employees for a two-year agreement from July 1, 2011 through June 30, 2013. The represented employees have since ratified their respective agreements and the City Council is scheduled to consider the agreements at its meeting on April 19, 2011.

The key terms of the agreements include (1) an ongoing 10.1% base wage reduction; (2) healthcare cost containment in cost sharing, co-pays, health and dental in-lieu and dual coverage; (3) reduction of disability leave supplemental pay during FY 2011-12 and elimination of this benefit as of June 30, 2012; (4) reduction in the number of vacation hours that may be sold back in calendar year 2012 and elimination of the vacation sellback program as of the first pay period in calendar year 2013. Although the 10.1% wage reduction is described in each of these agreements as ongoing, upon the agreement’s expiration, the ongoing base wage reduction will be subject to renegotiation. The City and these unions also agreed to stop as of the first pay period in FY 2011-12 the ongoing additional retirement contributions that the employees represented by these unions had agreed to be deducted in FY 2010-11 and that offset the City’s retirement contributions. See “Pension Plans— Funding Status and Contribution Rates—Federated Plan Contribution Rates. “

In addition, the tentative agreements between the City and these unions include separate side letters with each union related to future discussions or negotiations about a number of topics and the resolution of an outstanding grievance. The side letters with each union will not become effective unless the City Council approves the tentative agreement with the applicable union. Described below are the side letters that address retirement reforms, sick leave payout and the Supplemental Retiree Benefit Reserve (“SRBR”).

In separate side letters with each of the unions, the City and the unions agreed to continue to meet and confer on retirement reforms and sick leave payout for current and future employees. The side letter specific to retirement reforms provides that in the event the parties reach impasse, at the conclusion of the impasse procedures, the City will have the right to unilaterally implement the proposed changes to retirement benefits but that neither party waives any legal rights. The side letter related to sick leave payout includes the City’s right to unilaterally implement changes to the sick leave payout benefit at the conclusion of impasse procedures but does not include the reservation of rights language that is specified in the retirement reform side letters.

With respect to the SRBR described in “Pension Plans—“Supplemental Retiree Benefit Reserves,” the City and each union agreed in a side letter to discuss the SRBR and, to the extent that change to the SRBR is a mandatory subject of bargaining, to meet and confer in good faith to reach agreement. However, the agreements with these unions further provide that if impasse is reached, at the conclusion of impasse procedures, the City will have the right to unilaterally implement the proposed change to the SRBR.

The tentative agreement with each of these unions include reopener provisions under specified circumstances for the concessions related to wage reduction, the elimination of supplemental disability pay as of June 30, 2012 and the elimination of vacation sellback as of the first pay period in calendar year 2013.

THE CONVENTION CENTER FACILITIES DISTRICT

Description of the Convention Center Facilities District

General. In general, all existing hotel properties in the City are a part of the Convention Center Facilities District including 77 hotels with 8,892 hotel rooms. More specifically, since July 1, 2009, all owners of parcels classified as Hotel Property within the boundaries of the Convention Center Facilities District have been subject to the Special Tax. See “BOND OWNERS’ RISKS – Exempt Properties and Exemptions from the Special Tax” for a description of some of the circumstances in which a Hotel Property is not obligated to pay Special Taxes.

There are two zones in the Convention Center Facilities District, and each zone is initially subject to a different Special Tax, as described in “SECURITY FOR THE 2011 BONDS – Rate and Method” above:

Zone 1: All properties in the Convention Center Facilities District on which a hotel is located within a two-and-one- quarter-mile (2.25 mi) radius of the San José McEnery Convention Center, 150 W. San Carlos Street, San José, CA 95113. As of the date of this Official Statement, there are 28 taxable Hotel Properties in Zone 1 with 3,157 rooms (35.5% of the total Citywide hotel rooms).

Zone 2: All properties in the City other than those in Zone 1. As of the date of this Official Statement, there are 49 taxable Hotel Properties in Zone 2 with 5,735 rooms (64.5% of the total Citywide hotel rooms).

The only significance of the zone distinction is that that, while Zone 1 has had a 4% Base Special Tax Rate since fiscal year 2009-10, the Zone 2 Base Special Tax Rate was phased in: it is currently 3% and will adjust to 4% beginning on July 1, 2011.

Future Annexation to the Convention Center Facilities District. When it formed the Convention Center Facilities District, the City Council identified all property that may be developed for hotel purposes (as defined in the City’s Municipal Code) anywhere within the City or within the City’s sphere of influence, as determined by the Local Agency Formation Commission of the County of Santa Clara, and which becomes annexed to the City as “territory proposed for annexation in the future”. This means that future hotels in the City can annex into the Convention Center Facilities District if the property owner executes a written consent to the annexation, and no further proceedings or hearings are required. The City has not adopted a development entitlement requirement for future hotel properties to annex into the Convention Center Facilities District, and the City can provide no assurances that any such requirement, if adopted, would be upheld by a court as a reasonable regulation under applicable California and federal law.

Hotel Sector in the City

The City commissioned Horwath Hospitality & Leisure LLC (“Horwath HTL”) to analyze estimated taxable hotel revenues in the City. Horwath HTL reports that it is the world's largest consulting organization specializing in the hospitality industry, with more than 50 offices in 39 countries. Horwath HTL’s report to the City, entitled “Report on the Projections of Taxable Hotel and CCFD Revenues to be Used for the Expansion and Renovation of the San José Convention Center,” dated March 2011 (the “Horwath Report”), is attached to this Official Statement as Appendix G. The

Horwath Report included in Appendix G has been updated from the version included in the Preliminary Official Statement to reflect the fact that the renovation of the San José McEnery Convention Center has not yet commenced.

The following summary of the hotel sector in the City is based on information set forth in greater detail in the Horwath Report. A more detailed discussion of the hotel sector of the City, including a summary of relevant regional and local economic conditions, is set forth in the Horwath Report.

Current Hotel Stock. As of December 31, 2010, there were 77 hotels with a total of 8,892 guestrooms located in the City, according to the City’s parcel database.

Hotel Property Under Construction. According to the Horwath Report, the 160-room Hotel Sierra opened on March 7, 2011. In addition, two other hotels have received development approvals: a Marriott Residence Inn/Fairfield Inn with 321 rooms and an America Center project with 176 rooms. Horwath HTL assumes the latter two hotels will be completed in 2013 and 2014, respectively. These hotels are not currently in the Convention Center Facilities District.

Categories of Hotel Stock. There are three broad categories of hotels in the Citywide market (a table in the Addenda to the Horwath Report presents a complete list of the City’s hotels by category):

Convention Hotels: There are 14 major hotels, including both the major downtown hotels as well as larger hotels in other parts of the City, that serve the convention market and also attract their own group business, representing a total of 4,409 guestrooms, or approximately 49.6% of the total lodging inventory of the City. The Convention Hotels tend to achieve the highest average rates due to the high quality of their facilities, the level of services provided, and the strong brand affiliation of several of these hotels.

Branded Hotels: This category includes 32 hotels with 3,199 guestrooms, or 36.0% of the total citywide supply. These Branded Hotels are either affiliated with the major brands or an upscale marketing association such as Preferred Hotels, but have limited meeting space and cater primarily to transient travelers. The Branded Hotels, generally smaller and more moderately priced, achieve the highest occupancy level of the hotel categories.

Independent Hotels: The hotels in this category are generally smaller and older and make up the smallest component of the market, with 31 properties comprising 1,284 guestrooms, or 14.4% of the total. The Independent Hotels trail the market in both occupancy and revenue per available room because their age and condition is generally poorer than the other hotels and they lack the reservations systems provided by the national chains.

Nature of Occupancy. Transient demand in the market is generated primarily by the many corporations in the City that attract business travelers. Because the City is not primarily a tourist destination, only a small portion of transient demand is leisure-related, with people visiting friends and relatives and attending special events in the area. Horwath HTL reports that over the past four years, the City’s 14 Convention Hotels have averaged approximately 40% group business and 60% transient travelers. Because the Convention Hotels represent the largest and most group-oriented of the hotels in the City, these results somewhat overstate the group market for the City overall.

Horwath HTL estimates that the Citywide market is made up of approximately 75% transient demand and 25% group demand.

Competition. The hotels in the City compete with other hotels in the neighboring cities within the Silicon Valley for corporate transient demand and group business. The cities of Milpitas, Santa Clara, and Sunnyvale all have hotels that compete directly for some of the major corporate demand generators in the area, as do some of the smaller nearby communities such as the cities of Campbell and Los Gatos. The hotels in Santa Clara, Sunnyvale and Cupertino are located closer to the largest corporations in Silicon Valley such as Google, Intel, Apple, Yahoo! and Advanced Micro Devices.

The Convention Center and large convention hotels also compete for major group business with regional convention centers such as Phoenix, Portland, Reno, Sacramento and Seattle. Team San José, which currently serves as the convention and visitors bureau for the City, has also reported increased competition from the large Las Vegas casino hotels, which have been discounting heavily to try to build business during the economic downturn.

Horwath HTL reports that the increased competition for convention business, when coupled with the eroding condition of the existing Convention Center facilities, has made it more difficult for the City to attract the core association and corporate groups it needs to effectively serve the City’s lodging market.

Short-Term and Long-Term Impact on Demand of Convention Center Expansion/Renovation Project. Horwath HTL reports that group demand is expected to grow slowly in the City until the completion of the proposed convention center expansion and renovation project, in calendar year 2013. More immediately, Horwath HTL estimates that approximately 20,000 room nights of demand will be lost in the market per year due to the proposed expansion/renovation project. As set forth more completely in the Horwath Report, Horwath HTL projects that when the Convention Center project is completed, demand will increase annually by 25,000 room nights per year, which is approximately 20% of the current room nights generated by the Convention Center.

Historical Operating Performance. The lodging market in the City has been tracked by Smith Travel Research (“STR”) since 1987; STR’s database reports on a census of 71 of the 77 hotels (92%) and 8,606 of the 8,892 rooms (97%); in general, the Independent Hotel properties do not contribute their data to the STR database.

The following table estimates the calendar year 2010 performance for the three categories of hotels in the City using data from the STR database and Team San José.

Table 3 City of San José Citywide Hotels - Performance by Category Estimated Calendar Year 2010

Average Revenue per Number of Daily Rate Available Room Category Rooms Occupancy (ADR) (RevPAR) Convention Hotels 4,409 59% $117 $69 Branded Hotels 3,199 69 78 54 Independent Hotels 1,284 58 82 48

Source; Horwath HTL (based on STR and Team San José data).

The following table presents the historical operating performance for the Citywide group of properties as reported by STR for calendar years 1987 through 2010.

Table 4 City of San José Citywide Lodging Performance Calendar Years 1987 through 2010

Revenue per Annual Room Available Calendar Nights Room Nights Occupancy Available Daily Room Year Available Occupied Rate Rate (ADR) (RevPAR) 1987 (1) 1,653,181 1,138,587 68.9% $53.08 $36.56 1988 1,811,495 1,250,785 69.0 59.68 41.21 1989 (2) 1,713,666 1,242,981 72.5 65.30 47.37 1990 (2) 1,744,253 1,192,990 68.4 67.87 46.42 1991 (2) 1,866,205 1,190,268 63.8 69.15 44.11 1992 (3) 1,955,713 1,238,799 63.3 67.95 43.04 1993 (4) 2,140,426 1,397,614 65.3 66.90 43.69 1994 2,150,920 1,478,549 68.7 69.99 48.11 1995 2,127,010 1,608,914 75.6 76.35 57.75 1996 2,150,215 1,711,785 79.6 87.37 69.55 1997 2,170,020 1,682,653 77.5 104.92 81.35 1998 (5) 2,310,252 1,692,612 73.3 114.62 83.97 1999 2,392,307 1,794,445 75.0 119.75 89.82 2000 (6) 2,487,455 2,026,252 81.5 138.58 112.88 2001 (7) 2,651,664 1,690,428 63.7 130.81 83.39 2002 (8) 2,786,552 1,572,178 56.4 107.48 60.64 2003 (9) 3,020,488 1,609,163 53.3 95.64 50.95 2004 3,134,640 1,761,465 56.2 93.20 52.37 2005 3,159,075 1,896,218 60.0 96.93 58.18 2006 3,159,075 2,087,613 66.1 106.19 70.17 2007 3,145,500 2,126,912 67.6 116.48 78.76 2008 3,156,147 2,033,492 64.4 119.29 76.86 2009 3,141,555 1,753,324 55.8 100.75 56.25 2010 3,141,249 1,988,523 63.3 99.40 62.92 CAGR (10) 2.8% 2.5% 2.8% 2.4% Change FY 09 to FY 10 0.0% 13.4% (1.3%) 11.9%

(1) Fairmont Hotel opened in late 1987. The hotel was opened with assistance from the San José Redevelopment Agency. (2) In 1989-1991, the Courtyard San José Airport, Holiday Inn Silicon Valley and Staybridge Suites opened. The Convention Center opened in 1989. (3) Homewood Suites opened. (4) Hilton San José opened with assistance from the San José Redevelopment Agency to build demand for the Convention Center. (5) Homestead, Residence Inn opened. (6) Extended Stay Deluxe opened. (7) Three Extended Stay Americas, Towne Place Suites and Moorpark Hotel opened. (8) Hampton Inn & Suites and Comfort Suites opened; Fairmont Expansion. (9) Marriott San José and Hotel Valencia opened. The Marriott San José was opened with assistance from the San José Redevelopment Agency. (10) Compounded annual growth rate. Source: Horwath HTL (based on STR data).

Recent trends in rooms, rates and occupancy. The City’s taxable hotel revenue was $186.0 million in fiscal year 2009-10, the lowest level since fiscal year 2004-05. The City’s taxable hotel revenues peaked in fiscal year 2000-01 at $255.4 million, at the end of the high tech boom and the dotcom bubble. Market demand dropped dramatically in 2001 following the addition of new supply, the economic downturn resulting from the bursting of the tech bubble and the drop in travel following the events of September 11, 2001. The downturn continued through 2003. Thereafter, hotel revenues steadily improved through 2007, but still had not returned to the 1997 level, indicating the continuing struggle the hotels in the City were facing despite a relatively robust economy. Then, beginning in the second half of 2008, the national economy suffered from the financial crisis and the Citywide market was affected like most of the country with a sharp drop in demand. Room rates fell in concert with occupancy, and continued to fall through 2010.

Hotel market data for calendar year 2010 indicates the beginning of a rebound. Although the ADR continued to decline in 2010 (by 1.3%), the increased demand and occupancy led to the gain in Revenue Per Available Room (“RevPAR”) to $62.92 for the Citywide market, up 11.9% from $56.23 for the same period in calendar year 2009. Interviews by Horwath HTL with managers of major hotels in the market indicate that the resurgence in individual business travelers is leading the recovery. Group business has been slower to return.

The overall Compounded Annual Growth Rate (“CAGR”) for RevPAR from 1987 through 2010 is 2.4%, although market data for the City reflects cyclical “boom or bust” activity levels rather than level growth as a result of the nature of the local high-tech economy. Over the 23 years of the market data reported by STR through 2010, there have been 15 years with positive growth (average growth rate in those years: 12.7%), and 8 years in which the market RevPAR declined (average decrease in those years: 13.5%).

Largest Hotel Properties

Largest Hotel Properties Based on Number of Rooms. The top 10 hotels based on number of rooms have a total of 3,915 rooms, comprising approximately 44% of the total rooms inventory in the City. The top three hotels – the Fairmont, the Holiday Inn and the Marriott – make up approximately 20% of the Citywide total. See Addendum A to the Horwath Report (Appendix G) for a list of all of the hotels in the City by category.

Top Hotel Properties Based on Rent. The following table identifies, in alphabetical order as of January 1, 2011, the top 10 hotels in the Convention Center Facilities District based on Rent. The amount of Rent collected by each hotel is confidential. The top 10 hotels based on Rent also are the 10 largest hotels based on number of room except as indicated below.

Table 5 City of San José Top 10 Hotel Properties Based on Rent Based on Fiscal Year 2009-10 Rent

Name of Type of Year Last Number of Hotel (Alphabetical) Hotel Built Renovation Rooms Zone Courtyard by Marriott (1) Branded 1990 2004 150 2 Crowne Plaza Convention 1974 2008 240 1 Doubletree Hotel Convention 1982 2004 505 2 Fairfield Inn & Suites (1) Convention 1969 2000 186 2 Fairmont Hotel Convention 1987 2008 805 1 Hotel Valencia Santana Row Branded 2003 2008 213 2 San José Airport Garden Hotel (2) Convention 1961 1998 512 2 San José Hilton Convention 1992 2002 355 1 San José Marriott Convention 2003 2008 506 1 Wyndham Hotel Convention 1974 2005 355 2

FY 09-10 Rent % of Total FY 09-10 Rent Total FY 09-10 Rent of Top 3 Hotels $53,636,957 28.8% Total FY 09-10 Rent of Top 1-10 Hotels 109,172,733 58.7 Total FY 09-10 Rent of Top 11-20 Hotels 30,322,715 16.3 Total FY 09-10 Rent of Top 1-20 Hotels 139,495,448 75.0 Total FY 09-10 Citywide 186,001,647 100.0

(1) This hotel is not a top 10 hotel based on number of rooms. The Dolce Hayes Mansion and the Holiday Inn Silicon Valley are top 10 hotels based on number of rooms but not top 10 hotels based on amount of Rent in fiscal year 2009-10. (2) Formerly Holiday Inn; converted as of the end of October 2010. Source: City of San José.

The top 10 hotels were responsible for approximately 58.7% of the total collections for the City over the past five years, which is higher than the percentage of rooms (approximately 43%) because the 10 hotels tend to be more upscale/higher priced and perform with a higher ADR and RevPAR than the market overall. For calendar year 2010, the top 10 hotels represented a slightly higher proportion of total rent than their 5-year average.

Historical T.O.T. Revenue and Historical Special Taxes

The T.O.T. in general and the Available T.O.T. are described above in “SECURITY FOR THE 2011 BONDS – Transfer of Available T.O.T.”

Annual T.O.T. Collections, Available T.O.T. and Hypothetical Special Tax Revenues. The following table provides a history of taxable hotel revenue in the City by fiscal year, and identifies the hypothetical Base Special Tax revenue (assuming a 4% Base Special Tax rate), Additional Special Tax revenue and Available T.O.T.. The City’s taxable hotel revenues are a function of both the hotels’ revenue per available room and the changes in the supply of guestrooms; as a result, even in years in which the revenue per available room in the City declined, such as fiscal year 1990-91, the added supply resulted in an increase in taxable hotel revenue. Through June 30, 2010, taxable hotel revenues are the same as “Rent,” as defined in the Rate and Method (see “SECURITY FOR THE 2011 BONDS – Rate and Method” above) because all of the hotels in the City were also in the Convention Center Facilities District. As explained above, the City has not adopted a development entitlement requirement for future hotel properties to annex into the Convention Center Facilities District, and, beginning in fiscal year 2010-11, there are hotels in the City that are not in the Convention Center Facilities District (see “- Hotel Sector in the City” above for information about the March 7, 2011 opening of the Hotel Sierra).

Table 6 City of San José Historical and Projected Available T.O.T. and Hypothetical Special Tax Revenues

Hypothetical Total Fiscal Hypothetical Special Year Base Hypothetical Hypothetical Taxes and Ending Taxable Hotel Percentage Special Taxes 1% Additional Available Available June 30 Revenue Change (1) Special Taxes T.O.T. T.O.T.(1) 1990 $66,267,870 - $2,650,715 $662,679 $994,018 $4,307,412 1991 67,799,477 2.3% 2,711,979 677,995 1,016,992 4,406,966 1992 73,049,396 7.7 2,921,976 730,494 1,095,741 4,748,211 1993 78,076,149 6.9 3,123,046 780,761 1,171,142 5,074,950 1994 88,816,493 13.8 3,552,660 888,165 1,332,247 5,773,072 1995 97,198,923 9.4 3,887,957 971,989 1,457,984 6,317,930 1996 120,553,349 24.0 4,822,134 1,205,533 1,808,300 7,835,968 1997 147,031,794 22.0 5,881,272 1,470,318 2,205,477 9,557,067 1998 172,056,806 17.0 6,882,272 1,720,568 2,580,852 11,183,692 1999 185,488,980 7.8 7,419,559 1,854,890 2,782,335 12,056,784 2000 224,325,055 20.9 8,973,002 2,243,251 3,364,876 14,581,129 2001 255,415,480 13.9 10,216,619 2,554,155 3,831,232 16,602,006 2002 165,774,679 -35.1 6,630,987 1,657,747 2,486,620 10,775,354 2003 164,796,014 -0.6 6,591,841 1,647,960 2,471,940 10,711,741 2004 163,951,186 -0.5 6,558,047 1,639,512 2,459,268 10,656,827 2005 179,786,082 9.7 7,191,443 1,797,861 2,696,791 11,686,095 2006 211,536,136 17.7 8,461,445 2,115,361 3,173,042 13,749,849 2007 224,596,462 6.2 8,983,858 2,245,965 3,368,947 14,598,770 2008 267,250,158 19.0 10,690,006 2,672,502 4,008,752 17,371,260 2009 194,819,035 -27.1 7,792,761 1,948,190 2,922,286 12,663,237 2010 186,001,647 -4.5 7,440,066 1,860,016 2,790,025 12,090,107 2011* 203,326,000 9.3 8,133,040 2,033,260 3,072,765 13,239,065 2012* 215,831,000 6.2 8,633,240 2,158,310 3,289,485 14,081,035

(1) Assumes a 4% Base Special Tax Rate in Zone 1 and Zone 2. * Projected. Hypothetical Base Special Taxes and Hypothetical Additional Special Taxes are based on $203,326,000 of taxable hotel revenue in the Convention Center Facilities District in fiscal year 2010-11 and $215,831,000 of taxable hotel revenue in fiscal year 2011-12, while Available T.O.T. is based on $204,851,000 of taxable hotel revenue in fiscal year 2010-11 and $219,299,000 taxable hotel revenue in fiscal year 2011-12. The difference is that additional rooms are expected to be added in the City but it is assumed that the new hotels will not annex into the Convention Center Facilities District. Source: Horwath HTL; City of San José.

As mentioned earlier in this Official Statement, the STR data for the City’s hotels samples the majority of hotels in the City, but not all of them; the data generally does not include the small, older independent hotels in the City. The independent hotels typically underperform the overall market and, therefore, the STR figures are slightly inflated for the City overall. In addition, the STR data does not factor in any exemptions for long-term stays or governmental employees, which affects the T.O.T. revenues but not the overall market. The STR sample has covered a larger percentage of the Citywide hotel rooms over time, growing from under 60% in 1990 to nearly 90% for the past five years, which has narrowed the variance in revenues and RevPAR. A more complete discussion of the variance is included in the Horwath Report. The Horwath Report includes a table reconciling STR data and actual results.

Monthly Taxable Hotel Revenues. Horwath HTL reports that, over the past five years, with fluctuations due to the economic downturn as well as seasonal patterns, the overall monthly taxable hotel revenues have mostly remained within a range from approximately $13 million to $20 million. When analyzed for the five-year period, every month except November and December have seen revenues average over $16 million, with December being the low month at $14.6 million and March the high month with an average of over $19 million. The following table shows the monthly taxable hotel revenues over the past five years. As set forth in the table, the taxable hotel revenues for fiscal year 2009-10 were below the pace of fiscal year 2008-09 until February, when hotel room demand began to increase. Through June 30, 2010, taxable hotel revenues are the same as “Rent,” as defined in the Rate and Method (see “SECURITY FOR THE 2011 BONDS – Rate and Method” above) because all of the hotels in the City were also in the Convention Center Facilities District. As explained above, the City has not adopted a development entitlement requirement for future hotel properties to annex into the Convention Center Facilities District, and, beginning in fiscal year 2010- 11, there are hotels in the City that are not in the Convention Center Facilities District (see “- Hotel Sector in the City” above for information about the March 7, 2011 opening of the Hotel Sierra).

Table 7 City of San José Monthly Taxable Hotel Revenues Fiscal Years 2005-06 through 2009-10 (In Thousands)

FY 09-10 Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year over Month 2005-06 2006-07 2007-08 2008-09 2009-10 FY 08-09 % Jul $14,830 $16,045 $19,239 $19,229 $13,228 -31.2% Aug 14,031 17,282 20,113 18,613 13,598 -26.9 Sep 14,594 17,470 19,100 19,864 13,824 -30.4 Oct 15,197 20,560 20,371 16,932 14,880 -12.1 Nov 15,943 15,431 17,925 14,664 12,769 -12.9 Dec 12,785 14,577 17,885 14,933 13,057 -12.6 Jan 16,196 18,368 19,398 14,323 12,404 -13.4 Feb 17,875 17,770 20,397 12,752 14,717 15.4 Mar 21,820 21,788 21,612 14,690 16,050 9.3 Apr 15,953 18,647 19,478 12,435 13,825 11.2 May 15,812 19,184 19,517 12,260 16,939 38.2 Jun 18,162 21,834 21,665 12,901 15,728 21.9 YE Reconciliation(1) 18,339 5,641 30,551 11,223 14,981 33.5 Annual 211,536 224,596 267,250 194,819 186,002 -4.5

(1) Year-end reconciliation includes late payments, post-audit collections and prior year adjustments. Source: Horwath HTL; City of San José Department of Finance.

Horwath HTL reports that, for the first five months of fiscal year 2010-11 (through December 2010), taxable hotel revenues increased substantially over the prior year. The following table presents the monthly and cumulative data for the first half of fiscal year 2010-11 compared with the same data for fiscal year 2009-10.

Table 8 City of San José Monthly Taxable Hotel Revenues – Comparison of 1st Half FY 2009-10 and 1st Half 2010-11 (In Thousands)

Percent 1st Half First Half Change – Percent 1st Half FY 09-10 1st Half FY 10-11 Year Over Change - Month FY 09-10 Cumulative FY 10-11 Cumulative Year Cumulative Jul $13,228 $13,228 $15,204 $15,204 14.9% 14.9% Aug 13,598 26,826 13,885 29,089 2.1 8.4 Sep 13,824 40,650 15,504 44,593 12.1 9.7 Oct 14,880 55,530 17,596 62,188 18.3 12.0 Nov 12,769 68,299 15,246 77,434 19.4 13.4 Dec 13,057 81,356 12,982 90,416 -0.6 11.1

Source: Horwath HTL; City of San José Department of Finance.

Projected Special Tax Revenues and Available T.O.T.

Underlying Assumptions. Set forth in the following table is Horwath HTL’s projected taxable hotel revenue, Available T.O.T., Base Special Tax revenues, Additional Special Tax revenues and total Special Tax revenues for fiscal years 2010-11 through 2040-41.

The projections assume the following (as described in greater detail in Appendix G):

• For the purpose of projecting Special Tax revenues, Horwath HTL assumes that no new hotels will be annexed to the Convention Center Facilities District because the City does not currently have a mechanism by which it can obligate new hotels to annex to the Convention Center Facilities District. • Horwath HTL assumes that no currently-existing hotels will discontinue operating as hotels. • For purposes of projecting Available T.O.T., Horwath HTL takes projected increases in hotel room supply in the City into account because new rooms will impact T.O.T. revenues. Horwath HTL assumes (i) that the two projects that are approved and awaiting financing (a Marriott Residence Inn/Fairfield Inn with 321 rooms and the America Center project with 176 rooms) will be completed in fiscal year 2012-13 and fiscal year 2013-14, respectively and (ii) that approximately 400 rooms will open every five years during the projection period. These growth assumptions result in a CAGR for supply of 0.8% from fiscal year 2009-10 through fiscal year 2045-46, in comparison to a CAGR of 2.9% from fiscal year 1989-90 through fiscal year 2009-10. Horwath HTL uses a slower projected growth rate than historical growth because Horwath HTL assumes (i) new real estate construction of all kinds will occur at a slower pace than historically, (ii) future additions represent smaller percentage increases than historical percentage increases because of the large base of hotel rooms in the mature City hotel market, and (iii) there are greater limitations on the availability of land for hotel development in the City. The revenue from

the projected new rooms is not included in Horwath HTL’s estimates of Special Tax revenue. • Horwath HTL assumes that economic cycles follow the pattern of five years of growth, two years of downturn and a flat year. • Horwath HTL assumes that RevPAR will increase from $57.31 in fiscal year 2009-10 to $100.43 in fiscal year 2045-46, equating to a CAGR of 1.6% over the 36-year period. This projection is significantly below the historical City RevPAR growth of 2.3% from 1990 through 2010. Over the projection period, the average annual growth in RevPAR during years of positive growth is 6.8%, while the average decline during downturns is -8.5%, although with growth cycles being longer than the downturns the net result is positive long- term growth. Because RevPAR combines both occupancy and ADR, inflationary pressure is reflected as growth in average room rates over the period. • Horwath HTL projects that supply growth will slightly outpace demand leading to lower occupancy levels over time. The estimated CAGR for supply is 0.8%, compared to 2.9% historically, and the estimated growth in demand is 0.7% as compared to 2.1% historically. Horwath HTL’s estimate of future overall growth in ADR is 1.7% annually, compared to 3.1% historically. • Using the cyclical model as a basis, Horwath HTL calculated the cumulative Special Tax revenue over the 36-year projection period, which equates to approximately $10.3 million annually. This estimate was then used to prepare an annual revenue model using steady annual growth in Taxable Hotel Revenue of 2.3% annually, as shown in the table below.

Additional information about the assumptions underlying Horwath HTL’s projections is presented in greater detail in Appendix G.

Uncertain Nature of Projections. The projection represents Horwath HTL’s estimate of projected financial results based upon its judgment of the most probable occurrence of certain future events. Actual results achieved during the projection period may vary from those presented in the forecast and such variations may be material. It is important to be aware that the travel industry is susceptible to a broad swath of macro- and micro-economic factors. The City can provide no assurances as to the accuracy or reasonableness of the projection.

Alternative Stress Tests. The City undertook a variety of stress tests with respect to debt service coverage on the 2011 Bonds and the results of such tests are summarized below. The City can provide no assurances that actual results will not vary from the stress test scenarios described below. The summary of the stress test results in the Preliminary Official Statement identified certain assumptions with respect to debt service on the 2011 Bonds and the Series 2011A Lease Revenue Bonds. The stress test results summarized below reflect actual debt service on the 2011 Bonds and the Series 2011A Lease Revenue Bonds and did not change from the results summarized in the Preliminary Official Statement.

(i) If taxable hotel revenues in the Convention Center Facilities District were to decline by 15% from their fiscal year 2009-10 levels and did not recover thereafter, the various sources of revenue potentially available for payment of debt service on the 2011 Bonds (Base Special Tax, Additional Special Tax, maximum Available T.O.T. (assuming 1.5% of the rent charged by hotel operators in the City (15% of T.O.T. revenues) is appropriated)) would provide at least 125% debt service coverage on the 2011 Bonds. In this scenario, the City’s Base Rental Payment obligation would be satisfied with Subordinate Revenues, including draws on the Revenue Stabilization Fund, but not any draws on the Reserve Fund.

(ii) If taxable hotel revenues in the Convention Center Facilities District were to decline by 32% from their fiscal year 2009-10 levels and did not recover thereafter, the various sources of revenue potentially available for payment of debt service on the 2011 Bonds (Base Special Tax, Additional Special Tax, maximum Available T.O.T. (assuming 1.5% of the rent charged by hotel operators in the City (15% of T.O.T. revenues) is appropriated)) would provide at least 100% debt service coverage on the 2011 Bonds. In this scenario, the City would not be able to satisfy its Base Rental Payment obligation with Subordinate Revenues, including draws on the Revenue Stabilization Fund (assuming no draws on the Reserve Fund).

Table 9 City of San José Convention Center Facilities District No. 2008-1 Projected Taxable Hotel Revenue, Available T.O.T. and Special Tax Revenues Fiscal Years 2010-11 through 2045-46 – Constant Annual Growth

Total 4% Special City CCFD Base Tax Taxable Taxable Special 1% Total and Fiscal Hotel Available Hotel Tax Additional Special Available Year Revenue (1) T.O.T. (2) Revenue (1) Revenue (3) Special Tax Taxes T.O.T. 2010-11 $190,810,203 $2,862,153 $189,172,469 $6,431,864 $1,891,725 $8,323,589 $11,185,742 2011-12 195,743,071 2,936,146 192,397,345 7,695,894 1,923,973 9,619,867 12,556,013 2012-13 200,803,464 3,012,052 195,677,196 7,827,088 1,956,772 9,783,860 12,795,912 2013-14 205,994,680 3,089,920 199,012,960 7,960,518 1,990,130 9,950,648 13,040,568 2014-15 211,320,101 3,169,802 202,405,589 8,096,224 2,024,056 10,120,280 13,290,081 2015-16 216,783,195 3,251,748 205,856,054 8,234,242 2,058,561 10,292,803 13,544,551 2016-17 222,387,523 3,335,813 209,365,340 8,374,614 2,093,653 10,468,267 13,804,080 2017-18 228,136,735 3,422,051 212,934,449 8,517,378 2,129,344 10,646,722 14,068,773 2018-19 234,034,577 3,510,519 216,564,402 8,662,576 2,165,644 10,828,220 14,338,739 2019-20 240,084,891 3,601,273 220,256,236 8,810,249 2,202,562 11,012,811 14,614,085 2020-21 246,291,619 3,694,374 224,011,006 8,960,440 2,240,110 11,200,550 14,894,925 2021-22 252,658,805 3,789,882 227,829,784 9,113,191 2,278,298 11,391,489 15,181,371 2022-23 259,190,597 3,887,859 231,713,662 9,268,546 2,317,137 11,585,683 15,473,542 2023-24 265,891,250 3,988,369 235,663,750 9,426,550 2,356,637 11,783,187 15,771,556 2024-25 272,765,131 4,091,477 239,681,176 9,587,247 2,396,812 11,984,059 16,075,536 2025-26 279,816,716 4,197,251 243,767,088 9,750,684 2,437,671 12,188,355 16,385,605 2026-27 287,050,600 4,305,759 247,922,653 9,916,906 2,479,227 12,396,133 16,701,892 2027-28 294,471,496 4,417,072 252,149,060 10,085,962 2,521,491 12,607,453 17,024,525 2028-29 302,084,239 4,531,264 256,447,516 10,257,901 2,564,475 12,822,376 17,353,639 2029-30 309,893,788 4,648,407 260,819,248 10,432,770 2,608,192 13,040,962 17,689,369 2030-31 317,905,232 4,768,578 265,265,507 10,610,620 2,652,655 13,263,275 18,031,854 2031-32 326,123,789 4,891,857 269,787,562 10,791,502 2,697,876 13,489,378 18,381,235 2032-33 334,554,814 5,018,322 274,386,706 10,975,468 2,743,867 13,719,335 18,737,658 2033-34 343,203,800 5,148,057 279,064,253 11,162,570 2,790,643 13,953,213 19,101,270 2034-35 352,076,381 5,281,146 283,821,539 11,352,862 2,838,215 14,191,077 19,472,223 2035-36 361,178,339 5,417,675 288,659,925 11,546,397 2,886,599 14,432,996 19,850,671 2036-37 370,515,602 5,557,734 293,580,791 11,743,232 2,935,808 14,679,040 20,236,774 2037-38 380,094,254 5,701,414 298,585,545 11,943,422 2,985,855 14,929,277 20,630,691 2038-39 389,920,536 5,848,808 303,675,616 12,147,025 3,036,756 15,183,781 21,032,589 2039-40 400,000,849 6,000,013 308,852,459 12,354,098 3,088,525 15,442,623 21,442,636 2040-41 410,341,760 6,155,126 314,117,554 12,564,702 3,141,176 15,705,878 21,861,004 2041-42 420,950,007 6,314,250 319,472,403 12,778,896 3,194,724 15,973,620 22,287,870 2042-43 431,832,501 6,477,488 324,918,539 12,996,742 3,249,185 16,245,927 22,723,414 2043-44 442,996,331 6,644,945 330,457,516 13,218,301 3,304,575 16,522,876 23,167,821 2044-45 454,448,771 6,816,732 336,090,918 13,443,637 3,360,909 16,804,546 23,621,277 2045-46 466,197,282 6,992,959 341,820,354 13,672,814 3,418,204 17,091,018 24,083,977

(1) The table forecasts a 2.6% increase in Citywide taxable hotel revenue (“City Taxable Hotel Revenue”) each year and a 1.7% increase in Convention Center Facilities District taxable hotel revenue (“CCFD Taxable Hotel Revenue”) each year. The use of a 1.7% annual growth rate for the Convention Center Facilities District yields the same annual average Convention Center Facilities District revenues of $10.3 million over the length of the term, and also closely mirrors the CAGR for taxable hotel revenues within the Convention Center Facilities District through 2046 of 1.6% The rate of increase in “City Taxable Hotel Revenue” reflects Horwath HTL’s assumptions with respect to increased room supply. Because the City currently has no entitlement mechanism to obligate future hotels to annex into the Convention Center Facilities District, “CCFD Taxable Hotel Revenue” does not reflect any increase in hotel room supply (Horwath also assumes that no existing hotels will discontinue operations.) (2) Subject to appropriation by the City Council. In addition, the City is not obligated to continue to appropriate 1.5% of rent charged by hotel operators in the City (15% of T.O.T. revenues) to convention uses. See “BOND OWNERS’ RISKS – Limited Obligation of the City to Pay Debt Service.” (3) The Base Special Tax Rate for Zone 2 will be 4% beginning in fiscal year 2011-12 and it is 3% in fiscal year 2010-11. Source: Horwath HTL.

Projected Debt Service Coverage

Based on the total Special Tax revenues projected by Horwath HTL, the following table shows projected debt service coverage on the 2011 Bonds. The assumptions made by Horwath HTL in projecting Special Tax revenues are described in the previous section and in the Horwath Report appended to this Official Statement.

Projected fiscal year 2010-11 Special Tax revenues ($8,323,589) are equal to 101% of maximum annual debt service on the 2011 Bonds ($8,213,063 in fiscal year 2019-20). Projected fiscal year 2010-11 Special Tax revenues plus projected maximum fiscal year Available T.O.T. (a total of $11,185,742) are equal to 136% of maximum annual debt service on the 2011 Bonds ($8,213,063 in fiscal year 2019-20).

As described above, the Zone 2 tax rate will increase from 3% to 4% in fiscal year 2011-12. Assuming this increase in tax rate and no change in projected Rent from the projected fiscal year 2010-11 level, projected fiscal year 2011-12 Special Tax revenues plus projected maximum fiscal year 2011-12 Available T.O.T. (a total of $12,320,776) are equal to 150% of maximum annual debt service on the 2011 Bonds.

Table 10 City of San José Special Hotel Tax Revenue Bonds, Series 2011 (Convention Center Expansion and Renovation Project) Projected Debt Service Coverage

2011 Bonds 2011 Debt Bonds Series Senior/ Senior/ Service Debt 2011A Subordinate Subordinate Coverage Service Lease Debt Service Debt Service Projected Ratio Coverage Revenue Coverage Coverage Balance in Base Additional 2011 Bonds Without Ratio With Bond Ratio Without Ratio With Revenue Fiscal Special Special Available Debt Available Available Debt Available Available Stabilization Year Tax (1) Tax (2) T.O.T. (3) Service T.O.T T.O.T Service(4) T.O.T (5) T.O.T(6) Reserve (7) 2010-11 $6,431,864 $1,891,725 $2,862,153 $ - NA NA NA NA NA $8,000,000 2011-12 7,695,894 1,923,973 2,936,146 6,890,181 140% 182% $ - 140% 182% 8,586,427 2012-13 7,827,088 1,956,772 3,012,052 6,544,763 149 196 827,019 133 174 9,037,092 2013-14 7,960,518 1,990,130 3,089,920 6,944,763 143 188 1,654,038 116 152 8,436,015 2014-15 8,096,224 2,024,056 3,169,802 8,212,763 123 162 1,654,038 103 135 6,684,159 2015-16 8,234,242 2,058,561 3,251,748 8,208,713 125 165 2,077,588 100 132 6,674,345 2016-17 8,374,614 2,093,653 3,335,813 8,208,513 128 168 2,227,213 100 132 10,026,186 2017-18 8,517,378 2,129,344 3,422,051 8,211,513 130 171 2,227,525 102 135 10,258,950 2018-19 8,662,576 2,165,644 3,510,519 8,212,313 132 175 2,228,963 104 137 8,535,430 2019-20 8,810,249 2,202,562 3,601,273 8,213,063 134 178 2,227,863 105 140 6,925,463 2020-21 8,960,440 2,240,110 3,694,374 8,211,563 136 181 2,229,794 107 143 7,673,167 2021-22 9,113,191 2,278,298 3,789,882 8,209,225 139 185 2,228,713 109 145 10,258,950 2022-23 9,268,547 2,317,137 3,887,859 8,211,725 141 188 2,230,300 111 148 9,140,651 2023-24 9,426,550 2,356,638 3,988,369 8,212,050 143 192 2,229,319 113 151 8,158,645 2024-25 9,587,247 2,396,812 4,091,477 8,209,050 146 196 2,229,563 115 154 7,320,452 2025-26 9,750,684 2,437,671 4,197,251 8,208,350 148 200 2,231,688 117 157 9,065,178 2026-27 9,916,906 2,479,227 4,305,759 8,209,400 151 203 2,229,250 119 160 10,258,950 2027-28 10,085,962 2,521,491 4,417,072 8,212,588 154 207 2,227,000 121 163 9,960,504 2028-29 10,257,901 2,564,475 4,531,264 8,209,138 156 211 2,231,725 123 166 9,826,752 2029-30 10,432,770 2,608,192 4,648,407 8,208,744 159 215 2,228,288 125 169 9,869,026 2030-31 10,610,620 2,652,655 4,768,578 8,210,488 162 220 2,226,688 127 173 10,085,944 2031-32 10,791,503 2,697,876 4,891,857 8,208,450 164 224 2,229,988 129 176 10,258,950 2032-33 10,975,468 2,743,867 5,018,322 8,211,625 167 228 2,227,825 131 179 10,258,950 2033-34 11,162,570 2,790,643 5,148,057 8,212,250 170 233 2,231,350 134 183 10,258,950 2034-35 11,352,862 2,838,215 5,281,146 8,209,350 173 237 2,230,275 136 187 10,258,950 2035-36 11,546,397 2,886,599 5,417,675 8,211,950 176 242 2,229,456 138 190 10,258,950 2036-37 11,743,232 2,935,808 5,557,734 8,208,425 179 247 2,228,606 141 194 10,258,950 2037-38 11,943,422 2,985,855 5,701,414 8,212,800 182 251 2,227,438 143 198 10,258,950 2038-39 12,147,025 3,036,756 5,848,808 8,208,125 185 256 2,230,519 145 201 10,258,950 2039-40 12,354,098 3,088,525 6,000,013 8,208,425 188 261 2,227,563 148 205 10,258,950 2040-41 12,564,702 3,141,176 6,155,126 8,211,750 191 266 2,228,281 150 209 10,258,950 2041-42 12,778,896 3,194,724 6,314,250 8,211,150 195 271 2,227,244 153 214 10,258,950

(1) Includes Base Special Tax revenues and Additional Special Tax revenues. The Base Special Tax Rate for Zone 2 will be 4% beginning in fiscal year 2011-12 and it is 3% in fiscal year 2010-11. Assumes Special Tax revenues are received by the City in the month they accrue, although, in practice, there will be a time lag between accrual and collection. (2) See “SECURITY FOR THE 2011 BONDS – Rate and Method” and “– Special Taxes” for information about the conditions under which the City will levy the Additional Special Tax. The Base Special Tax Rate for Zone 2 will be 4% beginning in fiscal year 2011-12 and it is 3% in fiscal year 2010-11. (3) Subject to appropriation by the City Council. In addition, the City is not obligated to continue to appropriate 1.5% of the rent charged by hotel operators in the City (15% of T.O.T. revenues) to convention uses, including debt service on the 2011 Bonds and the Series 2011A Lease Revenue Bonds. See “BOND OWNERS’ RISKS – Limited Obligation of the City to Pay Debt Service.” (4) Series 2011A Lease Revenue Bonds debt service calculated on amount payable by the City in any fiscal year. (5) Includes debt service on the 2011 Bonds and the Series 2011A Lease Revenue Bonds. (6) Projected balance on May 2 of every year. The projected balances of the Revenue Stabilization Reserve include an assumed $150,000 annual administrative expense charge as well as assumed interest earnings on projected balances in the Revenue Stabilization Reserve at 0.5% in 2011, 1% in 2012, 1.5% in 2013 and 2% annually thereafter. Source: Horwath HTL.

BOND OWNERS' RISKS

The purchase of the 2011 Bonds described in this Official Statement involves a degree of risk that may not be appropriate for some investors. The following includes a discussion of some of the risks which should be considered before making an investment decision, in no particular order of importance.

Limited Obligation of the City to Pay Debt Service

The City has no obligation to pay principal of and interest on the 2011 Bonds other than from proceeds of the Special Tax and, if any, amounts on deposit in the Revenue Fund, the Reserve Fund, the Revenue Stabilization Reserve or funds derived from the tax sale or foreclosure and sale of parcels for Special Tax delinquencies. The City is not obligated to advance its own funds to pay debt service on the 2011 Bonds.

Although the City has covenanted to in certain circumstances require its City Manager to recommend to the City Council that the City Council appropriate, in its annual budget for the following fiscal year, the Available T.O.T. for transfer to and deposit in the Revenue Fund, a failure of the City Council to follow the recommendation and to appropriate such funds will not be a violation of this covenant or a default under the Indenture. See “SECURITY FOR THE 2011 BONDS – Transfer of Available T.O.T.”

The City has not covenanted to continue the historical allocation of 1.5% of the rent charged by hotel operators in the City (15% of the T.O.T. revenues) to convention uses and can provide no assurances that the Available T.O.T. will be available for deposit into the Revenue Fund.

Levy and Collection of the Special Tax

The principal source of payment of principal of and interest on the 2011 Bonds is the proceeds of the annual levy and collection of the Special Tax against property within the Convention Center Facilities District. The Special Tax is equal to a percentage of Rent; it is not levied on the property tax roll. The levy cannot be made at a higher rate even if the failure to do so means that the estimated proceeds of the levy and collection of the Special Tax, together with other available funds, will not be sufficient to pay debt service on the 2011 Bonds.

If sales or foreclosures of property are necessary as a result of delinquencies in the payment of Special Taxes, there could be a delay in payments to owners of the 2011 Bonds pending such sales or the prosecution of foreclosure proceedings and receipt by the City of the proceeds of sale if the Reserve Fund is depleted. It is important for investors to understand that the obligation to pay Special Taxes is a function of Rent rather than a fixed maximum amount that is correlated to debt service on the 2011 Bonds and any Additional Bonds. As a result, it is possible that Special Tax revenue will be insufficient to pay debt service on the 2011 Bonds and any Additional Bonds even though there are no or nominal delinquencies and, in this situation, the City will have no right to initiate foreclosure of any properties in the Convention Center Facilities District. See “SECURITY FOR THE 2011 BONDS – Covenant to Foreclose.”

Cyclical Nature of Hotel Tax Revenue Stream

Horwath HTL reports that the hotel market in the City has experienced cyclical “boom or bust” activity levels as a result of the nature of the local high-tech economy and other economic factors. Horwath HTL reports that, although overall CAGR in RevPAR for the City’s hotel market from 1987

through 2010 is 2.4%, there have been 15 years during that period with positive growth (average growth rate in those years: 12.7%), and 8 years in which the market RevPAR declined (average decrease in those years: 13.5%).

In projecting taxable hotel revenue, Horwath HTL assumes economic cycles with five years of growth, two years of downturn and a flat year, although the projection table set forth in this Official Statement shows steady annual growth because of the uncertain nature of future economic cycles. See the Horwath Report in Appendix G for a more complete discussion of the assumptions underlying Horwath HTL’s projection of taxable hotel revenue.

Neither the City nor the operators of the Hotel Properties can control the macro- and micro- economic factors that impact the lodging market cycles. If one or more of these factors were to occur, it would probably not only reduce Special Tax revenues but also the Available T.O.T.

Factors Affecting Hotel Tax Revenues

Special Tax revenues are a function of Rent charged by and received by operators of the Hotel Properties. A variety of factors can impact the amount of Rent charged and received by operators of Hotel Properties, including, but not limited to, the following:

• Competition from outside the City could reduce occupancy levels or force the operators to reduce their rental rates. The Horwath Report discusses competition to the City’s hotels.

• Mismanagement of a Hotel Property or a deteriorating hotel stock could result in reduced occupancy levels and reduced rental income.

• Damage to or destruction of a hotel could reduce rental income or eliminate rental income altogether (see “- Natural Disasters” below).

• The presence of hazardous substances could reduce rental income or eliminate rental income altogether (see “- Hazardous Substances” below).

• Changes in general economic conditions in the United States and around the world, including a severe and long-lasting economic downturn like the current one, could decrease the demand for transient rooms and related lodging services, including as a result of a reduction in business travel.

• The number of Hotel Properties and hotel rooms and the performance of the Hotel Properties in the Convention Center Facilities District are subject to a variety of local economic factors, including the health of the technology-focused local economy and the location of major companies.

• Hotel Properties could be converted to other uses not subject to the Special Tax such as condominiums or office space. In this regard, it should be noted that the City is considering the possible sale or conversion to another use of the Dolce Hayes Mansion, which is a 214-room hotel owned by the City. The City realized an operating loss of $2,286,018 at the Dolce Hayes Mansion in fiscal year 2009-10 (on room revenue of $4,373,250). The Dolce Hayes Mansion is one of the 15 largest hotels in the City based on fiscal year 2009-10 revenue and one of the 10 largest hotels in the City based on number of rooms.

• Changes in travel patterns could adversely impact the demand for the Hotel Properties. For example increased teleconferencing could reduce Rent. In addition, the financial condition of the airline industry could reduce demand for Hotel Properties; substantial increases in air and ground travel costs and decreases in airline capacity have recently reduced demand for hotel rooms across the United States. Furthermore, war and terrorist activity (including threatened terrorist activity), domestic and international political conditions, and heightened travel security measures could reduce travel. Finally, many businesses, particularly financial institutions, face restrictions on the ability to travel and hold conferences or events. The negative publicity associated with such companies holding large events, typically at resort locations, may result in reduced bookings. New or revised regulations on businesses participating in government financial assistance programs, as well as the negative publicity associated with conferences and events could adversely impact Rent.

• Travelers’ fears of exposures to contagious diseases and other conditions, such as bedbug infestation or Legionnaire’s Disease, could reduce travel and, as a result, demand for the Hotel Properties. The Hotel Properties could be materially and adversely affected by the effect of a pandemic disease on the travel industry. For example, the past outbreaks of SARS and avian flu had a severe impact on the travel industry, and the past outbreak of swine flu in Mexico had a similar impact. A prolonged recurrence of SARS, avian flu, swine flu or another pandemic disease also may result in health or other government authorities imposing restrictions on travel. Any of these events could result in a significant drop in demand for the Hotel Properties.

• Increased internet room bookings through third-party intermediaries (often at lower rates) could reduce Rent.

• There has been legislation introduced in the State Legislature and in Congress in recent years that was not enacted, but which would have limited the application of transient occupancy taxes on rooms booked through on-line travel companies. Currently, a bill has been introduced in the State Senate which appears to limit the amount of rent on which a transient occupancy tax may be imposed. However, it is unclear whether the proposed Senate bill will apply to the City's T.O.T. or the Special Tax. The City is unable to predict whether this bill will be enacted or, if enacted, the impact, if any, on the Special Tax revenues or the Available T.O.T.

• The cyclical nature of the City’s lodging market could result in reduced Rent at various periods during the term of the 2011 Bonds. (see “Cyclical Nature of Hotel Tax Revenue Stream” above).

• Changes in operating costs including, but not limited to, energy, labor costs (including the impact of unionization), food costs, workers’ compensation and health-care related costs, insurance and unanticipated costs such as acts of nature and their consequences could adversely the financial viability of the Hotel Properties.

• Congress and the State are considering and have undertaken actions to regulate and reduce greenhouse gas emissions. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of the Hotel Properties and/or result in significant additional expense and operating restrictions on the Hotel Properties. In addition, regulation or

taxation of carbon dioxide emissions by airlines and other forms of transportation could adversely impact the demand for Hotel Properties.

Concentration of Tax Base

Approximately 44% of the hotel rooms in the City are concentrated in the 10 largest hotels in the City (the 3 largest hotels account for approximately 20% of the Citywide total). The 3 largest hotels based on Rent accounted for approximately 28.8% of the fiscal year 2009-10 Rent.

Failure of one or more of the largest Special Tax payers in the Convention Center Facilities District to pay installments of the Special Tax when due could result in an insufficiency of Special Tax proceeds to meet obligations under the Indenture. Further, the elimination of one or more of the larger Hotel Properties could significantly reduce Rents generated in the District. In that event, there could be a delay or failure in payments of the principal of and interest on the 2011 Bonds.

As explained in “- Factors Affecting Hotel Tax Revenues” above, the City is considering whether to sell or convert the Dolce Hayes Mansion to another use. The Dolce Hayes Mansion is one of the 15 largest hotels in the City based on fiscal year 2009-10 revenue and one of the 10 largest hotels in the City based on number of rooms.

Payment of Special Tax is not a Personal Obligation of Property Owners

An owner of Hotel Property is not personally obligated to pay the Special Tax. Rather, the Special Tax is an obligation only against the parcels of Hotel Property. If, after a default in the payment of the Special Tax and a foreclosure sale by the City, the resulting proceeds are insufficient, taking into account other obligations also constituting a lien against the parcels of Hotel Property, the City has no recourse against the owner.

Natural Disasters

The Rents generated by Hotel Property and the value of the Hotel Property in the future can be adversely affected by a variety of natural occurrences, particularly those that may affect infrastructure and other public improvements and private improvements on the Hotel Property and the continued habitability and enjoyment of such private improvements.

Seismic. There are several geological faults in the greater San Francisco Bay Area that have the potential to cause serious earthquakes which could result in damage to buildings, roads, bridges, and property within the City. According to the safety element of the City’s “2020 General Plan” (the “General Plan”), the City is located in a region of very high seismic activity. As described in the General Plan, the major earthquake faults in the region are the San Andreas Fault, located near the crest of the Santa Cruz Mountains, and the Hayward and Calaveras fault systems located in the Diablo Range. Numerous other active and potentially active faults are located in the hills throughout the Santa Clara Valley, including among others, the Silver Creek Fault. A U.S. Geological Survey study, which was released in April 2009, provides additional information regarding the Silver Creek Fault and charts its course throughout downtown San José and other parts of the City. The most recent significant earthquake in the San José area, which had a magnitude of 7.1, occurred on October 17, 1989. The extent of damage and the long-term effects from an earthquake, particularly ongoing earthquake activity, may be difficult to determine immediately. Additionally, an earthquake resulting from movement at the Silver Creek Fault could cause substantial damage given its proximity to downtown San José and other parts of the City.

Earthquakes can result in the hazards of surface rupture, landslides, ground shaking, liquefaction and seismically induced inundation.

Pursuant to applicable state law, the California Geological Survey has prepared maps to identify certain areas as liquefaction hazard zones. “Liquefaction” is the transformation of soil from a solid state to a liquid state during a major earthquake, and liquefaction hazard zones are areas where historic occurrence of liquefaction or local geological, geotechnical and ground water conditions indicate a potential for permanent ground displacements during a major earthquake. According to the most recent published maps prepared by the California Geological Survey, the Hotel Property is located in areas that have potential for liquefaction during a major earthquake. The Hotel Property is located within the State of California Seismic Hazard Zone of Required Investigation for Liquefaction (CGS, 2002).

Flooding. The City and the Santa Clara Valley have a history of flooding due to among other things heavy rain, inadequate storm drains, and levee failure which has resulted in property damage. The Federal Emergency Management Agency (“FEMA”) has prepared a flood map for territory within the City and established designations to identify the risk of flooding in particular areas.

The City participates in the National Flood Insurance Program ("NFIP") administered by FEMA. Approximately 20,000 parcels within the 100-year flood hazard area (area subject to a flood that has a 1% chance of being equaled or exceeded in any given year) established by FEMA are located in the City. This represents approximately 10% of the total number of properties within the City. This can be extrapolated to estimate that roughly 10% of the area of the City may be inundated by flood waters of at least one foot in depth.

The City, per NFIP requirements, regulates new construction and substantial improvements to existing structures to protect new and redeveloped properties from the 100- year flood event. In addition, the Santa Clara Valley Water District (the "District") is in the process of improving the Upper Guadalupe River. Upon anticipated completion in 2016, it is estimated that approximately 7,500 parcels will be removed from the 100-year flood boundary.

In the event of a catastrophic event, damage to one or more dams from any number of causes could result in flooding within the City. On October 13, 2010, the District issued a press release and notified City officials regarding the results of a preliminary evaluation report showing how Anderson Dam could be affected by a major earthquake with a magnitude of 7.25 on the Calaveras Fault within two kilometers of the dam. Anderson Dam, located east of Morgan Hill, is an earth and rock fill structure constructed in 1950 which creates the Anderson Reservoir, the largest reservoir in Santa Clara County. The press release stated that the analysis found loosely compacted layers of liquefiable materials in the lower portions of the dam. These materials are susceptible to a reduction in strength when subjected to severe earthquake shaking (i.e., liquefaction). If this reduction in strength occurred, parts of the dam could experience significant slumping. If the reservoir were full at the time, there could be an uncontrolled release of water. As a result, the district’s dam operators will keep the water at no higher than 57 feet below the dam crest until further analysis is completed and the results discussed with dam safety regulators (Anderson Dam is regulated by the State of California Division of Safety of Dams, which performs yearly reviews and requires maintenance and safety standards to be enforced by the dam owners and operators. Additionally, the Federal Energy Regulatory Commission also has dam safety jurisdiction at Anderson Dam.). Although the chances are remote, a complete failure of Anderson Dam could send a wall of water 35

feet high into downtown Morgan Hill in 14 minutes, and 8 feet deep into San José within three hours.

Subsequent to the work noted above, further studies on the dam have yielded more information on the amount of movement and slumping, known as deformation that could occur in a large earthquake and what corrective measures are needed to ensure public safety and continue dam operations. That additional work resulted in a revised recommendation to keep the water at no higher than 40 to 45 feet below the dam crest. The District will review this information with dam safety regulators. The District is also studying a fault trace under the dam to see if it is active, and whether it could cause damage to the dam’s outlet.

Like Anderson Dam, there are four other dams (Almaden, Calero, Guadalupe and Lenihan) that are being evaluated to determine the impact of a major earthquake. Each of these dams is located upstream from the City and could impact the City as a result of an earthquake. For Almaden, Calero and Guadalupe Dams, the reservoir levels will be kept lower than normal to ensure public safety while these questions are being answered.

The preliminary data on Calero Dam indicate the presence of alluvium—gravel and sand from the underlying creek bed—under the downstream dam embankment, which could make the dam vulnerable to damage during a major earthquake. The district will keep the water at no higher than 20 feet below the dam crest until the full integrity of the dam can be assessed or corrective action can be completed. This information and operating restriction has been shared with the State of California Division of Safety of Dams for review.

District staff will continue to work with the State of California Division of Safety of Dams on the results of the field and laboratory investigations with the preliminary seismic stability results in September 2011, and a final report in 2012. Additionally, a study has begun on the impact of an earthquake on Lenihan Dam, which creates Lexington Reservoir. A final report on seismic stability of Lenihan Dam is expected to be available in January 2012.

Natural Gas Transmission Pipelines

On September 9, 2010, a Pacific Gas and Electric Company ("PG&E") high pressure natural gas transmission pipeline exploded in San Bruno, California, with catastrophic results. There are numerous similar pipelines owned, operated and maintained by PG&E located throughout the City.

PG&E’s website (www.pge.com) provides information regarding its high pressure natural gas transmission pipelines and its long range natural gas transmission pipeline planning. This information is summarized below.

According to its website, PG&E has a comprehensive inspection and monitoring program to ensure the safety of its natural gas transmission pipeline system, and uses a risk management program that inventories each of the 20,000 segments within PG&E’s natural gas transmission pipeline system and evaluates them against criteria such as:

• the potential for third party damage like dig-ins from construction,

• the potential for corrosion,

• the potential for ground movement, and

• the physical design and characteristics of the pipe segment.

PG&E has also indicated that it considers the proximity of its natural gas transmission pipelines to high density populations, potential reliability impacts and environmentally sensitive areas, and uses the data it collects to help plan and prioritize future work.

Based on all of these factors, PG&E determines which segments warrant further evaluation, monitoring or other future action. PG&E has created a list of the "Top 100" segments to help inform future work plans (although it should be noted that the pipeline that caused the explosion in the City of San Bruno was not on the Top 100 list). As conditions change from year to year, PG&E reevaluates the segments included on the list. This list can be found on PG&E’s website at: http://www.pge.com/includes/docs/pdfs/myhome/customerservice/response/planning_ segments.pdf.

A pipeline segment may be placed into planning for further study and long-range planning based upon its risk for one of five factors:

• Potential for Third-Party Damage,

• Potential for Corrosion,

• Potential for Ground Movement,

• Physical Design and Characteristics, and

• Overall (did not score high in any one factor of the above factors, but scored moderately high in more than one factor).

As noted above, additional information may be found on PG&E’s website, specifically at http://www.pge.com/includes/docs/pdfs/myhome/customerservice/response/planning_segments.pdf.

One of the natural gas transmission pipelines on the PG&E Top 100 list is located within the City. However, as noted above, the pipeline that caused the explosion in the City of San Bruno was not on the Top 100 list.

The City is not able to independently confirm the information set forth above or the information contained on the PG&E website with respect to PG&E’s pipelines, and can provide no assurances as to its accuracy or completeness. Further, the City can provide no assurances as to the condition of PG&E pipelines in the City, or predict the extent of the damage to the surrounding property that would occur if a PG&E pipeline located within the City were to explode.

Hazardous Substances

One of the most serious risks in terms of the potential reduction in the Rents generated by Hotel Properties and the value of a Hotel Property is a claim with regard to a hazardous substance. In general, the owners and operators of Hotel Property may be required by law to remedy conditions relating to releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as

“CERCLA” or the “Superfund Act,” is the most well-known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner or operator is obligated to remedy a hazardous substance condition of property whether or not the owner or operator has anything to do with creating or handling the hazardous substance. The effect, therefore, should any of the Hotel Property be affected by a hazardous substance, is to reduce the use, marketability and value of the parcel.

Hotel Properties use certain substances and generate certain wastes that may be deemed hazardous or toxic under applicable environmental laws, and from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses of certain substances. Environmental laws govern occupational exposure to asbestos containing materials (“ACMs”) and require abatement or removal of certain ACMs that may be present in various building materials in the Hotel Properties, such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping. Environmental laws also regulate polychlorinated biphenyls (“PCBs”), which may be present in electrical equipment. Some of the Hotel Properties may have underground storage tanks (“USTs”) and equipment containing chlorofluorocarbons (“CFCs”); the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by environmental laws.

Other Possible Claims Upon the Value of Hotel Property

While the Special Taxes are secured by the Hotel Property, the security only extends to the value of such Hotel Property that is not subject to senior, priority and parity liens and similar claims.

Other governmental obligations may be authorized and undertaken or issued in the future, the tax, assessment or charge for which may become an obligation of one or more of the parcels of Hotel Property and may be secured by a lien on a parity with the lien of the Special Tax securing the 2011 Bonds.

In general, the Special Tax is on equal priority to other taxes, assessments and charges collected on the tax roll (even though the Special Tax will not be collected on the property tax roll). Questions of priority become significant when collection of one or more of the taxes, assessments or charges is sought by some other procedure, such as foreclosure and sale. In the event of proceedings to foreclose for delinquency of Special Taxes securing the 2011 Bonds, the Special Tax would usually be subordinate only to existing prior governmental liens, if any. Otherwise, in the event of such foreclosure proceedings, the Special Taxes would generally be on a parity with the other taxes, assessments and charges, and will share the proceeds of such foreclosure proceedings on a pro-rata basis. Although the Special Taxes will generally have priority over non-governmental liens on a parcel of Hotel Property, regardless of whether the non-governmental liens were in existence at the time of the levy of the Special Tax or not, this result may not apply in the case of bankruptcy. See “– Bankruptcy and Foreclosure Delays” below.

Exempt Properties and Exemptions from the Special Tax

Only Hotel Properties in the Convention Center Facilities District are subject to the Special Tax. Hotel Properties include three properties owned by the City or its redevelopment agency: the Dolce Hayes Mansion, which is owned and operated by the City, and the Fairmont Hotel and the Hilton Hotel (the ground under each of which is owned by the City’s redevelopment agency and leased to the hotel owners). Properties that are currently Hotel Properties but whose land use is changed in the future to a non-hotel use will no longer be subject to the Special Tax. See “SECURITY FOR THE 2011 BONDS – Rate and Method.”

In addition, “Rent” on which the Special Tax is calculated does not include (i) rent charged to federal or state employees when on official business, (ii) rent charged to any officer or employee of a foreign government who is exempt by reason of express provisions of federal law or international treaty and (iii) rent paid by a person who occupies a hotel room for more than 30 consecutive days. The same exclusions apply to the T.O.T.

In addition, although the Act provides that if property subject to the Special Tax is acquired by a public entity through eminent domain proceedings, the obligation to pay the Special Tax with respect to that property is to be treated as if it were a special assessment, the constitutionality and operation of these provisions of the Act have not been tested, meaning that such property could become exempt from the Special Tax. See also “SECURITY FOR THE 2011 BONDS - Covenant to Foreclose”. The constitutionality and operative effect of these provisions have not been tested in the courts, but it is doubtful that they would be upheld as to, for example, property owned by the federal government, agencies of the federal government or government sponsored enterprises such as Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”).

Any expansion of an existing hotel that occurs on a different parcel than the parcel on which the hotel currently sits will not be subject to the Special Tax if the parcel is not already in the Convention Center Facilities District, unless the owner elects to annex the expansion parcel into the Convention Center Facilities District.

Depletion of Reserve Fund

The General Account within the Reserve Fund is to be maintained at an amount equal to the Reserve Requirement for the 2011 Bonds and any Additional Bonds for which the General Account is made available. See “SECURITY FOR THE 2011 BONDS – Reserve Fund.” Funds in the General Account of the Reserve Fund may be used to pay principal of and interest on the 2011 Bonds and any Additional Bonds for which the General Account is made available if insufficient funds are available from the proceeds of the levy and collection of the Special Tax against property within the Convention Center Facilities District. If funds in the General Account of the Reserve Fund are depleted, the funds can be replenished from the proceeds of the levy and collection of the Special Tax that are in excess of the amount required to pay all amounts to be paid to the owners of the 2011 Bonds and any Additional Bonds pursuant to the Indenture. However, no replenishment from the proceeds of a Special Tax levy can occur as long as the proceeds that are collected from the levy of the Special Tax against property within the Convention Center Facilities District at the maximum Special Tax rates, together with other available funds, remains insufficient to pay all such amounts. Thus it is possible that the General Account of the Reserve Fund will be depleted and not be replenished by the levy of the Special Tax.

Depletion of Revenue Stabilization Reserve

A Revenue Stabilization Reserve is established pursuant to the Indenture (see “SECURITY FOR THE 2011 BONDS – Revenue Stabilization Reserve”). The Revenue Stabilization Reserve is available to pay debt service on the 2011 Bonds and any Additional Bonds, and it is also available to pay debt service on the Series 2011A Lease Revenue Bonds and other Subordinate Bonds. See “SECURITY FOR THE 2011 BONDS – Subordinate Obligations”).

A decline in Special Taxes or failure to appropriate the Available T.O.T. when requested (which are pledged to the 2011 Bonds, any Additional Bonds and the Subordinate Bonds) could result

in a draw on the Revenue Stabilization Reserve. In addition, the inability of the City to pay lease payments under the 2011 Lease from sources other than Special Taxes may result in a draw on the Revenue Stabilization Reserve. The City currently plans to use any Special Taxes deposited into the Subordinate Revenue Fund (see “SECURITY FOR THE 2011 BONDS – Subordinate Revenue Fund”) and to draw on the Revenue Stabilization Reserve to pay debt service on the Series 2011A Lease Revenue Bonds before appropriating moneys from its general fund to pay lease payments under the 2011 Lease.

If funds in the Revenue Stabilization Reserve are depleted, the funds can be replenished from the proceeds of the levy and collection of the Special Tax, but Special Taxes will first be applied to a variety of purposes described in “SECURITY FOR THE 2011 BONDS – Revenue Fund.” Because severe adverse economic conditions in the City could result in a depletion of the Revenue Stabilization Reserve, and because the demand on the Revenue Stabilization Reserve may increase over time as Additional Bonds and additional Subordinate Bonds are issued, it is possible that the Revenue Stabilization Reserve will be depleted and not be replenished by the levy of the Special Tax or Available T.O.T. appropriations.

Bankruptcy and Foreclosure Delays

Bankruptcy. The payment of the Special Tax and the ability of the City to foreclose the lien of a delinquent unpaid tax, as discussed in “SECURITY FOR THE 2011 BONDS,” may be limited by bankruptcy, insolvency or other laws generally affecting creditors' rights or by the laws of the State of California relating to judicial foreclosure. The various legal opinions to be delivered concurrently with the delivery of the 2011 Bonds (including Bond Counsel's approving legal opinion) will be qualified as to the enforceability of the various legal instruments by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights, by the application of equitable principles and by the exercise of judicial discretion in appropriate cases.

Although bankruptcy proceedings would not cause the Special Taxes to become extinguished, bankruptcy of a property owner or any other person claiming an interest in Taxable Property, could result in a delay in superior court foreclosure proceedings and could result in the possibility of Special Tax installments not being paid in part or in full. Such a delay would increase the likelihood of a delay or default in payment of the principal of and interest on the 2011 Bonds. To the extent that property in the Convention Center Facilities District continues to be owned by a limited number of property owners, the chances are increased that the Reserve Fund established for the 2011 Bonds could be fully depleted during any such delay in obtaining payment of delinquent Special Taxes. As a result, sufficient moneys would not be available in the Reserve Fund for transfer to the 2011 Bond Fund to make up shortfalls resulting from delinquent payments of the Special Tax and thereby to pay principal of and interest on the 2011 Bonds on a timely basis.

Property Owned by FDIC. In addition, the ability of the City to foreclose upon the lien on property for delinquent Special Taxes may be limited for properties in which the Federal Deposit Insurance Corporation (the “FDIC”) has an interest. On November 26, 1996, the FDIC adopted a Statement of Policy Regarding the Payment of State and Local Property Taxes (the “Policy Statement”) (which superseded a prior statement issued by the FDIC and the Resolution Trust Corporation in 1991). The Policy Statement applies to the FDIC when it is liquidating assets in its corporate and receivership capacities. The Policy Statement provides, in part, that real property of the FDIC is subject to state and local real property taxes if those taxes are assessed according to the property's value, and that the FDIC is immune from ad valorem real property taxes assessed on other bases. The Policy Statement also provides that the FDIC will pay its proper tax obligations when they become due and will pay claims for delinquencies as promptly as is consistent with sound business

practice and the orderly administration of the institution's affairs, unless abandonment of the FDIC interest in the property is appropriate. It further provides that the FDIC will pay claims for interest on delinquent property taxes owned at the rate provided under state law, but only to the extent the interest payment obligation is secured by a valid lien. The FDIC will not pay for any fines or penalties and will not pay nor recognize liens for such amounts. The Policy Statement also provides that if any property taxes (including interest) on FDIC-owned property are secured by a valid lien (in effect before the property became owned by the FDIC), the FDIC will pay those claims. No property of the FDIC is subject to levy, attachment, garnishment, foreclosure or sale without the FDIC's consent. In addition, a lien for taxes and interest may attach, but the FDIC will not permit a lien or security interest held by the FDIC to be eliminated by foreclosure without the FDIC's consent.

With respect to challenges to assessments, the Policy Statement provides: “The [FDIC] is only liable for state and local taxes which are based on the value of the property during the period for which the tax is imposed, notwithstanding the failure of any person, including prior record owners, to challenge an assessment under the procedures available under state law. In the exercise of its business judgment, the [FDIC] may challenge assessments which do not conform with the statutory provisions, and during the challenge may pay tax claims based on the assessment level deemed appropriate, provided such payment will not prejudice the challenge. The [FDIC] will generally limit challenges to the current and immediately preceding taxable year and to the pursuit of previously filed tax protests. However, the [FDIC] may, in the exercise of its business judgment, challenge any prior taxes and assessments provided that (1) the [FDIC's] records (including appraisals, offers or bids received for the purchase of the property, etc.) indicate that the assessed value is clearly excessive, (2) a successful challenge will result in a substantial savings to the [FDIC], (3) the challenge will not unduly delay the sale of the property, and (4) there is a reasonable likelihood of a successful challenge.”

The Policy Statement states that the FDIC generally will not pay non-ad valorem taxes, including special assessments, on property in which it has a fee simple interest unless the amount of tax is fixed at the time the FDIC acquires its fee simple interest in the property, nor will the FDIC recognize the validity of any lien to the extent it purports to secure the payment of any such amounts. Because the Special Taxes are neither ad valorem taxes nor special assessments, and because they are levied under a special tax formula under which the amount of the Special Tax is determined each year, the Special Taxes appear to fall within the category of taxes the FDIC generally will not pay under the Policy Statement.

Following the County of Orange bankruptcy proceedings filed in December 1994, the FDIC filed claims against the County of Orange in the U.S. Bankruptcy Court and the Federal District Court which challenged special taxes that Orange County had levied on FDIC-owned property (and which the FDIC had paid) under the Act. The FDIC took a position similar to that outlined in the Policy Statement, to the effect that the FDIC, as a governmental entity, is exempt from special taxes under the Act. The Bankruptcy Court agreed, finding that the FDIC was not liable for post-receivership Mello-Roos taxes, and the Bankruptcy Appellate Panel affirmed. On appeal, the U.S. Court of Appeals for the Ninth Circuit, while not specifically asked to decide on the issue, stated in its decision filed on August 28, 2001, that “the FDIC, as a federal agency, is exempt from the Mello-Roos tax,” and quoted Section 53340(c) of the Act in stating that “’properties or entities’ of the federal government are exempt from the tax.” The County of Orange did not appeal the decision.

The City is unable to predict what effect the application of the Policy Statement would have in case of a Special Tax delinquency on a parcel in which the FDIC has an interest. However, prohibiting the judicial foreclosure sale of an FDIC-owned parcel would likely reduce the number of or eliminate the persons willing to purchase a parcel at a foreclosure sale. Owners of the 2011 Bonds

should assume that the City will be unable to foreclose on parcels of land in the Convention Center Facilities District owned by the FDIC. Such an outcome would cause a draw on the Reserve Fund and perhaps, ultimately, a default in payment of the 2011 Bonds.

Property Owned by Other Federal Government Entities. In the event a parcel of Hotel Property is owned by a federal government entity or federal government sponsored entity, such as Fannie Mae or Freddie Mac, or a private deed of trust secured by a parcel of Hotel Property is owned by a federal government entity or federal government sponsored entity, such as Fannie Mae or Freddie Mac, the ability to foreclose on the parcel or to collect delinquent Special Taxes may be limited. Federal courts have held that, based on the supremacy clause of the United States Constitution (“This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the contrary notwithstanding.”), in the absence of Congressional intent to the contrary, a state or local agency cannot foreclose to collect delinquent taxes or assessments if foreclosure would impair the federal government interest. This means that, unless Congress has otherwise provided, if a federal government entity owns a parcel of taxable property but does not pay taxes and assessments levied on the parcel (including Special Taxes), the applicable state and local governments cannot foreclose on the parcel to collect the delinquent taxes and assessments.

Moreover, unless Congress has otherwise provided, if the federal government has a mortgage interest in the parcel and the City wishes to foreclose on the parcel as a result of delinquent Special Taxes, the property cannot be sold at a foreclosure sale unless it can be sold for an amount sufficient to pay delinquent taxes and assessments on a parity with the Special Taxes and preserve the federal government’s mortgage interest.

Disclosure to Future Purchasers

The City has recorded a notice of the Special Tax lien in the real property records of the County of Santa Clara. While title companies normally refer to such notices in title reports, there can be no guarantee that such reference will be made or, if made, that a prospective purchaser or lender will consider such special tax obligation in the purchase of a parcel of Hotel Property or the lending of money secured by Hotel Property.

California Civil Code Section 1102.6b requires a seller to at least make a good faith effort to notify the prospective purchaser of the Special Tax lien in a format prescribed by statute. Failure by an owner of the property to comply with these requirements, or failure by a purchaser or lessor to consider or understand the nature and existence of the Special Tax, could adversely affect the willingness and ability of the purchaser or lessor to pay the Special Tax when due.

No Acceleration Provisions

The Indenture does not contain a provision allowing for the acceleration of the 2011 Bonds in the event of a payment default or other default under the terms of the 2011 Bonds or the Indenture. Under the Indenture, a Bond holder is given the right for the equal benefit and protection of all Bond holders similarly situated to pursue certain remedies, subject to the compliance with certain requirements.

Loss of Tax Exemption

As discussed under the caption “LEGAL MATTERS – Tax Matters,” interest on the 2011 Bonds might become includable in gross income for purposes of federal income taxation retroactive to the date the 2011 Bonds were issued as a result of future acts or omissions of the City in violation of its covenants in the Indenture. For example, if the Internal Revenue Service were to conclude that the City or its various contractors at the Convention Center were violating applicable management contract rules, the interest on the 2011 Bonds could become includable in gross income for purposes of federal income retroactive to the date the 2011 Bonds were issued. The Indenture does not contain a special redemption feature triggered by the occurrence of an event of taxability. As a result, if interest on the 2011 Bonds were to be includable in gross income for purposes of federal income taxation, the 2011 Bonds would continue to remain outstanding until maturity unless earlier redeemed pursuant to optional or mandatory redemption. See “THE 2011 BONDS – Redemption.”

Voter Initiatives

Under the California Constitution, the power of initiative is reserved to the voters for the purpose of enacting statutes and constitutional amendments. Since 1978, the voters have exercised this power through the adoption of Proposition 13 and similar measures.

Any such initiative may affect the collection of fees, taxes and other types of revenue by local agencies such as the City. Subject to overriding federal constitutional principles, such collection may be materially and adversely affected by voter-approved initiatives, possibly to the extent of creating cash-flow problems in the payment of outstanding obligations such as the 2011 Bonds.

Proposition 218 (Voter Approval for Local Government Taxes—Limitation on Fees, Assessments, and Charges - Initiative Constitutional Amendment), which was approved by the voters on November 5, 1996, added Articles XIIIC and XIIID to the California Constitution, imposing certain vote requirements and other limitations on the imposition of new or increased taxes, assessments and property-related fees and charges.

The Special Taxes and the 2011 Bonds were each authorized by at least a two-thirds vote of the landowner within the Convention Center Facilities District which constituted the qualified electors at the time of such voted authorization. The City believes, therefore, that issuance of the 2011 Bonds does not require the conduct of further proceedings under the Act or Proposition 218.

Among other things, Section 3 of Article XIIIC states that “. . . the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge.” The Act provides for a procedure, which includes notice, hearing, protest and voting requirements to alter the rate and method of apportionment of an existing special tax. However, the Act prohibits a legislative body from adopting any resolution to reduce the rate of any special tax or terminate the levy of any special tax pledged to repay any debt incurred pursuant to the Act unless such legislative body determines that the reduction or termination of the special tax would not interfere with the timely retirement of that debt. Although the matter is not free from doubt, it is likely that the exercise by the voters of the initiative power referred to in Article XIIIC to reduce or terminate a Special Tax is subject to the same restrictions as are applicable to the City, in its actions in respect of the Convention Center Facilities District, pursuant to the Act. Accordingly, it is likely that Articles XIIIC and XIIID have not conferred on the voters the power to repeal or reduce the Special Taxes if such reduction would interfere with the timely retirement of the 2011 Bonds.

It may be possible, however, for voters or the City to reduce the Special Taxes in a manner which does not interfere with the timely repayment of the 2011 Bonds, but which does reduce the maximum amount of Special Taxes that may be levied in any year below the existing levels. Therefore, no assurance can be given with respect to the levy of Special Taxes for administrative expenses. Furthermore, no assurance can be given with respect to the future levy of the Special Taxes in amounts greater than the amount necessary for the timely retirement of the 2011 Bonds.

Secondary Market

There can be no guarantee that there will be a secondary market for the 2011 Bonds or, if a secondary market exists, that any 2011 Bonds can be sold for any particular price. Prices of bond issues for which a market is being made will depend upon then-prevailing circumstances. Such prices could be substantially different from the original purchase price. No assurance can be given that the market price for the 2011 Bonds will not be affected by the introduction or enactment of any future legislation (including without limitation amendments to the Internal Revenue Code), or changes in interpretation of the Internal Revenue Code, or any action of the Internal Revenue Service, including but not limited to the publication of proposed or final regulations, the issuance of rulings, the selection of the 2011 Bonds for audit examination, or the course or result of any Internal Revenue Service audit or examination of the 2011 Bonds or obligations that present similar tax issues as the 2011 Bonds.

CONTINUING DISCLOSURE

The City will covenant in a continuing disclosure certificate, the form of which is set forth in “APPENDIX E –Continuing Disclosure Certificate” (the “Continuing Disclosure Certificate”), for the benefit of holders and beneficial owners of the 2011 Bonds, to provide certain financial information and operating data relating to the Convention Center Facilities District and the 2011 Bonds (the “Annual Report”) by not later than nine months after the end of the City’s Fiscal Year (which would correspond to a distribution date of not later than March 31 based on the City’s current fiscal year ending of June 30). The City Continuing Disclosure Certificate also requires the City to provide notices of the occurrence of certain enumerated events.

The covenants of the City in the Continuing Disclosure Certificate are being made in order to assist the Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the “Rule”).

A default under the Continuing Disclosure Certificate would not constitute an Event of Default under the Indenture, and the sole remedy under the Continuing Disclosure Certificate in the event of any failure of the City to comply would be an action to compel specific performance.

The City has never failed to comply, in all material respects, with an undertaking under the Rule.

LEGAL MATTERS

Legal Opinions

The legal opinion of Orrick Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel, approving the validity of the 2011 Bonds will be made available to purchasers at the time of original delivery and is attached as Appendix F.

The City Attorney of the City will also pass upon certain legal matters for the City.

Jones Hall, A Professional Law Corporation, San Francisco, California is serving as Disclosure Counsel to the City.

Hawkins Delafield & Wood LLP, San Francisco, California, is acting as Underwriters’ Counsel.

See “PROFESSIONAL FEES” below.

Tax Matters

In the opinion of Orrick, Herrington & Sutcliffe LLP (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the 2011 Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the “Code”) and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the 2011 Bonds is not a specific preference item for purposes of the federal individual and corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel is also of the opinion that interest on the 2011 Bonds is exempt from State of California personal income taxes. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix F hereto.

To the extent the issue price of any maturity of the 2011 Bonds is less than the amount to be paid at maturity of such 2011 Bonds (excluding amounts stated to be interest and payable at least annually over the term of such 2011 Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the 2011 Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the 2011 Bonds is the first price at which a substantial amount of such maturity of the 2011 Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the 2011 Bonds accrues daily over the term to maturity of such 2011 Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such 2011 Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such 2011 Bonds. Beneficial Owners of the 2011 Bonds should consult their own tax advisors with respect to the tax consequences of ownership of 2011 Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such 2011 Bonds in the original offering to the public at the first price at which a substantial amount of such 2011 Bonds is sold to the public.

2011 Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner’s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the 2011 Bonds. The City has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the 2011 Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the 2011 Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the 2011 Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel’s attention after the date of issuance of the 2011 Bonds may adversely affect the value of, or the tax status of interest on, the 2011 Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters.

Although Bond Counsel is of the opinion that interest on the 2011 Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the 2011 Bonds may otherwise affect a Beneficial Owner’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.

Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the 2011 Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the 2011 Bonds. Prospective purchasers of the 2011 Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion.

The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the 2011 Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service (“IRS”) or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the City, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The City has covenanted, however, to comply with the requirements of the Code.

Bond Counsel’s engagement with respect to the 2011 Bonds ends with the issuance of the 2011 Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the City or the

Beneficial Owners regarding the tax-exempt status of the 2011 Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the City and its appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the City legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the 2011 Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the 2011 Bonds, and may cause the City or the Beneficial Owners to incur significant expense.

The complete text of the final opinion that Bond Counsel expects to delivery upon issuance of the 2011 Bonds is set forth in Appendix F.

Absence of Material Litigation

To the best knowledge of the City, there is no controversy of any nature now pending or threatened against the City which seeks to restrain or enjoin the sale or issuance of the 2011 Bonds or which in any way contests or affects the validity of the 2011 Bonds or any proceedings of the City taken with respect to the issuance or sale thereof, or the pledge or application of any moneys or security provided for the payment of the 2011 Bonds, the use of the 2011 Bonds proceeds or the existence or powers of the City relating to the issuance of the 2011 Bonds.

On May 21, 2010, the City and The San José Redevelopment Agency filed a complaint in the United States District Court for the Northern District of California, City of San José and The San José Redevelopment Agency v. Bank of America, N.A., et al., Case No. CV-10-2199 (N.D. Cal) alleging antitrust violations related to municipal derivatives. The complaint named a number of financial institutions, banks, and brokers, including affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets, Inc., that provided municipal derivatives, including guaranteed investment contracts and interest rate swaps. On June 25, 2010, the case was transferred to the Multi-District Litigation (MDL) proceeding in the United States District Court for the Southern District of New York, and consolidated with class actions and other individual actions for pretrial purposes in the multidistrict litigation In re Municipal Derivatives Litigation, MDL No. 1950, Case No. CV-08-2516 (S.D.N.Y) (VM) (GWG). The City does not believe this litigation will impact its ability to pay debt service on the 2011 Bonds.

RATINGS

It is anticipated that, on the date of issuance of the 2011 Bonds, Moody’s Investors Service (“Moody’s”) will assign its municipal bond rating of “A2” to the 2011 Bonds and Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. (“S&P”), will assign its municipal bond rating of “A-” to the 2011 Bonds.

These ratings reflect only the views of the respective rating agency, and an explanation of the significance of these ratings, and any outlook assigned to or associated with these ratings, should be obtained from the respective rating agency.

Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. The City has provided certain additional information and materials to the rating agencies (some of which does not appear in this Official Statement).

There is no assurance that these ratings will continue for any given period of time or that these ratings will not be revised downward or withdrawn entirely by the respective rating agency, if in the judgment of the rating agency, circumstances so warrant. Any such downward revision or withdrawal of any rating on the 2011 Bonds may have an adverse effect on the market price or marketability of the 2011 Bonds.

FINANCIAL ADVISOR

The City has retained Stone & Youngberg LLC, San Francisco, California, as Financial Advisor in connection with the authorization and delivery of the 2011 Bonds. The Financial Advisor’s fee for services rendered with respect to the sale of the 2011 Bonds is contingent upon the authorization and delivery of the 2011 Bonds. Stone & Youngberg LLC, in its capacity as Financial Advisor, does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the 2011 Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies.

The Financial Advisor has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information.

UNDERWRITING

Purchase of the 2011 Bonds. The 2011 Bonds are being purchased by the underwriters named on the cover page of this Official Statement (the “Underwriters”) at a purchase price of $104,901,819.74 (which represents the aggregate principal amount of the 2011 Bonds ($107,425,000) less net original issue discount of $1,945,944.10 and less an Underwriters’ discount of $577,236.16).

The purchase agreement relating to the 2011 Bonds provides that the Underwriters will purchase all of the 2011 Bonds, if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in such purchase agreement.

The Underwriters may offer and sell 2011 Bonds to certain dealers and others at prices lower than the offering price stated on the inside cover page hereof. The offering prices may be changed from time to time by the Underwriters.

Certain Information Relating to the Underwriters. Citigroup Inc. and Morgan Stanley, the respective parent companies of Citigroup Global Markets Inc. and Morgan Stanley & Co. Incorporated, have entered into a retail brokerage joint venture. As part of the joint venture each of Citigroup Global Markets Inc. and Morgan Stanley & Co. Incorporated will distribute municipal securities to retail investors through the financial advisor network of a new broker-dealer, Morgan Stanley Smith Barney LLC. This distribution arrangement became effective on June 1, 2009. As part of this arrangement, Citigroup Global Markets Inc. will compensate Morgan Stanley Smith Barney LLC for its selling efforts in connection with their respective allocations of the Bonds.

Wells Fargo Securities is the trade name for certain capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association.

Wells Fargo Bank, National Association ("WFBNA"), one of the underwriters of the Bonds, has entered into an agreement (the "Distribution Agreement") with Wells Fargo Advisors, LLC ("WFA") for the retail distribution of certain municipal securities offerings, including the Bonds. Pursuant to the Distribution Agreement, WFBNA will share a portion of its underwriting compensation with respect to the Bonds with WFA. WFBNA and WFA are both subsidiaries of Wells Fargo & Company.

PROFESSIONAL FEES

In connection with the issuance of the 2011 Bonds, fees payable to certain professionals are contingent upon the issuance and delivery of the 2011 Bonds. Those professionals include:

• the Underwriters;

• Stone & Youngberg LLC, as financial advisor;

• Orrick Herrington & Sutcliffe LLP, as Bond Counsel;

• Jones Hall, A Professional Law Corporation, as Disclosure Counsel to the City; and

• U.S. Bank National Association, as Trustee for the 2011 Bonds.

• Hawkins Delafield & Wood LLP, as Underwriters’ Counsel.

EXECUTION

This Official Statement has been duly authorized by the City Council of the City.

CITY OF SAN JOSE

By: /s/ Debra Figone City Manager

APPENDIX A

CITY OF SAN JOSE: DEMOGRAPHIC, ECONOMIC AND FINANCIAL INFORMATION

A-1

APPENDIX A

THE CITY OF SAN JOSE: DEMOGRAPHIC, ECONOMIC AND FINANCIAL INFORMATION

Table of Contents

Table of Contents...... i

Introduction to Appendix A...... 2

General Description ...... 3

Demographic and Economic Information...... 3

San José Municipal Government ...... 12

Budget...... 13

Major General Fund Revenue Sources ...... 22

Financial Operations ...... 36

Insurance and Self-Insurance Programs...... 40

Significant Litigation, Claims and Proceedings...... 43

Labor Relations...... 49

Pension Plans ...... 53

Investment Policy and Practices of the City ...... 79

Current Investment Portfolio ...... 79

Debt Management Policy...... 80

Bonded and Other Indebtedness ...... 80

Overlapping Bonded Debt ...... 83 Appendix A

THE CITY OF SAN JOSE: DEMOGRAPHIC, ECONOMIC AND FINANCIAL INFORMATION

Introduction to Appendix A

Appendix A is the part of the Official Statement that provides investors with information concerning the City of San José (the “City”). Investors are advised to read the entire Official Statement, including Appendix A, to obtain information essential to making an informed investment decision.

When used in this Appendix A and in any continuing disclosure made by the City, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “forecast,” “expect,” and “intend,” and similar expressions identify “forward looking statements.” Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Any forecast is also subject to such risks and uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between forecasts and actual results, and those differences may be material. This Appendix A speaks only as of its date, and the information and expressions of opinion contained in this Official Statement are subject to change without notice.

Appendix A summarizes portions of the City’s Basic Financial Statements for the Fiscal Year Ended June 30, 2010 (included in this Official Statement as Appendix B), the City’s Comprehensive Annual Debt Report for the Fiscal Year Ended June 30, 2010, the City’s Adopted Budgets for Fiscal Year (“FY”) 2009-10 and FY 2010-11, 2009-2010 Annual Report, 2010-2011 Mid-Year Budget Review report, the 2011-2012 City Manager’s Budget Request and 2012-2016 Five-Year Forecast, as well as the most recent Actuarial Valuation Reports for the City’s Federated City Employees Retirement Plan and the City’s Police and Fire Department Retirement Plan. Investors can obtain copies of the Debt Report, the budget and retirement plan documents by writing to the following addresses:

Comprehensive Annual Debt Report City Budget Debt Management City Manager’s Budget Office City of San José - Finance City of San José 200 East Santa Clara Street 200 East Santa Clara Street San José, CA 95113-1905 San José, CA 95113-1905

Federated City Employees’ Retirement System Police and Fire Department Retirement Plan Board of Administration Board of Administration Federated City Employees’ Retirement System Police and Fire Department Retirement Plan 1737 North First Street, Suite 580 1737 North First Street, Suite 580 San José, CA 95112 San José, CA 95112

Investors may also contact the Debt Management division of the City’s Finance Department for a copy of any other document summarized in Appendix A. The City maintains a website. However, the information presented on the website is not a part of this Appendix A and should not be relied upon in making an investment decision.

A-2 General Description

The City is the tenth largest city in the United States and the third largest city in California (the “State”), with an April 1, 2010 population estimated at 945,942, according to the U.S. Census Bureau. The territory of the City encompasses approximately 178 square miles. Located at the southern end of the San Francisco Bay, the City is the county seat of the County of Santa Clara (the “County”).

Having originated as a Spanish pueblo established in 1777, the City is the oldest city in the State. From a former rich agricultural setting, San José has become the capital of the innovative, high-technology based Silicon Valley - so named for the principal material used in producing semiconductors. During the 1980s and 1990s the City experienced an expansion in manufacturing, service, retail and tourism industries. With the dot-com collapse in the last recession in the early 2000s, Silicon Valley was one of the first and most deeply impacted regions in the nation. This has not been the case in this recession. Until the last quarter of 2008, Silicon Valley was somewhat less impacted than other areas in the state of California and the nation. However, the deep global recession has now enveloped this region as well, as evidenced by increasing job losses, rising unemployment, steep declines in home prices, rising foreclosures, and rising commercial vacancy rates. For additional information regarding the recent economic environment, see “Demographic and Economic Information – Economic Overview.”

Demographic and Economic Information

Introduction

The information provided in the section entitled “Demographic and Economic Information” has been collected from sources that the City believes to be reliable and is the most current information available from those sources. Because it is difficult to obtain complete and timely regional economic and demographic information, the City’s economic condition may not be fully apparent in all of the publicly available regional economic statistics provided herein, but the City has included this information to provide context about the City’s finances. For current estimates regarding the City’s General Fund revenue sources, see “Budget – City Budget” and “Major General Fund Sources of Revenue.”

Economic Overview

As stated earlier, the City has experienced a significant economic downturn since the fourth quarter of 2008. This is evidenced in several key economic indicators such as unemployment rates, residential foreclosure rates, office vacancy rates, and median home prices.

In 2008 and 2009, the unemployment rates at the local, State, and national levels significantly increased to some of the highest rates in decades. The unemployment rate in the City remains high at a rate of 11.7% as of January 2011, but reflects improvement from the 2010 annual average rate of 12.7%.

Real estate performance in Santa Clara County improved in 2010 relative to the deep trough in 2008 and 2009, yet the market still remains weak. In the residential real estate market, during the calendar year 2010, San José households received 10,780 foreclosure filings, out of which 1,749 homes were repossessed by banks, down from 16,552 foreclosure filings with 2,455 homes repossessed by banks during the calendar year 2009. The decreased number of foreclosure filings and bank repossessions in 2010 does not necessarily indicate an improvement in the underlying conditions but may be attributable to two factors as follows: 1) the amount of time it takes a home in default to move through the foreclosure

A-3 process has increased significantly; and 2) longer time is needed for banks to issue a Notice of Default (the first stage of the foreclosure process) to a home in arrears.

The median sales price for single-family homes within the City fell 2.4% from $490,000 in December 2009 to $478,000 in December 2010. December 2010 marks the third month in a row that the median sales price has decreased from the same month in the prior year.

In the non-residential real estate market, the vacancy rate for office space in San José increased from 24.2% in the fourth quarter of 2009 to 26.8% during the fourth quarter of 2010.

Population

City residents account for over half of the population of the County, which is the most populous of the San Francisco Bay Area counties. While the period from 1960 to 1980 was characterized by extremely rapid population growth in both the City and County, the last two decades reflect a trend of slower but steady growth. Table 1 shows the population of the City, the County and the State according to the U.S. Census Bureau for the years 1960, 1970, 1980, 1990, 2000 and 2010.

Table 1 City, County and State Population Statistics

City of County of State of San José % Change Santa Clara % Change California % Change 1960...... 204,196 642,315 15,717,204 1970...... 459,913 125.23% 1,064,714 65.76% 19,953,134 26.95% 1980...... 629,442 36.86 1,295,071 21.64 23,667,902 18.62 1990...... 782,248 24.28 1,497,577 15.64 29,760,021 25.74 2000...... 895,131 14.43 1,682,585 12.35 33,873,086 13.82 2010...... 945,942 5.68 1,781,642 5.89 37,253,956 9.98

Sources: U.S. Census Bureau (1960-2010).

A-4 Employment

Table 2 sets forth employment figures for the City and the County and unemployment rates for the City, the County, the State and the United States for the five most recent years. The City’s unemployment rate has increased from 5.0% in 2006 to 11.7% as of January 2011.

Table 2 Santa Clara County Estimated Average Annual Employment and Unemployment of Resident Labor Force

Civilian Labor Force (in thousands) 2006 2007 2008 2009 2010(1) City of San José Employed...... 414 419 429 406 405 Unemployed...... 22 22 31 56 53 Total(2) ...... 436 441 460 462 458 County of Santa Clara Employed...... 797 807 827 781 780 Unemployed...... 37 40 53 96 91 Total(2)...... 834 855 880 878 871 Unemployment Rates City ...... 5.0% 5.3% 6.7% 12.2% 11.7% County...... 4.5 4.7 6.0 11.0 10.5 State...... 4.9 5.4 7.2 11.4 12.7 United States...... 4.6 4.6 5.8 9.3 9.8

(1) Preliminary, not seasonally adjusted; data are for January 2011. (2) Totals may not add due to independent rounding. Source: California Employment Development Department, Labor Market Information Division.

The City is the geographic center of Silicon Valley. The high-technology industry component of the City’s economy is diversified in research, development, manufacturing, marketing and management. Development of high technology has been supported by the area’s proximity to Stanford University, San José State University, Santa Clara University and other institutions of higher education, and such research and development facilities as SRI International (formerly the Stanford Research Institute), the Stanford Linear Accelerator Center (SLAC) and NASA Ames Research Center.

While the County is known worldwide as “Silicon Valley,” the silicon-based semiconductor industry is only a part of the industrial picture. Other industries include information systems, solar, computers, peripherals, instruments, software and a wide array of communication electronics.

A-5 Table 3 displays the composition of employment in the San José-Sunnyvale-Santa Clara Metropolitan Statistical Area by general category for the most recent three years available.

Table 3 San José-Sunnyvale-Santa Clara Metropolitan Statistical Area Employment by Category Annual Averages Percent Percent Percent 2008(1) of Total 2009(1) of Total 2010(1) of Total Farm...... 6,100 0.66% 5,600 0.65% 5,200 0.61% NaturalResources&Mining...... 300 0.03 200 0.02 200 0.02 Construction...... 44,200 4.80 34,400 3.99 32,300 3.77 Manufacturing ...... 168,000 18.24 155,800 18.07 153,000 17.83 WholesaleTrade...... 39,800 4.32 35,600 4.13 35,100 4.09 RetailTrade...... 84,400 9.16 78,800 9.14 78,200 9.12 TransportWarehousing,Utilities...... 13,500 1.44 12,100 1.40 12,100 1.41 Information...... 42,300 4.59 41,600 4.82 43,900 5.12 FinancialActivities...... 34,300 3.72 31,500 3.65 30,800 3.59 Professional&BusinessServices...... 178,900 19.42 161,400 18.72 162,300 18.92 Educational&HealthServices...... 108,200 11.74 109,300 12.68 111,400 12.99 Leisure&Hospitality...... 78,100 8.48 74,900 8.69 74,300 8.66 OtherServices...... 25,400 2.76 24,500 2.84 25,500 2.97 Government...... 97,800 10.62 96,500 11.19 93,600 10.91 (2) Total ...... 921,300 862,200 857,900

(1) Data based on March 2010 benchmark (2) Totals may not add due to independent rounding. Source: California Employment Development Department, Labor Market Information Division.

A-6 Major Employers

Table 4 shows fifteen selected major employers in San José, ranked by the number of their employees, estimated as of February 2011. Because there is no official source for this information, it has been gathered by the City’s Office of Economic Development on an informal basis and the City can provide no assurances as to the accuracy of the information.

Table 4 Selected Major San José Employers As of February 2011 Approximate Number of Company/Organization Type of Industry Employees 1 Santa Clara County Government 15,420 2 Cisco Systems Computer Equipment 11,600 3 IBM Corporation Computer Equipment 6,750 4 City of San José Government 5,655(1) 5 San José State University Education 3,100 6 eBay/Paypal On-Line Auction 3,000 7 San José Unified School District Education 2,690 8 Xilinx Semiconductor 2,440 9 Adobe Systems Inc. Computer Software 2,000 10 Hitachi Storage Software 2,000 11 Kaiser Permanente Health Care 1,920 12 Good Samaritan Health System Health Care 1,850 13 Cadence Design Systems Inc. Computer Software 1,800 14 Brocade Communications Telecommunication/Networking 1,450 15 PricewaterhouseCoopers Financial Services 1,220

(1) Reflects the City’s full-time equivalent authorized employees as of February 28, 2011. Source: City of San José, Office of Economic Development.

A-7 Household Income

Household income, as measured by the U.S. Census Bureau, includes the income of the householder and all other people 15 years and older in the household, whether or not they are related to the householder. The median is based on the income distribution of all households, including those with no income. Table 5 shows the top ten median household incomes by metropolitan statistical area in the United States in 2009. The San José-Sunnyvale-Santa Clara metropolitan area had the second highest median household income in 2009, which was well above the national median.

Table 5 2009 Top Ten Median Household Income For Statistical Areas with at least 65,000 People 1. Washington-Arlington-Alexandria, DC-VA-MD-WV Metro Area ...... $85,168 2. San José-Sunnyvale-Santa Clara, CA Metro Area...... 84,483 3. Bridgeport-Stamford-Norwalk, CT Metro Area...... 79,063 4. San Francisco-Oakland-Fremont, CA Metro Area...... 73,825 5. Anchorage, AK Metro Area ...... 72,712 6. Lexington Park, MD Metro Area...... 72,474 7. Oxnard-Thousand Oaks-Ventura, CA Metro Area...... 71,723 8. Trenton-Ewing, NJ Metro Area...... 71,650 9. Fairbanks, AK Metro Area...... 70,610 10. Boston-Cambridge-Quincy, MA-NH Metro Area...... 69,334

U.S. Median...... $50,221

Source: U.S. Census Bureau, 2009 American Community Survey.

Retail Sales

Tables 6a and 6b set forth a history of taxable sales for the City for calendar years 2005 to 2009 reported by the California State Board of Equalization (the “BOE”). A comparison of the total taxable sales in the City between the calendar year 2008 and the calendar year 2009 (the most recent official data available from the BOE) shows a decrease of $1.98 billion, or 16%. However, sales tax revenue only declined 3.5% based on actual receipts in FY 2009-10 due to higher than anticipated collections in the last two quarters of FY 2009-10. For additional information regarding sales tax receipts, see “Major General Fund Revenue Sources – Sales and Use Taxes.”

A-8 The BOE has recently completed a process of converting business codes of sales and use tax permit holders to North American Industry Classification System (NAICS) codes. Taxable sales from calendar year 2005 to 2008, as shown in Table 6a, were reported by BOE using business codes of sales and use tax permit holders. Beginning in 2009, taxable sales are reported using the North American Industry Classification System (NAICS) codes. Table 6b shows taxable sales for the City for calendar year 2009.

Table 6a City of San José Taxable Sales Calendar Year 2005 to 2008 (in thousands) 2005 2006 2007 2008 ApparelStores...... $ 476,095 $ 514,552 $ 537,902 $ 586,621 GeneralMerchandiseStores...... 1,273,994 1,332,598 1,425,777 1,361,162 FoodStores...... 401,720 409,257 427,237 410,915 Eating and Drinking Establishments ...... 1,046,629 1,128,192 1,206,390 1,230,360 HomeFurnishingsandAppliances...... 363,119 364,657 360,402 405,072 Building Materials and Farm Implements..... 853,656 875,354 781,551 699,786 Auto Dealers and Auto Supplies ...... 1,573,954 1,584,002 1,548,373 1,137,915 ServiceStations...... 1,021,176 1,128,236 1,245,967 1,398,999 OtherRetailStores...... 1,417,102 1,576,089 1,700,093 1,306,125 RetailStoresTotal...... $ 8,427,445 $ 8,912,937 $ 9,233,692 $ 8,536,956 AllOtherOutlets...... 3,279,248 3,357,103 3,542,272 3,860,721 Total All Outlets...... $11,706,693 $12,270,040 $12,775,964 $12,403,677

Source: California State Board of Equalization.

Table 6b City of San José Taxable Sales Calendar Year 2009 (in thousands) 2009 Motor Vehicle and Parts Dealers...... $ 993,527 Home Furnishings and Appliance Stores...... 469,310 Bldg. Matrl. and Garden Equip. and Supplies...... 567,923 Food and Beverage Stores...... 442,760 Gasoline Stations...... 967,330 Clothing and Clothing Accessories Stores ...... 702,930 General Merchandise Stores...... 1,062,696 Food Services and Drinking Places...... 1,157,304 Other Retail Group...... 808,565 Total Retail and Food Services ...... $ 7,172,346 All Other Outlets...... 3,252,940 Total All Outlets...... $10,425,287

Source: California State Board of Equalization.

A-9 Construction Activity

A history of construction valuation and new dwelling units for the most recent five calendar years appears in Table 7 below. More information regarding building permits and fees is set forth below in the section entitled “Major General Fund Revenue Sources – Licenses, Permits and Miscellaneous Taxes.”

Table 7 City of San José Construction Valuation and New Dwelling Units (in thousands)(1) 2006 2007 2008 2009 2010 Valuation:(1) Residential...... $ 490,543 $ 348,893 $ 284,103 $ 94,673 $ 419,611 Non-Residential. 409,256 682,705 541,640 289,136 354,230 Total $899,799 $1,031,598 $ 825,743 $ 383,809 $ 773,841

New Dwelling Units: Single Family ..... 611 462 254 75 78 Multi-Family ...... 2,362 1,708 1,716 232 2,386 Total 2,973 2,170 1,970 307 2,464

(1) Valuation figures are adjusted to 2010 dollars per Bureau of Labor Statistics Consumer Price Index, San José-San Francisco-Oakland. Source: City of San José, Department of Planning, Building and Code Enforcement as of January 4, 2011.

Education

The residents of the County, for the school year 2009-10, are served by 241 elementary schools; 59 middle schools and junior high schools; 50 high schools; 44 K-12, community, alternative, special education, continuation and juvenile hall schools, 36 charter schools and a number of private schools. The City is served by 15 of the 33 public school districts in the County. These school districts cross municipal boundaries. Principal public school systems serving the City are the San José Unified School District (grades K-12) and the East Side Union High School District. In addition, the City is in close proximity to the County’s seven community colleges (within four community college districts: Foothill- DeAnza, Gavilan Joint, San José-Evergreen, and West Valley-Mission). Major universities in the County include Stanford University, Santa Clara University, and San José State University.

Transportation

The San José area is served by a network of freeways providing regional, national and international access. Bayshore Freeway (Highway 101), a major north-south highway between San Francisco and Los Angeles, provides access to air passenger and cargo facilities at Norman Y. Mineta San José International Airport (the “Airport”) and San Francisco International Airport. Interstate 880 connects San José with the Oakland International Airport and the Port of Oakland. Interstates 280 and 680 provide access to the peninsula and eastern regions of the San Francisco Bay Area, respectively, and State Route 17 serves to connect San José with the Pacific Coast at Santa Cruz. Additional freeways serving the local area are State Routes 85, 87 and 237. During the past two decades, approximately $1.8 billion has been invested by the State and the County to expand and improve the area freeway system.

A-10 The Santa Clara Valley Transportation Authority (the “VTA”) provides public transit service throughout Santa Clara County, servicing 326 square miles of urbanized area. Transit services are readily accessible to residents of the City, as most residences and businesses in the City are within a quarter mile of bus or light rail service. According to the VTA Comprehensive Annual Financial Report (“VTA CAFR”) for fiscal year ended June 30, 2010, VTA’s bus network is comprised of 73 bus routes, over 3,803 bus stops, 799 bus shelters, and 12 park-and-ride bus lots. VTA also partners with Altamont Commuter Express (ACE) and Caltrain to provide commuter rail service, with Santa Cruz Metro to provide regional bus service from Santa Cruz to Downtown San José, and with the Dumbarton Express for bus services between the East Bay to northern Santa Clara County work centers and communities. In addition, VTA offers light rail and ACE Train bus shuttles to various worksites and locations.

In the November 2000 election, the voters of the County approved a 30-year, one-half cent sales tax that commenced collection in 2006 upon the expiration of a previously approved one-half cent sales tax. This sales tax will finance various transit projects, including the Silicon Valley Rapid Transit Project (the “SVRT”) which is proposed to extend the Bay Area Rapid Transit (“BART”) system to the City. BART is a heavy rail rapid transit system currently serving Alameda, Contra Costa, and San Francisco counties and the northern portions of San Mateo County.

In November 2008, California voters passed Proposition 1A providing $9 billion in initial funding for a statewide high-speed rail system. The proposed first phase of the line would stretch between San Francisco and Anaheim with stations in San José, Gilroy, Merced, Fresno, Bakersfield, and Los Angeles at an estimated cost of $33 billion. Also, in November 2008, Santa Clara County voters approved a one- eighth of one percent retail sales and use tax as proposed by the VTA to be used by BART to operate, maintain and improve the 16-mile BART extension from Fremont to the County of Santa Clara, with stations in Milpitas, San José, and Santa Clara, connecting with Caltrain from Gilroy to San Francisco, and establishing a People Mover to the Airport. Per the terms of the ballot measure, the tax will be collected only if sufficient State and federal funds are secured to match local construction dollars.

The Airport is located on approximately 1,050 acres of land approximately two miles north of Downtown San José, between the Bayshore Freeway (Highway 101) and Interstate 880. The Airport is a commercial service and general aviation airport and is classified by the Federal Aviation Administration as a “medium hub” (an airport that enplanes at least 0.25% but less than 1.0% of the total number of passenger boardings at all commercial service airports in the United States). The City has invested approximately $1.3 billion in Airport’s Terminal Area Improvement Program over the last four years.

Through the month ended January 31, 2011 in FY 2010-11, the Airport served approximately 2.5 million enplaned passengers and accommodated 71,715 operations (takeoffs and landings) compared with 2.4 million enplaned passengers and 79,722 operations for the same period in FY 2009-10. According to traffic statistics published by the Airports Council International-North America (“ACI-NA”), in calendar year 2009, the Airport was the 46th busiest airport in North America in terms of total passengers and the 63rd busiest in terms of total cargo.

In November 2005, the San José City Council approved a comprehensive plan to replace and upgrade the terminal facilities at the Airport. The Terminal Area Improvement Program (the “TAIP”) is scheduled to be completed in two phases. The first phase of the TAIP (“Phase 1”) includes, but is not limited to, a new Terminal B, upgrades for the existing Terminal A and improvements to the roadway system, and a new consolidated rental car garage. As of March 2011, Phase 1 construction and improvements are largely complete.

The second phase of the TAIP (“Phase 2”) includes an expansion of Terminal B and construction of a new South Concourse facility, adding a total of 12 gates. Pursuant to the Airport’s lease agreement with

A-11 its tenant airlines, projects in Phase 2 of the TAIP have been pre-approved, but construction is contingent on meeting certain activity-based benchmarks. Specifically, the Airport must reach 217 scheduled flights on any one day, or must enplane or deplane at least 12.2 million passengers in any given fiscal year in order to begin Phase 2.

San José Municipal Government

The City is a charter city, which means the City, through its charter (the “Charter”), may regulate municipal affairs, subject only to restrictions and limitations provided in the Charter. In matters other than municipal affairs or in matters of statewide concern, the City is subject to State law. The form of municipal government established by the Charter is known as the “Council-Manager” form of government.

The City Council consists of a Mayor and ten other council members. The Mayor is elected at large for a four-year term. Council members are elected by district for staggered four-year terms. The Mayor and the council members are limited to two consecutive four-year terms.

The City Council appoints the City Manager who is responsible for the operation of all municipal functions except the offices of City Attorney, City Clerk, City Auditor and Independent Police Auditor. The officials heading these offices are appointed by the City Council and carry out the policies set forth by the City Council.

The City provides a full range of services contemplated by statute or charter, including those functions delegated to cities under State law. These services are organized in five key lines of business - Community and Economic Development, Environmental and Utility Services, Neighborhood Services, Public Safety, Transportation and Aviation Services and Strategic Support. These cross-departmental service areas provide a forum for strategic planning and investment decisions within the context of the Mayor and City Council policy priorities. Plans, policies, and investment decisions are then carried out through departmental core and operational services.

The City Council also acts as the Board of Directors of the Redevelopment Agency of the City of San José (the “Agency”), which is a separate legal entity from the City, established by State law. The Executive Director of the Agency is appointed by and reports directly to the City Council, acting as the Agency Board. The Agency is a component unit of the City and its financial statements are combined into the City’s Comprehensive Annual Financial Report. Transfers from the Agency have been a significant source of revenue to the City as discussed in more detail below. See “Major General Fund Revenue Sources – Revenue from Local Agencies.”

A-12 Budget

State Budget

Over the last decade, the State has experienced significant budget challenges and has exercised its authority to divert revenues from property tax, sales and use taxes, gasoline tax, Motor Vehicle License Fees and other revenues payable to the City to address its budget deficits. Additionally, the State has diverted property tax revenues from redevelopment agencies throughout the State, including the Agency, as described below.

During this period, the voters approved Proposition 1A in November 2004 to amend the State Constitution to place constraints on the State’s ability to divert certain specified revenues from local agencies to the State. Subsequently, in November 2010, the voters approved Proposition 22 to amend the State Constitution to further constrain or eliminate the State’s ability to redirect revenues from local agencies, including property tax revenues from redevelopment agencies.

Nonetheless, an understanding of the State budget process remains important to understanding the City’s financial condition. A brief discussion of the State budget process as well as selected ballot measures and State budget actions over the past decade that had a material impact on the City’s finances follows.

State Budget Process. The State’s fiscal year begins on July 1 and ends on June 30. The State Constitution requires the Governor to submit a budget for each fiscal year to the Legislature by the immediately preceding January 10 (the “Governor’s Budget”).

Next, the Legislature considers the Governor’s Budget. The Constitution requires the Legislature to pass a budget bill by June 15; however, the Legislature has regularly missed this date. As a result of the passage of Proposition 58, the Balanced Budget Amendment, in March 2004, beginning with FY 2004- 05, the Legislature may not pass a budget bill in which State General Fund expenditures exceed estimated State General Fund revenues and fund balances.

Because more than half of the State’s General Fund income is derived from the April 15 personal income tax, the Governor submits a “May Revised Budget” by May 14. The Legislature typically waits for the May Revised Budget before making final budget decisions. Once the Budget Bill has been approved by a two-thirds vote of each house of the Legislature, it is sent to the Governor for approval.

March 2004 Ballot Measures. In order to address a projected deficit of approximately $14 billion dollars in FY 2004-05, the State Legislature placed both Propositions 57 and 58 on the statewide ballot at the March 2, 2004 primary election. The voters passed both Propositions 57 and 58, as described below.

 The California Economic Recovery Bond Act (“Proposition 57”), which authorized the State to issue up to $15 billion of economic recovery bonds to finance the negative State General Fund reserve balance as of June 30, 2004 and other State General Fund obligations undertaken prior to June 30, 2004. Proposition 57 also called for local sales and use taxes to be redirected from local governments to the State, including 0.25% that would otherwise be available to the City, to pay debt service on the economic recovery bonds, and for an increase in local governments’ share of local property tax by a like amount. As of July 1, 2010, the State had $7.7 billion of economic recovery bonds outstanding. It should be noted that the City continues to record the replacement tax revenues as sales and use tax revenue.

A-13  The Balanced Budget Amendment (“Proposition 58”), which required the State to adopt and maintain a balanced budget and establish an additional reserve, and restricted future long-term deficit-related borrowing.

Re-allocation of Redevelopment Agency Revenues. In both FY 2004-05 and FY 2005-06, the State directed county auditors to shift the allocation of $250 million in property tax revenue from redevelopment agencies statewide to “educational revenue augmentation funds” (“ERAFs”) to support schools. The impact to the Agency in FY 2004-05 was $18,626,954 and in FY 2005-06 was $14,500,614. These payments were made through the Agency’s participation in the California Statewide Communities Development Authority (the “CSCDA”) ERAF Loan Program. Although the primary source of repayment is the Agency tax increment or other revenues, if the Agency fails to make a scheduled payment on its ERAF Loan the County Auditor will be directed to transfer the first available ad valorem property tax revenues of the City to make the payment. Payments on the ERAF loan are due semiannually each March 1 and November 1 in an amount sufficient to pay debt service on the next succeeding August 1 and February 1, respectively. The Agency’s annual loan payment is approximately $4.5 million. The final loan payment will be due on March 1, 2016. The Agency has made its required payments to date. See “Major General Fund Revenue Sources – Revenue from Local Agencies” for information about moneys transferred by the Agency to the City’s General Fund.

FY 2009-10 Budget Act. The FY 2009-10 Budget Act included funding from local government revenues as described below.

The Governor signed the FY 2009-10 Budget Act on February 20, 2009 (the “FY 2009-10 State Budget”). Substantial amendments were made to the FY 2009-10 State Budget on July 28, 2009 to address a projected $24 billion deficit. These amendments include:

 Property Tax Borrowing. The State borrowed 8%, or approximately $1.9 billion, of the amount of property tax revenue apportioned to cities, counties and special districts as permitted under the State Constitution as amended by Proposition 1A (2004). The State is required to repay this amount plus interest by June 30, 2013. The City’s portion of the State borrowing was approximately $20.4 million; however, the City participated in the CSCDA Proposition 1A Securitization Program that was established to mitigate the impact of the State borrowing on local governments. Under this program, the City received proceeds of the securitization in the same amounts and on the same schedule as the property taxes that the State borrowed and all costs associated with the program were borne by the State.

 Supplemental ERAF. In July 2009 the State Legislature adopted, and the Governor of the State signed, Assembly Bill No. 26x4 (the "2009 SERAF Legislation"), which mandated that redevelopment agencies in the State make deposits to the Supplemental Educational Revenue Augmentation Fund ("SERAF") that is established in each county treasury throughout the State in the aggregate amount of $1.7 billion for FY 2009-10, which were due prior to May 10, 2010, and $350 million for FY 2010-11.

The Agency was informed by the State Director of Finance that the total payable by it for FY 2009-10 was $62.2 million and for FY 2010-11 will be $12.8 million. Pursuant to the 2009 SERAF Legislation, redevelopment agencies may use any funds that are legally available and not legally obligated for other uses, including reserve funds, proceeds of land sales, proceeds of bonds or other indebtedness, lease revenues, interest and other earned income. The 2009 SERAF Legislation also allows redevelopment agencies to borrow money from their low and moderate income housing funds to meet their SERAF obligation.

A-14 The Agency met its $62.2 million payment for FY 2009-10 with funds borrowed from the Agency’s Low and Moderate Income Housing Fund and from the City. It expects to meet its $12.8 million FY 2010-11 SERAF obligations with funds borrowed from the Agency’s Low and Moderate Income Housing Fund. The City and the Agency are currently evaluating options with regards to the FY 2010-11 payment due to the County on May 10, 2011. See “Major General Fund Revenue Sources – Revenue from Local Agencies” for a further discussion.

FY 2011-12 Proposed Budget. On January 10, 2011, Governor Brown submitted his 2011-12 Proposed Budget (the “Proposed Budget”) to the Legislature. The Proposed Budget acknowledged a $25.4 billion budget problem, consisting of an $8.2 billion deficit that would remain at the end of FY 2010-11 absent budgetary action, and an estimated $17.2 billion shortfall between revenues and expenditures in FY 2011- 12 unless his legislative proposals are implemented. The Governor’s Proposed Budget includes a plan to submit to the voters at a special election in June 2011 an extension of the four temporary tax increases adopted in 2009. Additionally, the Governor proposes to restructure the state-local relationship by shifting funding and responsibility to local government for certain services, resulting in a shift of $5.9 billion in State program costs to counties. The Governor also proposes eliminating redevelopment agencies (See “Major General Fund Revenue Sources – Revenue from Local Agencies” for a discussion of this proposal’s impact to the City.) The Proposed Budget includes expenditure reductions that touch nearly every area of the State budget.

City Budget

Over the last decade, the City has faced significant budgetary challenges. The City is legally required to have a balanced budget in place before the beginning of each fiscal year and has used a variety of strategies to balance its budget; however, a number of restrictions limit the City’s ability to raise revenues. See “Major General Revenue Sources – City’s Financial Condition; Limitation on Sources of Revenues” for further information.

City Budget Process. During the second quarter of each fiscal year, the City Manager releases preliminary forecast of the General Fund for use as an initial planning tool in the development of the proposed budget. In the third quarter of each fiscal year, the City Manager releases the “Five-Year Economic Forecast and Revenue Projections for the General Fund and Capital Improvement Program.” Since 1986, the City has used this five-year forecast to assist in projecting revenue levels and expenditures based on certain assumptions and expectations.

Pursuant to the City Charter, the Mayor releases an annual “budget message.” This document describes the budget process, the current fiscal situation of the City, the strategy for developing the proposed budget, recommendations on specific budget items and other related issues. The City Council reviews the Mayor's budget message, and a public hearing is held to discuss the budget message prior to the City Council taking action on it. The City Council, by majority vote, may make revisions to the Mayor’s budget message.

The City Charter requires that the City Manager release the Proposed Capital Budget and Capital Improvement Program and the Proposed Operating Budget at least thirty days prior to the beginning of each fiscal year, or at such earlier time as the City Council may specify. As currently directed by the City Council, in early May, the City Manager releases the Proposed Operating and Capital Budgets and Proposed Fees and Charges Report. The Proposed Operating Budget contains the complete financial plan for the City for the next fiscal year. It describes, by core service, each department's activities and recommended additions or reductions to those activities. It accounts for all revenue received by the City and accounts for the usage of the revenue. The City Council holds a number of study sessions in mid-

A-15 May to discuss the proposed operating and capital budgets and holds a series of public hearings on the budget in late May and early June.

In early June, the Mayor releases the final budget modification message. It contains changes to the Proposed Budget recommended by the Mayor after review and discussion of the document during the budget hearings. In mid-June, the City Council adopts the operating and capital budgets for the next fiscal year, along with the implementing appropriation ordinances and funding sources resolutions that appropriate the budgeted amounts to the respective departments.

Current City practice calls for the preparation of Bi-Monthly Financial Reports, which are presented to the City Council Public Safety, Finance, and Strategic Support Committee and subsequently reported to the entire City Council. Additionally, in February each year the City Council holds a study session on the mid-year status of the operating and capital budgets, and takes actions as necessary to maintain a balanced budget. At any public meeting, the City Council may amend or supplement the budget by affirmative vote of at least a majority of the total members of the City Council.

City’s 2010-2011 Adopted Budget. The City Council adopted the 2010-2011 Budget on June 17, 2010. This budget closed a projected $118.5 million General Fund deficit – the combined shortfall in the FY 2010-11 base operating budget of $116 million and development fee program services of $2.5 million. A combination of strategies was used to deal with the significant funding shortfall including: 1) service reductions and eliminations; 2) revenue increases, use of reserves, and funding shifts; and 3) cost savings and new service delivery models. The General Fund shortfall was closed by identifying $56.5 million in additional sources, including use of $15.5 million of reserves and FY 2010-11 Beginning Fund Balance to address one-time expenditures, and significantly decreasing expenditures by $62.0 million. Of these solutions, 83% were ongoing solutions and 17% were one-time solutions.

As part of the FY 2010-11 budget balancing strategies, the total employee count was recommended to be reduced to a level roughly equivalent to the City’s FY 1989-90 employee count. In the intervening years, the City population has grown to 945,942 in 2010, representing an increase of approximately 5.68% from 2000, according to the U.S. Census Bureau. Since 2002 when the City’s employee count peaked, the net reduction of City positions totals 1,625, which represents a decrease of approximately 21.8%. The 2010- 2011 Adopted Budget included a net reduction of 783 positions from the 2009-2010 Adopted Budget, including 49 firefighter positions. Subsequent to the adoption of the FY 2010-11 budget, 70 police officer positions were restored (see “Budget – City Budget – Adjustments to the City’s 2010-2011 Adopted Budget” and “Labor Relations” for more information).

During the budget process, the City Council called for all City employees to agree to reductions in total compensation of 10%, with at least 5% of those reductions ongoing. Agreements achieving this objective were negotiated with six of the City’s eleven bargaining groups and were approved by the City Council in late June 2010. The cost savings associated with the agreements were used to restore services that were recommended for elimination in the 2010-2011 Proposed Budget, primarily library and community center hours. If these agreements had not been reached, then an additional 107 City positions would have been eliminated as part of the 2010-2011 Adopted Budget. See “Labor Relations” for more information regarding the status of the City’s agreements with bargaining/employee groups.

Adjustments to the City’s 2010-2011 Adopted Budget. Subsequent to the adoption of the City’s 2010- 2011 Budget, the City reached an agreement with the Police Officers Association (POA) that reduced the compensation and benefits for members of that bargaining group. Cost savings associated with the agreement were used to restore 70 police officer positions that were eliminated in the 2010-2011 Adopted Budget.

A-16 On September 30, 2010, the City Manager transmitted her Annual Report describing the financial status of the City as of the end of FY 2009-10. The Annual Report stated that the General Fund ended the fiscal year with an Available Ending Fund Balance of $141.4 million, an increase of $6.6 million compared to the budgetary estimate of $134.8 million. The report recommended significant adjustments for two of the revenue estimates in the 2010-2011 Adopted General Fund Budget. A decrease to the Property Tax revenue estimate of $4.1 million was recommended to bring the revenue estimate in line with the 2010- 2011 Property Tax information provided by the County of Santa Clara Controller-Treasurer. An increase to the Sales Tax estimate of $4.2 million was recommended based on actual 2009-2010 revenue performance. On October 19, 2010, the City Council accepted the City Manager’s recommendations for adjusting the 2010-2011 Adopted Budget.

On January 28, 2011, the City Manager transmitted her Mid-Year Budget Review report comparing actual performance through December 31, 2010 with the 2010-2011 Modified Budget as of December 31, 2010 (the “2010-2011 Modified Budget”). The Mid-Year Budget Review report recommended actions to address an estimated $10.0 million General Fund net revenue shortfall and to set aside expenditure savings to establish a 2010-2011 Ending Fund Balance Reserve of $8.5 million to better position the City for the 2011-2012 budget process. A combination of actions was recommended to address the $10.0 million net General Fund revenue shortfall, including use of the City’s Economic Uncertainty Reserve ($4.0 million), transfers from other funds and increased revenues ($3.6 million), and expenditure shifts and transfers ($2.4 million). The use of the Economic Uncertainty Reserve provided a significant portion of the balancing strategy, leaving that Reserve with a balance of $5.0 million. On February 8, 2011, the City Council accepted the City Manager’s recommendations for adjusting the 2010-2011 Modified Budget. See “Major General Fund Revenue Sources” for more information related to the Annual Report and Mid-Year Budget Review revenue adjustments.

City’s 2012-2016 General Fund Forecast. Prior to the release of the 2011-2012 City Manager’s Budget Request and 2012-2016 Five-Year Forecast (the “Forecast”), on February 14, 2011, the Budget Office presented at a City Council study session, for illustrative purposes, a potential 2011-12 budget balancing scenario in order to address the then estimated $110 million shortfall. The presentation noted that given the magnitude of the 2011-12 projected shortfall, fundamental changes to cost and revenue structures will be required to bring the General Fund budget into balance. The purpose of the Budget Office’s presentation was to emphasize that even with complete implementation of labor concessions, significant reductions in services and staffing will be required. The Budget Office projected that if the City Council’s direction to achieve 10% across the board salary and benefit reductions were realized, it would equate to approximately $38.0 million in 2011-12 budgetary savings, leaving an estimated $67.0 million shortfall to address. If the entire $38.0 million from labor concessions were not able to be achieved, the equivalent position eliminations necessary to achieve the $38.0 million would approximate 335 full-time employees. In addition to the potential savings from labor concessions, the Budget Office estimated that approximately $30.0 million in savings could be realized through a combination of general proposals including deferring facility openings, service/department reorganizations, outsourcing, and civilianization. In the budget balancing scenario, the remaining $37.0 million budget shortfall would be eliminated through a combination of significant community impact proposals including elimination of the school crossing guard program, library branch hour reductions, fire engine/truck elimination, and community center reductions.

On February 28, 2011, the City Manager transmitted her Forecast to the City Council. The Forecast projected a substantial General Fund Base Budget shortfall of $105.4 million for FY 2011-12 and a $183.7 million cumulative shortfall over the five-year period of the Forecast. The projected 2011-12 Base Budget shortfall is attributable to a $20.5 million carry-over from the 2010-2011 Adopted Budget related to the use of one-time solutions; $79.3 million of expenditure changes, the majority of which

A-17 ($58.4 million) is due to increased retirement contributions; and $5.6 million due to decreased revenue estimates.

Alternative “Optimistic” and “Pessimistic” cases have been developed to model the range of financial scenarios possible under varying economic conditions and the projected shortfall for FY 2011-12 ranges from $97.0 million to $109.1 million, as compared to $105.4 million in the Base Case. In FY 2011-12, the City will face its tenth consecutive fiscal year of General Fund budget shortfalls. Over the past nine years, the City has addressed the General Fund budget shortfalls totaling $565.2 million and eliminated approximately 1,600 positions, with staffing now at 1994-1995 levels.

For 2011-12, General Fund retirement costs total $192.9 million, or 21.4% of the total base expenditure budget. This amount is not final and will be updated based on the Police and Fire Board’s consideration of the actuarial valuation for retiree health care, which is expected to be considered at the May meeting of the Police and Fire Board. During the Forecast period, General Fund retirement costs are projected to increase by approximately $112 million from $192.9 million for 2011-12 to $304.5 million for 2015-16, or 28.1% of the total projected base expenditure budget. For additional information on projected retirement contributions, see Table 27d in the “Pension Plans – Summary of Pension Plans” section.

It is important to note that this Forecast does not reflect: the impact of unanticipated compensation changes resulting from negotiations or arbitration awards; impacts from the potential future Agency general budget balancing actions or potentially more severe budget impacts associated with the proposed elimination of redevelopment agencies per Governor Brown’s budget proposal (see “Budget – State Budget – FY 2011-12 Proposed Budget”); additional impacts to the City’s contribution to the retirement system from changes in actuarial assumptions and methodologies that may be approved by the Retirement Boards in upcoming years or from pension reform efforts that are currently underway; revenue from the Marijuana Business Tax that is effective March 1, 2011 (see “Major General Fund Revenue Sources – Licenses, Permits and Miscellaneous Taxes”); funding for unmet/deferred infrastructure and maintenance needs; and one-time revenue sources or one-time expenditure needs. In addition, the projected shortfall for 2011-12 only incorporates 5% ongoing compensation reductions agreed to in 2010-11, but does not incorporate any one-time compensation reductions. Accordingly, the 2011-2012 budget shortfall of $105.4 million does not include the service reductions and eliminations, totaling 223 positions, that are effective July 1, 2011 as approved by the City Council through the 2010-2011 budget process. These service reductions and eliminations total approximately $23 million.

The City’s General Fund Structural Deficit incorporates both the projected Base Budget shortfall as well as unmet/deferred infrastructure and maintenance needs. When the projected incremental unmet/deferred infrastructure needs of $8.6 million in each fiscal year are added to the projected Base Budget shortfall (excluding one-time infrastructure and maintenance needs of $446 million), the City’s General Fund Structural Deficit is projected to total $114.0 million in FY 2011-12 and $226.7 million over the Forecast period.

A-18 Table 8 summarizes the updated 2012-2016 Structural Deficit Projection as of February 2011.

Table 8 City of San José 2012-2016 Structural Deficit Projection (February 2011) (in millions) 2011-12 2012-13 2013-14 2014-15 2015-16 Total Projected Base Budget Shortfall (Feb. 2011 Forecast)(1) ($105.4) ($43.1) ($25.1) ($10.0) ($0.1) ($183.7) Unmet/Deferred Infrastructure & Maintenance Needs(2) (8.6) (8.6) (8.6) (8.6) (8.6) ($43.0) Total Incremental Deficit ($114.0) ($51.7) ($33.7) ($18.6) ($8.7) ($226.7)

Total Cumulative Deficit ($114.0) ($165.7) ($199.4) ($218.0) ($226.7) ($226.7)

(1) Does not assume cost-of-living salary increases; additional impacts associated with the Agency; additional impacts from changes in actuarial assumptions and methodologies that may be approved by the Retirement Boards in future years that could substantially increase the City's required contributions or, conversely, that reduce the City's required contributions as a result of pension reform efforts that are currently underway; revenue from Marijuana Business Tax; unmet/deferred infrastructure and maintenance needs; or one-time revenues/expenses. (2) Assumes a five-year ramp-up period to reach the annual ongoing funding requirement in the General Fund of $43.1 million identified in May 2010; does not address one-time needs of $446 million in the General Fund ($821 million all funds) based on 2009 estimates. Source: City of San José 2012-2016 Five-Year Forecast and Revenue Projections.

Mayor’s March Budget Message. On March 11, 2011, the Mayor released his budget message for 2011- 12. The City Council is scheduled to consider the Mayor’s budget message on March 22, 2011. The City Council, by majority vote, may approve the Mayor’s budget message as presented, or may approve revisions to the Mayor’s budget message.

The Mayor’s budget message does not assume the elimination of the Agency, but recognizes that amendment of the budget message may be required depending on the actions subsequently taken by the State. However, the Mayor’s Budget Message assumes that approximately $10 million in ongoing payments from the Agency to the General Fund will stop as of 2011-12. Additionally, the Mayor’s budget message projects that the $183.7 base budget shortfall in the General Fund for the fiscal years 2012-2016 as forecasted by the City Manager should be increased to approximately $216 million by adding the elimination of the Agency’s ongoing funding ($10 million) and the one time funding included in the 2010-11 Budget ($23 million). For a discussion of the impact of the loss of revenues from the Agency, see “Major General Fund Revenue Sources – Revenue from Local Agencies”, below.

In addition to making specific recommendations regarding funding of particular programs, making improvements to existing processes, reviewing the City’s fee and tax structure for new developments and suspension of certain construction related taxes for an 18 month period, the Mayor’s budget message recommends that the City Council adopt a number of fiscal reform guiding principles. In summary, these include (1) restoring service levels for police, fire, community centers and libraries to the levels as of January 1, 2011; (2) maintaining the City’s contributions to both Pension Plans at the same amounts paid in 2010-11; (3) continuing to make the contributions to both Pension Plans as determined by their

A-19 respective boards; (4) reducing retirement benefits for current employees in a number of ways; (5) eliminating the automatic 3% cost of living increases paid to retirees; and (6) eliminating supplemental payments to retirees except under limited circumstances.

Lastly, the Mayor recommends that the City Council direct the City Manager to present recommendations in the City Manager’s Proposed Budget for 2011-12 based on the fiscal reform guiding principles to achieve $216 million in annual cost reductions in the General Fund and/or new General Fund revenues to restore service levels to the January 1, 2011 levels and to permit the opening within five years of certain City facilities that are under construction or have been completed. These recommendations should include (1) reducing compensation of current employees; (2) avoiding increases in retirement costs over the amounts paid in the current fiscal year; (3) reforms in workers’ compensation and disability retirements; (4) reducing costs of other employee benefits, including vacation buybacks, sick leave payouts, overtime pay and health care plans.

The City cannot predict whether the City Council will approve the Mayor’s recommendations as presented. Further, the implementation of recommendations regarding changes to retirement benefits for current employees is subject to the limitations imposed by the City Charter, which may necessitate voter approval. Additionally, for current employees represented by unions, the City would be required to meet and confer regarding proposed retirement changes and for public safety employees under the City’s Charter, proceed to binding arbitration in case of impasse. Finally, changing retirement benefits for current employees and retirees may be limited by existing law including court decisions.

Table 9 on the following page summarizes the City’s FY 2008-09 Actuals, FY 2009-10 Actuals, and the 2010-2011 Modified Budget.

A-20 Table 9 City of San José General Fund Budget Summaries FY 2008-09, FY 2009-10, FY 2010-11 (in thousands)(1) 2008-2009 2009-2010 2010-2011 (2) SOURCE OF FUNDS Actuals Actuals Modified Budget FUND BALANCE Encumbrance Reserve ...... $ 41,648 $ 25,824 $ 20,635 Carryover...... 223,651 173,213 141,398 Total Fund Balance...... 265,299 199,037 162,033 GENERAL REVENUES Property Tax(3) ...... 210,844 202,186 194,909 Sales and Use Tax...... 132,005 127,238 134,679 Transient Occupancy Tax...... 7,795 6,900 6,684 Franchise Fees ...... 41,067 38,410 42,271 Utility Taxes...... 85,750 87,651 87,432 Telephone Line Tax(4)...... 7,870 20,500 20,525 Licenses and Permits ...... 70,388 65,985 68,198 Fines and Forfeitures ...... 13,905 15,998 17,920 Revenue from Use of Money and Property...... 6,888 3,191 2,667 Revenue from Local Agencies...... 52,317 48,067 45,682 Revenue from the State Government(3) ...... 13,539 11,749 18,513 Revenue from the State Government-Recovery Act ...... 0 0 404 Revenue from the Federal Government ...... 8,801 5,127 9,313 Revenue from the Federal Government-Recovery Act ...... 0 367 10,955 Departmental Charges ...... 27,276 27,281 29,610 Other Revenue(5) ...... 21,622 27,023 89,866 Total General Revenue ...... 700,067 687,673 779,628 INTERFUND TRANSFERS AND REIMBURSEMENTS Overhead Reimbursements...... 38,635 40,530 34,303 Transfers to the General Fund(4)...... 48,170 37,504 41,682 Reimbursements for Services ...... 16,648 16,916 17,354 Total Interfund Transfers and Reimbursements...... 103,453 94,950 93,339 TOTAL SOURCE OF FUNDS...... $ 1,068,819 $ 981,660 $ 1,035,000 USE OF FUNDS DEPARTMENTAL General Government...... $ 82,463 $ 76,480 $ 77,043 Public Safety...... 446,322 442,288 450,721 Capital Maintenance...... 66,164 60,779 58,927 Community Services...... 120,286 109,779 107,904 Total Departmental...... 715,235 689,326 694,595 NON-DEPARTMENTAL Citywide(5) ...... 99,671 92,287 205,832 Capital Expenditures...... 17,007 12,588 8,221 Transfers to Other Funds ...... 37,868 25,425 28,534 Encumbrance Reserve ...... 25,824 20,635 20,635 Earmarked Reserves(6) ...... 0 0 47,874 Contingency Reserve(6) ...... 0 0 29,309 Ending Fund Balance...... n/a n/a n/a Total Non-Departmental and Reserves ...... 180,371 150,935 340,405 TOTAL USE OF FUNDS...... $ 895,606 $ 840,261 $ 1,035,000

(1) Totals may not add due to independent rounding. (2) 2010-2011 Modified budget as of 2/15/2011. (3) Property tax revenue received in-lieu of Motor Vehicle License Fee Revenue is budgeted as Property Tax Revenue, rather than as Revenue from the State. (4) The Telephone Line Tax was approved by voters on November 4, 2008. On April 1, 2009 the City began collecting the Telephone Line Tax and simultaneously discontinued collection of the Emergency Communications System Support (ECSS) Fee. The ECSS fee was categorized as a transfer to the General Fund. See the “Major General Fund Revenue Sources – Miscellaneous Revenues – Telephone Line Tax” and “Major General Fund Revenue Sources – Interfund Transfers and Reimbursements.” (5) Other Revenue and Citywide categories include the issuance/repayment of $75 million tax and revenue anticipation notes in FY 2010-11. (6) Actual application of Earmarked and Contingency Reserve amounts are reflected in the Use of Funds categories to which they were applied. At year end, the unexpended Reserve amounts are rebudgeted to the next fiscal year. Sources: City of San José 2009-2010 Annual Report, City of San José 2010-2011 Adopted Operating Budget, City of San José 2010-2011 Funding Sources Resolution and Appropriation Ordinance. A-21 Land Annexation

In 2006, the City and the County entered into a settlement agreement that requires, among other things, that the City make good faith efforts to initiate and complete the processing of annexations into the City of existing County pockets that are 150 acres or less by April 15, 2011. Additionally, under the settlement agreement, the City agreed to make good faith efforts to initiate the annexation process for County pockets greater than 150 acres by April 15, 2011.

The City has a program in place to process the annexations of County pockets of 150 acres or less over the course of FY 2006-07 through FY 2010-11, with the smaller pockets processed in advance of the larger ones. Under current State law (which sunsets in 2014), annexations of County pockets that are 150 acres or less do not require an election of the residents. The City has completed the annexations of County pockets of 150 acres or less with the exception of the 103-acre Cambrian No. 36 pocket that is expected to be annexed in June 2011 unless an agreement is reached to allow for the area to be annexed by the City of Campbell.

The City has not yet initiated the annexation process for any County pockets greater than 150 acres in size and it is unlikely that the City will commence initiation of these County pockets prior to the April 15, 2011 deadline specified in the settlement agreement. The City estimates that there are 8 pockets of this size, totaling approximately 3,500 acres. Under current State law, annexation of County pockets greater than 150 acres may, in some cases, require an election of the residents. As of the date of this Official Statement, it is unknown whether the County will take any action to enforce the provisions of the settlement agreement related to the annexation of the County pockets greater than 150 acres. Under the settlement agreement, matters related to the enforcement or interpretation of the settlement agreement are to be submitted to a judge selected by the Presiding Judge of the Superior Court of Santa Clara County.

The City projects operations and maintenance expenses of $180,000 in FY 2010-11 related to additional street infrastructure due to annexation of County pockets. In prior years, these costs were incorporated into the City budget as augmentations to the Department of Transportation operating budget; in FY 2010- 11, these costs have been absorbed into the Department of Transportation operating budget without augmentation. Other than these additional street infrastructure costs, the City has not budgeted additional funds in the current or prior years to address the incremental operating or capital costs resulting from annexations.

Major General Fund Revenue Sources

Following is a discussion of the City’s principal General Fund revenue sources: Sales and Use Taxes; Property Taxes; Licenses, Permits and Miscellaneous Taxes; Utility Taxes; and Revenue from Local Agencies. These major five sources of revenue totaled $531.1 million, representing 77.2% of General Fund revenues in FY 2009-10 and approximately $530.9 million, representing 68.1% of the City’s projected General Fund general revenues in the 2010-2011 Modified Budget. It is important to note that for the purpose of this presentation, general revenues, referred to for brevity in the following sections as General Fund revenues, correspond to the items shown under the General Revenues category in Table 9, and do not include Interfund Transfers and Reimbursements, which are discussed separately below. The 2010-2011 Modified Budget represents the 2010-2011 Adopted Budget and any subsequent budget adjustments as approved by City Council through February 15, 2011.

A-22 Property Taxes and Assessed Valuations

The assessed valuation of property is established by the County Assessor and reported at 100% of the full cash value as of January 1, except for public utility property, which is assessed by the State Board of Equalization.

The County collects the ad valorem property taxes. Taxes arising from the 1% levy are apportioned among local taxing agencies based on a formula established by State law in 1979. Under this formula, the City receives a base year allocation plus an allocation based on growth in assessed value (consisting of new construction, change of ownership and inflation). Taxes relating to voter-approved indebtedness are allocated to the relevant taxing agency. Beginning in FY 1990-91 (with the adoption of new State legislation), the County deducts the pro-rata cost of collecting property taxes from the City’s allocation.

The California Community Redevelopment Law authorizes redevelopment agencies to receive the allocation of tax revenues resulting from increases in assessed valuations of properties within designated project areas. In effect, the other local taxing authorities realize tax revenues from such properties only on base-year valuations that are frozen at the time a redevelopment project area is created. The tax revenues resulting from increases in assessed valuations flow to the redevelopment areas. The City has created redevelopment project areas pursuant to California law. Generally, funds must be spent within the redevelopment areas in which the tax increment revenues were generated, and may only be spent on projects that qualify under California redevelopment law.

Table 10 sets forth a ten-year history of the City’s assessed valuation.

Table 10 City of San José Historical End of Fiscal Year Assessed Value Property (in thousands) Net Assessed Percentage Fiscal Year Valuation(1) Change 2000-01...... $ 57,175,296 (10.59) 2001-02...... 63,975,252 11.89 2002-03...... 67,915,616 6.16 2003-04...... 73,077,977 7.60 2004-05...... 77,532,649 6.10 2005-06...... 85,234,836 9.93 2006-07...... 93,616,483 9.83 2007-08...... 101,093,290 7.99 2008-09...... 105,827,554 4.68 2009-10...... 103,018,120 (2.65)

(1) Valuations as of the end of the fiscal year, and net of exemptions. Sources: City of San José Comprehensive Annual Financial Report for Fiscal Year Ended June 30, 2010.

Under current County policy, the City’s allocation of total ad valorem taxes is received in approximately the following cumulative percentages: 40% by mid-December, 50% by the first week of January, 85% by the third week of April, 90% by the end of April and 100% by the end of June.

The County Board of Supervisors approved the implementation of an alternative method of distribution of tax levies and collections of tax sale proceeds (a “Teeter Plan”), as provided for in Section 4701 et seq. of the California Revenue and Taxation Code. Under the County’s Teeter Plan, the County apportions

A-23 secured property taxes on an accrual basis when due (irrespective of actual collections) to its local political subdivisions, including the City, for which the County acts as the tax-levying or tax-collecting agency. The County then receives all future delinquent payments, penalties and interest. The Teeter Plan was effective in the County beginning the fiscal year commencing July 1, 1993.

The Teeter Plan is applicable to all tax levies for which the County acts as the tax-levying or tax- collecting agency, or for which the County treasury is the legal depository of tax collections. As adopted by the County, the Teeter Plan excludes Mello-Roos Community Facilities Districts and special assessment districts that provide for accelerated judicial foreclosure of property for which special taxes or assessments are delinquent.

The Teeter Plan is to remain in effect unless the County Board of Supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year of the County (which commences on July 1), the Board of Supervisors receives a petition for its discontinuance joined in by resolutions adopted by at least two-thirds of the participating revenue districts in the County, in which event the Board of Supervisors is to order discontinuance of the Teeter Plan effective at the commencement of the subsequent fiscal year. The Board of Supervisors may, by resolution adopted no later than July 15 of the fiscal year for which it is to apply, after holding a public hearing on the matter, discontinue the procedures under the Teeter Plan with respect to any political subdivision in the County if the rate of secured property tax delinquency in that political subdivision in any year exceeds 3% of the total of all taxes and assessments levied on the secured rolls for that political subdivision. If the Teeter Plan were discontinued subsequent to its implementation, only those secured property taxes actually collected would be allocated to political subdivisions (including the City) for which the County acts as the tax-levying or tax-collecting agency.

Property Tax receipts collected for the City by the County are set forth in Table 11.

Table 11 City of San José Property Tax Receipts (in thousands) Percentage of Property Tax General Fund Percentage Fiscal Year Receipts Revenues Change (Y/Y) 2006-07 Actual(1) ...... $ 189,683 27.1% 13.9 % 2007-08 Actual(1) ...... 203,718 28.2 7.4 2008-09 Actual(1) ...... 210,844 30.1 3.5 2009-10 Actual(1)(2) ...... 202,186 29.4 (4.1) 2010-11 Modified Budget(1) ...... 194,909 25.0 (3.6)

(1) Includes motor vehicle license fee (MVLF) property tax replacement revenue. (2) Proceeds from the City’s securitization of property revenues that were borrowed by the State in FY 2009-10 are included in the 2009-2010 figures. See “Budget – State Budget – FY 2009-10 Budget Act.” Sources: City of San José 2009-2010 Annual Report, City of San José 2010-2011 Adopted Operating Budget, City of San José 2010-2011 Funding Sources Resolution and Appropriation Ordinance as of 2/15/2011.

Under California law, property owners are entitled to an assessment based on the lower of the fair market value of their property as of the property tax lien date (January 1) or the assessed value as determined at the time of purchase or construction, and increased by no more than two percent (2%) annually. A reduction of a property’s assessed valuation may occur upon the request of the property owner or the County Assessor may unilaterally reduce the assessed valuations of properties in response to declining

A-24 market values. In the event a property owner’s request for a reduction in assessed value is denied, the property owner may file an appeal.

On July 1, 2010, the County Assessor issued its “2010 Assessment Roll” media release documenting taxable FY 2010-11 real and business property values for the City and the Agency. The media release indicated that there was a decrease to the City’s assessment roll of 2.3% and a decrease to the Agency’s roll of 7.3%. The declines were attributable to a continued drop in real property values, a steep decline in the value of business personal property, and the reduction of assessed real property values by a negative California Consumer Price Index factor, the first since Proposition 13 passed in 1978.

In preparing its budget, the City forecasts property taxes based on each of the specific categories of receipts (secured and unsecured, current and delinquent receipts, supplemental, and State replacement funds). Secured Property Tax receipts are based on the County Assessor’s estimate of growth or reduction in assessed valuation, adjusted for estimates in growth, if any, for redevelopment project areas. Estimates of other property tax receipts are primarily based on historical collections. The estimate of Property Tax receipts for FY 2010-11 takes into account the County Assessor’s latest projections regarding changes in assessed valuations of property located in the City. Due to constantly changing assessed valuations and the unpredictable nature of payment collections, property tax receipts do not trend proportionately with annually reported assessed values.

Table 12 presents a list of the ten largest taxpayers for FY 2009-10, based on secured assessed valuations, within the City. A portion of these property owners are located in Agency project areas.

Table 12 City of San José Ten Largest Local Secured Property Taxpayers (in thousands) Assessed Property Percentage Name Valuation of Total Cisco Technology Inc...... $ 1,226,712 1.08% Blackhawk Parent LLC...... 968,362 0.85 The Irvine Company LLC...... 647,225 0.57 Legacy Partners...... 645,974 0.57 Hitachi Global Storage Techs Inc...... 617,312 0.54 VF Mall LLC...... 492,108 0.43 Carr NP Properties LLC...... 386,866 0.34 EBay Inc...... 357,881 0.31 Sobrato Group...... 347,806 0.31 Hercules Holding II LLC...... 342,578 0.30

Total Top 10 secured assessed property valuation, FY 2009-10 $ 6,032,823 5.30% Total City of San José secured assessed property valuation, FY 2009-10 $ 113,864,934

Source: California Municipal Statistics, Inc.

Sales and Use Taxes

The sales tax is an excise tax imposed on retailers for the privilege of selling tangible personal property. The use tax is an excise tax imposed on a person for the storage, use or other consumption of tangible

A-25 personal property purchased from any retailer. The proceeds of sales and use taxes (collectively, “Sales Tax”) imposed within the boundaries of the City are distributed by the State to various agencies as shown in Table 13. The total Sales Tax rate for the County of Santa Clara currently is 9.25% and is allocated as follows:

Table 13 City of San José Sales Tax Rates(1) State – General State – Fiscal Fund...... 6.00% State – Fiscal Recovery Fund ...... 0.25 State – Local Revenue Fund...... 0.50 Local – City of San José...... 0.75 Local – Santa Clara County...... 0.25 Public Safety Fund (Proposition 172) ...... 0.50 Sub-Total Statewide Sales and Use Tax...... 8.25 Santa Clara County Transit District (SCCT)...... 0.50 Santa Clara County Valley Transportation Authority (SCVT)...... 0.50 Total ...... 9.25%

(1) The 0.125% increase in sales tax approved by voters in November 2008 to support BART has not yet been implemented. See “Demographic and Economic Information - Transportation.” Source: California State Board of Equalization.

The City’s budgeting forecast of Sales Tax receipts is based on State officials’ estimates and the forecast of local economists. In addition to the 0.75% Sales Tax to be received by the City in FY 2010-11, the City’s budgeting forecast also includes the 0.50% Sales Tax extension under Proposition 172 approved by voters on the November 1993 ballot, property tax in-lieu payments to reimburse the City for reduction in Sales Tax receipts resulting from the passage of Proposition 57, and the redirection of sales tax revenues to pay the State’s economic recovery bonds.

A-26 Table 14 shows Sales Tax receipts, their respective percentage of General Fund revenues, and year-over- year changes since FY 2006-07.

Table 14 City of San José Sales Tax Receipts (in thousands) Percentage of Sales Tax General Fund Percentage Fiscal Year Receipts(1) Revenues Change (Y/Y) 2006-07Actual...... $ 149,962 21.4% 6.9 % 2007-08Actual...... 154,002 21.4 2.7 2008-09Actual...... 132,005 18.9 (14.3) 2009-10Actual...... 127,238 18.5 (3.6) 2010-11ModifiedBudget...... 134,679 17.3 5.8

(1) Includes property tax in-lieu payments to reimburse the City for reduction in Sales Tax receipts resulting from the passage of Proposition 57 and the redirection of sales tax revenues to pay the State’s economic recovery bonds. Sources: City of San José 2009-2010 Annual Report, City of San José 2010-2011 Adopted Operating Budget, City of San José 2010-2011 Funding Sources Resolution and Appropriation Ordinance as of 2/15/2011.

Utility Taxes

The Utility Tax is charged to all users of a given utility (electricity, gas, water, and telephone) other than the corporation providing the utility (e.g., a utility company’s consumption of all utilities used in the production or supply of its service is not taxed). Except as described below with respect to the City’s telephone utility user’s tax, the consumers of these services pay a tax at the rate of five percent (5%) of the utility charges to the utility company that acts as a collection agent for the City. The utility company collects the tax from consumers on a monthly basis and is required to remit that amount to the City by the 25th of the following month. The tax is not applicable to State, County, or City agencies. Also, per State law, insurance companies and banks are exempted from the tax.

On November 4, 2008, voters approved Measure K, a ballot measure that replaced the existing tax on telephone service with an updated telecommunications user’s tax. The updated telecommunication user’s tax took effect on April 1, 2009 and reduces the 5.0% tax rate to 4.5%, and applies the tax to all intrastate, interstate and international communications services regardless of technology used to provide such services, such as private communication services, voicemail, paging, and text messaging, and continues to tax existing communication services including landline, wireless, Voice over Internet Protocol (VoIP), and bundled services, where taxable and non-taxable services are bundled together.

In connection with placement of the telecommunications user’s tax measure on the November ballot, the City Council directed the Finance Department to continue working with large business partners to determine if the new telecommunications user’s tax would create a disproportionate financial impact on large businesses and, if so, to provide a mitigation plan to the Council if the ballot measure were approved by the voters. On February 24, 2009, the City Council approved the Finance Department’s proposed mitigation plan, and adopted an ordinance amending the new voter approved telecommunications user’s tax to cap the maximum amount of telecommunications user’s tax payable by customers that meet certain threshold requirements in order to mitigate any disproportionate financial impact on customers. The ordinance went into effect on April 3, 2009, and expires on December 31, 2012, unless extended by the City Council.

A-27 In 2007, the California Court of Appeals held that the City of Los Angeles (“Los Angeles”) had violated Proposition 218 in its application of its telephone utility user’s tax on wireless telephone calls when Los Angeles changed its taxing methodology without voter approval. See AB Cellular LA LLC v. City of Los Angeles (2007) 150 Cal.App.4th 747 (“AB Cellular”). Since AB Cellular was decided, Los Angeles, like the City, sought and obtained voter approval of a ballot measure which reduced and modernized its telephone utility user’s tax in order to address, in part, the issues raised by AB Cellular. However, in light of the published AB Cellular decision, the City could be subject to potential refund claims in connection with revenues derived from wireless calls under the City’s former telephone utility user’s tax. Even though the City has a tax refund ordinance which limits the refund period to one year, the courts have not definitively ruled on whether claimants can be limited to a one year refund period or may be able to claim a refund for a three year period (which corresponds to the otherwise applicable statute of limitations).

For FY 2007-08 the revenue derived from wireless calls was approximately $16.8 million. In FY 2008- 09 through March 31, 2009, the last date through which the City received tax revenue under its previous structure, tax revenue derived from wireless calls was $14.8 million. See “Significant Litigation, Claims and Proceedings” for more information regarding claims seeking refunds of the City’s former telephone utility user’s tax.

Table 15 shows Utility Tax receipts, their respective percentage of General Fund revenues, and year-over- year changes since FY 2006-07.

Table 15 City of San José Utility Tax Receipts (in thousands) Percentage of Utility Tax General Fund Percentage Fiscal Year Receipts Revenues Change (Y/Y) 2006-07 Actual...... $ 79,129 11.3 % 4.8 % 2007-08 Actual...... 82,254 11.4 3.9 2008-09 Actual...... 85,750 12.2 4.2 2009-10 Actual...... 87,651 12.7 2.2 2010-11 Modified Budget ...... 87,432 11.2 (0.2)

Sources: City of San José 2009-2010 Annual Report, City of San José 2010-2011 Adopted Operating Budget, City of San José 2010-2011 Funding Sources Resolution and Appropriation Ordinance as of 2/15/2011.

Licenses, Permits and Miscellaneous Taxes

This category comprises six major subcategories: business taxes, cardroom taxes, disposal facility taxes, fire permits, building permits and miscellaneous other licenses and permits. Two cardroom clubs exist in the City. The City imposes an annual “base tax” on each cardroom permittee in an annual minimum amount of $150 per year, plus an additional tax in the amount of $18 per employee based on the average number of employees, not to exceed a maximum of $25,000. In addition, if the annual gross revenue of the cardroom exceeds $10,000, the City imposes a tax equal to 13% of the cardroom’s gross revenues. Cardroom tax collections are expected to be approximately $12.7 million in FY 2009-10. In June 2010, San José voters approved a measure to increase the gross receipts tax on cardrooms from 13% to 15%. Additionally, the voters approved: 1) increasing the number of tables allowed in the City from 80 to 98; (2) increasing the number of tables allowed at each cardroom from 40 to 49; (3) removing the limit on the number of permissible card games by permitting any card game allowed under State law consistent with

A-28 City regulations; and (4) increasing the current $200 betting limit to that allowed under State law which currently specifies no limit. Revenues from the cardroom tax in FY 2010-11 are anticipated to be $13.8 million.

On November 2, 2010, San José voters approved Measure U, which imposed a tax on marijuana businesses in San José at a rate of up to ten percent (10%) of gross receipts from the planting, cultivation, harvesting, transporting, manufacturing, compounding, converting, processing, preparing, storing, packaging, and sales of marijuana and ancillary products in the City. On December 13, 2010, the City Council adopted an ordinance setting the rate of the tax at 7% of gross receipts. Collection of the tax commenced in March 2011. At this time the City has not determined the amount of additional revenue the marijuana tax will generate.

Table 16 shows Licenses, Permits and Miscellaneous Taxes receipts, their respective percentage of General Fund revenues, and year-over-year changes since FY 2006-07.

Table 16 City of San José Licenses, Permits and Miscellaneous Tax Receipts (in thousands) Licenses, Permits and Percentage of Other Tax General Fund Percentage Fiscal Year Receipts Revenues Change (Y/Y) 2006-07 Actual...... $ 74,561 10.6 % (1.7) % 2007-08 Actual...... 74,059 10.3 (0.7) 2008-09 Actual...... 70,388 10.1 (5.0) 2009-10 Actual...... 65,985 9.6 (6.3) 2010-11 Modified Budget ...... 68,198 8.7 3.4

Revenue from Local Agencies

As shown on Table 17, 5.9% of General Fund Revenues are derived from transfers from other local public agencies in the current fiscal year, with the largest portion coming from the Agency. The $45.7 million budgeted for this category in the 2010-2011 Modified Budget includes reimbursements from the Agency ($30.0 million), Central Fire District payments ($5.1 million), paramedic program payments ($1.8 million), and other miscellaneous payments ($8.8 million).

Agency Reimbursements and Obligations to the General Fund. The Agency has various obligations to the General Fund which are subordinate to debt service on its Merged Area Redevelopment Project Tax Allocation Bonds and its variable rate Merged Area Redevelopment Project Revenue Bonds (Subordinate Tax Allocation) (together, “Senior Agency Bonds”). To the extent that tax increment in any year is insufficient to pay debt service on the Senior Agency Bonds, the Agency may not be able to pay the obligations due to the City. Similarly, if for any reason the Agency’s payment obligations on the Senior Agency Bonds are accelerated, there may not be sufficient funds to pay the obligations due to the City. The City is aware of three current circumstances beyond the control of the City and Agency that could impact the Agency’s ability to continue to make payments to the General Fund: (1) proposed legislation to eliminate redevelopment; (2) declining tax increment revenues; and (3) acceleration of certain

A-29 obligations relating to the Agency’s variable rate Merged Area Redevelopment Project Revenue Bonds (Subordinate Tax Allocation). These conditions are discussed in more detail below. Additionally, other circumstances could arise that could adversely affect the Agency’s ability to continue to make payments to the General Fund.

The $30.0 million of reimbursements from the Agency to the General Fund budgeted for FY 2010-11 covers the following expenses:

 $15.0 million in debt service payment on the City of San José Financing Authority Lease Revenue Bonds, Series 2001F (Convention Center Refunding Project) (the “Convention Center Bonds”);

 $9.0 million in reimbursement for City staff providing services to Agency projects;

 $4.7 million in payment for eligible City expenditures in redevelopment project areas; and

 $1.3 million in rent payments for Agency use of City Hall facilities.

In addition to the Agency’s annual reimbursements discussed above, the Agency has the following outstanding obligations which may impact the City’s General Fund if the obligations are not paid in accordance with the instrument creating the obligation:

 SERAF Loan (see “Budget – State Budget – FY 2009-10 Budget Act”). Of the $75 million principal amount of the SERAF Loan, $25 million was loaned by the City and the City of San José Financing Authority (the “Authority”) to the Agency’s Housing Fund through the issuance of the Authority’s commercial paper notes, which are backed by the City’s General Fund, and $10 million was loaned from various City special funds. Interest and fees are anticipated to accrue during the term and are payable with the principal of the SERAF Loan on June 30, 2016; and

 ERAF Loan borrowed by the Agency from the CSCDA (see “Budget – State Budget – Re- allocation of Redevelopment Agency Revenues”). The Agency’s loan payments are approximately $4.5 million per year through FY 2015-16 and the current outstanding balance is $19 million (principal and interest). In the event that the Agency has insufficient funds to make any of its ERAF Loan payments, the County Auditor is required to deduct the payment from the City’s first available ad valorem property taxes.

The Agency has other outstanding obligations to the City that do not impact the City’s General Fund. The most significant of these is in the form of a Pledge Agreement entered into in connection with the City of San José Financing Authority Revenue Bonds, Series 2001A (4th & San Fernando Parking Facility Project) (“4th St. Garage Bonds”) wherein the Agency pledges to make debt service payments from surplus Agency revenues, after payment of senior Agency debt. To the extent that there are insufficient Agency revenues to make the debt service payments, the City’s General Purpose Parking Fund is obligated to pay the difference. The outstanding balance of the 4th St. Garage Bonds as of March 1, 2011 is $52,956,811. Annual debt service on the 4th St. Garage Bonds is approximately $3.3 million. The General Purpose Parking Fund has also loaned the Agency approximately $13.6 million for general redevelopment purposes (“Parking Fund Loan”).

FY 2011-12 State Proposed Budget. On January 10, 2011, the Governor released a proposed budget package (the “Proposed Budget”, as previously described in “Budget – State Budget – FY 2011-12 Proposed Budget”) that, if adopted as proposed, would have direct and immediate impacts on the

A-30 Agency’s ability to make payments to the City. On February 24, 2011, the State Department of Finance released proposed legislation to implement the Proposed Budget, and makes the following redevelopment-related proposals (the “RDA Provisions”), among others:

 The RDA Provisions, if adopted, would prohibit existing agencies from creating new contracts or obligations effective upon enactment of urgency legislation.

 By July 1, 2011, the RDA Provisions, if adopted, would disestablish existing redevelopment agencies and successor local agencies would be required to use the property tax revenues that redevelopment agencies would otherwise have received to retire redevelopment agency debts and contractual obligations in accordance with existing payment schedules.

 For FY 2011-12, the RDA Provisions, if adopted, would divert an estimated $1.7 billion remaining statewide after paying the redevelopment agency debts and contractual obligations to offset State General Fund costs for Medi-Cal and trial courts.

 For fiscal years after FY 2011-12, the RDA Provisions, if adopted, would distribute the money available after payment of redevelopment agency debt and contractual obligations to schools, counties, cities, and non-enterprise special districts for general uses.

 The RDA Provisions, if adopted, would shift amounts in each redevelopment agency's balances reserved for low-moderate income housing to cities or authorities for low and moderate income housing.

On March 15, 2011, two identical bills, SB77 and AB101, were introduced into the State Senate and State Assembly implementing this proposal. These bills provide a process and structure for the winding down of redevelopment agencies. Among other provisions, the bills as written seek to invalidate agreements between a redevelopment agency and the city or county that established the agency. This may be interpreted to include the Reimbursement Agreement between the Agency and the City for debt service on the Convention Center Bonds, as well as the Pledge Agreement between the Agency and the Authority for payment of debt service on the 4th St. Garage Bonds. It could also include the SERAF Loan and the Parking Fund Loan, all as discussed above.

The City cannot predict the timing, terms or ultimate implementation of any final legislation implementing the Proposed Budget, including the RDA Provisions or the impact on the Agency of any proposed, interim or final legislative or constitutional changes that may be adopted arising out of the Proposed Budget.

Declines in Agency’s Revenues. Regardless of whether the RDA Provisions of the Proposed Budget are implemented, the City’s General Fund is significantly exposed to changes in the Agency’s fiscal health. Recent declines in tax increment and diversions of tax increment as part of the recent State budgets have negatively impacted the Agency’s ability to continue making the reimbursements and other payments to the City described above. The Agency’s proposed revised 2010-2011 Capital and Operating Budgets were released on September 17, 2010 and included a decline of 7.89% in tax increment revenues from FY 2009-10. Despite this decline, the Budget included full appropriation of Agency reimbursement for the Convention Center debt service payments and rent. However, it included reductions to City staff support of approximately $700,000 and payments for eligible City projects of $500,000. The revised 2010-2011 Capital and Operating Budgets were adopted on November 2, 2010 and the City’s Budget was adjusted accordingly.

A-31 The potential impact on the City’s General Fund of current and future declines in tax increment is uncertain at this time. If the Agency defaults under the reimbursement Agreement for the Convention Center Bonds, the City’s General Fund will not be reimbursed in the annual debt service amount, currently $15 million. If the Agency does not pay rent for use of City Hall, then other budget adjustments within the General Fund would need to be taken in order to account for the loss of revenue. However, to the extent that the Agency is unable to make transfers to the City to pay for staff costs and capital projects, the City would have the option of eliminating services and projects.

The City’s General Fund could be liable for (a) the repayment of the $25 million in commercial paper notes, plus interest and fees, and (b) the $10 million to the special funds with accrued interest. The Agency’s ability to repay the SERAF Loan in FY 2015-16 will depend on whether it is able to issue new debt before then. Even if the RDA Provisions discussed above are not implemented, if tax increment does not substantially rebound within the next four years, it is unlikely that the Agency will be able to issue debt.

Additionally, if the Agency’s revenues decline to the point where it cannot repay its ERAF Loan, the General Fund could lose up to $4.5 million per year through FY 2015-16 in diverted ad valorem property taxes.

Acceleration of Obligations relating to the Agency’s Variable Rate Merged Area Redevelopment Project Revenue Bonds (Subordinate Tax Allocation). The Agency’s variable rate Merged Area Redevelopment Project Revenue Bonds (Subordinate Tax Allocation) are currently supported by letters of credit from JPMorgan Chase Bank, National Association (“JP Morgan”). The letters of credit are currently set to expire November 25, 2011. If the Agency, or if the RDA Provisions are enacted, its successor agency, is unable to extend the expiration date of the letters of credit or to replace the letters of credit prior to the expiration date, or if the Agency defaults on its obligations to reimburse JP Morgan for amounts drawn on the letters of credit to pay debt service on the variable rate Merged Area Redevelopment Project Revenue Bonds (Subordinate Tax Allocation), JP Morgan could elect to cause the trustee for such bonds to draw on the letters of credit to redeem the bonds in full. In such case, all tax increment in excess of the amounts needed to pay debt service on the Agency’s Merged Area Redevelopment Project Tax Allocation Bonds could be required to be paid to JP Morgan until JP Morgan is reimbursed in full, with interest, for such draws. Currently, the outstanding principal amount of variable rate Merged Area Redevelopment Project Revenue Bonds (Subordinate Tax Allocation) is $96.9 million, and it could take the Agency several years to repay JP Morgan if JP Morgan were to direct the bond trustee to draw on the letters of credit to redeem all such bonds.

A-32 Table 17 shows Revenue from Local Agencies, their respective percentage of General Fund revenues, and year-over-year changes since FY 2006-07.

Table 17 City of San José Revenue from Local Agencies (in thousands) Revenue Percentage of from Local General Fund Percentage Fiscal Year Agencies Revenues Change (Y/Y) 2006-07 Actual...... $ 45,314 6.5 % 5.3 % 2007-08 Actual...... 49,127 6.8 8.4 2008-09 Actual...... 52,317 7.5 6.5 2009-10 Actual...... 48,067 7.0 (8.1) 2010-11 Modified Budget ...... 45,682 5.9 (5.0) Sources: City of San José 2009-2010 Annual Report, City of San José 2010-2011 Adopted Operating Budget, City of San José 2010-2011 Funding Sources Resolution and Appropriation Ordinance as of 2/15/2011.

Miscellaneous Revenues

The following provides a discussion of the remaining General Fund revenues. Included in this category are Revenue from the State; Telephone Line Tax; Franchise Fees; Departmental Charges (permits, fees for use); Revenue from Use of Money and Property (interest income); Transient Occupancy Tax; Fines, Forfeitures and Penalties; Revenue from the Federal Government; and Other Revenues. In FY 2009-10, these combined sources of revenue total approximately $156.5 million, representing 22.8% of General Fund revenues. In the 2010-2011 Modified Budget, these combined sources total approximately $248.7 million, representing 31.9% of General Fund revenues and an increase of 58.9% from the FY 2009-10 Actual.

Revenue from the State. Revenue from the State consists of Motor Vehicle License Fees (“MVLF”), Airplane in-lieu taxes and State grants.

The MVLF is a State tax levied annually on the value of motor vehicles registered in the State. Under the State Constitution, MVLF revenues are allocated to cities and counties pursuant to State statute. In FY 2004-05, the MVLF rate was reduced from 2% to 0.65% of the market value of the vehicle. Also commencing in FY 2004-05, by State statute, the State is required to allocate to cities and counties property tax revenues in order to make up the difference in revenues as a result of the MVLF rate reduction from 2% to 0.65%. In FY 2006-07 and thereafter, the replacement property taxes will increase at rates corresponding to the rate of increase, if any, in each jurisdiction’s gross assessed property value. Additionally, per the amendments to the State Constitution enacted by the passage of Proposition 1A in November 2004, if the MVLF rate is reduced below 0.65%, then the State must replace the corresponding revenues to cities and counties. The MVLF replacement property tax revenue is reflected in the City’s budget as Property Tax Revenue, rather than Revenue from the State.

Revenue from the State in FY 2009-10 was $11.7 million, representing 1.7% of General Fund revenues and a decrease of 13.2% from FY 2008-2009. Revenue from the State in the 2010-2011 Modified Budget is approximately $18.5 million, representing 2.4% of budgeted General Fund revenues and an increase of 57.6% from the FY 2009-10 Actual.

A-33 Telephone Line Tax. On November 4, 2008, voters approved Measure J, a ballot measure that replaced the Emergency Communications System Support (ECSS) Fee with a Telephone Line Tax. The City began collecting the Telephone Line Tax and simultaneously discontinued collecting the ECSS fee on April 1, 2009. The Telephone Line Tax is imposed at the rate of $1.57 per telephone line and $11.82 per commercial trunk line. These rates are lower than the comparable ECSS Fee rates of $1.75 per telephone line and $13.13 per commercial trunk line. The Telephone Line Tax is shown as a General Fund revenue line item commencing with the 2009-2010 Budget whereas the ECSS Fee was shown in prior budget documents as a transfer from the ECSS Fee Fund to the General Fund. See “Major General Fund Revenue Sources – Interfund Transfers and Reimbursements.”

The City collected ECSS revenues of $21.3 million for FY 2006-07 and $23.8 million for FY 2007-08. For FY 2008-09, the City collected ECSS fees of $16.6 million and Telephone Line Tax revenues of $7.9 million, for an aggregate total of $24.5 million. Telephone Line Tax revenues in FY 2009-10 were $20.5 million, representing 3.0% of budgeted General Fund revenues while the 2010-2011 Modified Budget projects the revenues to total approximately $20.5 million, representing 2.6% of budgeted General Fund revenues and an increase of 0.1% from the FY 2009-10 Actual.

Franchise Fees. Franchise Fees are collected mainly from utility providers for the use of public rights-of- way. Franchise Fees totaled $38.4 million in FY 2009-10, representing 5.6% of General Fund revenues and a decrease of 6.5% from FY 2008-09. The 2010-2011 Modified Budget projects the revenues from Franchise Fees to total approximately $42.3 million, representing 5.4% of budgeted General Fund revenues and an increase of 10.1% from the FY 2009-10 Actual. Franchise Fees include revenues from electricity, gas and water utility services, commercial solid waste, cable television, and City-Generated Towing and nitrogen pipelines. Actual collections are subject to significant fluctuations from the impact of weather conditions and/or rate changes because the largest sources of Franchise Fees are based on utility revenues.

In February 2010, the City and PG&E entered into a settlement agreement to resolve a suit brought by the City for breach of PG&E’s franchise agreements, among other claims. The dispute concerned the application of a State statute to the amounts remitted to the City by PG&E for sales of gas and electricity by third party energy service providers to customers in San José (“Surcharges”). In exchange for the City dismissing its case against PG&E, PG&E agreed to pay $6.0 million for the past due Surcharges, to give the City a credit for approximately $1.1 million that the City owed to PG&E for electricity used for the operation of street lights, and to increase the franchise fee rate from 2.0% to 2.3% of PG&E’s gross receipts from the sale of gas and electricity in the City through 2021. In May 2010, the California Public Utilities Commission approved the 0.3% rate increase.

Departmental Charges. Departmental Charges were $27.3 million in FY 2009-10, representing 4.0% of General Fund revenues and no change from FY 2008-09. The 2010-2011 Modified Budget projects revenues from Departmental Charges to total approximately $29.6 million, representing 3.8% of budgeted General Fund revenues and an increase of 8.5% from the FY 2009-10 Actual.

Revenue from Use of Money and Property. Revenue from Use of Money and Property in FY 2009-10 decreased to $3.2 million, representing 0.5% of General Fund revenues and a decrease of 53.7% from FY 2008-09. This decline reflects the impact of lower yields, as well as the application of General Fund reserves to accommodate, in part, the City’s budget shortfall. The 2010-2011 Modified Budget projects these revenues to total approximately $2.7 million, representing 0.3% of budgeted General Fund revenues and a decrease of 16.4% from the FY 2009-10 Actual. In this case, the decline is the result of lower yields which were built into the 2010-2011 Modified Budget.

A-34 Transient Occupancy Tax. General Fund revenue from the Transient Occupancy Tax in FY 2009-10 was $6.9 million, representing 1.0% of General Fund revenues and a decrease of 11.5% from FY 2008-09. The 2010-2011 Modified Budget projects revenue from Transient Occupancy Tax to total approximately $6.7 million, representing 0.9% of budgeted General Fund revenues and a decrease of 3.1% from the FY 2009-10 Actual.

Fines, Forfeitures and Penalties. Revenues from Fines, Forfeitures and Penalties in FY 2009-10 were approximately $16.0 million, representing 2.3% of General Fund revenues and an increase of 15.1% from FY 2008-09. The 2010-2011 Modified Budget projects revenues from Fines, Forfeitures and Penalties to total approximately $17.9 million, representing 2.3% of budgeted General Fund revenues and an increase of 12.0% from the FY 2009-10 Actual.

Revenue from the Federal Government. Revenue from the Federal Government is in the form of various grants received by the City. Revenue from the Federal Government in FY 2009-10 was $5.1 million, representing 0.7% of General Fund revenues and a decrease of 41.7% from FY 2008-09. The revenue estimates in this category include only those grant proceeds that are obligated to be paid in the fiscal year. The amount of federal grants payable in FY 2010-11 is estimated at $9.3 million.

Revenue from the Federal and State Governments – Recovery Act. This category accounts for the revenue associated with the American Recovery and Reinvestment Act of 2009 that is recorded in the General Fund. Associated expenditure appropriations are also included in the 2009-2010 Budget in the Capital and City-Wide expenditure categories. Currently, no additional grant funds are programmed for FY 2010-11. Grant funding from FY 2009-10 has been rebudgeted in the 2010-2011 Modified Budget.

Other Revenue. Other Revenue in 2009-2010 was $27.0 million, representing 3.9% of General Fund revenues and an increase of 25.0% from FY 2008-09. The 2010-2011 Modified Budget projects these revenues to be approximately $89.9 million, which includes the issuance of $75.0 million in Tax and Revenue Anticipation Notes. Not including this one-time revenue source, Other Revenue represents 2.1% of budgeted General Fund revenues and a decrease of 45.0% from the FY 2009-10 Actual. Major categories of revenue included in Other Revenue are HP Pavilion revenues (parking, arena and suite rentals, and naming rights), investment program reimbursements, the Public, Educational and Governmental Access (“PEG Access”) Facilities payment from Comcast, and other miscellaneous revenues.

Interfund Transfers and Reimbursements

This source of revenue to the General Fund was $95.0 million in FY 2009-10. The 2010-2011 Modified Budget projects transfers and reimbursements to total $93.4 million. This includes Overhead Reimbursements ($34.3 million), Transfers to the General Fund ($41.7 million) and Reimbursement for Services ($17.4 million). Historically, one of the largest sources of revenue was the transfer from the Emergency Communications System Support (ECSS) Fee Fund. The ECSS Fee became effective on January 1, 2005, and was enacted to fund approximately 80% of the cost of operating, maintaining and upgrading the City’s 911 emergency communication system. The ECSS Fee was charged on landline and cellular telephones with a billing address in the City. On November 4, 2008, the voters approved a measure to replace the ECSS Fee with a Telephone Line Tax, which became effective on April 1, 2009. See “Major General Fund Revenue Sources – Miscellaneous Revenues – Telephone Line Tax.”

Lawsuits challenging similar fees imposed by other jurisdictions including Union City and Santa Cruz County have been brought, alleging, among other theories, that these fees violate Proposition 218. In 2008, the California Court of Appeals for the First District held that Union City’s fee violated Proposition

A-35 218 in that Union City’s fee was a special tax that had not been approved by the voters. See Bay Area Cellular Telephone Company et al., v. City of Union City (2008) 162 Cal.App.4th 686 (“Bay Area Cellular”). The First District Court of Appeals’ decision in Bay Area Cellular is in conflict with an earlier but unpublished decision involving Santa Cruz County’s fee in which the Sixth District Court of Appeals upheld the imposition of the fee. However, the Sixth District Court of Appeals’ unpublished decision may not be cited as authority by other litigants.

The ECSS ordinance, in accordance with State law, provides for a one-year period for filing refund claims. To date, no claims have been filed against the City; the final date for filing was March 31, 2010. In the event that the City’s ECSS Fee was challenged and a court determined that it violated Proposition 218 or was otherwise unenforceable, and if claims were filed, the City could be liable for refunds of the ECSS Fees. While the City’s ECSS ordinance provides for a one-year refund period, the courts have not definitively ruled on whether claimants can be limited to a one-year refund period or may be able to claim a refund for a three-year period (which corresponds to the otherwise applicable statute of limitations).

The City collected ECSS revenues of $23.8 million for FY 2007-08. For FY 2008-09, the City collected ECSS fees of $16.6 million and Telephone Line Tax revenues of $7.9 million, for an aggregate total of $24.5 million.

City’s Financial Condition; Limitation on Sources of Revenues

There are limitations on the ability of the City to increase revenues payable to the General Fund. Legal limitations generally restrict the ability of cities to raise or increase taxes without voter approval and to increase fees in excess of the amount needed to provide the service with respect to which such fees are charged, and increases to property-related fees may be subject to majority protest pursuant to Proposition 218. Additional limitations may also be imposed through legislation or initiatives. Furthermore, existing revenues may be subject to certain risk factors. See “Major General Fund Revenue Sources” for more information.

Financial Operations

Financial Statements

Since FY 2001-02, the City has prepared its audited Basic Financial Statements (referred to as General Purpose Financial Statements in previous years) in accordance with Governmental Accounting Standards Board Statement No. 34 (GASB 34). The Basic Financial Statements provide both government-wide financial statements with a long-term perspective on the City’s activities while retaining the more traditional fund-based financial statements that focus on near-term inflows, outflows, and balances of spendable financial resources. The government-wide financial statements report on a full accrual basis and include comprehensive reporting of the City’s infrastructure and other fixed assets.

Tables 18 and 19 on the following pages summarize financial information contained in the City’s Basic Financial Statements as of June 30 for FY 2005-06 through FY 2009-10. The tables include information solely on the General Fund of the City and the debt service funds that are funded from General Fund revenues.

A-36 Table 18 General Fund Balance Sheet FY 2005-06 through FY 2009-10 2005-06 2006-07 2007-08 2008-09 2009-10 ASSETS Cash and Pooled Investments...... $ 221,735,443 $ 226,712,766 $ 246,586,004 $ 218,535,366 $ 173,830,449 Other Investments...... ------Receivables: Taxes...... 27,619,359 32,078,847 30,970,055 27,594,883 29,402,612 AccruedInterest...... 3,392,856 4,860,345 4,947,699 1,295,495 578,113 Grants...... 2,619,467 6,600,384 4,825,492 3,666,756 2,679,371 Loans...... 2,141,459 2,391,459 2,141,459 2,391,459 2,391,459 Other...... 17,295,305 15,816,332 17,085,710 15,496,430 14,749,332 DuefromOtherFunds...... 10,598,356 34,744,681 19,165,611 5,688,353 3,026,130 DuefromOutsideAgency...... 245,706 1,896,469 2,765,396 3,336,027 3,167,672 AdvancestoOtherFunds...... 3,634,522 3,607,282 3,337,934 3,332,852 3,957,150 Advances and Deposits...... 73,761 12,961 12,961 12,961 284,797 Restricted Assets: Cash and Pooled Investments ..... 975,019 932,700 1,023,761 722,177 757,540 Other Investments...... 79,834 85,526 -- -- 11,371 Other Assets ...... -- -- 346,736 -- -- TOTAL ASSETS $ 290,411,087 $ 329,739,752 $ 333,208,818 $ 282,072,759 $ 234,835,996 LIABILITIES AND FUND EQUITY LIABILITIES AccountsPayable...... $ 13,212,020 $ 10,132,718 $ 10,718,772 $ 12,139,373 $ 9,923,313 Accrued Salaries, Wages and PayrollTaxes...... 18,990,589 20,929,575 25,862,423 34,180,502 35,982,723 Due to Other Funds ...... 44,052 131,338 1,169,051 277,859 1,146 DuetoOutsideAgency...... 488,794 301,846 529,138 696,584 875,782 DeferredRevenue...... 8,634,963 6,946,365 7,483,910 12,096,291 4,432,294 Advance, Deposits, and Reimbursement Credits ...... 7,203 7,203 7,203 7,203 7,203 AdvancesfromOtherFunds...... 604,350 250,000 250,000 500,000 500,000 Other Liabilities...... 11,459,625 10,443,662 10,055,511 10,982,079 12,226,542 TOTAL LIABILITIES $ 53,441,596 $ 49,142,707 $ 56,076,008 $ 70,879,891 $ 63,949,003 FUND EQUITY Fund Balances: Reserved for Encumbrances ...... $ 26,362,154 $ 28,678,478 $ 41,648,273 $ 25,824,094 $ 20,635,146 Reserved for Non-current AdvancesandLoans...... 6,904,595 7,029,928 6,862,851 6,576,280 6,634,000 Unreserved: Designated for Contingencies. 75,972,562 67,176,372 63,839,981 47,296,128 53,315,711 Designated for Future Projects 68,555,104 91,849,562 69,029,254 50,453,640 34,292,251 Undesignated...... 59,175,076 85,862,705 95,752,451 81,042,726 56,009,885 TOTAL FUND EQUITY $ 236,969,491 $ 280,597,045 $ 277,132,810 $ 211,192,868 $ 170,886,993 TOTAL LIABILITIES AND FUND EQUITY $ 290,411,087 $ 329,739,752 $ 333,208,818 $ 282,072,759 $ 234,835,996

Source: City of San José Comprehensive Annual Financial Reports, FY 2005-06 through FY 2009-10.

A-37 Table 19 General Fund Statement of Revenues, Expenditures and Changes in Fund Balance FY 2005-06 through FY 2009-10 2005-06 2006-07 2007-08 2008-09 2009-10 REVENUES Taxes: PropertyTaxes...... $ 168,523,127 $ 191,825,613 $ 203,718,290 $ 210,843,575 $ 202,186,036 SalesTaxes...... 140,327,107 149,962,080 154,001,942 132,005,205 127,237,778 UtilityTaxes...... 75,488,559 79,129,154 82,254,430 93,619,124 108,150,882 State of California in-lieu Tax(1).. 5,817,221 5,910,847 9,244,157 8,838,369 7,168,871 FranchiseTaxes...... 36,759,857 40,415,138 41,063,799 41,067,393 38,410,068 Miscellaneous Taxes ...... 7,688,090 8,600,000 9,560,000 7,795,177 6,900,000 TotalTaxes...... 434,603,961 475,842,832 499,842,618 494,168,843 490,053,635 Licenses,Permits,andFines...... 90,351,138 88,611,157 89,655,944 84,274,251 81,983,013 Intergovernmental...... 12,231,773 20,487,739 12,762,108 16,365,749 12,822,916 ChargesforCurrentServices...... 27,847,331 29,624,325 30,533,402 28,139,927 28,055,147 Interest and Investment income…... 9,697,772 18,454,100 27,146,043 7,541,406 1,514,213 Other Revenues...... 27,817,324 41,264,785 34,467,568 32,605,741 34,852,861 TOTAL REVENUES $ 602,549,299 $ 674,284,938 $ 694,407,683 $ 663,095,917 $ 649,281,785 EXPENDITURES Current: GeneralGovernment...... $ 78,504,837 $ 86,047,864 $ 86,907,472 $ 98,536,305 $ 76,717,521 PublicSafety...... 341,794,392 368,839,637 416,255,089 419,043,439 427,020,434 CapitalMaintenance...... 37,666,933 43,303,338 50,678,104 53,439,861 46,160,853 CommunityServices...... 124,057,227 129,063,357 141,877,817 138,991,586 126,815,406 Sanitation ...... 1,735,317 1,832,698 1,896,091 2,620,646 1,671,593 CapitalOutlay...... 27,288,306 3,921,801 1,468,606 5,233,310 3,940,205 Debt Service(2): Principal ...... ------953,000 1,008,000 Interest...... ------630,021 146,196 TOTAL EXPENDITURES $ 611,047,012 $ 633,008,695 $ 699,083,179 $ 719,448,168 $ 683,480,208

Excess (Deficiency) of Revenues over Expenditures $ (8,497,713) $ 41,276,243 $ (4,675,496) $ (56,352,251) $ (34,198,423) OTHER FINANCING SOURCES (USES) TransfersIn...... $ 43,814,163 $ 38,072,779 $ 39,192,371 $ 32,809,381 $ 22,661,774 Loan Proceeds...... 25,093,930 -- 373,930 -- -- Transfers Out...... (15,472,302) (35,721,468) (38,355,040) (42,397,072) (28,769,226) TOTAL OTHER FINANCING SOURCES (USES) $ 53,435,791 $ 2,351,311 $ 1,211,261 $ (9,587,691) $ (6,107,452)

Excess (Deficiency) of Revenues and Other Sources over Expenditures and Other Uses $ 44,938,078 $ 43,627,554 $ (3,464,235) $ (65,939,942) $ (40,305,875) Fund Balance - July 1 192,031,413 236,969,491 280,597,045 277,132,810 211,192,868 Residual Equity Transfer ------Fund Balance - June 30 $ 236,969,491 $ 280,597,045 $ 277,132,810 $ 211,192,868 $ 170,886,993

(1) Includes MVLF in-lieu. (2) Excludes debt service funds of the Redevelopment Agency and other debt service funds. Source: City of San José Comprehensive Annual Financial Reports, FY 2005-06 through FY 2009-10.

A-38 Financial and Accounting Information

The accounts of the City are organized on the basis of funds, each of which is considered a separate accounting entity. The fund financial statements provide information about the City’s funds, including fiduciary funds. The emphasis of fund financial statements is on major governmental and enterprise funds, each displayed in a separate column. All remaining governmental and enterprise funds are separately aggregated and reported as non-major funds. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures (or expenses) as appropriate. Government resources are allocated and accounted for in individual funds based on the purposes for which they are to be spent and the means by which spending activities are controlled. Separate statements for each fund category – governmental, proprietary and fiduciary – are presented.

All governmental funds are accounted for using the modified accrual basis of accounting. Their revenues are recognized when they become measurable and available. Taxpayer-assessed income, gross receipts and other taxes are considered “measurable” when in the hands of intermediary collecting governments and are recognized as revenue at that time. Anticipated refunds of such taxes are recorded as liabilities and reductions of revenue when they are measurable and their validity seems certain. Expenditures are recognized when a liability is incurred. Exceptions to this general rule include: (1) accumulated unpaid vacation, sick pay, and other employee amounts which are not accrued; and (2) principal and interest on general long-term debt which is recognized when due. All proprietary funds are accounted for using the accrual basis of accounting. Their income is recognized when it is earned and expenses are recognized when they are incurred.

A-39 Insurance and Self-Insurance Programs

The City reassesses its insurance coverage annually. Therefore, the City makes no representations that these insurance coverages will be maintained in the future.

The City self insures for liability (other than for the Airport and the Water Pollution Control Plant), personal injury, and workers’ compensation. The City currently maintains an all-risk property insurance policy with coverage for City and Redevelopment Agency property, including coverage for boiler and machinery exposures. This policy also provides coverage for loss due to business interruption or flood. The City generally does not carry earthquake insurance. A summary of the City’s all-risk property insurance is provided in Table 20.

Table 20 City of San José Summary of Citywide Property Insurance Coverage (For Policy period October 1, 2010 – October 1, 2011)

Limit Deductible Per Occurrence Per Occurrence Property, including Business Interruption(1) ...... $ 1 billion $ 100,000(2) Flood Flood Zones A and V...... $ 25 million $ 500,000(3) Flood Zone B...... $ 50 million $ 100,000(3) All Other Flood Zones...... $ 100 million $ 100,000(3)

(1) The policy limit for property damage caused by terrorism is $2.5 million per occurrence and in aggregate. (2) The deductible for property coverage and business interruption is combined $100,000 per occurrence. (3) Deductible applies per location affected Source: City of San José, Human Resources Department - Risk Management.

The City has airport liability policies covering the Airport, which provide a $200 million each occurrence combined single limit for bodily injury and property damage, with a $25 million each occurrence limit for personal injury, currently subject to a per occurrence deductible of $250,000 and in the aggregate. The City also maintains an automobile liability policy covering vehicles associated with the Airport and Water Pollution Control Plant operations. The limit of liability is $1 million for each occurrence for liability, and the City is self-insured for physical damage.

Workers’ Compensation and Third Party Liability Claims. As noted above, the City is self-insured and self-administered for workers’ compensation with claims paid on a “pay as you go” basis. The City budgets for workers’ compensation payouts based on prior year payout history. Over the five-year period of FY 2005-06 through FY 2009-10, the City experienced workers’ compensation payouts ranging from $15.1 million to $17.5 million, with the payout from the General Fund averaging approximately 89% of the total. The City is also self-insured for third party liability claims other than those involving the Airport and the Water Pollution Control Plant, as described above. All third party liability claims are handled by the City Attorney’s Office. There is an emergency reserve fund of $10 million in the General Fund for both liability and workers’ compensation claims.

Unemployment Insurance. The City self-insures to the limits required by State statute. The City budgets for each year’s anticipated unemployment insurance claims. By policy, the City also funds a reserve of the same amount in each fiscal year.

A-40 Airport Coverages for Phase 1 of the Airport Development Program

Airport Owner-Controlled Insurance Program – North Concourse Project. On March 31, 2004, the City bound certain liability insurance coverages for the major components of the North Concourse project through an owner-controlled insurance program from American International Group (“AIG”), now Chartis. An owner-controlled insurance program (“OCIP”) is a single insurance program that provides insurance coverage for construction job site risks of the project owner, general contractors, and all subcontractors associated with construction at the designated project site. The specific coverages, limits, and deductibles are summarized in Table 21 below.

Table 21 City of San José Summary of Airport Owner-Controlled Insurance Program – North Concourse Project Coverages Limit Deductible Per Occurrence General Liability $2 million per occurrence $ 250,000 $4 million aggregate Workers’ Compensation Statutory $ 250,000 Employers’ Liability $2 million per accident $ 250,000 Excess Liability $150 million

Source: City of San José.

The City was required to establish a claims loss reserve for the North Concourse Project in the aggregate principal amount of $3.6 million with an additional $300,000 available in a cash working fund. The claims loss reserve funds the deductible amount of up to $250,000 per occurrence, to a maximum loss exposure to the City of $3.9 million.

The North Concourse Project has been completed and the policies expired December 31, 2008. AIU refunded to City $2.5 million of the loss fund in June 2010. AIU will continue to hold the remaining funds in the loss reserve fund until such time as the exposure to risk of claims ceases or the City opts to cash out the remaining funds in exchange for accepting responsibility for potential future claims.

Airport Owner-Controlled Insurance Program – Terminal Area Improvement Program. On March 15, 2007, the City bound certain liability insurance coverages for the major components of the Terminal Area Improvement Program through another OCIP (the “TAIP OCIP”) procured through Chartis (formerly known as AIG). The terms of the TAIP OCIP require the City to fund a claims loss reserve with Chartis in the amount of $8.9 million which Chartis has permitted the City to fund incrementally. The claims loss reserve had a balance of $5.9 million as of June 30, 2010. The specific coverages, limits, and deductibles are summarized in Table 22.

The City is obligated to maintain the TAIP OCIP through the term of its design-build contract with Hensel Phelps for the design and construction of the TAIP. The term of the TAIP OCIP is currently set to expire on March 31, 2011. The City’s final acceptance of the TAIP is presently scheduled for the end of March 2011. The City has the option to either extend the OCIP or to require Hensel Phelps to provide the required coverages through the date of City’s final acceptance of the TAIP, pursuant to the terms of the design-build contract.

A-41 Table 22 City of San José Summary of Airport Owner-Controlled Insurance Program – Terminal Area Improvement Program Coverages Limit Deductible Per Occurrence General Liability $2 million per occurrence $ 250,000 $4 million aggregate Workers’ Compensation Statutory $ 250,000 Employers’ Liability $1 million per accident $ 250,000 Excess Liability $200 million

Source: City of San José.

Builders’ Risk and Owner’s and Contractor’s Protective Professional Indemnity, Including Contractor’s Pollution Liability Policies.

On July 23, 2007, the City bound the builders’ risk coverage for the TAIP through December 31, 2010 (construction is currently scheduled for final completion by March 31, 2011). The original limit on the coverage was $488,210,574 and the budgeted construction cost for Terminal Area Improvement projects is $600,717,460.

Following substantial completion, the buildings included within the TAIP will be added to the City’s property insurance coverage. All of the TAIP projects are estimated to be substantially completed on or before March 31, 2011.

Hensel Phelps, under its design-build agreement with the City for the TAIP, has provided a contractor’s protective professional liability insurance (“CPPI”) policy specific to its design work on the Terminal Area Improvement Program. The CPPI affords vicarious liability coverage for the City and the contractor’s pollution liability policy names the City as an additional insured. The limit on the coverage is $5.0 million.

A-42 Significant Litigation, Claims and Proceedings

The City is involved in a variety of pending actions. Additionally, there are a number of claims filed against the City. The pending or threatened litigation and other proceedings, described below, is the most significant in terms of potential risk of loss, using a threshold of $10 million.

Significant Litigation

Litigation Related to Watson Park. The City has been sued by fifteen family members alleging damages totaling $19.4 million (the “Plaintiffs”). The Plaintiffs currently or previously have resided at, or have visited, a home in San José that is located adjacent to the City-owned Watson Park. Watson Park, which was formerly a landfill site, has been closed to the public since 2005, due to the discovery of hazardous materials in the park. The City has undertaken hazardous remediation work at Watson Park and at the homes that are located adjacent to Watson Park, including the home involving the Plaintiffs. The Plaintiffs allege that each has suffered injuries as a result of contamination at the subject home. Since the lawsuit was filed, eleven of the fifteen plaintiffs have dismissed their cases against the City. The City is unable to predict the outcome of this litigation or whether any of the plaintiffs who have filed dismissals will attempt to file another case against the City.

The City has entered into a settlement agreement with the owners of the other properties located adjacent to Watson Park at which the City performed remediation work.

Water Company Litigation. A private water company in San José sued both the City and the Agency claiming that they have illegally used their respective authority to deny permits, licenses and other authorizations to the water company and its potential customers, in an effort to cause property owners and developers to use the City’s Municipal Water System instead of the private water company in two areas of the City. The water company alleged that the City and/or the Agency inversely condemned the water company’s property, interfered with its contracts and business opportunities, and violated various provisions of the State Water Code. In 2008 the water company agreed to dismiss its case without prejudice while the parties attempt to settle the matter. If a settlement is not reached by the end of 2011, the water company can re-file the lawsuit, or as has occurred the past three years, the parties can extend their agreement. Discovery concerning the water company’s alleged damages was not completed before the case was dismissed. If the effort to reach a settlement fails, and the water company re-files its case and ultimately prevails, the City and the Agency are unable to predict the nature or amount of the damages that can be proven.

Significant Outstanding Obligations

County of Santa Clara Litigation. On March 10, 2011, the County of Santa County (the “County”) filed a lawsuit against the City, the Agency and the Diridon Development Authority (a joint powers authority comprised of the City and the Agency) seeking, among other things, damages against the City and the Agency on a joint and several basis in the amount of approximately $63 million plus interest. The County’s claim for damages arises out of Agency’s non-payment of tax allocation payments during the period of FY 2008-09 through and including FY 2010-11 under an agreement among the County, the City and the Agency that the parties entered into in 2001 (the “2001 Agreement”). Additionally, the County sought injunctive relief to enjoin the City, the Agency, and the Diridon Development Authority from actions that may cause or contribute to a breach of the 2001 Agreement or the County’s ability to recover amounts alleged to be owed to the County under the 2001 Agreement.

A-43 On March 16, 2011, the parties entered into a judicially supervised settlement of the County’s claims, which provides, among other things:

 The Agency will pay the County $21.5 million in tax-exempt bond proceeds by March 30, 2011 to be used by the County for eligible purposes, and an additional $5 million in unrestricted funds by May 15, 2011.

 The Agency will acquire from the City fee simple title to the former City Hall parcel and transfer it to the County by June 30, 2011.

 The Agency will pay to County pursuant to a payment schedule for the remainder of funds still owing to the County ($23.78 million), starting in FY 2013-14 through FY 2017-18.

 If and to the extent the Agency does not comply with the above deadlines for performance, the interest rate on the late-compliance items shall revert from 3% to 10% per annum.

 As security for Agency’s performance of its obligations, the Agency will assign to the County 50% of the proceeds received from the sale, transfer or other disposition of certain Downtown properties held by the Agency and subject to Disposition and Development Agreements with residential developers, as well as second position deeds of trust on various other Downtown parcels.

 With respect to the payments for road improvements to the Montague Expressway pursuant to a prior settlement agreement among the City, the County and the Agency ($11 million) that were to be paid by the City to the County by June 30, 2010, the County will extend the time for payment of these funds until the project is approaching construction. “Approaching construction” is defined to mean a resolution adopted by the County Board of Supervisors that authorizes County staff to proceed with the design and bid of the Montague Expressway Improvements. The County will provide the City with 6 months notice of when payment is due, and the City will pay the funds to the County no later than that due date.

Other Significant Proceedings

FAA Audit of Use of Airport Revenue. The FAA commenced an audit of the City’s use of Airport revenue in the spring of 2010. Federal law requires all airport owners that receive Federal assistance, such as the City, to use airport revenues for the capital or operating costs of the Airport. As a general rule, any use of airport revenues by an airport owner for costs that cannot properly be considered airport capital or operating costs is deemed to be improper revenue diversion. On June 2, 2010, auditors from the FAA provided the City with a draft audit finding improper use of Airport revenues by the City in three areas of expenditure as described below.

The City provided its response to the draft findings in June 2010 and awaited the FAA’s response. In March 2011, the FAA notified the City that the FAA was prepared to issue its final audit consistent with the draft findings, but would give the City the opportunity to comment on the final draft of the audit findings prior to issuance The FAA has not provided the City with a timeframe for its issuance of a final audit. In the event that the FAA issues a final audit finding improper use of Airport revenue by the City, the City will have an opportunity for an administrative hearing to contest any such determination through the administrative procedures set forth in 14 CFR Part 16. Although the City believes that it has made proper use of airport revenues, the City cannot predict whether the outcome of the FAA’s final audit or whether the City will prevail in any appeal of an adverse FAA decision.

A-44 The improper uses of airport revenues alleged by the FAA are described below:

Airport Lease Obligation. The City purchased approximately 75 acres of real property located near the southwest corner of the Airport from the FMC Corporation between 2005 and 2006, as a strategic effort to promote economic development opportunities and to preserve the future viability of the Airport. The City acquired the property in two phases. The initial phase, consisting of the acquisition of 52 acres of the property (referred to as the “Airport West Property”) was completed in February 2005. The City completed the second phase, consisting of the acquisition of the remaining 23 acres of the property, in May 2006. The City intended to use the remaining 23 acres of the property for non-Airport economic development purposes.

The purchase of the Airport West Property was financed with lease revenue bonds issued by the Authority. Upon acquisition, the City leased the Airport West Property from the Authority and used a portion of the Property for construction laydown needs (including material storage and construction employee parking) to support the Terminal Area Improvement Program. The City agreed to make lease payments for the Airport West Property from Airport operating revenues available in the Maintenance and Operation Fund. At the time of the acquisition, the City contemplated other potential Airport uses for the Airport West Property, such as rental car storage, public or employee parking, flight kitchen operations, airport/airline warehouses and compatible non-aviation leaseholds. The City subsequently determined not to use the Airport West Property for these other potential Airport uses, and the City’s use of the Property for construction laydown needs ceased with the completion of the Terminal Area Improvement Program on June 30, 2010. The City ceased using Airport operating revenues to make Airport West Property lease payments as of July 2, 2010.

In its June 2, 2010, draft audit finding, the FAA determined that the City could use Airport operating revenues to pay rent only for those portions of the Airport West property that the City actually used for its Airport construction laydown needs and that the use of Airport operating revenues to pay rent for the remainder of the Airport West Property not actually used by the City for Airport purposes violated federal law regarding use of airport revenue. Consequently, the FAA auditors recommended that the City recalculate the rent paid from Airport operating revenues based upon actual Airport use, set the rent at fair market value, and return the remainder to the Airport enterprise fund, with interest. The City paid approximately $2.2 million from Airport operating revenues and approximately $10.0 million from the issuance of Airport Commercial Paper supported by general Airport revenues as rent for the Airport West Property from its acquisition through June 30, 2010.

The City believes that it has viable defenses to the FAA audit determination with regard to Airport West lease payments. Acquisition of property for Airport purposes (whether by purchase or lease) necessarily requires planning and development prior to the commencement of actual Airport uses, and the use of Airport operating revenues to pay rent on property acquired for planned future Airport uses does not constitute improper use of Airport operating revenues under federal law. There is no basis under applicable federal law for the distinction made by the FAA auditors between rent payments for actual as opposed to planned airport uses.

Guadalupe Gardens. In early 2002, the City Council approved a Master Plan for Guadalupe Gardens, consisting of approximately 120 acres of mostly vacant, City-owned property located south of the Airport, much of which falls within an FAA-established safety zone. The City acquired the Guadalupe Gardens properties using FAA grants for airport approach protection and noise compatibility, and the FAA grant agreements consequently required FAA approval of any planned City use of the properties acquired with grant proceeds. By letter dated

A-45 August 9, 2002, addressed to the City’s Director of Aviation, the FAA San Francisco Airport District Office (“ADO”) approved the City’s Master Plan for reuse of Guadalupe Gardens for runway and approach protection, and the City finalized the Master Plan in reliance upon the FAA approval.

Citing provisions of federal law that require recipients of FAA grants for acquisition of land for noise compatibility purposes to dispose of any such acquired land when no longer needed by the airport owner for noise compatibility purposes, the FAA auditors determined that the FAA ADO erred in its 2002 approval of the Guadalupe Gardens Master Plan and that the City is obligated to prepare an inventory of the Guadalupe Gardens to identify those parcels that were acquired by the City with noise compatibility grant proceeds. This inventory would then be used to prepare for FAA review and approval a disposition plan for those parcels no longer needed by the City for noise compatibility. Proceeds of the sale of the parcels proportionate to the FAA grant share of the original purchase price would be required to be used for other approve noise compatibility projects at the airport or returned to the FAA.

The City believes that it has viable defenses to the FAA audit determination with regard to Guadalupe Gardens. The FAA ADO’s 2002 approval of the Guadalupe Gardens Master Plan constituted an official FAA approval of the City’s reuse of the parcels acquired with proceeds from FAA noise compatibility grants, and the approval expressly provides that the entire Guadalupe Gardens is necessary for the continuing aeronautical purpose of runway and approach protection. Having received official FAA approval of its reuse of the parcels, the City is under no obligation to take any further action to secure further FAA approval of its continuing use of the Guadalupe Gardens.

Cost Allocations. The FAA auditors reviewed the City’s allocation of its costs to the Airport department for services provided by the City to the Airport in FY 2010-11. The City uses both direct and indirect methodologies to allocate costs to the Airport. The FAA auditors found the direct cost allocations to be acceptable.

The FAA contends that the City’s indirect methodology does not correlate to the cost of services actually provided by the City to the Airport. Consequently, the auditors have recommended that the City re-allocate its costs charged to the Airport for fiscal years 2005 through 2010 using an allocation methodology that reflects services actually provided to the Airport and repay any overcharges to the Airport enterprise fund, with interest. The amount of costs allocated by the City to the Airport using the indirect methodology for fiscal years 2005 through 2010 was estimated to be $59.1 million.

The City believes that its cost allocation methodologies reflect the cost of City services actually provided to the Airport and that the methodologies used by the City are consistent with applicable federal cost allocation guidance.

Significant Tax Refund Claims

Before Measure K was approved by the voters, the City imposed a Telephone utility user’s tax (“UUT”) on every person in the City using intrastate telephone communication services. The City’s former Telephone UUT is described above in “Major General Fund Revenue Sources – Utility Taxes.” The City stopped collection of the former Telephone UUT on March 31, 2009.

A-46 The City’s former Telephone UUT, like the telephone utility tax imposed by many other jurisdictions, linked imposition of the tax to the Federal Excise Tax (“FET”) and was written before the introduction of new communications technologies and changes to federal law. Utility user’s taxes imposed by other California cities that contain language similar to that in the City’s former Telephone UUT have been the subject of legal controversy. The City’s current Telephone UUT removed outdated language that was the subject of lawsuits in other jurisdictions. However, if the City’s former Telephone UUT were challenged, the outdated language could subject the City to significant tax refund claims. On May 25, 2006, the U.S. Treasury Department issued Notice 2006-50 in which it announced it was conceding the legal dispute over whether it should be applying the FET to long distance and bundled telephone communication services, where the charges for the services are based on time only and not time and distance. Consequently, effective August 1, 2006, the IRS no longer applies the FET to long distance and bundled services. A bundled service is local and long distance service provided under a single plan that does not separately state the charges for local telephone service.

On June 27, 2006, in response to Notice 2006-50, the City Council adopted an urgency ordinance which went into effect the same day reaffirming its intent to continue its long-standing practice of applying its Telephone UUT in a manner consistent with the IRS’ interpretation of the FET prior to the issuance of Notice 2006-50. The City Council subsequently adopted an identical regular ordinance which became effective on September 8, 2006. The ordinances clarified that the City was not changing its application of its Telephone UUT based on the IRS’ decision to discontinue taxing long distance and bundled services in order to resolve legal disputes with telephone customers. Rather, the City would continue to tax intrastate local, long distance, and bundled services based on the IRS’s interpretation of the FET prior to May 25, 2006. In light of the AB Cellular decision discussed above in “Major General Fund Revenue Sources – Utility Taxes,” there is a risk that if the City’s application of its former Telephone UUT was challenged, a court could rule that the actions the City took in June 2006 violate Proposition 218.

Following the Council’s actions in June 2006 with respect to the ordinances, on July 24, 2006, the City’s Director of Finance gave notice to approximately 200 telecommunication carriers doing business in the City that the City would continue to apply its Telephone UUT to intrastate telephone communication services consistent with the IRS’ interpretation of the FET prior to May 25, 2006. One carrier objected to the July 24 notice, but continued to collect and remit the former Telephone UUT to the City, without waiving its rights to seek refunds and other appropriate relief.

On January 29, 2007, the U.S. Treasury Department issued Notice 2007-11, which states that Notice 2006-50 does not affect the ability of state or local governments to impose or collect telecommunication taxes under their respective statutes of government. However, the City is unable to determine at this time what impact, if any, Notice 2007-11 might have on future requests for refunds in connection with revenues derived from the City’s former Telephone UUT.

Prior to the IRS’ issuance of Notice 2006-50, two telephone customers filed claims with the City seeking refunds of the City’s Telephone UUT. Collectively, the two customers seek refunds in the amount of approximately $2.7 million, claiming among other things, that the City’s former Telephone UUT was erroneously applied to package or bundled plans where the charges are exempt under the FET and, accordingly, under the City’s former Telephone UUT. On June 2, 2008, the City received a third claim from a telephone customer, seeking a refund of the City’s former Telephone UUT in an unspecified amount for what appears to be a one year period between May 2007 and May 2008 on the grounds that it was being charged a tax on communication services which were not subject to the FET and, therefore, not subject to the City’s former Telephone UUT. In addition, the telephone customer claimed that the City’s post IRS Revenue Notice 2006-50 modification of its former Telephone UUT is unenforceable because it violates Proposition 218. On June 1, 2009, the City received another claim from the same telephone

A-47 customer seeking an additional refund of the City’s former Telephone UUT in an unspecified amount for what appears to be a one year period between May 2008 and May 2009 on the grounds set forth above.

To date, the City has not taken action on these claims and the claimants have not pursued litigation against the City. However, lawsuits have been filed challenging the authority of other California cities to impose taxes on package or bundled plans where the charges are exempt under the FET, including lawsuits filed against the City of Los Angeles, the County of Los Angeles, and the City of Long Beach. In light of Federal Court decisions regarding the exemption of bundled telephone service plans from the FET and the litigation described herein, the City may be presented with additional requests for refunds in connection with its former Telephone UUT.

On November 19, 2010, the City received a refund claim from AT&T Mobility, seeking a refund of Telephone UUT from 2005-2010, in the amount of approximately $3.3 million. Based upon the refund claim submitted, it appears that AT&T Mobility and its affiliates (collectively, “AT&T”) have been sued in a number of cases in which the plaintiffs (AT&T customers) allege that AT&T applied taxes for certain data services which included internet access in violation of the Internet Tax Freedom Act (“ITFA”). These cases have been consolidated in a class action overseen by a federal district court in Illinois. AT&T and the attorneys representing the class have negotiated a settlement agreement. Under the proposed settlement, AT&T has agreed, among other things, to pursue refunds on behalf of the class from various taxing authorities and then pay the refunded amounts to the class. As of the date of this Official Statement, the court has not approved the proposed settlement.

The City has sent AT&T a notice of insufficiency related to its claim, but has otherwise not taken any action on it. The City cannot predict whether AT&T will pursue litigation against the City to obtain a refund or the outcome of any such litigation.

Even though the City has a tax refund ordinance which limits the refund period to one year, and the refund period expired, the courts have not definitively ruled on whether claimants can be limited to a one year refund period or may be able to claim a refund for a three year period (which corresponds to the otherwise applicable statute of limitations).

The City’s revenue from the former Telephone UUT (including revenues from landline and wireless calls) for FY 2007-08 and FY 2008-09 (through March 31, 2009) was approximately $45.8 million. At this time, the City is unable to separately estimate the Telephone UUT revenues derived from long-distance and bundled services from local service or from data services. Further, the City is unable to estimate the amount of Telephone UUT revenues that may be subject to refund based on the claim that the telephone service provided was not subject to the FET under the former Telephone UUT.

A-48 Labor Relations

Overview

The City has eleven recognized employee bargaining units. The representation and agreement dates are shown in Table 23. All bargaining units have current agreements with the exception of the International Association of Firefighters, Local 230 (“Local 230”) and the Association of Building, Mechanical and Electrical Inspectors (ABMEI). All of the City’s remaining bargaining units have agreements expiring in FY 2010-11, with the exception of the Confidential Employees’ Organization (“CEO”) whose agreement expires September 17, 2011. In addition to its represented employees, the City has 209 unrepresented employees as of February 28, 2011.

Table 23 City of San José Summary of Labor Agreements Agreement Full-Time Expiration Equivalent Date Employment(1) Assoc. of Building, Mechanical and Electrical Inspectors (ABMEI) ...... 12/10/2009 50 Association of Maintenance Supervisory Personnel (AMSP) ...... 06/30/2011 79 Association of Engineers and Architects (AEA)(2) ...... 06/30/2011 200 Association of Legal Professionals (ALP) …………………………….. 06/30/2011 38 Operating Engineers, Local #3 (OE#3) ...... 06/30/2011 759 International Brotherhood of Electrical Workers (IBEW) ...... 06/30/2011 74 City Association of Management Personnel (CAMP) ...... 06/30/2011 344 San José Police Officers’ Association (POA) ...... 06/30/2011 1220 International Association of Firefighters (IAFF, Local 230) ………….. 06/30/2009 647 Municipal Employees Federation (MEF) ...... 06/30/2011 1844 Confidential Employees’ Organization (CEO) ...... 09/17/2011 191 Total ...... 5,446

(1) Full-time Equivalents (FTE's) are the combined total number of budgeted full-time positions. For example, one full- time position equals one FTE. Similarly, two half-time positions equal one FTE. The FTE numbers presented are as of February 28, 2011. (2) The City has two separate agreements with AEA; the first agreement is related to employees of Unit 41 and Unit 42 and the second agreement is related to employees in Unit 43. Both agreements expire on June 30, 2011. Source: City of San José, Office of Employee Relations, City Manager’s Budget Office.

Under California law, sworn police and fire employees are not permitted to strike. The City Charter provides that police and fire bargaining units have the right to binding interest arbitration of labor disputes once either the City or the applicable bargaining unit declares that the negotiations are at impasse. A summary of the City Charter’s binding arbitration provisions is set forth below in – Binding Arbitration.

The agreements with AEA, CEO, IBEW, MEF, and OE#3 have “no strike” clauses during the terms of their respective agreements.

A-49 Labor Costs and Staffing Reductions

During the period from FY 2000-01 through FY 2009-10, the City’s total compensation costs have increased significantly. The term “total compensation costs” refers to the City’s cost of pay and benefits, including base pay, retirement contributions, health insurance and other benefits. The chart below shows the increase in budgeted costs of total compensation of the City’s full-time employees (“FTEs”) from FY 2000-01 through FY 2009-10 for all of the City’s funds. Although the number of FTEs decreased during this period, the City’s average total compensation cost per FTE has increased approximately 63.65% from $73,581 per FTE in FY 2000-01 to $120,418 in FY 2009-10.

Table 24 City of San José Citywide Salary and Benefits(1) FY 2000-01 FY 2009-10 Difference

Base Payroll $416,010,420 $582,337,708 39.98%

Retirement Benefits $63,054,083 $137,472,029 118.02% Federated Retirement $39,409,193 $72,534,127 84.05% Police/Fire Retirement $23,644,890 $64,937,902 174.64%

Health/Dental Benefits(2) $30,317,792 $64,197,978 111.75% Health $24,856,910 $57,160,932 129.96% Dental $5,460,882 $7,037,046 28.86%

Other Benefits $6,608,312 $13,566,187 105.29% (Unemployment & Other Miscellaneous Benefits) Total (All Benefits) $99,980,187 $215,236,194 115.28%

Grand Total $515,990,607 $797,573,902 54.57%

Average Total Cost Per FTE $73,581 $120,418 63.65%

(1) Does not include worker's compensation cost or overtime. The figures above are budgeted costs and include the cost of providing paid time off, such as vacation, holidays, personal/executive leave, and sick leave, to the extent that paid leave is taken during the fiscal year. The actual salary and benefit costs of individual employees vary. (2) Health/Dental Benefits are the costs budgeted for the health and dental benefits provided to FTEs. Source: City of San José Salary and Fringe Benefit Costs by Bargaining Unit & Fund for 2000-2001 through 2009-2010 Adopted Budget

In November 2009, the City Council considered the City’s projected budget deficit for FY 2010-11 and gave direction that the City’s ongoing total compensation costs of City employees must be reduced by 5.0%. Subsequently in March 2010, in response to a projected increase in the budget deficit for FY 2010- 11, the City Council directed that total compensation costs be reduced by 10.0%. The City Council further directed that half of the reduction be an ongoing reduction and the remaining half be compensation savings for FY 2010-11.

As discussed above in “Budget – City Budget – City’s 2010-2011 Adopted Budget”, the City reached agreement with six bargaining units, each for a one-year term, that resulted in a 10% reduction in total compensation for FY 2010-11 for these bargaining units with 5.0% considered to be ongoing. As each of

A-50 these agreements expires, any further ongoing concessions will be subject to negotiation in future agreements. Additionally, the City Council approved a compensation package for 237 unrepresented employees for FY 2010-11 that includes a 10% reduction in total compensation for FY 2010-11 with 5.0% considered to be ongoing. Also, as discussed above in “Budget – City Budget – Adjustments to the City’s 2010-2011 Adopted Budget”, subsequent to the adoption of the City’s FY 2010-11 Budget, the City and the POA entered into an agreement for FY 2010-11 that avoided layoffs of 70 police officers. The reduction in total compensation agreed to by the POA was approximately 3.82%.

The City was unable to reach agreement with CEO, MEF and ABMEI to reduce their total compensation. In the case of CEO and MEF, their agreements are in effect through FY 2010-11 and their members received a 2.0% wage increase in FY 2010-11. The agreement with ABMEI had expired prior to the City Council’s directive to achieve a 10.0% reduction in total compensation. After ABMEI and the City were unable to reach an agreement, the City Council imposed the terms of its Last, Best and Final Offer on ABMEI that resulted in a 5.0% ongoing reduction in total compensation for FY 2010-11. The implementation of the City’s Last, Best and Final Offer on ABMEI does not result in a memorandum of agreement between the City and ABMEI.

With the restoration of the 70 police officer positions, the 2010-2011 Budget reduced the total number of positions by 713 city-wide. 185 FTEs and 21 part-time employees were laid off, including 49 firefighters.

Status of Current Negotiations

The City is in negotiations with all of the bargaining units for FY 2011-12. On November 18, 2010, the City Council gave direction to the City Manager regarding the negotiations with the bargaining units for the FY 2011-12 agreements as follows: (1) continue, on an ongoing basis, the 10% total compensation reduction for those bargaining units that had agreed to the reduction in FY 2010-11; (2) roll back any general wage increases received in FY 2010-11 and reduce total compensation by 10% on an ongoing basis; (3) include healthcare cost containment in cost sharing, co-pays, health and dental in-lieu and dual coverage as had been previously recommended by the City’s Auditor.

In addition, the City Council has directed the City Manager to negotiate reforms with respect to pension and retiree healthcare benefits, payments of accrued sick leave to employees upon retirement, disability leave supplement, supplemental retiree benefit reserve, and compensation structure. See “Pension Plans – Pension Plan Reform Initiatives – Second Tier Retirement Benefit for New Employees.”

On March 3, 2011, the City and Local 230 reached a tentative agreement for a term retroactive to July 1, 2009 to June 30, 2013. The agreement has been ratified by Local 230’s members and is anticipated to be considered by the City Council on March 22, 2011. Key components of the agreement include (1) a 10% total ongoing compensation reduction commencing as of June 26, 2011, (2) healthcare cost containment in cost sharing, co-pays, health and dental in-lieu and dual coverage effective as of July 1, 2011, (3) reduction of minimum staffing requirements effective upon the City Council’s approval of the agreement, and (4) five-year phase in of retiree healthcare funding commencing on June 26, 2011. Under the tentative agreement, the City will establish a qualified trust by July 1, 2011 for the retiree healthcare funding. See “Pension Plans – Other Postemployment Benefits – Agreement with Local 230 Related to Police and Fire Plan’s Health and Dental Benefits.”

In addition, Local 230 and the City agreed to continue to meet and confer on a number of issues, including pension and retiree health care benefits for both current and future employees.

A-51 Binding Arbitration

In November, 2010, the voters approved a Charter amendment to revise the Charter’s binding arbitration provisions for the City’s public safety bargaining units to, among other things, change the selection process for the neutral arbitrator member of the Arbitration Board (as defined below) and the factors to be weighed by the Arbitration Board in making its award, and to place limits on the Arbitration Board’s authority. The Charter’s provisions governing arbitration, as amended, are described below.

Under the City’s Charter, the City and the bargaining unit each select one arbitrator and jointly select a third neutral arbitrator. The neutral arbitrator serves as the Chair of the three-person arbitration board (“Arbitration Board”). If the City and the bargaining unit cannot reach agreement on the selection of the neutral arbitrator, then either party may request the Superior Court to appoint the third arbitrator who shall be a retired judge of the Superior Court.

At the conclusion of the arbitration hearings, the Arbitration Board shall direct each of the parties to submit, within such time limit as the Board may establish, a last offer of settlement on each of the issues in dispute. The Arbitration Board shall decide each issue by majority vote by selecting whichever last offer of settlement on that issue it finds by the preponderance of the evidence submitted to the Arbitration Board satisfies the factors below, is in the best interest and promotes the welfare of the public, and most nearly conforms with those factors traditionally taken into consideration in the determination of wages, hours, and other terms and conditions of public and private employment, including, but not limited to, changes in the average consumer price index for goods and services, the wages, hours, and other terms and conditions of employment of other employees performing similar services.

The primary factors in decisions regarding compensation shall be the City’s financial condition and, in addition, its ability to pay for employee compensation from on-going revenues without reducing City services. No arbitration award may be issued unless a majority of the Arbitration Board determines, based upon a fair and thorough review of the City’s financial condition and a cost analysis of the parties’ last offers, that the City can meet the cost of the award from on-going revenues without reducing City services. The arbitrators shall also consider and give substantial weight to the rate of increase or decrease of compensation approved by the City Council for other bargaining units.

Additionally, the Arbitration Board cannot issue an award that would (1) increase the projected cost of compensation at a rate that exceeds the rate of increase in revenues from the sales tax, property tax, utility tax and telephone tax averaged over the prior five fiscal years; (2) retroactively increase or decrease compensation, excluding base wages; (3) create a new unfunded liability for which the City would be obligated to pay; or (4) interfere with the discretion of the Police or Fire Chiefs to make operational or staffing decisions.

A-52 Pension Plans

General

All regular full-time City employees participate in one of two public employee retirement plans established pursuant to the City Charter: the Federated City Employees’ Retirement System (the “Federated Plan”) and the Police and Fire Department Retirement Plan (the “Police and Fire Plan” and together with the Federated Plan, the “Pension Plans”). Both Pension Plans are structured as tax qualified defined benefit plans in which retirement benefits are based upon salary and length of service. Both Pension Plans pay fixed cost-of-living increases and all or a portion of health and dental insurance premiums for retirees who qualify.

Each Pension Plan is administered by its own Board of Administration, and day-to-day operations are carried out by the City’s Director of the Retirement Services Department and by the Director’s staff. Participation by covered employees in the Pension Plans is mandatory; employees contribute a percentage of their salaries to the applicable Pension Plan, and currently the City provides funding through contributions equal to a percentage of its full-time employee covered payroll. The total contribution rates for the City and employees are based upon actuarial calculations that take into consideration a number of assumptions, including assumed investment earnings on the valuation assets of the Pension Plans that are used to pay benefits. However, the Boards for both Pension Plans recently expressed support for implementing a fixed dollar contribution “floor” each year as determined by the respective Pension Plan’s actuary as an alternative to the current percent of payroll method, so that future required contributions would be whichever method yields the higher contribution amount.

The information presented hereafter regarding retirement benefits and postretirement healthcare and dental benefits for the Pension Plans excludes assets, liabilities and costs associated with the Supplemental Retiree Benefit Reserves (SRBRs) for the Pension Plans which are separately described below.

The following terms will be used in this section:

Actuarial Accrued Liability (AAL): That portion of the present value of future benefits not provided for by future normal costs. The AAL can be thought of as the value of benefits already earned (under the Pension Plan’s funding method) in exchange for employees’ past service.

Actuarial Value of Assets: In order to reduce the impact of market fluctuations on City contribution rates, market returns above/below the assumed net rates of return are recognized over a five-year period, beginning with the year the returns are first measured. The actuarial value of assets is determined by the Pension Plan’s respective actuary and incorporates a smoothing methodology.

Annual Required Contribution (ARC): The City’s actuarially determined contributions to the Pension Plans have two components, the “normal cost” and the amortized amount of the unfunded actuarial accrued liability (“UAAL”). The amortization of the UAAL represents the current year’s portion of the unfunded actuarial accrued liability costs (i.e., the UAAL) attributable to past years’ employment that is charged to the City.

Market Value of Assets: The market value of assets is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and

A-53 without compulsion. The market value of assets is adjusted for accruals at the end of each fiscal year and is reported in the CAFR of each Pension Plan.

Normal Cost: Normal cost is the portion of the contribution the City will be expected to fund that covers the present value of benefits that are attributable to current service by covered employees under the funding method adopted by each Board. The covered employees also contribute a portion of the normal cost. Currently, the Pension Plans use the entry age normal cost method to calculate the annual normal cost rates of contribution.

Smoothing: When measuring assets for determining the UAAL, many pension plans, including each of the Pension Plans, “smooth” gains and losses to reduce the volatility of contribution rates. Specific smoothing methodologies for the respective plans are discussed below in Actuarial Valuations - Smoothing Methodology.

Unfunded Actuarial Accrued Liability: The UAAL is the excess of the AAL over the actuarial value of assets. The UAAL is an estimate based on a series of assumptions, and that calculation utilizes the demographic data of the Pension Plan’s membership. The UAAL typically results from investment losses and gains and changes in actuarial assumptions, benefit improvements and other experiences that differ from those anticipated by the actuarial assumptions. The purpose of the UAAL calculation is to determine, as of the date of the calculation, the sufficiency of the assets in the Pension Plan for funding, the accrued costs attributable to currently active, vested terminated (i.e., the deferred members) and retired employees. The funding sufficiency is typically expressed as the ratio of the actuarial valuation of assets to the actuarial accrued liabilities. If the actuarially calculated funding level of a plan is less than 100%, the plan has a UAAL.

Recent Governance Changes to Boards of Administration

In August 2010, the City Council adopted ordinances to implement governance changes for the Board of Administration for each Pension Plan to provide for the following: (1) the majority of each Board be members of the public; (2) minimum qualifications for the public members, including education and expertise related to pension plan administration; (3) geographical requirements for the public members; (4) revising the process for removal of Board members and defining the causes for removal, including provisions for removal due to actual, potential or the appearance of a conflict of interest. The membership changes to both Boards eliminate the seats designated for City Council members, and the Civil Service Commission member seat and City’s Administration seat on the Police and Fire Board.

The governance change to the Police and Fire Board increased the size of the Board from seven to nine members and changed the composition to: (1) five public members; (2) one current Fire Department employee and one current Police Department member who are members of the Police and Fire Plan; and (3) one retired Fire Department and one retired Police Department employee who are members of the Police and Fire Plan. The governance changes to the Federated Board maintained the Board’s size of seven members but changed the composition to: (1) four public members; (2) two current City employees who work in different City departments and who are members of the Federated Plan; and (3) one retired member of the Federated Plan.

All seven (7) Federated Board seats are filled. As of the date of this Official Statement, eight (8) of the nine (9) Police and Fire Board seats are filled, with the appointment by the City Council of the final public member to occur after the Police and Fire Board conducts interviews of candidates.

A-54 Recent Tax Filings by Boards of Administration

On January 28, 2011, applications were filed with the Internal Revenue Service (IRS) pursuant to the direction of both Boards of Administration, for a tax compliance statement and favorable determination letter under the streamlined procedures of the Voluntary Correction Program (“VCP”) pursuant to Revenue Procedure 2008-50. Tax qualified governmental plan are not required to file these applications, but receipt of a tax compliance statement provides assurance that the plan submitted for review to the IRS is tax compliant as of the date of the review. In addition, receipt of a favorable determination letter under the VCP provides assurance that the IRS will not pursue sanctions under Internal Revenue Code Section 401(a), 403(b) or 408(p) on account of any plan failures identified in the VCP filing,. The Pension Plans’ VCP filings sought relief for failure to timely adopt certain Plan amendments, including requirements related to compliance with IRC Section 401(h) and Treasury Regulation 1.401-14, which relate to the provisions of medical and dental benefits to retirees and survivors. On February 15, 2011, the City Council adopted an ordinance containing amendments to the Municipal Code as recommended by outside tax counsel for submission to the IRS. Both Pension Plans’ tax applications are currently pending with the IRS and there is no estimated date for commencement of IRS review or decision.

Summary of Pension Plans

A summary of Pension Plan characteristics and actuarial results as of the most recently completed valuation is presented in Table 25. The UAAL and funded ratio calculations provided in the table exclude health, dental and Supplemental Retiree Benefit Reserves assets and benefits for both Pension Plans. As described in Table 26a, over the past nine years, both Pension Plans have experienced steady and significant increases in UAAL, primarily attributable to changes in actuarial assumptions, unfavorable demographic experience and unfavorable investment returns (some of which have not yet been recognized under the Pension Plans’ “smoothing” methodology).

In order to achieve and maintain the appropriate funding status of the Pension Plans, the Pension Plans’ actuaries analyze the respective assets and liabilities of the Pension Plans to determine what level of required annual contributions are needed. The actuarial process can employ various funding methodologies to determine annual contribution levels and currently both Plan’s actuaries employ the Entry Age Normal funding method. Under this method, there are two components to the total required annual contribution: the normal cost, and the unfunded actuarial accrued liability contribution.

Normal costs for both Pension Plans, as governed by the City Charter and the San José Municipal Code, are shared by the City and the active employee members of the Pension Plans with a contribution ratio of 8/11 for the City and 3/11 for the employee. Historically, the City has been responsible for funding the cost of amortizing the majority of the UAAL and other miscellaneous costs of the Pension Plans. In 2010, some employee bargaining groups agreed to pay a portion of the cost of amortizing the UAAL in addition to the employee contribution for the normal costs. See Funding Status and Contribution Rates – Federated Plan Contribution Rates; – Police and Fire Contribution Rates.

The annual contribution costs for the health and dental benefits provided to retirees by both Pension Plans are allocated to both the City and the active employee members. For the Federated Plan, the annual contributions for health costs are shared 50/50 and the dental costs are shared in a ratio of 8/11 for the City and 3/11 for the employee. For the Police and Fire Plan, the annual contribution for health costs is shared 50/50 and the annual contributions for dental costs are shared in a ratio of 75/100 for the City and 25/100 for the employee. The City is in the process of phasing in payment of the annual required contributions for the retiree health and dental benefits provided by both Pension Plans as calculated

A-55 pursuant to Governmental Accounting Board Statements 43 and 45. For more information on the City’s funding of health and dental costs of retirees, see Other Postemployment Benefits.

The actuaries for the Federated Plan have concluded as of June 30, 2010 that employer contribution rates are expected to increase for the next few years as the balance of recent market value investment losses are recognized under the asset smoothing method and as the actuarially assumed net rate of return is decreased to 7.75%. In addition, actuaries for the Police and Fire Plan have concluded as of June 30, 2010 that contribution requirements are expected to increase over the next few years as a result of deferred investment losses under the actuarial value of assets smoothing process, to the extent those losses are not offset by future investment gains. In addition to the plan assessments provided by the Pension Plan’s respective actuaries, on September 29, 2010, the City Auditor published the audit report as discussed below in Pension Plan Reform Initiatives – City Auditor’s Pension Report.

A-56 Table 25 City of San José Summary of Pension Plan Characteristics and Actuarial Results(1) As of June 30, 2010 Federated Plan Police and Fire Plan Membership Active 3,818 2,021 Deferred(2) 732 79 Retired + Beneficiaries 3,111 1,810 Total 7,661 3,910 Covered Payroll $ 300,811,165 $ 251,058,473 Calculation of Unfunded Actuarial Accrued Liability (UAAL)(3) Actuarial Accrued Liability $ 2,510,358,000 $ 3,230,456,034 Actuarial Value of Assets 1,729,414,000 2,576,704,563 UAAL $ 780,944,000 $ 653,751,471 Actuarial Funded Ratio(3) 68.9% 79.8% Employer Cost (% of covered payroll) Retirement Benefits(4) 28.34% 50.44%(6) (7) Health and Dental Benefits(5) 7.16 TBD(6) Total 35.50% TBD Employee Cost (% of covered payroll) Retirement Benefits(4) 4.68% 10.57%(6) Health and Dental Benefits(5) 6.51 TBD(6) Total 11.19% TBD

(1) The contribution rates are the result of actuarial valuation reports and do not reflect contribution shifts associated with various bargaining groups and contribution prefunding described in the Funding Status and Contribution Rates for Retirement Benefits for both Pension Plans. (2) Deferred refers to vested employees who have left City service. (3) UAAL and Funded Ratio calculations exclude health, dental, and Supplemental Retiree Benefit Reserves assets and liabilities for both Pension Plans. (4) For the Police and Fire Plan, the rates for the employer and Employee as shown are a blend of the different rates calculated for Police officer Employees and Fire department Employees. Retirement contribution rates for the Federated Plan reflect the second year of a three-year phase-in of economic assumptions changes applicable for the June 30, 2010 actuarial valuation. (5) The Federated and Police and Fire contribution rates for health and dental benefits only provide partial funding of the liabilities for these benefits. See “Other Postemployment Benefits – Contribution Rates for Phase-In of ARC for Federated Plan” and “Other Postemployment Benefits – Contribution Rates for Health and Dental Benefits for the Police and Fire Plan” for a discussion of increased contribution rates for health and dental benefits starting July 1, 2009 for Police Employees. (6) Represents payroll based weighted average of Board adopted separate rates for Police Employees and Fire Employees. Police and Fire Health and Dental Benefits rates are pending receipt and approval of valuations from the actuary for the Police and Fire Plan. It is anticipated that the reports related to health and dental contributions and GASB 43/45 health and dental valuation will be presented to the Police and Fire Board at its May 2011 meeting and June 2011 meeting, respectively. (7) Will be offset by 0.49% on account of a transfer of $1.3 million from the Supplemental Retiree Benefit Reserve to the valuation assets which was applied to reduce the City’s required contributions, but only for FY 2011-12. Sources: Report of the Actuarial Valuation of Federated City Employees’ Retirement System as of June 30, 2010, dated December 3, 2010 and City of San José Police and Fire Department Retirement Plan Actuarial Valuation Report as of June 30, 2010, dated December 22, 2010. Report of the Actuarial Valuation of Federated City Employees’ Retiree Healthcare Plan as of June 30, 2010, dated January 7, 2011 and City of San José Police and Fire Department Retire Medical and Dental Actuarial Valuation Report as of June 30, 2010, dated March 1, 2010.

A-57 Table 26a below shows the historical dollar amount of the UAAL for both Pension Plans as of the last six valuation dates, calculated using the actuarial (smoothed) value of assets.

Table 26a City of San José Historical Retirement Plan UAAL and Funded Ratio Federated Plan Police/Fire Plan Total Fiscal Year UAAL Funded Ratio UAAL Funded Ratio UAAL 6/30/2001 $ 12,189,000 99% $(221,080,000) 115% $(208,891,000) 6/30/2003 30,972,000 98% (3,087,000) 100% 27,885,000 6/30/2005 326,916,000 81% 44,342,000 98% 371,258,000 6/30/2007 338,092,000 83% 6,596,000 100% 344,688,000 6/30/2009 729,567,000 71% 393,913,000 87% 1,123,480,000 6/30/2010 780,944,000 69% 653,751,000 80% 1,434,695,000

Source: City of San José, Retirement Services Department.

Table 26b below shows the historical dollar amount of the unfunded liability and the funded ratio for both Pension Plans as of the last six valuation dates, calculated using the market value of assets.

Table 26b City of San José Historical Retirement Plan Market Value of Assets Unfunded Liability and Market Value Funded Ratio Federated Plan Police/Fire Plan Total Unfunded Unfunded Unfunded Fiscal Year Liability Funded Ratio Liability Funded Ratio Liability 6/30/2001 $ (41,256,000) 103.8% $ (170,577,000) 111.4% $ (211,833,000) 6/30/2003 176,958,000 86.5% 191,103,000 89.5% 368,061,000 6/30/2005 293,366,000 82.9% (17,110,000) 100.8% 276,256,000 6/30/2007 213,136,000 89.1% (282,257,000) 111.9% (69,121,000) 6/30/2009 1,149,303,000 53.8% 994,350,000 66.4% 2,143,653,000 6/30/2010 997,556,000 60.3% 999,749,000 69.1% 1,997,305,000

Source: City of San José, Retirement Services Department.

A-58 As shown in Table 26c below, the Pension Plans’ actuaries initiated Health and Dental actuarial studies for both Pension Plans in 2006.

Table 26c City of San José Historical Health and Dental Plan UAAL and Funded Ratio Federated Police/Fire Health and Dental Plan Health and Dental Plan Total Fiscal Year UAAL Funded Ratio UAAL Funded Ratio UAAL 6/30/2006 $ 621,651,000 12% $ 812,836,000 5% $1,434,487,000 6/30/2007 520,148,000 16% 620,834,000 7% 1,140,982,000 6/30/2009 710,884,000 11% 705,987,000 7% 1,416,871,000 6/30/2010 818,360,000 12% Not available(1) Not available(1) TBD(1)

(1) Police and Fire Health and Dental Benefits rates are pending receipt and approval of valuations from the actuary for the Police and Fire Plan. It is anticipated that the reports related to health and dental contributions and GASB 43/45 health and dental valuation will be presented to the Police and Fire Board at its May 2011 meeting and June 2011 meeting, respectively. Source: City of San José, Retirement Services Department.

As shown in Tables 27a, 27b and 27c, the City’s contribution to the ARC has recently been an increasing percentage of the City’s covered payroll. The employee contribution is also growing.

Table 27a City of San José Retirement and Health and Dental Contributions (%) Federated Plan Employer Cost Employee Cost Fiscal Year (% of covered payroll) (% of covered payroll) 1999-00 16.52 5.31 2000-01 16.09 4.76 2001-02 17.40 4.96 2002-03 15.20 5.08 2003-04 15.20 5.08 2004-05 17.12 6.06 2005-06 17.12 6.06 2006-07 21.98 7.58 2007-08 21.98 7.58 2008-09 23.56 8.93 2009-10 24.01 9.35 2010-11 29.59 10.30 2011-12 35.50 11.19

Source: City of San José, Retirement Services Department.

A-59 Table 27b City of San José Retirement and Health and Dental Contributions (%) Police and Fire Plan Employer Cost Employee Cost Fiscal Year (% of covered payroll) (% of covered payroll) 1999-00 20.11(1) 10.22(1) 2000-01 15.70 9.79 2001-02 15.70 9.79 2002-03 14.22 10.25 2003-04 14.22 10.25 2004-05 24.59 11.16 2005-06 25.04 11.16 2006-07 28.51(2) 25.22(3) 11.67(2) 11.26(3) 2007-08 28.90 25.61 11.67 11.26 2008-09 25.80 28.31 11.96 12.40 2009-10 26.89 28.31 12.96 12.40 2010-11 45.03 44.61 15.57 13.70 2011-12(4) TBD TBD TBD TBD

(1) Combined rate for Police and Fire Employees (2) Rate for Police Employees (3) Rate for Fire Employees (4) Police and Fire Health and Dental Benefits rates are pending receipt and approval of valuations from the actuary for the Police and Fire Plan. It is anticipated that the reports related to health and dental contributions and GASB 43/45 health and dental valuation will be presented to the Police and Fire Board at its May 2011 meeting and June 2011 meeting, respectively. Source: City of San José, Retirement Services Department.

Table 27c City of San José Retirement and Health and Dental Contributions ($) Fiscal Year Federated Plan Police/Fire Plan Total 2006-07 $ 61,732,000 $ 55,707,000 $ 117,439,000 2007-08 66,518,000 66,990,000 133,508,000 2008-09 73,388,000 62,991,000 136,379,000 2009-10 71,593,000 63,599,000 135,192,000 2010-11 66,986,000 89,144,000 156,130,000 2011-12(1) TBD TBD TBD

In addition to the increases in contribution rates illustrated in Tables 27a through 27c, it is projected that annual dollar contributions to the Pension Plans will continue to increase through FY 2015-16. Total City contributions from all funds are estimated to exceed $1.7 billion over the next five years and projected to increase to $400.7 million in FY 20115-16. The total anticipated City contribution levels incorporated in the Five Year Forecast for the General Fund are based on actuarial projections provided by the Retirement Services Department. The actuarial projections include estimates of the additional costs due to deferred

A-60 asset losses under the Pension Plans’ actuarial asset smoothing processes and the additional future costs associated with the five-year phase in of contributions to the Retiree Health and Dental Plans. Table 27d below represents anticipated contribution levels, derived from the total projected estimates of contribution costs, for the General Fund as projected by the City’s Budget Office in the Five Year Forecast. As depicted in the table below, during the Forecast period, General Fund retirement and health and dental costs are projected to increase to $303.9 for FY 2015-16, representing an increase of 58% from FY 2011- 12. For FY 2015-16, projected retirement and health and dental costs would represent 28% of the total base expenditure budget compared to 21% for FY 2011-12. These contribution rates assume the current staffing level of the Forecast; however, in order to close the shortfall in FY 2011-12, it will be necessary to reduce staffing levels and therefore, it will be necessary to increase contribution rates for the remaining positions to generate the fixed contributions. It should be noted that the contribution amounts in Table 27d reflect the “floor” methodology and the presumption that the retirement (but not health and dental) contributions for the Police and Fire Plan effective July 1, 2012 and later would be determined using a 7.50% actuarial assumed net investment rate of return.

As discussed below, the City Council has not taken action to amend the Municipal Code in order to implement the “floor” methodology. See Funding Status and Contribution Rates – Federated Plan Contribution Rates; – Police and Fire Contribution Rates.

Table 27d City of San José Projected General Fund Retirement and Health and Dental Contributions(1) (in millions) Fiscal Year Federated Plan Police/Fire Plan Total 2012-13 $ 65,100,000 $ 170,500,000 $ 235,600,000 2013-14 78,100,000 194,400,000 272,500,000 2014-15 84,700,000 209,900,000 294,600,000 2015-16 87,300,000 216,500,000 303,800,000

(1) Does not include retirement costs associated with part-time benefited employees and the Mayor and Council who do not participate in the City’s Pension Plans. Source: City of San José 2012-2016 Five-Year Forecast and Revenue Projections.

Service Retirement Formulas

The service retirement formulas for both the Police and Fire Plan and the Federated Plan are described below.

Federated Plan. An employee may retire at age 55 with five or more years of service or at any age with 30 years of service. The calculation of the retirement annuity is Final Average Salary (defined below) multiplied by 2.5% per year of service (maximum benefit is 75% of Final Average Salary). For Federated Plan members who retire on or after July 1, 2001, Final Average Salary is the average annual compensation earnable for the highest 12 consecutive months, not to exceed 108% of the second highest 12 consecutive months. For Federated Plan members who retired prior to July 1, 2001, Final Average Salary is the highest compensation earnable during any three consecutive years of service.

Police and Fire Plan. An employee who reaches normal retirement age of 55 with 20 years of service; an employee of age 50 with 25 years of service; an employee of any age with 30 years of service; or an employee of age 70 with no service requirement is entitled to a monthly retirement allowance. For employees who retired prior to February 2, 1996, the allowance is equal to Final Average Salary (defined

A-61 below) multiplied by 2.5%, multiplied by years of service up to 30 years (maximum benefit is 75% of Final Average Salary.) The allowance formula has been modified three (3) times since 1996. The current monthly allowance for members with less than 20 years of service is Final Average Salary multiplied by 2.5% for each year of service. Effective July 1, 2006, the current monthly allowance for police members of the Plan with 20 or more years of service is equal to Final Average Salary multiplied by 2.5% for the first 20 years of service, plus 4% of Final Average Salary for each year of service thereafter (maximum benefit is 90% of Final Average Salary). For fire members of the Plan with 20 or more years of service, the current monthly allowance (effective July 1, 2008) is equal to Final Average Salary multiplied by 3% for each year of service (subject to a maximum of 90% of Final Average Salary). Final Average Salary is defined as the highest 12 consecutive months of compensation, not to exceed 108% of compensation paid to the extent that any part of the pension that is based on compensation earned during the last year of service. Final Average Salary excludes overtime pay and expense allowances.

Actuarial Valuations

Prior to FY 2010-11 actuarial valuations for the retirement benefits of both Pension Plans were prepared on a biennial basis. Commencing with the June 30, 2009 actuarial valuations, the valuations for the retirement and health and dental benefits of both Pension Plans will be prepared on an annual basis, and, in each actuarial valuation for each of the Pension Plans, the corresponding actuary recommends contribution rates for the fiscal year beginning after the completion of that actuarial valuation. When approved by the respective boards of administration of the Pension Plans, these become the City’s and the employees’ legally required contribution rates for the fiscal year beginning one year after the valuation date. For example, the recommended contributions contained in each of the actuarial reports for the Pension Plans as of June 30, 2010 apply to contributions by the City and the employees for the fiscal year beginning July 1, 2011.

Actuarially Assumed Investment Rates of Return. The net rate of return that is assumed by each Pension Plan’s actuary represents the rate of return on the applicable Pension Plan’s investments that together with current assets and future contributions would generate sufficient funds to pay benefits. The Board for each Pension Plan has approved reducing the net investment rate of return for purposes of the respective Pension Plan’s actuarial valuations. For the June 30, 2009 actuarial valuation, the Federated Board adopted a phase-in of the actuarially assumed net investment rate of return from 8.25% to 7.75%. For the June 30, 2010 actuarial valuation, the Police and Fire Board approved reducing the actuarially assumed net investment rate of return from 8% to 7.75% with no phase-in period. In addition, the actuary for each respective Pension Plan has recommended that the actuarial assumed net investment rate of return for each respective Pension Plan should be lowered to 7.50%. These recommendations are anticipated to be scheduled for discussion by the respective Boards in the later half of FY 2010-11.

For the June 30, 2009 actuarial valuation the Federated Plan valuation report and the ARC were prepared in accordance with the standards of the Governmental Accounting Standards Board (GASB) using an actuarially assumed net investment rate of return of 7.75%. In conjunction with that change, the Federated Plan’s actuary provided a contribution schedule for the 2010-11 fiscal year which implemented a five year phase-in of the dollar impact of the change from 8.25% to 7.75% (not an incremental reduction in the Plan’s assumed net investment rate of return). The City fully paid the contribution amount for FY 2010-11 as presented in the contribution schedule prepared by the Federated Plan’s actuary and approved by the Federated Board.

It is the City’s policy to pay the ARC for its Pension Plans but due to these changes in actuarial methodology the amount of the City’s payment to the Federated Plan for FY 2010-11 was less than the GASB ARC as presented in the actuarial valuation report for the Federated Plan dated as of June 30,

A-62 2009. In order to address this situation, in February 2010, the Federated Board directed that the phase in to a 7.75% assumed net investment rate of return be implemented as an incremental change in the assumed net investment rate of return as opposed to the dollar impact methodology previously utilized. Additionally, the Federated Board adopted a faster phase-in of the actuarially assumed net investment rate of return resulting in full implementation of the 7.75% actuarially assumed net investment rate of return for the valuation to be dated as of June 30, 2011. As a result of the actions taken by the Federated Board, the actuarially assumed net investment rate of return for the June 30, 2010 valuation was 7.95%.

In addition to the net rate of return necessary to provide sufficient funding for benefits, the investment and administrative cost associated with maintenance of the Federated Pension Plan and the SRBR benefits is estimated to be 0.90% and the investment and administrative cost associated with maintenance of the Police and Fire Pension Plan and SRBR benefits is estimated to be 0.75%. Consequently, the Retirement Services Department has estimated that the investment portfolio for the Federated Plan and the Police and Fire Plan need to earn the gross rate of 8.85% and 8.50%, respectively, in order to pay investment manager fees, administrative expenses and benefits not reserved for, such as the Supplemental Retiree Benefit Reserve transfers. In general, if the Pension Plans do not earn the gross rates of return, then the UAAL for each Plan would increase as a result. The investment portfolio must earn the gross rates in order to have the net rate available for benefit payments, i.e. in order to break even.

Potential investment returns and the subsequent risk associated with those returns are partially a function of the underlying assets of the respective Plans. Each Pension Plan Board, as part of its fiduciary responsibilities, adopts asset allocation targets commensurate with the plans diversification goals and risk tolerance. For further information on plan assets and allocation refer to the Federated City Employees’ Retirement System CAFR for the year ended June 30, 2010 and the Police and Fire Department Retirement Plan CAFR for the year ended June 30, 2010. In addition to the Plan CAFRs the investment policies of both Pension Plans provide additional information on allowable asset classes and constraints.

During the past two years, the Boards for both Pension Plans have received projections from their respective investment consultants for the expected net rates of return over a 20 year period based on the respective approved asset allocations. In January 2010, the investment consultant for the Federated Plan, provided its projection of the expected net rate of return of 7.00%. In August 2009, the investment consultant for the Police and Fire Plan provided its projection of the expected net rate of return of 6.7%.

In addition, as shown in Table 28 below, in November 2010, the Retirement Services Department provided the Boards for both Pension Plans, the staff’s projections for expected net rates of return for a 30 year period that was based on the approved asset allocations for each of the Pension Plans. As shown in Table 28, the expected net rates of return projected by the Retirement Services Department staff are significantly below the net actuarially assumed investment rates of return and the gross investment rate of return that Retirement Services Department staff has estimated to be required in order to pay the benefits that have not been reserved for and the expenses of the Pension Plans. If the projections of net investment rates of returns made by the Retirement Services Department staff and the Pension Plans’ investment consultants were to come to fruition, then the UAAL for both Plans would increase due to the disparity between actual investment results and actuarially assumed investment rates of return.

A-63 Table 28 City of San José Assumed and Projected Investment Rates of Return Actuarially Assumed Investment Rate of Investment Rate of Forward Looking Expected Rate Return (Net) Return (Gross) (5) of Return (Net) Federated Plan 7.95%(1) 8.85% 6.70%(3) Police and Fire Plan 7.75%(2) 8.50% 6.75%(4)

(1) Report of the Actuarial Valuation of Federated City Employees’ Retirement System as of June 30, 2010, dated December 3, 2010 and City of San José Police and Fire Department Retirement Plan Actuarial Valuation Report as of June 30, 2010, dated December 22, 2010. (2) City of San José Police and Fire Department Retirement Plan Actuarial Valuation Report as of June 30, 2010, dated December 22, 2010 (3) 30 year projection based on Retirement Services Department staff memo dated November 4, 2010 using the approved asset allocation. (4) 30 year projection based on Retirement Services Department staff memo dated November 23, 2010 using the approved asset allocation. (5) The Investment Rate of Return is equal to the Actuarially Assumed Investment Rate of Return added to the investment and administrative cost associated with maintenance of the Federated Plan and the SRBR benefits estimated to be 0.90% and the investment and administrative cost associated with maintenance of the Police and Fire Plan and SRBR benefits estimated to be 0.75%. Source: City of San José, Retirement Services Department.

“Smoothing” Methodology. When measuring assets for determining the UAAL, many pension plans, including each of the Pension Plans, “smooth” gains and losses to reduce the volatility of contribution rates. If in the one-year period prior to the annual actuarial valuation the actual net investment return on the Pension Plan’s market value of assets is lower or higher than the actuarial assumed net rate of return (7.95% for the Federated Plan and 7.75% for the Police and Fire Plan as of June 30, 2010), then 20% of the shortfall or excess is recognized each year when determining the recommended contribution rates for that actuarial valuation. This results in the smoothing or spreading of that shortfall or excess over a five- year period. The impact of this will result in “smoothed” assets which are lower or higher than the market value of assets depending upon whether the remaining amount to be smoothed is either a net gain or a net loss.

For the Police and Fire Plan, past practice has been to limit the smoothed assets to be no greater than 120% and no less than 80% of the market value of assets. The market value range from 80% to 120% is referred to as a “market value corridor” and is currently only applied to the Police and Fire Plan. Under this practice, any investment gains or losses that would cause the smoothed assets to fall outside of this 80-120% market value corridor would be recognized immediately rather than be smoothed over the next five years. As of February 4, 2010, the Police and Fire Board increased the market value corridor to 70- 130% only for the June 30, 2009 valuation in order to recognize the market rebound that had occurred as of the date of the Board action and to continue its policy of minimizing volatility of contribution rates.

As of June 30, 2010, as a consequence of smoothing, there were approximately $244.9 million in deferred losses yet to be realized for the Federated Pension Plan. The Federated Health and Dental Plan valuation uses the market value of assets and there is no smoothing of asset gains and losses. Similarly for the Police and Fire Plan, there were approximately $353.8 million in deferred losses ($346.0 million pension benefits plus $7.8 million health and dental benefits). It is anticipated that future actuarial valuations will incorporate investment portfolio performance and both gains and losses will be “smoothed” as described

A-64 above. If the $244.9 million in deferred asset losses for the Federated Plan were to be recognized immediately and amortized, it would result in an increase in annual required contributions of $18.6 million for FY 2011-12. If the $346.0 million in deferred asset losses for the Police and Fire Plan were to be recognized immediately and amortized, it would result in an increase in annual required contributions of $28.5 million for FY 2011-12.

Amortization Method and Period. Various plans use different amortization periods for paying off (or “amortizing”) a UAAL. Prior to June 30, 2009, the Federated Plan used a 30-year open or rolling amortization period which meant that in each actuarial valuation, the entire UAAL was reamortized over a new 30-year period following each valuation period. Subsequent to June 30, 2009, the UAAL for the Federated Plan as of June 30, 2009 is being amortized over a 30-year closed period. Changes in the UAAL in future years will be amortized over a 20-year closed period, with a separate amortization schedule set up for each change in UAAL in each year for both pension and health and dental benefits.

With respect to all unfunded liabilities attributable to periods on or before June 30, 2003, the Police and Fire Plan uses a closed amortization period which ends on June 30, 2017. With respect to all unfunded liabilities attributable to periods after June 30, 2003, the Police and Fire Plan amortizes such unfunded liabilities through a layered amortization method in which unfunded liabilities experienced between annual valuation dates are amortized over a period ending 16 years following each applicable valuation date. The contribution to the UAAL as of the end of a given year (as reflected in an actuarial valuation report) is amortized as a level percentage of payroll.

Actuarial Methods and Assumptions. Investors are cautioned that, in considering the amount of the UAAL, the funded ratio, and the calculations of normal cost as reported by the Pension Plans and the resulting amounts of required contributions by the City, this is “forward looking” information. Such “forward looking” information reflects the judgment of the Board of Administration of the respective Pension Plans and their actuaries as to the amount of assets which the Pension Plan will be required to accumulate to fund future benefits over the lives of the currently active employees, vested terminated employees, existing retired employees, and their beneficiaries. These judgments are based upon a variety of assumptions, one or more of which may prove to be inaccurate or that may change with the future experience of the Pension Plans. The actuarial methods and assumptions could be changed by the Boards of the respective Pension Plans at anytime. Such changes could cause the City’s obligations to the Pension Plans to be higher or lower in any particular year. The Retirement Services Department have identified potential assumption changes for future consideration by the applicable Board including: modifications to amortization schedule for both Plans; modifications to mortality table for the Police and Fire Plan; modification to projected merit increases for the Police and Fire Plan; modification to the net investment rate of return for both Pension Plans; and modification to projected retirements for the Police and Fire Plan. The aforementioned potential assumption changes would all result in the City’s obligations increasing. The more significant actuarial methods and assumptions used in the calculations of employer and employee contributions for the retirement benefits of each Pension Plan are summarized in Table 29.

A-65 Table 29 City of San José Summary of Key Actuarial Methods and Assumptions Federated Plan Police and Fire Plan (June 30, 2010) (June 30, 2010) Actuarial Methods Actuarial Cost Method Entry Age Normal Cost Method Entry Age Normal Cost Method Amortization Method Level Percentage of Payroll Level Percentage of Payroll Amortization Period 30/20 layered closed Varies(1) Asset Valuation Method 5-year Smoothed Market (without 5-year Smoothed Market (with an corridor) 80%-120% corridor, adjusted to 70%-130% only for the June 30, 2009 valuation) Actuarial Assumptions Investment Annual Net Rate 7.95% 7.75% of Return(2) Annual Fixed 3.0% 3.0% Cost-of-Living Adjustments for Retirees Salary Increases Salary increase rates are based on years Salary increase rates are based on of service as described in the Federated years of service as described in the Experience Study as follows: The base Police and Fire Experience Study as annual rate of salary increase is follows: The base annual rate of comprised of a 3.90% inflation rate. salary increase is comprised of a This is added to a rate increase for 3.50% inflation rate plus 0.75% for merit/longevity for the first 5 years of wage inflation for a total rate of service ranging from 5.75% to 0.25% at 4.25%. This is added to a rate the 5th year of service. increase for merit/promotion set at 5.50% for the first five years of service; 2.50% for years 6 and 7; and 1.75% for year 8 and beyond.

Active Service, Withdrawal, Based on June 30, 2009 Experience Based on the June 30, 2009 Death, Disability Retirement Study. Experience Analysis.

Postretirement Mortality 1994 Group Annuity Mortality Table RP-2000 combined healthy mortality (non-disabled retirees) (sex distinct), set back three years for table for males with no collar males and one year for females. adjustment, projected for 10 years, set back four years. RP-2000 combined healthy mortality table for females with no collar adjustment, projected for 10 years, with no age set-back.

(1) With respect to all unfunded liabilities attributable to periods on or before June 30, 2003, the Police and Fire Plan uses an amortization period which ends on June 30, 2017. With respect to all unfunded liabilities attributable to periods after June 30, 2003, the Police and Fire Plan amortizes such unfunded liabilities through a layered amortization method in which unfunded liabilities experienced between annual valuation dates are amortized over a period ending 16 years following each applicable valuation date. (2) The Retirement Services Department has clarified that, for both Pension Plans, the assumed net rate of return is a net rate of return and does not take into account the amounts necessary to fund the administrative, operating expenses, investment management fees or costs associated with the respective SRBR for each Pension Plan. Sources: Report of the Actuarial Valuation of Federated City Employees’ Retirement System as of June 30, 2010, dated December 3, 2010; and City of San José Police and Fire Department Retirement Plan Actuarial Valuation Report as of June 30, 2010, dated December 22, 2010.

A-66 Funding Status and Contribution Rates

A description of the current funding status of the retirement benefits provided by both Pension Plans is summarized below. As set forth above, the funded ratio for each Pension Plan does not take into account the assets and liabilities related to health and dental benefits or the SRBR for such Pension Plan. The Schedules of the Funding Progress for both Pension Plans are set forth in the Required Supplementary Information Section of the City’s Basic Financial Statements for the Fiscal Year Ended June 30, 2010. However, it is important to note that the Funding Progress schedules referred to in the City’s Basic Financial Statements for the Fiscal Year Ended June 30, 2010, attached as Appendix B to this Official Statement, reflect actuarial data as of June 30, 2009. The most recent actuarial valuations for the Federated Plan and the Police and Fire Plan, both as of June 30, 2010, represent the current data available for the Funding Progress for both Pension Plans.

The Federated Plan Retirement Benefits. The most recent actuarial valuation of the Federated Plan, as of June 30, 2010, was performed by Cheiron (the “Federated Plan Actuary”) and summarized by the Federated Plan Actuary in its report dated December 3, 2010, entitled: “Federated City Employees Retirement System June 30, 2010 Actuarial Valuation” (“2010 Federated Actuarial Report”). In the 2010 Federated Actuarial Report, the Federated Plan Actuary concluded that the funded ratio for the actuarial value of assets for the Federated Plan as of June 30, 2010, was 68.9%, down from 70.7% as of June 30, 2009. The net return on the market value of assets for the period from July 1, 2009 to June 30, 2010 was better-than-expected. However, on an actuarial asset value basis, the smoothing in of the less-than- expected returns for the period from July 1, 2007 to June 30, 2009 was the primary reason for the decrease in the funded ratio. Since 1993, the funded ratio has ranged from the current low of 68.9% as of June 30, 2010, to a high of 98.9% as of June 30, 2001. As of June 30, 2010, the Federated Plan had a UAAL of approximately $780.9 million as compared to a UAAL of $729.6 million in the Actuarial Report completed as of June 30, 2009. As of June 30, 2010, the Federated Plan had an actuarial value of assets, exclusive of assets in the health and dental reserve and the SRBR reserve, equal to $1,729.4 million and actuarial accrued liabilities of $2,510.4 million. For the period ending June 30, 2010, the funded ratio based on the market value of assets was 60.3%, up from 53.8% as of June 30, 2009. The Federated Plan has deferred losses of $244.9 million (16.2% of market value of assets) as of June 30, 2010. If deferred losses aren’t offset by future investment gains or other favorable experience, the recognition of the $244.9 million in deferred market losses is expected to have a significant impact on the Plan’s future funded ratio and contribution rate requirements.

Federated Experience Study. On November 3, 2009, Gabriel, Roeder, Smith & Company (GRS), the previous actuary for the Federated Plan delivered its Report of an Experience Investigation (the “Federated Experience Study”) and reported findings and recommendations from its investigation of the experience of the Federated Plan during the period from July 1, 2003 through June 30, 2009. Based on this investigation, GRS recommended several changes to the actuarial assumptions used to prepare the retirement valuation. The current assumptions were approved by the Board of the Federated Plan and implemented in the 2009 Federated Actuarial Report. The actuarial assumption changes approved by the Board included phasing in the impact on contribution rates of the following over a five year period: a reduction in the investment net rate of return assumption from 8.25%, net of expenses, to 7.75%, net of expenses; a reduction in the underlying inflation assumption from 4.0% to 3.67%; a reduction in the payroll growth assumption from 4.00% to 3.83%; and a reduction in the ultimate salary increase assumption from 4.25% to 4.08%. The impact of these economic assumption changes was to increase the actuarial accrued liability by $141.5 million. The Board also approved immediate implementation of demographic assumption changes to include a longer life expectancy for post-retirement mortality calculations. The impact of these changes was to increase the actuarial accrued liability by $87.3 million. The Federated Plan Actuary is scheduled to complete an updated Experience Study as of June 30, 2011.

A-67 As part of Board’s methodology change to phase in the actuarially assumed net rate of return to 7.75% over a revised three-year period (discussed in the Summary of Pension Plans section), the Federated Plan Actuary revised the payroll growth assumption from 3.83% to 3.90% and the ultimate salary increase assumption from 4.08% to 4.15% for the June 30, 2010 actuarial valuation only.

Federated Plan Contribution Rates. Table 30 below summarizes the contribution rates for both the City and the employee members of the Federated Plan for both retirement benefits and health and dental care benefits, as recommended in the Federated Actuarial Report dated as of June 30, 2009, and adopted by the Federated Board for FY 2010-2011. Table 30 also summarizes the contribution rates, adopted by the Federated Retirement Board for FY 2011-12, based on the 2010 Federated Actuarial Report, and the Board’s revised decision to adopt a revised three-year phase in period (ending with the June 30, 2011 actuarial valuation) for the change in actuarially assumed net rate of return to 7.75%. The retirement contribution rates shown reflect the second year of the revised phase in policy.

After the 2010-2011 retirement contribution rates were approved by the Federated Board, several of the City’s bargaining units agreed to make additional employee contributions in order to reduce the City’s required contributions toward the Federated Plan’s UAAL. In June 2010, the City reached agreements with AEA, CAMP, OE#3, AMSP and IBEW to have employees covered under these agreements make additional one-time retirement contributions, equal to 10.83% of pensionable compensation, effective June 27, 2010 through June 25, 2011. These bargaining units also agreed to make a portion of these additional contributions, ranging from 7.30% to 7.75% of pensionable compensation, continue on an ongoing basis. These additional employee contributions are being made on a pre-tax basis pursuant to IRS Code Section 414(h)(2) and are subject to withdrawal, return and redeposit in the same manner as any other employee pension contributions. However, as the AEA, CAMP, OE#3, AMSP and IBEW collective bargaining agreements will expire on June 30, 2011, the on-going contributions will be subject to renegotiation. It is unknown at this time whether further additional contributions to the UAAL will be agreed to by employees.

The required contributions rates determined by the Federated Plan Actuary anticipate that the City will make contributions on a bi-weekly basis throughout the fiscal year. The City has elected since FY 2008- 09 to “prefund” all or part of its total annual required contributions to the Plan at the beginning of each fiscal year and the Federated Plan’s Actuary applies an interest discount to the required contributions to account for the fact that contributions are made at the beginning of the year instead of throughout the year. The “prefunded” annual contributions are made on the basis of estimated bi-weekly pay for the fiscal year and are trued up at the end of the fiscal year based on actual bi-weekly payroll. It is anticipated that the City will elect to prefund its total annual required contributions for FY 2011-12.

In early 2011, the Federated Board took action to address unexpected shortfalls in contributions that may result when payroll does not grow at the rate assumed by the actuaries. The Board adopted a resolution recommending that the City Council amend the Municipal Code to set the ARC to be the greater of the dollar amount reported in the actuarial valuation (“the floor”) and the dollar amount determined by applying the percent of payroll reported in the actuarial valuation to the actual payroll for the fiscal year. Council has yet to take action but if adopted by the Council, the floor for FY 2011-12 would be established as a normal cost contribution of $40,639,000 and a UAAL contribution of $49,636,000 for a total floor contribution of $90,275,000. As of the date of this Official Statement, the Council has not taken action on the Board’s recommendation.

A-68 Table 30 City of San José Federated City Employees’ Retirement Plan Contribution Rates(1) (As Percentage of Covered Payroll) June 30, 2009 June 30, 2010 Employer Cost(2) Retirement Normal Cost Rate 12.35% 12.76% Rate of Contribution to UAAL 10.83 15.58 Total Retirement 23.18% 28.34% Health and Dental(3) 6.41 7.16 29.59% 35.50% Employee Cost(2) Retirement 4.54% 4.68% Health and Dental(3) 5.76 6.51 10.30% 11.19%

Total Cost 39.89% 46.69%

(1) The contribution rates are the result of actuarial valuation reports but do not reflect subsequent contribution shifts associated with various bargaining groups and contribution prefunding described above in Funding Status and Contribution Rates. (2) Represents a percentage of covered payroll. The total covered payroll for employees covered by the Federated Plan as of June 30, 2009 was $323,020,387 and as of June 30, 2010, was $300,811,165. (3) The contribution rates for health and dental benefits only provide partial funding of the liabilities for these benefits. See “Other Postemployment Benefits – Contribution Rates for Phase-In of ARC for Federated Plan” for a discussion of increased contribution rates for health and dental benefits as of FY 2009-10. Sources: Reports of the Actuarial Valuation of the San José Federated City Employee’s Retirement System as of June 30, 2009, dated March 1, 2010 and June 30, 2010, dated December 3, 2010. Report of the Actuarial Valuation of the City of San Jose Federated Retiree Healthcare Plan as of June 30, 2009, dated March 8, 2010 and the Report of the Actuarial Valuation of Federated City Employees’ Retiree Healthcare Plan as of June 30, 2010, dated January 7, 2011 .

Police and Fire Department Retirement Plan. The most recent actuarial valuation of the Police and Fire Plan, as of June 30, 2010, was performed by The Segal Company (the “Police and Fire Plan Actuary” or “Segal”) and summarized by the Police and Fire Plan Actuary in its report dated December 22, 2010 (the “2010 Police and Fire Report”). In the 2010 Police and Fire Report, the Police and Fire Plan Actuary concluded that the funded ratio of the Police and Fire Plan as of June 30, 2010, was 79.8%, down from 86.7% as of June 30, 2009. Over the last ten years, the funded ratio has ranged from the current low of 79.8% as of June 30, 2010, to a high of 114.8% as of June 30, 2001, taking into account all benefit improvements that have occurred over this time period. As of June 30, 2010, the Police and Fire Plan had a UAAL of approximately $653.8 million as compared to the UAAL of approximately $393.9 million in the Actuarial Report completed as of June 30, 2009. This decrease in the funded ratio, and increase in UAAL, are primarily attributable to changes in actuarial assumptions and unfavorable investment returns during the two year period ended June 30, 2009. As of June 30, 2010, the Police and Fire Plan had an actuarial value of pension assets equal to approximately $2.577 billion, not including the Police and Fire SRBR, and actuarial accrued liabilities of approximately $3.230 billion. As of June 30, 2010, the Police and Fire Plan had a total unrecognized investment loss of approximately $353.8 million ($346.0 million pension benefits plus $7.8 million health and dental benefits) for both pension and health and dental benefits. For the period ending June 30, 2010, the funded ratio based on the market value of assets was 69.1% for the Pension Plan, up from 66.4% as of June 30, 2009. The Police and Fire Plan Actuary noted

A-69 that deferred losses represent 15% of the market value of assets as of June 30, 2010. If deferred losses aren’t offset by future investment gains or other favorable experience, the recognition of the $353.8 million in deferred market losses is expected to have a significant impact on the Police and Fire Plan’s future funded percentage and contribution rate requirements.

Police and Fire Experience Study. On October 26, 2009, the Police and Fire Plan Actuary issued its Actuarial Experience Study (the “Police and Fire Actuarial Experience Study”) for the period July 1, 2005 through June 30, 2009. The study utilized census data prepared for the four-year period ending June 30, 2009. Based on this investigation, the Police and Fire Plan Actuary recommended several changes to the actuarial assumptions used to prepare the retirement valuation. The actuarial recommended demographic (non-economic) assumption changes were approved by the Police and Fire Board on February 4, 2010. Approved changes included establishing a higher retirement rate for Police, higher disability rates for Fire, and an increase of one year for life expectancy for mortality rates, among other changes. Combined, the assumption changes accounted for an increase in the actuarial accrued liability of $145.4 million as of June 30, 2009. In addition to increases in the actuarial accrued liability from assumption changes, losses associated with actuarial experience included a net loss from investments of $138.4 million, a loss of $106.5 million for differences in actual experience, and a loss of $7.0 million for data corrections. Recent experience over the last few experience study periods has indicated that demographic assumptions should have been more conservative in many areas, which has resulted in additional unfunded actuarial liabilities and plan costs as the experience has emerged. Effective with the June 30, 2010 actuarial valuation, the Board, based on a recommendation from the Retirement Services Department staff and with concurrence from the actuary, changed the assumed investment net rate of return assumption from 8.00% to 7.75%. The Police and Fire Plan Actuary is scheduled to complete an updated Experience Study as of June 30, 2011.

Police and Fire Contribution Rates. The contribution rates for both the City and the members of the Police and Fire Plan for both retirement and health and dental benefits, are summarized below in Table 31. In August 2010, the City reached agreement with the POA to require Police members of the Police and Fire Plan to make additional retirement contributions of 5.25% of pensionable compensation, effective June 27, 2010 through June 25, 2011. These additional employee contributions are in addition to the employee retirement contribution rates approved by the Police and Fire Board. The additional employee contributions will be applied to reduce the City’s required contributions toward the Plan’s UAAL. These additional employee contributions are made on a pre-tax basis pursuant to IRS Code Section 414(h)(2) and are subject to withdrawal, return and redeposit in the same manner as any other employee contribution. It is unknown at this time whether further additional contributions to the UAAL will be agreed to by employees.

The Police and Fire Plan Actuary has determined that the additional 5.25% employee contributions will offset an equivalent 5.21% City required contribution rate, due to the estimated portion of the additional employee contributions which will be paid as refunds of employee contributions upon employee termination.

The required contributions rates determined by the Police and Fire Plan’s Actuary anticipate that the City will make contributions on a bi-weekly basis throughout the fiscal year. The City has elected since FY 2008-09 to “prefund” all or part of its total annual required contributions to the Plan at the beginning of each fiscal year and the Plan’s Actuary applies a discount to the required contributions to account for the fact that contributions are made at the beginning of the year instead of throughout the year. The “prefunded” annual contributions are made on the basis of estimated bi-weekly pay for the fiscal year and are trued up at the end of the fiscal year based on actual bi-weekly payroll. It is anticipated that the City will elect to prefund its total annual required contributions for FY 2011-12.

A-70 In early 2011, the Police and Fire Board addressed unexpected shortfalls in contributions that may result when payroll does not grow at the rate assumed by the actuaries. The Board expressed support that the City Council amend the Municipal Code to set the ARC to be the greater of the dollar amount reported in the actuarial valuation (“the floor”) and the dollar amount determined by applying the percent of payroll reported in the actuarial valuation to the actual payroll for the fiscal year. Council has yet to take action but if adopted by the Council, the floor for FY 2011-12 would be established as a normal cost contribution of $70,303,098 and a UAAL contribution of $56,318,587 for a total floor contribution of $126,621,685. As of the date of this Official Statement the Council has not taken action on the Board’s recommendation.

Table 31 City of San José Police and Fire Department Retirement Plan Contribution Rates (As Percentage of Covered Payroll) June 30, 2009(1)(2) June 30, 2010 Employer Cost(4) Retirement Normal Cost Rate 26.24% 28.00% Rate of Contribution to UAAL 13.21 22.44 Total Retirement(3) 39.45%(5) 50.44%(6) Health and Dental(6) 5.44 TBD(7)(8) Total City 44.89% TBD%(7)(8) Employee Cost(4) Retirement(3) 9.91% 10.57% Health and Dental(7) 5.00 TBD(7)(8) Total Employee 14.91% TBD%(7)(8)

Total Cost 59.80% TBD%(7)(8)

(1) Contribution rates were calculated based on the actuarial assumptions used to prepare the Police and Fire Report as of June 30, 2009. (2) The contribution rates are the result of actuarial valuation reports but do not reflect the subsequent contribution shift agreed to by the POA for police officer Employees and contribution prefunding described above in Funding Status and Contribution Rates for the Police and Fire Plan. (3) For the Police and Fire Plan, the rates for the employer and Employee as shown are a blend of the different rates calculated for police officer Employees and fire department Employees. (4) Represents a percentage of payroll. Total covered payroll was $255,222,552 as of June 30, 2009 and $251,058,473 as of June 30, 2010. (5) Was offset by 0.45% on account of a transfer of $1.2 million from the SRBR to the valuation assets which is applied to reduce the City’s required contributions, but only for FY 2010-11. (6) Will be offset by 0.49% on account of a transfer of $1.3 million from the SRBR to the valuation assets which is applied to reduce the City’s required contributions, but only for FY 2011-12. (7) The contribution rates for health and dental benefits only provide partial funding of the liabilities for these benefits. See “Other Postemployment Benefits – Contribution Rates for Phase-In of ARC for Federated Plan” and – “Contribution Rates for Health and Dental Benefits for the Police and Fire Plan” for a discussion of increased contribution rates for health and dental benefits as of FY 2009-10. (8) Police and Fire Health and Dental Benefits rates are pending receipt and approval of valuations from the actuary for the Police and Fire Plan. It is anticipated that the reports related to health and dental contributions and GASB 43/45 health and dental valuation will be presented to the Police and Fire Board at its May 2011 meeting and June 2011 meeting, respectively. Source: City of San José Police and Fire Department Retirement Plan Actuarial Valuation Reports as of June 30, 2009, dated February 23, 2010 and as of June 30, 2010, dated December 22, 2010.

A-71 Supplemental Retiree Benefit Reserves

Both Pension Plans include a Supplemental Retiree Benefit Reserve (“SRBR”). The purpose of each SRBR is to establish a reserve to provide a lump sum supplemental payment to the pension plan’s retirees no more frequently than annually. The terms of each SRBR are described below.

Federated SRBR. Within the assets of the Federated Plan, there is a Supplemental Retiree Benefit Reserve (the “Federated SRBR”). As of June 30, 2010, $28.331 million were on deposit in the Federated SRBR. After the end of each fiscal year, an amount equal to the investment earnings attributable to the SRBR balance is transferred to the SRBR, using the lesser of the actuarially assumed net rate or the actual rate of return earned by the retirement fund; then the Board of Administration of the Federated Plan determines the amount of excess earnings, if any (i.e., earnings of the retirement fund after accounting for any investment losses recognized during the year and any administrative costs, and after crediting interest and income to the various accounts and reserves). To the extent there are excess earnings, 90% of the excess earnings are transferred to the Plan’s General Reserve, and 10% of the excess earnings are transferred to the Federated SRBR. At the end of each fiscal year, to the extent that the amount on deposit in the Federated SRBR satisfies certain thresholds, the Federated Plan pays each retiree a lump- sum payment as a supplemental benefit. For the fiscal year ended June 30, 2010, the total amount of interest credited to the SRBR was $8.545 million and $1.595 million was available for distribution during FY 2010-11. SRBR transfer amounts, if any, are determined after the fiscal year end and except for fiscal year 2010-11 distribution amounts, if any, are made to retirees in the following fiscal year. For fiscal year 2010-11, the City Council adopted a resolution suspending distribution of SRBR payments to retirees.

Police and Fire SRBR. Within the assets of the Police and Fire Plan, there is a Supplemental Retiree Benefit Reserve (the “Police and Fire SRBR”). As of June 30, 2010, $33.3 million was on deposit in the Police and Fire SRBR. The Police and Fire SRBR was originally funded through a one-time transfer from the valuation assets of the Police and Fire Plan calculated as of the end of the fiscal year ending June 30, 1999, in the amount of $19,110,300. After that transfer, the Police and Fire SRBR is funded from certain earnings (calculated on a smoothed actuarial basis as described previously) of the Police and Fire Plan, as follows. After the end of each fiscal year, an amount equal to the investment earnings attributable to the SRBR balance is transferred to the SRBR; then the Board of Administration for the Police and Fire Plan determines the amount of excess earnings, if any (i.e. earnings of the retirement fund after accounting for any investment gains and losses recognized during the year and any administrative costs, and after crediting interest to other accounts and reserves at the Board adopted actuarially assumed net rate of return). Ninety percent of excess earnings are allocated and included as valuation assets, and the remaining 10% are transferred to the Police and Fire SRBR. At the end of each calendar year, from the earnings credited to the Police and Fire SRBR, the Police and Fire Plan pays each retiree and each person receiving survivor benefits, a lump-sum payment as a supplemental benefit. For the fiscal year ended June 30, 2010, the total amount of interest transferred to the Police and Fire SRBR was $1.0 million. The SRBR excess earning transfer amount, if any, is determined after the fiscal year end and except for fiscal year 2010-11, distribution amounts, if any are made to retirees in the following fiscal year. In late 2010, the City Council adopted Ordinance No. 28848, suspending distribution of SRBR payments to retirees for the remainder of the fiscal year.

If City contributions are increased due to poor investment returns, 10% of the City’s increased contributions for the first 12 months after the increase in rates is transferred (certain restrictions apply to the maximum amount transferable) from the SRBR to the valuation assets and is applied to reduce the City’s required contributions. As of June 30, 2009, $1.2 million was transferred from the SRBR to the valuation assets and applied to reduce the City’s required contributions for FY 2010-11 only, on account of this provision. As of June 30, 2010, $1.3 million was transferred from the SRBR to the valuation assets and applied to reduce the City’s required contributions for FY 2011-12 only, on account of this provision.

A-72 Other Postemployment Benefits

Overview. In April 2004, the Governmental Accounting Standards Board (“GASB”) issued Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. Statement No. 43 establishes uniform financial reporting standards for postemployment healthcare and other nonpension benefits (“OPEB”) plans. The approach followed in Statement No. 43 is generally consistent with the approach adopted for defined benefit pension plans with modifications to reflect differences between pension plans and OPEB plans. Statement No. 43 became effective for the City’s OPEB Plans for the fiscal year ending June 30, 2007.

Additionally, in June 2004, GASB issued Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, which addresses how state and local governments should account for and report their costs and obligations related to OPEB. Statement No. 45 generally requires that employers account for and report the annual cost of OPEB and the outstanding obligations and commitments related to OPEB in essentially the same manner as they currently do for pensions. Statement No. 45’s provisions may be applied prospectively and do not require governments to fund their OPEB plans. An employer may establish its net OPEB liability at zero as of the beginning of the initial year of implementation; however, the unfunded actuarial accrued liability is required to be amortized over future periods. Statement No. 45 also establishes disclosure requirements for information about the plans in which an employer participates, the funding policy followed, the actuarial valuation process and assumptions, and, for certain employers, the extent to which the plan has been funded over time. Statement No. 45 became effective for the City’s fiscal year ending June 30, 2008.

Both Pension Plans provide eligible retirees with both health and dental benefits (“Health and Dental Benefits”). For health benefits, the Pension Plans pay that portion of the premium that is equivalent to the premium for the lowest-priced medical plan with which the City contracts for medical benefits for City employees; if the retiree elects a medical plan that is not the lowest-priced plan, the eligible retiree or survivor pays the difference between the portion paid by the applicable Pension Plan and that charged by the medical care provider. In the case of dental benefits, both Pension Plans pay the entire premium.

An implicit subsidy for Health and Dental Benefits exists because the medical experience for retirees under age 65 are pooled with the experience for active employees thereby resulting in a lowering of the premium paid for retirees under age 65. While the liabilities for the implicit subsidy have been included in the GASB 43 and 45 disclosure calculations, they have not been included in the phase-in contribution rate calculations for Police but have been included in the phase-in contribution rate calculations for Federated.

For the Federated Plan, per the San José Municipal Code, the City and the active employee members of the Federated Plan share the cost of health benefits at a ratio of 50/50, and, with respect to the dental benefits, they share that cost at a ratio of 8/3. For the Police and Fire Plan, per the San José Municipal Code, the City and the active employee members of the Police and Fire Plan share the cost of health benefits at a ratio of 50/50 and, for dental benefits, they share that cost at a ratio of 75/25.

Funding Policy. Until the City entered into agreements with various bargaining groups as described below, contributions for the Health and Dental Benefits for both the City and the participating employees of both Pension Plans were based upon an actuarially determined percentage of employees’ base salary sufficient to provide adequate assets to pay benefits when due, over the next 10 years for the Police and Fire Plan, and over the next 15 years for the Federated Plan.

Increased contribution rates for Health and Dental benefits for some, but not all of, the members of both Pension Plans that became effective in FY 2009-10, are discussed below in Contribution Rates for Phase-

A-73 In of ARC for the Federated Plan and Contribution Rates for Phase-In of ARC for POA Members of the Police and Fire Plan. The contribution rates for the fire department employee members of the Police and Fire Plan has continued to be calculated per the methodology discussed above. However, the City and Local 230’s tentative agreement includes a five-year phase-in of full funding of the ARC as of June 26, 2011. See above “Labor Relations – Status of Current Negotiations” and below “– Agreement with Local 230 Related to Police and Fire Plan’s Health and Dental Benefits.”

Postemployment Healthcare Plan Valuations. The City’s Federated Plan engaged the Federated Plan Actuary to perform an actuarial valuation, as of June 30, 2010, of the Federated Retiree Health and Dental Care Plan. The actuarial accrued liability as of June 30, 2010 is $926.4 million with $108.0 million in assets resulting in a UAAL of $818.4 million, with a plan funded ratio of 11.7%. The ARC calculated in accordance with GASB, and based on a 6.71% actuarially assumed net rate of return is $47.6 million.

The City’s Police and Fire Plan engaged its actuary to perform an actuarial valuation, as of June 30, 2010, of its Health and Dental Benefits, which is anticipated to be presented to the Police and Fire Plan Board at its June 2011 meeting. As of June 30, 2009, the actuarial accrued liability was $761.6 million with $55.6 million in assets resulting in a UAAL of $706.0 million, with a funded ratio of 7.30%. The ARC calculated in accordance with GASB, and based on a 6.7% actuarially assumed net rate of return was $48.8 million.

Actuarial assumptions used for the postemployment healthcare plan valuations are generally the same as are used for the pension plan valuations, but also include assumptions with respect to future healthcare utilization and inflation. Actuarial methods are generally the same, except for the use of a 30-year open (non-decreasing) amortization period for the Police and Fire Health and Dental Benefits Plan ARC calculation and a 28 year declining amortization period for the City and employee contributions for police department employees.

The City implemented GASB 45 in fiscal year 2008 and elected to report a zero net OPEB obligation at the beginning of the transition year for both Pension Plans. As reported in the City’s Comprehensive Annual Financial Report for the fiscal year ended June 30, 2010, the net OPEB obligation for the Federated Plan was $62.6 million and the net OPEB obligation for the Police and Fire Plan was $107.1 million.

Phase-In Funding of the ARC for Both Healthcare Plans. In 2007 and 2008, the City engaged in a process to determine whether to implement a policy to fully pre-fund the ARC as calculated under GASB 45 for each of the Healthcare Plans. In connection with this process, the City retained outside counsel to provide advice regarding the legal restrictions on making changes to the Health and Dental Benefits of both retirees and active employees. In a March 2008 memorandum to City employees and retirees, the City Manager announced that because the Health and Dental Benefits can be considered a “vested” benefit, at such time the City Administration would not be recommending a change in these benefits as specified in the Municipal Code.

Agreements Related to Federated Plan’s Health and Dental Benefits. In April, 2009, the City reached agreements with ABMEI, AEA, AMSP, CAMP, IBEW, MEF, and CEO to phase in full pre-funding of the ARC over a five year period. The pre-funding specified in these terms of these agreements is also being applied to unrepresented employees. These agreements provide that the initial unfunded retiree healthcare liability will be fully amortized over a thirty year period so that it will be paid by June 30, 2039. From time to time, the actuary for the Federated Plan will update the contributions required to fully pre-fund the ARC by such date. In December 2010, the Board, acting upon advice from its actuary, adopted a 20 year closed amortization period for changes in unfunded actuarial liabilities which develop on or after June 30, 2010.

A-74 The agreements also provide that the five year phase-in of the ARC will not have an incremental increase of more than 0.75% of pensionable pay in each fiscal year for the employee contributions and the City cash contribution rate will not have an incremental increase of more than 0.75% of pensionable pay in each fiscal year. Notwithstanding these limitations on incremental increases, the agreements further provide that by the end of the five year phase-in the City and the employee members “shall be contributing the full Annual Required Contribution in the ratio currently provided” in the relevant sections of the San José Municipal Code.

Agreement with POA Related to Police and Fire Plan’s Health and Dental Benefits. In February 2009, the City reached an agreement with the POA to fully pre-fund the ARC with respect to the police department employees over a five year period, subject to the limitations described below. The agreement provides that the initial unfunded retiree healthcare liability will be fully amortized over a thirty year closed (decreasing) period starting July 1, 2009 so that it will be paid by June 30, 2039. From time to time, the Police and Fire Plan’s actuary will update the contributions required to fully pre-fund the liabilities for retiree healthcare.

The agreement with the POA provides that the five year phase-in of the annual required contributions for police department employees in the Police and Fire Plan will not have an incremental increase of more than 1.25% of pensionable pay in each fiscal year for the employee contributions and City cash contribution will not have an incremental increase of more than 1.35% of pensionable pay in each fiscal year. If at any time the employee’s cash contribution rate exceeds 10% of pensionable pay or the City cash contribution rate exceeds 11% of pensionable pay (excluding implicit subsidy as discussed below), the City and the POA will meet and confer on how to address any retiree healthcare contributions above 10% of pensionable pay for employees or 11% of pensionable pay for the City. Such discussions will include alternatives to reduce retiree healthcare costs. These limitations may preclude full pre-funding of the ARC within the five year period.

Agreement with Local 230 Related to Police and Fire Plan’s Health and Dental Benefits. As discussed in Labor Relations – Status of Current Negotiations, the City and Local 230 have reached a tentative labor agreement that is scheduled to be considered by the City Council on March 22, 2011. The agreement includes provisions to fully pre-fund the ARC with respect to the fire department employees over a five year period commencing on June 26, 2011, subject to the same limitations described above in the discussion of the City’s agreement with the POA related to fully pre-funding the ARC for police department employees. These limitations may preclude full pre-funding the ARC within the five year period.

The agreement provides that the initial unfunded retiree healthcare liability will be fully amortized over a thirty year closed (decreasing) period so that it will be paid by June 30, 2041. From time to time, the Police and Fire Plan’s actuary will update the contributions required to fully pre-fund the liabilities for retiree healthcare.

Contribution Rates for Phase-In of ARC for Federated Plan. On March 11, 2010, the Federated Plan’s Board adopted a policy that the contribution rates for the City and the employee members of the Federated Plan will be phased in to meet full pre-funding of the ARC. The approved contribution rates, expressed as a percentage of payroll for FY 2010-11 and FY 2011-12 for the employees and the City are set forth in Table 30.

Contribution Rates for Health and Dental Benefits for the Police and Fire Plan. On May 6, 2010, the Police and Fire Board approved new contribution rates for the City and the employee members of the Police and Fire Plan. These rates were effective for FY 2010-11. Contribution rates for subsequent fiscal

A-75 years will require approval by the Police and Fire Board. Contribution rates for FY 2011-12 are not yet available but are anticipated to be submitted to the Police and Fire Board for approval in May 2011.

For FY 2010-11, the approved contribution rates for police department employees, expressed as a percentage of payroll, are 5.76% for the employees and 6.26% for the City. The contribution rates were based on the 2009 valuation of the Police and Fire Plan’s Health and Dental Benefits prepared by Segal.

For FY 2010-11, the approved contribution rates for fire department employees, expressed as a percentage of payroll, are 3.61% for the employees and 3.92% for the City. The contribution rates were based on the 2009 valuation of the Police and Fire Plan’s Health and Dental Benefits prepared by Segal and reflect the funding methodology described above in Funding Policy.

Potential Tax Limitation on Phase In Funding of ARC for Health and Dental Benefits. On February 10, 2011, the Federated Board received a report from the Federated Plan Actuary, indicating that projected contributions to the Plan’s medical and dental benefits account were projected to exceed the subordination limits set forth in Internal Revenue Code Section 401(h) during the fiscal year ending June 31, 2012. The Federated Plan Actuary further advised that once the limit is reached, future 401(h) contributions would be limited to one-third of the pension normal cost contributions. Although, a subordination limit calculation for the Police and Fire Plan for fiscal year 2011-12 is still pending it is anticipated that a similar concern will arise soon. In order to assure that the ramp up to full funding of the ARC can continue, the City is actively pursuing establishment of an IRC 115 trust as an alternative medical and dental benefits funding vehicle.

Section 401(h) of the Internal Revenue Code permits a pension plan to provide retiree health care benefits under certain conditions, one of which is that the medical benefits are subordinate to the pension benefits. In order to be considered subordinate, Treasury regulations require that the aggregate contributions for medical benefits not exceed 25% of the total contributions, including pension contributions (other than UAAL contributions) and medical benefit contributions. Violation of the 25% rule could potentially void the plan’s tax qualified status.

Pension Plan Reform Initiatives

City Auditor’s Pension Report. The City’s Charter establishes the office and responsibilities of the City Auditor. The City Auditor is an appointee of the City Council whose responsibilities under the City's Charter include the conducting of City Council-assigned performance audits to determine whether (1) City resources are being used in an economical, effective, and efficient manner; (2) established objectives are being met; and (3) desired results are being achieved.

As noted above, on September 29, 2010, the City Auditor released a report entitled: “Pension Sustainability: Rising Pension Costs Threaten the City’s Ability to Maintain Service Levels – Alternatives for a Sustainable Future” (the “Pension Report”). The City Auditor presented the Pension Report to the full City Council on October 26, 2010, and the Council accepted the Report in its entirety.

The Pension Report outlines its objectives as “to assess the long-term sustainability of the City’s pension benefits and the potential impact of increase in pension costs on City operations, and provide background on pension reform alternatives.” The Pension Report’s focus is on the pensions paid by Pension Plans, rather than the retiree health and dental benefits provided by the Pension Plans. The City Auditor in the Pension Report made a number of recommendations to the City Council and the City Administration as generally discussed below.

A-76 The Pension Report provides background information regarding both Pension Plans, including the history of pension benefit increases, the significant growth of the UAAL for both Pension Plans since 1991 in terms of both the dollar amount and percentage of the unfunded liability and the costs associated with various benefits provided by the respective Plans. In this connection, the Pension Report recommends that the City Council explore prohibiting:

1. Pension benefit enhancements without voter approval. 2. Retroactive pension benefit enhancements that create unfunded liabilities.

Further, as a significant portion of the UAAL for both Pension Plans as of June 30, 2009 is attributable to actuarial assumptions not holding true, the City Auditor recommends that the City Council amend the Municipal Code to require an actuarial audit of the Pension Plans’ valuations every five years if the actuary retained by the Police and Fire Board or Federated Board, as applicable, has not changed during the five year time period. See Funding Status and Contribution Rates above.

The Pension Report describes fiscal sustainability as “… whether the City can maintain current service levels without compromising service levels for future generations and whether the City can meet future obligations.” In this regard, the Pension Report notes that current salary and benefit costs for City employees, including the pension and retiree health and dental costs comprise approximately two-thirds of the City’s General Fund. Citing to the City Manager’s Five Year General Fund Forecast for fiscal years 2010 through 2015, the Pension Report notes that the City’s annual contributions to fund both pension and retiree health and dental costs are projected to total 25% of total General Fund expenditures by FY 2014-15. Since the Pension Report’s release date, the City Manager has issued the Five Year General Fund Forecast for fiscal years 2011 through 2016, which increased this projection of annual contributions to 28%. See “Budget – City Budget – City’s 2012-2016 General Fund Forecast.”

As the City Manager’s Office projected deficits in the City’s General Fund in each fiscal year through FY 2014-15, the Pension Report observes the following:

To close projected budget deficits, the City Council will need to make decisions about cutting services, laying off employees, and negotiating with bargaining units including retirement reform. Continuing this trend of layoffs or reducing pay or benefits may make it difficult for the City to retain and attract a quality workforce in the future. Moreover, years of successive budget reductions are cutting City services to the core.

The Pension Report also briefly outlines five additional recommendations for the City’s Administration to pursue as cost-containment strategies, either alone or in combination.

1. Additional cost sharing between City and employees. 2. Eliminating the SRBR in both Pension Plans or at least prohibiting transfers in and distributions from the SRBRs when the Pension Plans are underfunded. 3. Negotiating with employee bargaining groups for changes to the Pension Plans for existing employees. 4. Establishing a second tier pension benefit for new employees. 5. Considering whether to join the California Public Employees Retirement System in order to reduce administrative costs.

A-77 As a number of the above recommendations involve changes to the Pension Plans for the City’s current employees, the Pension Report recognizes that there are legal constraints on the City’s ability to make changes.

Furthermore, the Pension Report recommends that the City Manager should propose an annual ongoing budget for actuarial services in order to obtain independent expert advice on pension risks and liabilities. The City Auditor notes that this recommendation is made in order to assist the City’s Office of Employee Relations in negotiations with bargaining groups regarding pension benefits.

The Pension Report makes the observation that “…there is the risk that even if the previous recommendations are implemented, pension costs may still be unsustainable.” The Pension Report does not quantify the potential risk or address at what level pension costs would be unsustainable. In this regard, the Pension Report recommends that the City Council should receive annual updates related to the Pension Plans and that communication with the Pension Plans’ members regarding the performance of the Plans and financial health should be improved. Specifically, the Pension Report recommends that Retirement Services Department should:

1. Ensure that each Councilmember receive both Pension Plans’ Comprehensive Annual Financial Report. 2. Provide an annual report to the City Council that includes updates on the financial status of the Pension Plans, forecasts of pension costs, and sensitivity analyses showing best and worst case scenarios. This would be a supplement to the City Manager’s Budget Office’s Five-Year Economic Forecast and Revenue Projections for the General Fund and Capital Improvement Program. 3. Prepare an annual summary report containing current and historical financial and actuarial information to be distributed to the Pension Plans’ members and posted on the Retirement Services Department website.

Consistent with the City’s practices related to the City Auditor’s issuance of audit reports, the Pension Report includes a response from the City’s Administration. The City Administration’s response notes that there will be retirement reform efforts undertaken in FY 2010-11. These include: (1) the reconvening of a prior task force comprised of residents, employees and other interest groups to consider issues related to retirement reform; and (2) negotiations with City employee bargaining groups related to retirement reform.

The City cannot predict whether any of the recommendations addressed in the Pension Report will be implemented or, the effect that implementation of any of the recommendations may have on the City’s pension costs.

Charter Amendment Related to Pensions. The City Council placed Measure W on the November 2, 2010 ballot to amend the pension provisions in the City Charter to (1) allow the City Council, by ordinance, to exclude officers and employees hired on or after the ordinance’s effective date from any retirement plans or benefits then in existence and to establish a retirement plan or plans for such officers and employees that do not meet current minimum requirements set forth in the Charter for City retirement plans, and (2) require in the Charter that any new or different retirement plan be actuarially sound. Measure W required majority approval and passed with 71% of the electorate voting in favor of passage.

Second Tier Retirement Benefit for New Employees. The City Council at its November 18, 2010 Organizational and Budget Planning special City Council meeting approved staff recommendations for direction in labor negotiations. That direction included analyzing options for a Second Tier retirement

A-78 program for new employees and returning to the City Council with recommendations. On January 25, 2011, the Administration presented their recommendations for implementing a Second Tier retirement program in a memorandum entitled: “Recommendations for Labor Negotiations Direction on Second Tier Retirement Benefits for New Employees” (the “Memorandum”). The Memorandum outlined historic costs associated with the Plans and summary of benefit provisions and eligibility among other items.

The City Council approved the Memorandum, and directed staff to explore issues related to the proposed benefits under a second tier retirement plan. The City Council accepted the staff recommendation that the normal cost to the City and employees not exceed 12.4% of pensionable pay. In addition, the Council directed that second tier retirement plan proposals provide benefits greater than those provided by Social Security and to seek further direction from the City Council as necessary. The City cannot predict whether any of the recommendations addressed in the Memorandum will be implemented or, the effect that implementation of any of the recommendations may have on the City’s pension costs.

Investment Policy and Practices of the City

The City and its related entities are required to invest all funds under the Director of Finance’s control in accordance with principles of sound treasury management and in accordance with the provisions of the California Government Code, the Charter, the City Municipal Code and the City Investment Policy (the “Policy”). The Policy was originally adopted by the City Council on April 2, 1985 (Resolution No. 58200) and is reviewed annually by the City Council. The Investment Policy was recertified in December 2009 by The Association of Public Treasurers of the United States and Canada (“Association”) that the revised policy is a professionally accepted policy based on the standards developed by the Association. This certification is applied for every two years.

On September 28, 2010, the City Council approved various updates to the Investment Policy. All changes are consistent with the California Government Code.

The primary objectives of the Policy, in their order of priority, are to (1) provide for the safe preservation of principal, (2) ensure that there is sufficient liquidity for operating needs, and (3) attain the maximum yield possible as long as investment practices are consistent with the first two stated objectives.

Current Investment Portfolio

As of January 31, 2011, the book value of the City’s pooled investment fund was $976,015,145 while the market value was $978,171,178. The composition of this fund, including the weighted average days to maturity and yield, is provided in Table 32. The General Fund portion of the pool was approximately 15.23% as of January 31, 2011.

With respect to potential loss of principal on any of the City’s investments, the Policy limits the composition of the holdings within the Investment Portfolio. Those limitations include the ability to hold medium-term notes within the criteria enumerated in the Policy. The City’s holdings as of January 31, 2011 included $29,919,250 medium term notes. These notes were purchased under the FDIC’s Temporary Loan Guarantee Program which offers “full faith and credit of the US Government”, and meets the criteria in the Policy. The Finance Department’s investment staff continues to focus investment decisions in accordance with the Policy’s primary investment objectives as described above in “Investment Policy and Practices of the City”.

A-79 Table 32 City of San José Pooled Investment Fund – General Pool Investments(4) As of January 31, 2011 Weighted Percent Average Weighted of Days to Average Book Value Portfolio Market Value Maturity Yield U.S. Treasury Bills and Notes... $ 0 0.0% $ 0 0 0.000% Federal Agency Securities(1)...... 728,902,194 74.7 730,369,404 196 0.500 MediumTermNotes(corp.)...... 29,919,250 3.1 30,550,000 283 2.859 Bankers Acceptance...... 0 0.0 0 0 0.000 CommercialPaper...... 107,641,701 11.0 107,699,774 77 0.283 Repurchase Agreements...... 0 0.0 0 0 0.000 Neg. Certificate of Deposit...... 0 0.0 0 0 0.000 MoneyMarketMutualFund..... 9,552,000 1.0 9,552,000 1 0.058 State of California LAIF(2) ...... 100,000,000 10.2 100,000,000 1 0.540

Total(3) ...... $ 976,015,145 100.0% $ 978,171,178 163 0.548%

(1) Composed only of Federal Home Loan Bank (FHLB), Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal Farm Credit Bank (FFCB) securities. (2) Estimated based upon City’s participation in the Local Agency Investment Fund (LAIF). Weighted average yield for LAIF is based upon the most recently reported quarterly earnings rate. (3) Totals may not add due to independent rounding. (4) Excludes funds invested in separate, segregated accounts as part of City held invested funds; excludes bond proceeds held by fiscal agents/trustees. Source: City of San José, Finance Department.

Debt Management Policy

The City Council adopted a Debt Management Policy for the City on May 21, 2002 (Resolution #70977). The policy allocates responsibility for debt management activities to the Finance Department, describes the purposes for which debt may be issued, and establishes overall parameters for issuing and administering the City’s debt.

Bonded and Other Indebtedness

The City may issue general obligation bonds for the acquisition and improvement of real property subject to the approval of the voters voting on the bond proposition. In accordance with all relevant provisions of law, the City is obligated to levy ad valorem taxes upon all property within the City subject to taxation by the City, without limitation of rate or amount (except with respect to certain personal property that is taxed at limited rates), for the payment of all outstanding general obligation bonds and the interest thereon. The City is obligated to direct the County of Santa Clara to collect such ad valorem taxes in such amounts and at such times as is necessary to ensure the timely payment of debt service on the general obligation bonds (See “Major General Fund Revenue Sources – Property Taxes and Assessed Valuations” herein). As of June 30, 2010, the City has issued $589,590,000 in general obligation bonds; of that amount, $499,970,000 was outstanding. The City anticipates that it will issue $9,230,000 in the summer of 2011, at which point, its general obligation bond authorization will be exhausted.

A-80 Table 33 below summarizes the various voter authorizations for general obligation bonds.

Table 33 City of San José General Obligation Bonds As of June 30, 2010 Amount Date of Amount Authorized but Election Projects Authorized Amount Issued Unissued 11/07/2000 San José Neighborhood Libraries Bonds $ 211,790,000 $ 205,885,000 $ 5,905,000 11/07/2000 San José Neighborhood Parks and Recreation Bonds 228,030,000 228,030,000 0 03/05/2002 San José 911, Fire, Police and Paramedic Neighborhood Security Act 159,000,000 155,675,000 3,325,000

Total $ 598,820,000 $ 589,590,000 $ 9,230,000

Source: City of San José, Finance Department

The City has the authority to issue tax and revenue anticipation notes (“TRANs”) that are to be repaid within the same fiscal year for cash management purposes without first obtaining voter approval. On July 2, 2010, the City issued its 2010 TRAN in an amount not to exceed $75,000,000 to facilitate the prefunding of employer retirement contributions. Security for repayment of the 2010 TRAN was a pledge of the City’s 2010-2011 secured property tax revenues received on and after April 1, 2011 plus all other legally available General Fund revenues of the City, if required. During FY 2010-11, the City has borrowed $75,000,000 under the 2010 TRAN. The 2010 TRAN was fully repaid on January 31, 2011.

The City has authority to enter into long-term lease obligations without first obtaining voter approval. The City has entered into various lease arrangements under which the City must make annual payments to occupy public buildings or use equipment necessary for City operations. Securities have been issued which certificate these lease arrangements.

As of June 30, 2010, the City had approximately $844.4 million in non-voter approved bonded or certificated lease obligations outstanding. Table 34 on the following page summarizes the bonded and certificated General Fund lease obligations payable out of the revenues and general funds of the City as of June 30, 2010. The City has never failed to pay principal of or interest on any debt or any lease obligation when due.

A-81 Table 34 City of San José Bonded and Certificated General Fund Lease Obligations As of June 30, 2010 Issue Amount Amount Final Issuer/Issue Date Project Issued Outstanding Maturity City of San José Financing Authority Lease Revenue Bonds, Series 1993B(1) 04/13/93 Community $ 18,044,854 $ 2,243,039 11/15/12 Facilities Lease Revenue Bonds, Series 1997B 07/29/97 Child Care 9,805,000 1,165,000 08/01/12 Facilities, Fire Apparatus, Library Land Refinancing Lease Revenue Bonds, Series 2001F 07/26/01 Convention 186,150,000 145,895,000 09/01/22 Center Refunding Project Lease Revenue Bonds, Series 2002B 11/14/02 Civic Center 292,425,000 291,820,000 06/01/37

Lease Revenue Bonds, Series 2003A 09/18/03 Central Service 22,625,000 17,465,000 10/15/23 Yard Refunding Taxable and Tax-Exempt Lease Revenue 01/13/04 MultipleProjects 116,000,000 53,530,000 N/A Commercial Paper Notes(2) Lease Revenue Bonds, Series 2006A 06/01/06 Civic Center 57,440,000 57,440,000 06/01/39 Refunding Lease Revenue Bonds, Series 2007A 06/28/07 Recreational 36,555,000 33,435,000 08/15/30 Facilities Refunding Lease Revenue Bonds, Series 2008A(3) 08/14/08 Civic Center 60,310,000 56,920,000 06/01/39 Refunding Project Lease Revenue Bonds, Series 2008B(3) 07/10/08 Civic Center 36,580,000 35,280,000 06/01/39 Garage Refunding Project Lease Revenue Bonds, Series 2008C(3) 06/26/08 Hayes Mansion 10,915,000 10,915,000 06/01/27 Refunding Project Taxable Lease Revenue Bonds, Series 2008D(3) 06/26/08 Hayes Mansion 47,390,000 45,080,000 06/01/25 Refunding Project Taxable Lease Revenue Bonds, Series 2008E(3) 07/03/08 Ice Centre 28,070,000 26,025,000 06/01/25 Refunding Project Taxable Lease Revenue Bonds, Series 2008F(3) 06/11/08 Land Acquisition 67,195,000 67,195,000 06/01/34 Refunding Project

$ 1,008,114,854 $ 844,408,039

(1) Includes Capital Appreciation Bonds at an accreted value as of June 30, 2010. (2) Value presented as “Amount Issued” is the authorized amount. (3) Variable rate bonds. Source: City of San José, Finance Department.

In addition, the City and its departments have issued bonds or entered into installment purchase contracts secured by and payable out of loans and installment sale contracts, in order to provide conduit financing for single and multi-family housing, industrial development, and 501(c)(3) non-profit corporations. Such bonds and certificates of participation are not secured by any City general funds or revenues.

A-82 Overlapping Bonded Debt

Contained within the City are overlapping local agencies providing public services. These local agencies have outstanding bonds issued in the form of general obligation, lease revenue, and special assessment bonds. A statement of the overlapping debt of the City, prepared by California Municipal Statistics, Inc., as of June 30, 2010, is shown in Table 35. The City makes no representations as to the completeness or accuracy of such statement.

Table 35 City of San José Statement of Direct and Overlapping Debt % Applicable Debt 6/30/10 Direct and Overlapping Tax and Assessment Debt: Santa Clara County...... 38.181% $ 133,633,500 Santa Clara Valley Water District Zone W-1 ...... 46.114 419,637 Foothill-De Anza Community College District...... 4.576 21,931,820 Gavilan Joint Community College District ...... 7.789 5,805,531 San José-Evergreen Community College District ...... 86.997 209,227,835 West Valley Community College District...... 27.965 60,144,239 Milpitas Unified School District...... 0.0002 97 Morgan Hill Unified School District ...... 18.876 12,339,060 San José Unified School District...... 97.772 510,191,881 Santa Clara Unified School District ...... 4.085 10,910,422 Campbell Union High School District...... 61.253 83,546,029 East Side Union High School District ...... 94.537 534,963,754 Fremont Union High School District...... 9.829 19,895,370 Los Gatos-Saratoga Joint Union High School District...... 0.644 379,413 Alum Rock Union School District...... 74.053 59,809,148 Berryessa Union School District ...... 93.933 38,942,772 Cambrian School District ...... 67.610 12,960,799 Campbell Union School District...... 48.926 48,056,754 Cupertino Union School District ...... 16.476 20,968,167 Evergreen School District...... 99.446 121,154,264 Evergreen School District Community Facilities District No. 92-1 ...... 100.000 3,940,000 Franklin-McKinley School District...... 98.428 57,705,707 Los Gatos Union School District...... 1.440 1,230,408 Luther Burbank School District...... 20.956 1,859,585 Moreland School District ...... 76.059 55,729,853 Mount Pleasant School District...... 87.545 7,380,036 Oak Grove School District ...... 99.548 92,654,224 Orchard School District...... 100.000 46,038,315 Union School District...... 72.041 54,122,685 City of San José...... 100.000 499,970,000 City of San José Community Facilities Districts 100.000 34,180,000 City of San José Special Assessment Bonds ...... 100.000 26,725,114 Santa Clara Valley Water District Benefit Assessment District...... 38.181 58,203,116 Total Direct and Overlapping Tax and Assessment Debt $ 2,845,019,535

A-83 Table 35 (Cont’d.) City of San José Statement of Direct and Overlapping Debt % Applicable Debt 6/30/10 Direct and Overlapping General Fund Debt:

Santa Clara County General Fund Obligations...... 38.181% $ 315,019,977 Santa Clara County Pension Obligations...... 38.181 148,159,393 Santa Clara County Board of Education Certificates of Participation ...... 38.181 5,184,980 Foothill-De Anza Community College District Certificates of Participation ...... 4.576 1,073,072 San José-Evergreen Community College District Benefit Obligations ...... 86.997 40,692,847 West Valley-Mission Community College District General Fund Obligations...... 27.965 15,693,958 Morgan Hill Unified School District Certificates of Participation...... 18.876 2,557,698 San José Unified School District Certificates of Participation ...... 97.772 109,783,018 Santa Clara Unified School District Certificates of Participation...... 4.085 530,230 East Side Union High School District Benefit Obligations ...... 94.537 30,076,947 Los Gatos-Saratoga Joint Union High School District Certificates of Participation ...... 0.644 65,720 Alum Rock Union School District Certificates of Participation...... 74.053 2,221,590 Franklin-McKinley School District Certificates of Participation...... 98.428 5,497,204 Luther Burbank School District General Fund Obligations...... 20.956 451,059 City of San José General Fund Obligations...... 100.000 789,448,126 Santa Clara County Vector Control District Certificates of Participation ...... 38.181 1,513,877 Midpeninsula Regional Open Space Park District General Fund Obligations...... 0.016 18,206 Total Gross Direct and Overlapping General Fund Debt $ 1,467,987,905 Less: San José Convention Center Lease Revenue Bonds (100% self-supporting from tax increment revenues)(1) 145,895,000 Total Net Direct and Overlapping General Fund Debt $ 1,322,092,905

Gross Combined Total Debt(2) $ 4,313,007,440 Net Combined Total Debt $ 4,167,112,440

Ratios to 2009-10 Assessed Valuation: Direct Debt ($499,970,000)...... 0.41% Total Direct and Overlapping Tax and Assessment Debt ...... 2.33% Ratios to Adjusted Assessed Valuation: Gross Combined Direct Debt ($1,289,418,126) ...... 1.25% Net Combined Direct Debt ($1,143,523,126) ...... 1.11% Gross Combined Total Debt ...... 4.18% Net Combined Total Debt...... 4.04% State School Building Aid Repayable as of 6/30/10: $ 0

(1) Supported from surplus tax increment revenues pursuant to a Reimbursement Agreement between the City and the Redevelopment Agency. See, however, “Major General Fund Revenue Sources – Revenue from Local Agencies.” (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds and non-bonded capital lease obligations. Qualified Zone Academy Bonds are included based on principal due at maturity. Source: California Municipal Statistics, Inc.

A-84

APPENDIX B

RATE AND METHOD OF APPORTIONMENT

B-1

RATE AND METHOD OF APPORTIONMENT OF SPECIAL TAX

CITY OF SAN JOSE CONVENTION CENTER FACILITIES DISTRICT NO. 2008-1

The Special Tax authorized by Convention Center Facilities District No. 2008-1 ("CCFD No. 2008-1") of the City of San Jose (the "City") shall be levied on all Assessor's Parcels within CCFD No. 2008-1 and collected as provided herein commencing in Fiscal Year 2009-2010 in an amount determined by the City Council through the application of the rate and method of apportionment of the Special Tax set forth below. All of the real property within CCFD No. 2008-1, unless exempted by law or by the provisions hereof, shall be taxed for the purposes, to the extent and in the manner herein provided.

A. DEFINITIONS The terms hereinafter set forth have the following meanings: “Additional Special Tax” means the Special Tax determined in accordance with Section D herein, which may be levied by the City Council in any Fiscal Year on an Assessor’s Parcel of Taxable Property to satisfy the Revenue Stabilization Reserve Requirement, provided that there are Bonds outstanding. “Assessor's Parcel” means a lot or parcel shown in an Assessor's Parcel Map with an assigned assessor's parcel number. “Assessor's Parcel Map” means an official map of the Assessor of the County designating parcels by assessor's parcel number. “Base Special Tax” means the Special Tax determined in accordance with Section C herein, which may be levied by the City Council in any Fiscal Year on an Assessor’s Parcel of Taxable Property. “Bond Documents” means any bond indenture, trust agreement or similar document setting forth the terms of any Bonds. “Bonds” means any binding obligation to pay or repay a sum of money, including obligations in the form of bonds, notes, certificates of participation, long-term leases, loans from government agencies, or loans from banks, other financial institutions, private businesses, or individuals, or long-term contracts, or any refunding thereof, to which the Special Tax has been pledged.

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“CCFD Administrator” means an official of the City, or designee thereof, responsible for determining the Special Tax Requirement and providing for the levy and collection of the Special Taxes for CCFD No. 2008-1. “Chapter” means Chapter 14.32 of the San Jose Municipal Code, as amended. “City” means the City of San Jose. “City Council” means the City Council of the City. “County” means the County of Santa Clara. “Director of Finance” means the finance director of the City. “Exempt Property” means all Assessor’s Parcels within CCFD No. 2008-1 which are exempt from the Special Taxes pursuant to Section F herein. “Facilities” has the meaning given to that term in the resolution of which this Rate and Method of Apportionment of Special Tax is a part. “Fiscal Year” means the period commencing on July 1 of any year and ending the following June 30. “Hotel Property” means an Assessor’s Parcel of Taxable Property which consists of one or more buildings or structures situated in the City that has, on file with the Director of Finance, a transient occupancy registration certificate, including, but not limited to, any hotel, inn, tourist home or house, motel, studio hotel, bachelor hotel, guesthouse, bed and breakfast inn, apartment house, dormitory, public or private club, mobilehome or house trailer at a fixed location, or other similar structure or portion thereof situated in the city, which is occupied or intended or designed for Occupancy by Transients for dwelling, lodging or sleeping purposes. “Hotel Transient Unit” means a room within Hotel Property as to which the Special Tax may be levied in that it is used for Transient Occupancy. “Occupancy” means the use or possession, or right to the use or possession of any Hotel Transient Unit, or portion thereof. “Operator” means the person who is proprietor of the Hotel Property, whether in the capacity of owner, lessee, sublessee, mortgagee in possession, licensee, or any other capacity. Where the operator performs his functions through a managing agent of any type or character other than an employee, the managing agent shall also be deemed an operator, and shall have the same duties and liabilities as his principal. “Owner” means the landowner, owner of land, or property owner of Hotel Property, except that if the fee owner of the Hotel Property is a government entity, ‘Owner’ means the lessee of the government entity.

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“Revenue Stabilization Reserve” means a fund to be established and held by the City. Prior to the issuance of Bonds, all Special Tax revenues will, as collected and received by the City, be deposited in the Revenue Stabilization Reserve. Prior to the first issuance of Bonds, the City may pay its authorized expenses incurred in connection with the Convention Center Facilities District from the Revenue Stabilization Reserve, and thereafter as may be specified in the Bond Documents. Funds in the Revenue Stabilization Reserve shall be available for transfer to the appropriate redemption funds or accounts, established by the Bond Documents for the payment of debt service on Bonds, in the event that Special Tax collections, at any time, are not sufficient to make scheduled payments of principal or interest on the Bonds.

Subject to any limitations that may be imposed by the Bond Documents, the City may, at any time, transfer amounts in the Revenue Stabilization Reserve in excess of the Revenue Stabilization Reserve Requirement to the project fund for the Facilities or provide for changes, including a reduction, of the Revenue Stabilization Reserve.

The Bond Documents may establish terms and conditions under which the Revenue Stabilization Reserve may be closed and the Special Tax revenues therein, and any investment earnings thereon, applied to other authorized purposes of CCFD No. 2008-1. In the absence of provisions in the Bond Documents, once all Bonds have been retired, or provision has been made for their retirement or early redemption (which provision may include the application of moneys in the Revenue Stabilization Reserve), the Revenue Stabilization Reserve will be closed and all remaining funds in the Revenue Stabilization Reserve transferred to the project fund for the Facilities. “Revenue Stabilization Reserve Requirement” means the minimum balance required in the Revenue Stabilization Reserve, as specified in the Bond Documents. “Special Tax” means the special tax authorized by CCFD No. 2008-1 to be levied by the City Council pursuant to the Chapter to fund the Facilities. “Taxable Property” means all Assessor’s Parcels that are not exempt from the Special Tax pursuant to law or the Rate and Method of Apportionment of Special Tax. “Transient” means a person who exercises occupancy or is entitled to occupancy by reason of concession, permit, right of access, license, or other agreement for a period of thirty consecutive calendar days or less, counting portions of calendar days as full days. “Zone” means one of the two mutually exclusive geographic areas defined below.

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• “Zone 1” means all territory in the City located within a two and one quarter (2 ¼) mile radius of the San Jose Convention Center located at 408 Almaden Blvd. San Jose CA. 95110. • “Zone 2” means all territory within the City of San Jose that is not within Zone 1.

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B. CLASSIFICATIONS OF ASSESSOR’S PARCELS

Each Fiscal Year using the definitions above, all Assessor’s Parcels within CCFD No. 2008-1 shall be classified as either Hotel Property or Exempt Property and all Hotel Property shall be classified as within either Zone 1 or Zone 2. Commencing with Fiscal Year 2009-2010 and for each subsequent Fiscal Year, all Hotel Property shall be subject to Special Taxes pursuant to Sections C, D and E below.

C. BASE SPECIAL TAX RATE

Zone 1 Commencing in Fiscal Year 2009-2010, each Assessor’s Parcel classified as Hotel Property within Zone 1 of CCFD No. 2008-1 shall be subject to a Base Special Tax. The Base Special Tax for each Assessor’s Parcel classified as Hotel Property within Zone 1 shall equal four percent (4%) of all Rent charged.

Zone 2 Commencing in Fiscal Year 2009-2010, each Assessor’s Parcel classified as Hotel Property within Zone 2 of CCFD No. 2008-1 shall be subject to a Base Special Tax. The Base Special Tax for each Assessor’s Parcel classified as Hotel Property within Zone 2 shall equal the percentage of all Rent charged as identified in Table 1 below.

TABLE 1 ZONE 2 BASE SPECIAL TAX RATES

Base Term Special Tax July 1, 2009 – December 31, 2009 1% January 1, 2010 – June 30, 2010 2% Fiscal Year 2010-2011 3% Fiscal Year 2011-2012 and thereafter 4%

D. ADDITIONAL SPECIAL TAX RATE

Commencing in Fiscal Year 2009-2010, each Assessor’s Parcel classified as Hotel Property in CCFD No. 2008-1 shall be subject to an Additional Special Tax. The Additional Special Tax for each Assessor’s Parcel classified as Hotel Property within either Zone shall equal one percent (1%) of all Rent charged.

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If Bonds are outstanding, and the City Council determines, by no later than June 1 of any calendar year (or such other date as specified in the Bond Documents), that the amount in the Revenue Stabilization Reserve is less than the Revenue Stabilization Reserve Requirement, then the City Council may levy and collect the Additional Special Tax in the following Fiscal Year. The City must mail written notice of the imposition of the Additional Special Tax to all Owners, or Operators on behalf of Owners, at least 30 days before the imposition of the Additional Special Tax may commence. If the Additional Special Tax will not be imposed in any year immediately following a year in which it was imposed, then the City must mail written notice by June 1 to all Owners or Operators on behalf of Owners that levy of the Additional Special Tax will cease as of the following July 1 for the Fiscal Year beginning on that day.

E. METHOD OF APPORTIONMENT OF THE SPECIAL TAX Commencing with Fiscal Year 2009-2010, and for each subsequent Fiscal Year, the City Council shall levy Special Taxes as described below: Step One: The Base Special Tax shall be levied on each Assessor’s Parcel classified as Hotel Property up to the rates specified in Section C. Step Two: The Additional Special Tax shall also be levied on each Assessor’s Parcel classified as Hotel Property if authorized, and as provided in, Section D. Special Taxes associated with Rent that is charged for Transient Occupancy shall be considered levied and due in the calendar month the Transient ceases Occupancy of the Hotel Transient Unit(s), except that Special Taxes associated with Rent that is paid by credit card shall be deemed levied and collected on the date that the credit card is presented for payment to the Operator. The Special Taxes are payable as described in Section G below. F. EXEMPTIONS No Special Tax shall be levied on any Assessor’s Parcel not classified as Hotel Property. G. MANNER OF COLLECTION The Special Tax shall be collected monthly by the City. Each Operator on behalf of the Owner shall, on or before the last day of each calendar month, submit the Special Taxes levied against their Hotel Property to the Director of Finance of the City and shall include a special tax obligation form provided by the City. H. FAILURE TO SUBMIT SPECIAL TAX If any Owner, or Operator on behalf of Owner, fails or refuses to pay the Special Tax levied, the Director of Finance shall proceed in such manner as he may deem best to obtain facts and information on which to base his estimate of the Special Tax. As soon as the Director of Finance shall procure such facts and information as he is able to obtain upon which to base the Special Tax for such Assessor’s Parcel classified as Hotel Property, the Director of Finance shall proceed to determine the amount of such Special Tax due plus any penalties and interest, as described City of San Jose January 16, 2009 CFD No. 2008-1 Page 7

below. In case such determination is made, the Director of Finance shall give a Determination of Special Tax Due by serving it personally or by depositing it in the United States mail, postage prepaid, addressed to the Owner or Operator on behalf of the Owner at its last known place of address. Such Owner, or Operator on behalf of the Owner, may file an appeal as prescribed in Section J herein. Any Operator who fails to remit the Special Tax levied within the time required shall be subject to a penalty of ten percent (10%) of the amount delinquent in addition to the delinquent Special Tax. Delinquent Special Taxes will incur an additional 1½% penalty (applied to the amount originally levied without compounding) on the first day of each month which is more than six months after the date when the delinquent Special Tax was levied. I. SPECIAL TAX AUDIT It shall be the duty of the Owner, or Operator on behalf of the Owner, for each Assessor’s Parcel classified as Hotel Property that is subject to the Special Tax to keep and preserve, for a period of three years, all records as may be deemed necessary by the City (and that will, at a minimum, include a record of all Rents collected) to determine the Special Taxes levied upon such Hotel Property by the City Council. The City shall have the right to inspect such records at all reasonable times. J. APPEALS Any Owner or Operator on behalf of the Owner, claiming that the amount or application of the Special Tax is not correct, may appeal to the City Council by filing a notice of appeal with the City Clerk within fifteen calendar days of the serving or mailing of the Determination of Special Tax Due. The City Council shall fix a time and place for hearing such appeal, and the City Clerk shall give notice in writing to such Owner and Operator at their last known place of address. The findings of the City Council shall be final and conclusive, and shall be served upon the appellant in the manner prescribed above for service of notice of hearing. Any Special Tax found to be due shall be immediately due and payable upon the service of the City Council findings. If the City Council decision requires that the Special Tax for an Assessor’s Parcel be modified or changed in favor of the Owner, or Operator on behalf of Owner, a cash refund shall not be made, but a credit shall be given against future Special Taxes on that Assessor’s Parcel.

K. TERM OF SPECIAL TAX The authority of the City Council to levy the Base Special Tax on all Assessor’s Parcels classified as Hotel Property within CCFD No. 2008-1 in accordance with Section E is perpetual. The Additional Special Tax may only be levied during a period when Bonds are outstanding in accordance with Section E herein.

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' : " & "= 9 * & . A $ : # ' : - ' : 28 9 ' : @ = 7 " " 9 8& * '$: 8 ' : & *D 777 & " 7 *" + 7 "& 7 (* 8 & 7 * '$: 8 ' : & *D 777 & " 7 *" + 7 7 (* 777 & ( * = 7 >* D "* "* " = 7 ? $ 8 & & ( * = 7 >* " 9 * & * &* ( * = 7 >* $ * &* ( * = 7 >* 8 $ * ' : *(* D & " *" + 7 (* & 8 &*8 + 7 D " * (*8 * " & D " *" 8& & 7& & * & $" 7 9$ 7 (* 7 * 7(*

C " ' : & & * D D "* & 77 " $

* ' : " 9 9"* * * " *" - 7 * *2 & * &8 * * * = 7 " * & 9 = 7 9 " $ *

'$ : E '$ : " 8 8& = 7 " " $8 '$: & * D '$: "D " '$'D & ? $ 8 " * & '$: & D "'$'D

$ * '$: && = & & D "* 8 * *$ "& "*9 '$ 'D 9 + 7 *"&

( * & '$: " 9 9"* * & &* 7 & & 9 9 '$ : $ " $ * $ && * ' : '$ " @ '$$ "&

4 ? $ 8 &8 &* & $ & 8 & * * 9 '$ : '$ 'D & 8 8 9 D "* & 89 9 & * 7 & & * '$:

" 9 '$ : 7 B B "$ " * * * & 9 B $ " $ 7 & &

> * $ 7 & & 8 * " 9 '$: $ " *& * & & 9 $ 9'$'D & 8 $* B & '$ :

" '$: & = 7 " " $8 8& 7 * '$: 8 " '$: * && D " 7 & " & " '$: * * " $ "* " 7 (* 8 " & " '$ : * = * & " -" & 2 (* 8 " & " '$: * * " $ "* " 7 C $" & 9 7 (*: 8 " '$ * & 8 " " '$ " '$'D & && & '$ : &*& & * & 7-& 8 8 & 2 & 8 89 78 $ "& 7 & 8 " & 7 D" " 9 & 8 " & 9 7 , && " 7 & D &

% : " & "= 9 * & . A $ : # % : - % : 2 & = 7 " " $8 8& 7 * '$: 8 & % : D D "* *& * & % " "& 7 (*89 * D " *& * & % $ * * % : " 9 9 "* * * % $ - " *& * & % $ 2 % : " "* * E 'D & *8 &9 " *" 'D C GG8 &9 - 2 8 * & " 8- 2 " 77 % : $ - 2 " $ *" & % :

3 '$ " @ '$ " & "= 9 * &. A $ : # '$ " @ '$- '$ " @ '$2 8& = 7 " " $8 & '$ " @ '$ & * D '$ " @ '$ D '$ " @ '$( ? $ 8 " '$ " @ '$ & D '$ " @ '$(

* '$ " @ '$9 " 9 9"* & & 9 7 <

: 8& &* 7 8 &8 - &*2 8 && ' : &

8 * '$ " @ '$ 9 " 9 9 "* & " '$: & &* 7 8 &8 - &*2 8 " && " '$ : & 8 78 & (*8 * * 7C $" *

8 & * 8 &* & $ & 9 $ * & 8 & * '$ " @ '$ '$ " @ '$ ( 8 9 9 & * 7 & '$ " @ '$ 9 & *

' " * 8& = 7 " " $8 &*& 7 '$: *& *9&9 * & "* $ : # 789 8 " *& *' >* * % &

$% "

> >* >& *9 ** & 8 &*8 " $* & * 9 & & & 8 9 & &* "$ & 7 8 8 $ D " "$ & "*

7 " %" *9 *$ & " *"& & $ 8 9 8 &8* 78 87 " * * '$ : $ ? $ 8 ** * 8 & 8 $ & " & *9& & $ : # 7* * "" & & 8 * " & '$ " @ '$

7 : *9 =* 8 & =* 8 & & = 9 $*&& & 7 & 6 & 8 & * *9 * * =* & & * & & *

0 = = * 9 " " 7" "F & "* & /0 & $ $ * " "F & "* & /-2 & " 7 "F & " *& *7 $ /1-"2 & ? *89 & & 89 *9 D & & ? $ 8 & * " & * 7 @ " && * D 7D 8 && & D 8 & 7 & 6 & 8 *** $* * 79 $ & $ * * & & & * * $ &* * "* & * 9 * & * 8 *"8 9 78 & * 8 * "8 = * " * 9

E 7 7 * & & 7 78 *9 *& D "" H & /0-&2 & 7 & H # & * 7 8 8 " && 89 " 7 $ $ * & & & 8 8 " * & *& " = 9 * &. A $ : # '" : - '" : 2 " "* & * * 9 * 9 $ & & 9 = 7 '" : 8 * '" : 7 $ * H & $ & $ * $ & $ & $ $ & &

>* & *9 * 7* 9& 9 8 & 8 7 " *"& & * & *& & * & & 8 & *8 8 9 7 * &

7' ?: + ' *9 =8 $ D =8 7 9 " & 7 8 $ 8 " 8 & & & & 89 7 7" 9 " ""F & * *K - $ @ 9 72 - 9 & *2 &* $ "=8 *

> & * ' 7 &K *9 $ * & 7 & K 9 9 & 7 7 &

>* &B $ 7 *9 * 7 * & 8 7 $ 7 *"$ 8 7 $ * & * 9 " *"8 * "D **7 $ 7 7

1 $ * &" 7 & *$ $ $ 7

)$* & *8 7* + 789 *$* 7 K > * $ : # = $ & &

-2 &8 *(* : ; 9 " 7$ 8 '$ " @ '$ '$ " @ '$ 'D 8 *9 @ & # % & ' ( $* & & 9 7: ;

-"2 &8 *(* : ; 9 " 7 * $ 8 '$ " @ '$ '$ " @ '$ ( 8 *9 @ & # % & ' ( $* & & 9 7: ;

-2 *9 7 $D & 8 & *"

$ " + &8 *(* : ; 9 " 7 $ 8 '$ " @ '$ '$ " @ '$ 'D 8 *(7& *D * 8 " 7 & & 9 7 : ;8 $ " + & & '$ : 8 $ & & * & "$ & $ &

H=C > +&& & & $ 7 * 9 * D & & * 7 7 * $ & &* 7 & 8 &*8

** $ * * * "* 9 7? $ 8 * " "= * 7 " $ 7 && ) 7 : 8 & 8$ 7 " - $ &" 9 2 & $ *& $ -N35882 "F $ "*& "= 7 * & "= *" & *8 9 D &*$ 7 7 *" $& 8 & & " &"= *" " " & & " * * 7"*7 $ 79 & 7 * "* 7 $ 7 & 7 "* K 8 $ 7 & 7 8 * * "* 9 7$ 7 D & D "* * 7 $ & & " && $ * & "* & 9 * -12 * & & $ 7 & $ " "* * $ 8 $ 7 7 * * & F &

& 89 * 8& 8 &*8 * " *"D "*98 $ 7 D & D "*

@ * "& * & K 8 &" & & & * & 7 9 " >* # &8 7 " =D "= "* 7 9 &8 " $ 8 * K & 8 &*8 & * * * "* * * "* *8 $ * & & 8 = & * "* * "* "& & & * & & 8 &*8 89 * 8" & & K &8 " D * K ** 8 " " *8 K * & * 8* *

) " * & & & 87 $ " = 87 $ & *8 * " * & & = * && * $ * & & & 8 & & " * & $ 8 * " * & 9 7 " 7 * 7 8 " " 9 & & & 97 7 9 & " " & * &F 7 7 & 8 " $ 97 7 7 & 8 $ & D = 9& 9 * " *& & & 8 &* & 7 9

" " & * &F 7 7 & "* " && " $ 97 7 7 & * * & 9 & & D & "* 7 *87 8 $8 " $ & 7 & * 8" "9"& 7 7 &* *87 8 $ "* ? $ "9"& 7 7 &* * & " "* 9

& * * & " 7 " 7

$* " *9 * & 8 * && 8 && 7 * " "* *9 * &

C " 7 * 8 & & *8 8 8 8 8 8E 'D & * " $ "* "7 $" 7 "* *

* 9 8 789 8 *89 7 7 D 8 & "& @ 9 * = && 7 & 9

E$ & 7 " 7 * " " " $ = 7 && 7* 8 - $ &" & * " 2*8 " &" & & 8" " $* " $ "* & & *89 "&9 & * = && $ & & &8 9 * $**8" *8 &8 $ & *D $ * "

('( )) (% '

"* &K

-2 7 " 7 & * & K * " * "* $* & "* * 89 " " 79 9 & K & * -4!2 777 & + 78 $ & D & $ 8& 9 C -2 * & 9 " 7 & * * & ( * = 7 >* & 8 &*8 * * & & $ 9 9 & K & 8 -2 "* * &* " 7 *"& & $ 8 F @ " * & * $* 8 -62 7 & D & 9 * 8 -/2 &** 7 " 7 & 8 * & " 9 9

-"2 C 9 7 & 7 78 & 9 * $*&& & &* & " 8 9 & & " 9 " $*&& 8 "& 9

E & K 7 " 7 & * & K * " * "* $* & "* * 8 9 " " 7 9 9 &*K 8" * "*9 & $ 7 $ 7+ & *& * & & 9 7 <

-2 7 $ D "& "* * 7 $ & " & "* * 9 - & *2 $*&& & K 8 * 7 9 $ & *9 - & *2 $*&& & K & " ?

-"2 = $ & & 7 *" 7 * & 78 7 7* & $ $ 7 D 7

9 ** " * 9 9 - & *2 $*&& & K & " ?

-2 @ "F &* $ 9 *" ?

- 2 @ "F &*'& 7 & * & $ 9 '& 7 *" ?

-2 = 8 & *"* & 7 & && & ?

-&2 = 8 & *"* * 7

# D & 9 & & * " + 7 & &* * & + 7 $ & 8 " =* $ &

% ' & & & && $ &* = $ " $8 ** *" "* & $ "* 8 & K &* + 7 && $ & & > +&& & " " & * 89 & 8 & *8"* & " 8 & K &* + 7 && $ 9 8 & + 7 8" 7 > +&& & 89 K 8 & + 7

"*( $ $ *K & 7* * "* K ? $ 8 &

(' '

' &K *K $ 7 & D"& & K * <

-2"* 7 9 D * & 7 7 *8 * 8 * & && * & *8 *8 * 8 * && * & * 7 $ 9 K ?

-"2 "* D * F * 79 9& $ 7 & K ?

6 -2"* D * * & D *8 * && * &

C 9 $C 7 && " 7 & *8 9 " 8 * & 8 &*8 $K & $ & * * $ & & & $ 8 && 7 &K 89 " 8 & * "*$ & "

9 $ &* & " & * "** K && * "D & " & * * 7 * "D & " & * C * "**K * 7 * 7 * & " & * * 7 * " " 9 $ &* & " & * D 8 $* 7 * & K "* *" & & & " "* K

&* 8 7 & * 7 * * " $* *K 8 * K " & 8 7 & 8 7 "" 7 =

' C % $C * & $ K " $ &* *8 $* *" $ " $* * 7 $ 9 & 7 9 D * "* 9 8 * " 9 7 9 7 * * & "* * 9

# 7 &

-2 & ** " 9 " K & + 7 & 8 &*8 8 7 8 $ " 7 & * K & 8 " $ " 7 & $ 8 $ * *"* " $ 7 & 8 * $ $ *& > F : * "* 9 D & * & & 8 &*8

-"2 *+ 7 * &" $" 9 7 & 9 && " -2 & & " 9 *9 && * 8 &*8

-2 *+ 7 8 * &8" $ " 9 7 9 && " -2 & &-2 * & " * * 8 *

/ $7 & $K & + 7 & $ "* 8-2 $" 9 97 * 9 " && B $ 9 "F "* & *- 7*B $ " = *& " = & # & * & H & 2 " 7 9 $" & 9 B $ 9 7 7 7 *"* ( *, J> ,8 &9 9 9 $ *9 8 7 9 *8 &*8 9 97 8"&& *9 " * &8 * "8 & 8 &*8 * &8 *"8$ "* & & >" * 7 @ 8 & 8 & 9 * 8 -62 $ "* "F 9 7 *-12 *8 *$7 K & & $ "* D "*-2" $" 9 9 7 $" 9 7 * 8 * "8 9 * " $ "& * & & 8 &*8

H ( ** 7 * 9 78* * "* & * 7 &* & * 9 & 9 -2*& 9 $ " *"8 * "* & *8 & *9 "* 8 & 9 -2*& & & * & 9 & 9 " *"8" "* * " *&& & > F : & 9 8 " 7 9 K = * *& * & ? $ 8 "& "D =* * * K &+ 7 & $ "* * & 89 " *-62 *& & 7 & 8 " & * 9 " *& > F :

) #& & 7*" + 7 "* '$ " @ '$8 $ & 7 " && 8$ & $ " &

) " * & *) > & C 9 7* 7 8 * "D $* * $ & * & & & $ & * & & 8 &*8 * " D * $ " + * & &

5 8 &*8 & "* *

" 7 & * & 8 &*8 *" *& & '$: * $ 7 8 * " 7 * & & & 7& & * " && & * 7 & * & & 8 &*8 8 - $ " + & "* * 2$"$ * & 8 & *8 "*7 D " 7 & 78 " * * & * * & & & $ 8 * & & 8 &*8 7 " 8 " * " 7 & * $ " + 7 & * & & 8 &*8 & "* * " & *9 7 &* * " 8 * * * && * &" "& * & & 8 &*8 9 & & & $

& & ) > C 7 8 8 7 $ * *8 K * 7 8 * "* & 8 *7 $ D " & "* "& & * * && * & " & $ "& & K & 7 7 9 78 & * " 8 "& & &8" *"& &

# '& > E$ * * && * & & 8&" 98 & 9 8 7 & && & * *$ * && *8 7 $ D "& "* "& & * * && * &" "& & $ & 9

% & # "* K * 8D 9 D " "*K *" & 8 *" "*K "* * * @ 9 7 & & "** K * &* 8D &* 9 7 7 ** " $ "* & &* * " && @ == 9 7 & " * 9 7 7 8D 9 7 = 9 7 &8 "*&& $ &9 *9 "& *" && 9 & 8 *8" & 7 " $ "* 7 " =D "= "*

4 * 8D 9 7 & K &* " & K & 9 * 7 && " "* * 7 & 9

# $ & ( * : * "* * & " " "* )7$ 8 " "* " 7 D "*9 & D "*9 * "* '$ : 8 ' : 8 '$ : 8 '$ " @ '$8% : > F : " $ "* )7$ 9 & * " &9 $ & *8 $ * " *= & & &* "* H 7 $ ** * $ & * & $ )7$ - * & && 2* 7 8 $ 7 9 = 7 &* $ "* * *7 & 8 " " & * && 9 * $ 9

$ '$: '$ " @ '$"$ "& C $" (* &* &$ & & $ 9 9$-2 & &$ 8 & $ 9$ -2 & & $ 8 9 $ " "* 8 & "8 & "8 & - 2 & $ 8 - 2 = $ & $ 8 = 7* $ 8 * * @ 7$ *"$ " 8 7 $ " 7 7 7* $ & '$ : '$ " @ '$ C $" (* *

*= 9 7 7 & & * " 7 * * 7 * 7 $ " =7 & & * * 8 * & * 9 $ & & "*9? $ 8 9 & * 9 & $ "*

$ * * $ " 9 & & 9 $ 9 8 * * $ "" "* & & 9 $ 9

C > ) " *C " & * && * & *" $ * * " & * & & 8 &*8 8" 7 $*" & * && * & *& & &* && * $ "* "* "** " $ &9

( &: *& D " " "* *" "* 7 * & 8 *8& & 7 8* & * & 9 8" & ?" 7 9 & " "*

3 9 * 9 7 & & * & 7 & K

APPENDIX D

DTC AND THE BOOK-ENTRY ONLY SYSTEM

The following description of the Depository Trust Company (“DTC”), the procedures and record keeping with respect to beneficial ownership interests in the bonds described in this Official Statement (the “Bonds”), payment of principal, interest and other payments on the Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.

Neither the issuer of the Bonds (the “Issuer”) nor the trustee, fiscal agent or paying agent appointed with respect to the Bonds (the “Agent”) take any responsibility for the information contained in this Appendix.

No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current "Rules" applicable to DTC are on file with the Securities and Exchange Commission and the current "Procedures" of DTC to be followed in dealing with DTC Participants are on file with DTC.

1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the securities (the “Securities”). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each issue of the Securities, each in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue.

2. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated

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subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. The information contained on this Internet site is not incorporated herein by reference.

3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC’s records. The ownership interest of each actual purchaser of each Security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued.

4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).

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8. Redemption proceeds, distributions, and dividend payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

9. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.

10. Issuer may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC.

11. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof.

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APPENDIX E

FORM OF CONTINUING DISCLOSURE CERTIFICATE

CITY OF SAN JOSE SPECIAL HOTEL TAX REVENUE BONDS, SERIES 2011 (CONVENTION CENTER EXPANSION AND RENOVATION PROJECT)

This CONTINUING DISCLOSURE CERTIFICATE (this “Disclosure Certificate”) is executed and delivered by the CITY OF SAN JOSE (the “City”) in connection with the execution and delivery of the bonds captioned above (the “Bonds”). The Bonds are being executed and delivered pursuant to an Indenture, dated as of April 1, 2011 (the “Indenture”), by and between the City and U.S. Bank National Association, as trustee.

The City covenants and agrees as follows:

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the holders and beneficial owners of the Bonds and in order to assist the Participating Underwriters in complying with S.E.C. Rule 15c2-12(b)(5).

Section 2. Definitions. In addition to the definitions set forth above and in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section 2, the following capitalized terms shall have the following meanings:

“Annual Report” means any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

“Annual Report Date” means the date that is nine months after the end of the City’s fiscal year (currently March 31 based on the City’s fiscal year end of June 30).

“Dissemination Agent” means the City or any successor Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation.

“Listed Events” means any of the events listed in Section 5(a) of this Disclosure Certificate.

“MSRB” means the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule, or any other repository of disclosure information that may be designated by the Securities and Exchange Commission as such for purposes of the Rule in the future.

“Official Statement” means the final official statement executed by the City in connection with the issuance of the Bonds.

“Participating Underwriters” means Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets, Inc., and Wells Fargo Bank, N.A., the original Underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds.

“Rule” means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as it may be amended from time to time.

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Section 3. Provision of Annual Reports.

(a) The City shall, or shall cause the Dissemination Agent to, not later than the Annual Report Date, commencing March 31, 2012, with the report for the 2010-11 fiscal year, provide to the MSRB, in an electronic format as prescribed by the MSRB, an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Certificate. Not later than 15 Business Days prior to the Annual Report Date, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). If by 15 Business Days prior to the Annual Report Date the Dissemination Agent (if other than the City) has not received a copy of the Annual Report, the Dissemination Agent shall contact the City to determine if the City is in compliance with the previous sentence. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report, and later than the Annual Report Date, if not available by that date. If the City’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(b). The City shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the City hereunder.

(b) If the City does not provide (or cause the Dissemination Agent to provide) an Annual Report by the Annual Report Date, the City shall provide (or cause the Dissemination Agent to provide) to the MSRB, in an electronic format as prescribed by the MSRB, a notice in substantially the form attached as Exhibit A.

(i) determine each year prior to the Annual Report Date the then-applicable rules and electronic format prescribed by the MSRB for the filing of annual continuing disclosure reports; and

(ii) if the Dissemination Agent is other than the City, file a report with the City certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, and stating the date it was provided.

Section 4. Content of Annual Reports. The City’s Annual Report shall contain or incorporate by reference the following:

(a) The City’s audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the City’s audited financial statements are not available by the Annual Report Date, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.

The City shall also include the following statement:

THE CITY’S ANNUAL FINANCIAL STATEMENT IS PROVIDED SOLELY TO COMPLY WITH THE SECURITIES EXCHANGE COMMISSION STAFF’S INTERPRETATION OF RULE 15C2-12. NO FUNDS OR ASSETS OF THE CITY ARE REQUIRED TO BE USED TO PAY DEBT SERVICE ON THE BONDS, AND THE CITY IS NOT OBLIGATED TO ADVANCE AVAILABLE FUNDS TO COVER ANY

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DELINQUENCIES. INVESTORS SHOULD NOT RELY ON THE FINANCIAL CONDITION OF THE CITY IN EVALUATING WHETHER TO BUY, HOLD OR SELL THE BONDS.

(b) Unless otherwise provided in the audited financial statements filed on or before the Annual Report Date, financial information and operating data with respect to the City for the preceding fiscal year, substantially similar to that provided in the corresponding tables in the Official Statement:

(i) Principal amount of Bonds outstanding as of May 2 of the most recently- completed fiscal year.

(ii) Balance in the General Account and any other accounts in the Reserve Fund and a statement of the applicable Reserve Requirement(s) as of May 2 in the most recently- completed fiscal year.

(iii) Balance in the Revenue Stabilization Reserve and a statement of the Revenue Stabilization Reserve Maximum as of May 2 in the most recently-completed fiscal year.

(iv) A description of (A) any Additional Bonds issued during the most recent fiscal year and (B) any additional Subordinate Bonds, the debt service on which is payable from Subordinate Revenues.

(v) The amount, if any, of the Available T.O.T. deposited into the Revenue Stabilization Reserve during the most recent fiscal year.

(vi) For the most recent fiscal year, the top 10 hotel properties in the Convention Center Facilities District based on Rent, in substantially the form of Table 5.

(vii) The amount of the Available T.O.T. and Special Tax revenues in the most recent fiscal year, in substantially the form of Table 6 of the Official Statement.

(viii) For the most recent fiscal year (no projected information is required), debt service coverage on the 2011 Bonds and any Additional Bonds in substantially the form of Table 10 of the Official Statement.

(ix) Any changes to the Rate and Method for the Convention Center Facilities District.

(x) A statement of (i) the total number of hotels and rooms in the Convention Center Facilities District as of June 30 of the most recently-completed fiscal year and (ii) the number of hotel rooms that annexed into the Convention Center Facilities District (if any) during the most recently-completed fiscal year.

(c) In addition to any of the information expressly required to be provided under this Disclosure Certificate, the City shall provide such further material information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading.

(d) Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which are available to the public on the MSRB’s Internet web site or filed with the Securities and Exchange Commission. The City shall clearly identify each such other document so included by reference.

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Section 5. Reporting of Significant Events.

(a) The City shall give, or cause to be given, notice of the occurrence of any of the following Listed Events with respect to the Bonds:

(1) Principal and interest payment delinquencies.

(2) Non-payment related defaults, if material.

(3) Unscheduled draws on debt service reserves reflecting financial difficulties.

(4) Unscheduled draws on credit enhancements reflecting financial difficulties.

(5) Substitution of credit or liquidity providers, or their failure to perform.

(6) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701- TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security.

(7) Modifications to rights of security holders, if material.

(8) Bond calls, if material, and tender offers.

(9) Defeasances.

(10) Release, substitution, or sale of property securing repayment of the securities, if material.

(11) Rating changes.

(12) Bankruptcy, insolvency, receivership or similar event of the obligated person.

(13) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material.

(14) Appointment of a successor or additional trustee or the change of name of a trustee, if material.

(b) Whenever the City obtains knowledge of the occurrence of a Listed Event, the City shall, or shall cause the Dissemination Agent (if not the City) to, file a notice of such occurrence with the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the occurrence of the Listed Event. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and (9) above need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Bonds under the Indenture.

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(c) The City acknowledges that the events described in subparagraphs (a)(2), (a)(7), (a)(8) (if the event is a bond call), (a)(10), (a)(13), and (a)(14) of this Section 5 contain the qualifier “if material.” The City shall cause a notice to be filed as set forth in paragraph (b) above with respect to any such event only to the extent that the City determines the event’s occurrence is material for purposes of U.S. federal securities law.

Section 6. Identifying Information for Filings with the MSRB. All documents provided to the MSRB under the Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB.

Section 7. Termination of Reporting Obligation. The City’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such termination in the same manner as for a Listed Event under Section 5(b).

Section 8. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be the City. Any Dissemination Agent may resign by providing 30 days’ written notice to the City.

Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the City may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) if the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of an obligated person with respect to the Bonds, or type of business conducted;

(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) the proposed amendment or waiver either (i) is approved by holders of the Bonds in the manner provided in the Indenture for amendments to the Indenture with the consent of holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the holders or beneficial owners of the Bonds.

If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first Annual Report filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.

If an amendment is made to this Disclosure Certificate modifying the accounting principles to be followed in preparing financial statements, the Annual Report for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the

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impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative.

A notice of any amendment made pursuant to this Section 9 shall be filed in the same manner as for a Listed Event under Section 5(b).

Section 10. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

Section 11. Default. If the City fails to comply with any provision of this Disclosure Certificate, the Participating Underwriters or any holder or beneficial owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance.

Section 12. Duties, Immunities and Liabilities of Dissemination Agent. (a) The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent shall have no duty or obligation to review any information provided to it by the City hereunder, and shall not be deemed to be acting in any fiduciary capacity for the City, the Bond holders or any other party. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.

(b) The Dissemination Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as amended from time to time, and shall be reimbursed for all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder.

Section 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, the Participating Underwriters and the holders and beneficial owners from time to time of the Bonds, and shall create no rights in any other person or entity.

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Section 14. Notices. Any notices or communications to be given to the City pursuant to this Disclosure Certificate may be given as follows:

To the City: City of San José - Finance Debt Management 200 East Santa Clara Street, 13th Floor Tower San José, California 95113-1905 [email protected]

Any person may, by written notice to the other persons listed above, designate a different address to which subsequent notices or communications should be sent.

Section 15. Counterparts. This Disclosure Certificate may be executed in several counterparts, each of which shall be regarded as an original, and all of which shall constitute one and the same instrument.

Date: April 12, 2011

CITY OF SAN JOSE

By:

Name:

Title:

APPROVED AS TO FORM:

Richard Doyle, City Attorney

By: Chief Deputy City Attorney

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EXHIBIT A

NOTICE OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: City of San José

Name of Issue: Special Hotel Tax Revenue Bonds, Series 2011 (Convention Center Expansion and Renovation Project)

Date of Issuance: April 12, 2011

NOTICE IS HEREBY GIVEN that the City has not provided an Annual Report with respect to the above-named Bonds as required by the Indenture, dated as of April 1, 2011, by and between the City and U.S. Bank National Association, as trustee. The City anticipates that the Annual Report will be filed by ______.

Dated:

DISSEMINATION AGENT:

______

By: Its:

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APPENDIX G

HOTEL TAX REVENUE REPORT

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Report on the Projections of Taxable Hotel and CCFD Revenues to be Used for the Expansion and Renovation of the San José Convention Center

March, 2011

Prepared for: The City of San José

Prepared by: HORWATH HOSPITALITY & LEISURE LLC San Francisco 1050 Northgate Drive, Suite 440 San Rafael, CA 94903

San Francisco – Corporate Office Atlanta ¡ Dallas ¡ Denver¡ Los Angeles ¡ Miami ¡ New York City ¡ Phoenix www.HorwathHTL.US Horwath HTL 1050 Northgate Drive, Suite 440 San Rafael, CA 94903 USA 415.925.8800 415.925.8804 Fax www.HorwathHTL.us

March 30, 2011

Ms. Julia H. Cooper Assistant Director of Finance City of San José - Finance 200 E Santa Clara Street 13th Floor San José, CA 95113-1905

Re: Taxable Hotel Revenue Projections for San José, CA

Dear Ms. Cooper:

Pursuant to our agreement, we have completed our analysis of estimated taxable hotel revenues in the City of San José. The City has formed the Convention Center Facilities District (CCFD), in which a special tax will be levied on all hotels within the district, some or all of which will be used to repay the bonds issued for the renovation and expansion of the San José McEnery Convention Center (the SJCC). The SJCC will be renovated and expanded for a total cost of approximately $120 million over an approximately two-year construction period. The financing for the project will be from bonds payable from the City’s CCFD special tax revenues and additional revenues available from 1.5% of the City’s 10.0% transient occupancy tax (TOT). At your request, we have prepared a projection of these CCFD special tax revenues for a 36-year period. Our analysis is based primarily on fieldwork and research conducted in September 2010, with additional information updated through the date of this report.

It has been a pleasure working with you and the rest of your staff on this project. I will look forward to discussing our findings with you after you have had the opportunity to review them.

Sincerely,

Anthony C. Dimond Principal – Horwath Hospitality & Leisure LLC TAXABLE HOTEL REVENUE PROJECTIONS FOR SAN JOSÉ, CA

TABLE OF CONTENTS

I. INTRODUCTION AND SUMMARY OF CONCLUSIONS Page 1

II. ECONOMIC CONDITIONS Page 4

III. SAN JOSÉ LODGING MARKET Page 13

IV. SAN JOSÉ HISTORICAL TAXABLE HOTEL REVENUES Page 21

V. SJCC EXPANSION AND RENOVATION Page 26

VI. CONVENTION CENTER FACILITIES DISTRICT Page 30

VII. TAXABLE HOTEL REVENUE FORECAST Page 32

ADDEMNDUM A – LIST OF SAN JOSÉ HOTELS BY CATEGORY Taxable Hotel Revenue Projections for San José, CA Page 1

I. INTRODUCTION AND SUMMARY OF CONCLUSIONS

We have completed our projection of estimated taxable hotel revenues in the City of San José through Fiscal Year 2046. Our analysis has included detailed market research and analysis of trends in the local economy and the performance of the lodging market over the past twenty years. Specifically, we have taken the following key steps:

Reviewed the historical performance of the San José lodging market; Reviewed historical attendance records of the SJCC; Interviewed operators of the major hotels in San José to determine their future performance forecasts; Researched economic indicators for the City and region; Reviewed advanced bookings of the SJCC; Reviewed public projections of growth in the national lodging market; Made projections of potential changes in the San José lodging market’s supply and demand, as well as potential rate growth, and calculating the resulting taxable hotel revenues; and, Estimated the percentage of revenue attributable to the CCFD’s Zone 1 & Zone 2, and applied the appropriate tax percentage.

Based on this research and analysis, the key conclusions include the following:

The city’s taxable hotel revenue was $186.0 million in Fiscal Year ended June 30, 2010 (FY 2010) the lowest level since FY 2005. The city’s taxable hotel revenues peaked in FY 2001 at $255.4 million.

Hotel market data for the calendar year 2010 indicates the beginning of a rebound with an increase in Revenue Per Available Room (RevPAR) to $62.92 for the San José citywide market, up 11.9% from $56.23 in 2009. The rebound is expected to continue, as lodging industry forecasts by five firms project RevPAR nationally to increase at rates ranging from 5.5% to 7.1% in 2011.

The overall Compounded Annual Growth Rate (CAGR) for RevPAR from 1987 through 2010 has been 2.4%, growing from $36.56 to $62.92. The historical trends in the local lodging market indicate that the market reflects cyclical “boom or bust” activity levels. As an example, the 2010 RevPAR represents a -5.7% CAGR from the peak RevPAR of $112.88 achieved in 2000.

• After adjusting for fiscal year calculations, we have projected RevPAR to increase from $57.31 in FY 2010 to $100.43 in FY 2046, equating to a CAGR of 1.6% over the 36-year period.

Taxable hotel revenues are projected to increase from $186.0 million in FY 2010 to $438.0 million in FY 2046, the last year of the projection period. While long-term growth is expected to continue to be cyclical, with peaks and troughs occurring over the 36-year period, the timing of such cycles is impossible to predict. We have therefore also presented our projections using a constant annual growth rate of 1.7% that results in the same total revenues over the projection period. Taxable Hotel Revenue Projections for San José, CA Page 2

The CCFD is comprised of hotel parcels in the district at the time it was created, and currently includes all hotels in San José. As new hotels are built over time, the new properties can be annexed into the CCFD if the owners elect to do so. It is possible that the owners of new hotels in the downtown, and larger full-service hotels in other parts of the city, would elect to join the CCFD in order to fully participate in the city’s convention and tourism community. For the purpose of this analysis, however, we have assumed that no new supply will enter the CCFD and no currently existing hotels will discontinue operating as hotels. Therefore, throughout the projection period the CCFD Special Taxes are estimated based solely on the existing base of hotels in the city.

In FY 2011, the first year of the projection period, the CCFD Special Tax Rate is 3.0% of Taxable Rent in Zone 2 and 4.0% in Zone 1. In FY 2012 and thereafter it will be 4.0% in both zones. In addition to the Base Rate, all the hotels are subject to an Additional Special Tax Rate (“Blinker Tax”) of 1.0% of Taxable Rent. The Blinker Tax is only to be applied in years in which the City’s Revenue Stabilization Reserve is less than required in the bond documents. Finally, the City has also dedicated 1.5% of Taxable Hotel Revenues, from the total 10.0% Transient Occupancy Tax (TOT) collected citywide, to convention and visitors bureau uses, and may appropriate these funds as needed for Convention Center debt payments.

The CCFD generated revenues of $4.2 million in FY 2010, the first year of its enactment, and has had cumulative cash collections of approximately $7.1 million as of January 2011. The revenues are projected to be $6.9 million for FY 2011 as a result of both taxable hotel revenue growth and a higher tax rate in Zone 2. Over the 36-year projection period, CCFD revenues are projected to average $10.3 million annually excluding the 1.0% Blinker Tax and 1.5% from the City’s TOT collections.

In general, while the San José lodging market has experienced a strong downturn in recent years, the recovery has begun. With recovery in hotel demand and the added potential for increases in room rates, it is reasonable to expect that the City’s taxable hotel revenues will continue to grow, albeit in a cyclical pattern, throughout the projection period. The following table presents the CCFD Revenue projections using a constant growth rate of 1.7% over the projection period. Taxable Hotel Revenue Projections for San José, CA Page 3

CCFD Financing Analysis CCFD Revenue Stream - No New Supply Annexed - Constant Annual Growth

Fiscal Year City Total CCFD Total Base Tax (4%) Ending Taxable TaxableCCFD Revenue Total w/o Total with City TOT Total with June30, Revenues Revenues Zone 1 Zone 2 Blinker Blinker (1%) Blinker 1.5% Portion City 1.5% TOT Actual 2010 $186,001,647 $186,001,647 $2,696,452 $1,510,395 $4,206,847 $1,860,016 $6,066,863 $2,790,025 $8,856,888 Projected 2011 $190,810,203 $189,172,469 $3,026,759 $3,405,104 $6,431,864 $1,891,725 $8,323,589 $2,862,153 $11,185,742 2012 195,743,071 192,397,345 3,078,358 4,617,536 7,695,894 1,923,973 9,619,867 2,936,146 12,556,013 2013 200,803,464 195,677,196 3,130,835 4,696,253 7,827,088 1,956,772 9,783,860 3,012,052 12,795,912 2014 205,994,680 199,012,960 3,184,207 4,776,311 7,960,518 1,990,130 9,950,648 3,089,920 13,040,568 2015 211,320,101 202,405,589 3,238,489 4,857,734 8,096,224 2,024,056 10,120,279 3,169,802 13,290,081 2016 216,783,195 205,856,054 3,293,697 4,940,545 8,234,242 2,058,561 10,292,803 3,251,748 13,544,551 2017 222,387,523 209,365,340 3,349,845 5,024,768 8,374,614 2,093,653 10,468,267 3,335,813 13,804,080 2018 228,136,735 212,934,449 3,406,951 5,110,427 8,517,378 2,129,344 10,646,722 3,422,051 14,068,773 2019 234,034,577 216,564,402 3,465,030 5,197,546 8,662,576 2,165,644 10,828,220 3,510,519 14,338,739 2020 240,084,891 220,256,236 3,524,100 5,286,150 8,810,249 2,202,562 11,012,812 3,601,273 14,614,085 2021 246,291,619 224,011,006 3,584,176 5,376,264 8,960,440 2,240,110 11,200,550 3,694,374 14,894,925 2022 252,658,805 227,829,784 3,645,277 5,467,915 9,113,191 2,278,298 11,391,489 3,789,882 15,181,371 2023 259,190,597 231,713,662 3,707,419 5,561,128 9,268,546 2,317,137 11,585,683 3,887,859 15,473,542 2024 265,891,250 235,663,750 3,770,620 5,655,930 9,426,550 2,356,637 11,783,187 3,988,369 15,771,556 2025 272,765,131 239,681,176 3,834,899 5,752,348 9,587,247 2,396,812 11,984,059 4,091,477 16,075,536 2026 279,816,716 243,767,088 3,900,273 5,850,410 9,750,684 2,437,671 12,188,354 4,197,251 16,385,605 2027 287,050,600 247,922,653 3,966,762 5,950,144 9,916,906 2,479,227 12,396,133 4,305,759 16,701,892 2028 294,471,496 252,149,060 4,034,385 6,051,577 10,085,962 2,521,491 12,607,453 4,417,072 17,024,525 2029 302,084,239 256,447,516 4,103,160 6,154,740 10,257,901 2,564,475 12,822,376 4,531,264 17,353,639 2030 309,893,788 260,819,248 4,173,108 6,259,662 10,432,770 2,608,192 13,040,962 4,648,407 17,689,369 2031 317,905,232 265,265,507 4,244,248 6,366,372 10,610,620 2,652,655 13,263,275 4,768,578 18,031,854 2032 326,123,789 269,787,562 4,316,601 6,474,901 10,791,502 2,697,876 13,489,378 4,891,857 18,381,235 2033 334,554,814 274,386,706 4,390,187 6,585,281 10,975,468 2,743,867 13,719,335 5,018,322 18,737,658 2034 343,203,800 279,064,253 4,465,028 6,697,542 11,162,570 2,790,643 13,953,213 5,148,057 19,101,270 2035 352,076,381 283,821,539 4,541,145 6,811,717 11,352,862 2,838,215 14,191,077 5,281,146 19,472,223 2036 361,178,339 288,659,925 4,618,559 6,927,838 11,546,397 2,886,599 14,432,996 5,417,675 19,850,671 2037 370,515,602 293,580,791 4,697,293 7,045,939 11,743,232 2,935,808 14,679,040 5,557,734 20,236,774 2038 380,094,254 298,585,545 4,777,369 7,166,053 11,943,422 2,985,855 14,929,277 5,701,414 20,630,691 2039 389,920,536 303,675,616 4,858,810 7,288,215 12,147,025 3,036,756 15,183,781 5,848,808 21,032,589 2040 400,000,849 308,852,459 4,941,639 7,412,459 12,354,098 3,088,525 15,442,623 6,000,013 21,442,636 2041 410,341,760 314,117,554 5,025,881 7,538,821 12,564,702 3,141,176 15,705,878 6,155,126 21,861,004 2042 420,950,007 319,472,403 5,111,558 7,667,338 12,778,896 3,194,724 15,973,620 6,314,250 22,287,870 2043 431,832,501 324,918,539 5,198,697 7,798,045 12,996,742 3,249,185 16,245,927 6,477,488 22,723,414 2044 442,996,331 330,457,516 5,287,320 7,930,980 13,218,301 3,304,575 16,522,876 6,644,945 23,167,821 2045 454,448,771 336,090,918 5,377,455 8,066,182 13,443,637 3,360,909 16,804,546 6,816,732 23,621,277 2046 466,197,282 341,820,354 5,469,126 8,203,688 13,672,814 3,418,204 17,091,018 6,992,959 24,083,977

Source: Horwath Hospitality & Leisure LLC Note: The Blinker and City TOT figures presented for 2010 are not actual collections but represent the potential revenue based on the Taxable Revenues and the applicable rates. The Base Tax rate for Zone 2 is 1.5% in FY 2010, 3.0% in FY 2011, and 4.0% thereafter.

The analysis presented above is based on assumptions and projections we believe to be accurate as well as our analysis of current market conditions. Horwath Hospitality & Leisure LLC neither represents, warrants or guarantees the validity of the above projections. Taxable Hotel Revenue Projections for San José, CA Page 4

II. ECONOMIC CONDITIONS A region’s lodging market is driven by the forces that shape the overall regional economy. As such, the San José hotel market and projections of taxable hotel revenues depend largely on the economic conditions in San José and, to a broader extent, the Silicon Valley.

The Silicon Valley has long been known as the center of innovation in technology, and this has influenced development and growth throughout the San Francisco Bay Area, especially the South Bay and San José. Despite a sharp job loss in the tech sector during the current economic downturn, the fundamental driving force behind the region’s economy remains the high technology sector. The confluence of a highly educated workforce, large innovative companies and universities and research facilities are expected to continue to propel the dynamic nature of the Silicon Valley economy.

Population San José is the largest city in Northern California and the third largest in the state. San José is the county seat of Santa Clara County, and serves as the social and institutional hub of the South Bay. The City’s estimated population was 945,942 as of April 1, 2010 according to the U.S. Census Bureau, or approximately 53% of the County total population of 1,781,642. The City’s population has grown from 629,442 in 1980, for a CAGR of 1.4% over this 30-year period. The following table presents the growth in population since 1980.

City of San José Historical Population Growth Year Population CAGR 1980 629,442 - 1990 782,248 2.2% 2000 895,131 1.4% 2010 945,942 0.6% Source: U.S. Census Bureau

Income Household income in the San José-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA) is the second highest in the country. The US Census Bureau estimated the median household income in 2009 to be $84,483, as compared to the national median of $50,221. The following table presents the top 10 metropolitan areas in terms of median household income. Taxable Hotel Revenue Projections for San José, CA Page 5

Top 10 Median Household Income MSAs Minimum 65,000 People - 2009 Median Rank Metropolitan Statistical Area Household Income 1 Washington-Arlington-Alexandria DC-VA $85,168 2 San José-Sunnyvale-Santa Clara CA 84,483 3 Bridgeport-Stamford-Norwalk CT 79,063 4 San Francisco-Oakland-Fremont CA 73,825 5 Anchorage AK 72,712 6 Lexington Park MD 72,474 7 Oxnard-Thousand Oaks-Ventura CA 71,723 8 Trenton-Ewing NJ 71,650 9 Fairbanks, AK 70,610 10 Boston-Cambridge-Quincy MA-NH 69,934 US Median $50,221 Source: US Census Bureau, 2009 American Community Survey

Employment The Silicon Valley has long been known as the center of innovation in technology, and this has not changed despite periodic downturns in the financial performance of the high-profile companies that lead the local economy. There are 16 companies headquartered in the Silicon Valley in the 2010 Fortune 500, ranked by revenues in the following table.

2010 Silicon Valley Fortune 500 Companies Revenues Fortune State Company City ($ millions) 500 Rank Rank Hewlett-Packard Palo Alto 114,552.0 10 2 Apple Cupertino 36,537.0 56 6 Cisco Systems San José 36,117.0 58 8 Intel Santa Clara 35,127.0 62 10 Google Mountain View 23,650.6 102 12 Oracle Redwood City 23,252.0 105 13 Sun Microsystems Santa Clara 11,449.0 204 22 eBay San José 8,727.4 267 25 Synnex Fremont 7,756.3 294 27 Yahoo Sunnyvale 6,460.3 343 33 Symantec Mountain View 6,149.9 353 35 Advanced Micro Devices Sunnyvale 5,403.0 390 41 Sanmina-SCI San José 5,177.5 405 44 Applied Materials Santa Clara 5,013.6 421 47 Agilent Technologies Santa Clara 4,481.0 461 50 Electronic Arts Redwood City 4,212.0 494 55 Source: CNNMoney.com

Over the past 20 years, employment in the San José-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA) has gone through a significant expansion and slump cycle. Starting with 837,261 employed people in 1990 according to the Bureau of Labor Statistics, the market slumped to 806,533 by 1992 before rebounding and growing steadily to a peak of 953,443 by 1999. Since that peak at the height of the dotcom bubble, employment shrank to 794,461 by 2004. While employment grew again to 844,623 by 2008, the loss of approximately 40,000 jobs in 2009 lowered employment to 802,858. As of December 2010 (preliminary statistics), employment was 801,355 with an unemployment rate of 10.7%, which is 1.6 Taxable Hotel Revenue Projections for San José, CA Page 6 percentage points below the overall state unemployment rate of 12.3%. Overall, total employment declined by -0.2 CAGR over the 20-year period. The following table presents the historical employment data from 1990 through December, 2010.

San Jose-Sunnyvale-Santa Clara MSA Employment Year Employment Unemployment Unemployment Rate 1990 837,261 36,456 4.2% 1991 810,550 51,670 6.0 1992 806,533 62,201 7.2 1993 806,977 62,715 7.2 1994 817,790 56,856 6.5 1995 838,174 45,420 5.1 1996 881,410 35,780 3.9 1997 924,443 31,619 3.3 1998 945,686 33,704 3.4 1999 953,443 31,446 3.2 2000 937,379 30,803 3.2 2001 917,565 49,397 5.1 2002 840,969 77,031 8.4 2003 802,306 73,521 8.4 2004 794,461 55,592 6.5 2005 795,811 45,694 5.4 2006 811,909 38,725 4.6 2007 831,313 41,358 4.7 2008 844,623 54,481 6.1 2009 802,858 99,981 11.1 December 2010 (P) 801,355 95,647 10.7 P = Preliminary Source: Bureau of Labor Statistics

Manufacturing continues to represent a significant component of the area’s workforce, with 18.1% of the total employment in the MSA. Professional and Business Services are the leading employment category with 18.7%, followed by Trade, Transportation & Utilities with 14.7%, Education & Health Services with 13.0%, and Government with 11.6% of the total. Leisure & Hospitality employment represents 8.7% of the total. The following chart shows the distribution of employment by category. Taxable Hotel Revenue Projections for San José, CA Page 7

San Jose MSA Employment Distribution - December

Mining 0% Construction 4% Government Far 11% m Other Manufacturing 3% 17% Leisure and Hospitality 9%

Educational and Health Trade, Transportation & Services Utilities 13% 15%

Information 5% Professional and Business Financial Activities Services 4% 18%

San Jose MSA is equivalent to Santa Clara and San Benito Counties Source: California Employment Development Department

Real Estate Market Development activity levels in San José have entered an extremely challenging period, with a much slower pace of construction that is likely to persist throughout the next five years. The current conditions are in sharp contrast to two readily identifiable periods in the recent past:

1996-2001, an extremely strong seven-year stretch when annual construction valuation exceeded $1.4 billion (peaking at $2.1 billion in 2000); and, 2003-2008, a slower, steadier five-year period with annual construction valuation of around $900 million, during which time continued strength in residential activity to some extent offset slack in non-residential activity.

Construction activity fell drastically to $383.8 million in 2009 although it rebounded to $773.8 million in 2010, and is expected to range from approximately $500 to $600 million annually over the next five years, according to the City of San José Department of Planning, Building and Code Enforcement.

The commercial real estate markets will need this extended period of limited construction, as there is a substantial inventory of available space in both the office and industrial markets. Colliers International reports that there was positive net absorption of 187,197 square feet in the Silicon Valley office market in the second quarter of 2010, the first positive sign in five quarters, but then slid backwards again in the 3rd quarter with negative absorption of 690,104 square feet. This leaves the vacancy rate in the market at 25.7%, with approximately 15.7 million of the area’s 61 million office square feet being vacant. San José’s 23.8 million square feet of office space has a vacancy rate of 24.6%. In the R&D, Industrial and Warehouse markets, net absorption continues to trend in a negative direction, with 1.0 million square feet coming on the market in the 3rd quarter. With 253.3 million square feet of total space in the market, R&D space makes up over 60% of the inventory with 158.2 million square feet and has a vacancy rate of Taxable Hotel Revenue Projections for San José, CA Page 8

20.5%, while Industrial and Warehouse space have lower vacancy rates of 11.5% and 9.8%, respectively. San José has approximately a third of the Silicon Valley market with 86.5 million square feet of R&D, Industrial and Warehouse space, with a vacancy rate of 18.4% overall, and 24.9% for the R&D space.

Airport Norman Y. Mineta San José International Airport (SJC) is located approximately two miles north of downtown San José, making it one of the more convenient airports of any major city. The airport has recently undergone significant improvements. SJC’s comprehensive $1.3 billion improvement program involves the modernization and replacement of the airport’s terminal facilities, including the just finished construction of new Terminal B and Terminal B Concourse that replaces Terminal C. The program also includes complete transformation of the interior of Terminal A to provide more spacious waiting areas, new ticketing areas, and faster security check-in systems. The current program also includes a new 3,350-space rental car and public parking garage directly in front of Terminal B. Terminal B opened in June 2010, and the balance of the program, including new parking areas, is scheduled for completion by summer 2011.

Airport passenger statistics (enplanements & deplanements) increased steadily from 7.3 million in FY 1994 to a peak of 13.9 million in FY 2001. Passenger traffic dropped -17.7% to 11.4 million in FY 2002 due to the effects of 9/11 and the bursting of the dotcom bubble. Passengers dropped again to 10.4 million in FY 2003, and remained relatively flat between 10.4 and 10.9 million through FY 2008. With the financial market crisis in 2008 and the subsequent recession, passenger traffic has decreased further to 8.8 million in FY 2009 and 8.2 million in FY 2010, which equates to 1995 levels. The following table presents historical airport traffic from FY 1994 through FY 2010. Taxable Hotel Revenue Projections for San José, CA Page 9

SJC Historical Traffic Fiscal Year Enplanements & Ending June 30 Deplanements % Change 1994 7,339,142 - 1995 8,579,554 16.9% 1996 9,455,951 10.2 1997 10,249,904 8.4 1998 10,187,973 -0.6 1999 11,062,424 8.6 2000 12,211,816 10.4 2001 13,908,799 13.9 2002 11,441,656 -17.7 2003 10,405,208 -9.1 2004 10,567,399 1.6 2005 10,727,145 1.5 2006 10,851,853 1.2 2007 10,653,817 -1.8 2008 10,380,825 -2.6 2009 8,821,452 -15.0 2010 8,232,446 -6.7 June-Dec 2009-10 4,281,828 June-Dec 2010-11 4,298,518 0.4 Source: Norman Y. Mineta San José International Airport

On a positive note, the airport has experienced a slight traffic increase of 0.4% for the first half of the current fiscal year, with increases in each month since September, indicating the downturn may have bottomed out. Load factors at the airport are over 90% for the major carriers, indicating they are operating at near capacity, so growth will only become significant as the airlines increase their routes. Southwest Airlines has announced six new flights from now through June, and Alaska/Horizon have increased their flights to Hawaii and added new service to Guadalajara, Mexico.

Downtown San José Downtown San José serves as the cultural hub of the South Bay. In addition to the convention center, the downtown offers a variety of recreational and cultural venues that draw visitors from around the region, as outlined below.

HP Pavilion, home of the San José Sharks NHL hockey team, also hosts concerts, performances such as Cirque du Soleil and Disney on Ice, and other major events. The Tech Museum offers interactive experiences providing insight into such areas as genetics, earth science, alternative energy, and microchips - the technology that has made Silicon Valley into the economic engine that it is. The San José Museum of Art features a contemporary West Coast collection, as well as hosting touring exhibits. Children’s Musical Theater is one of the nation’s largest youth musical theaters, and offers extensive training programs for youth in the community. The San José Center for Performing Arts is a 2,665-seat performance hall that features performances by Ballet San Jose as well as a variety of touring theater productions and other artists. The California Theater is a restored historic music hall that houses the San José Symphony and Opera San José, as well as other special events and performances. Taxable Hotel Revenue Projections for San José, CA Page 10

San José Repertory Theater, the home of the only fully professional theater company in the city. Institute for Contemporary Art presents challenging contemporary art in three galleries and features opening receptions, First Friday gallery walks, and after-dark programming. Located just outside of the downtown area, the Sharks Ice at San José features four full-sized hockey rinks and provides recreational ice activities including hockey, figure skating, speed skating and curling. Sharks Ice at San José hosts a variety of regional events and tournaments that attract participants from throughout the state.

All of these facilities and performing arts companies bring people into the downtown area throughout the year, and serve as amenities for both the local and regional community as well as visitors to the area. While San José is not noted as a major tourist destination, these activities generate some demand from attendees who choose to make an outing into a special occasion by staying in one of the city’s hotels.

One potential new development is a new sports facility with stadiums for both the San José Earthquakes (soccer) and Oakland Athletics baseball team. Currently based in the Oakland Coliseum, the Athletics have been trying to get a new baseball park built for several years, and ownership is currently working with Major League Baseball to study the possibility of relocating to San José. While this is very preliminary, a downtown baseball stadium would generate significant activity for 81 games per year.

Recession Cycles Since the end of World War II in 1945, there have been 10 economic cycles, with an average of 10 months of contraction from peak to trough, and an average of 57 months, or nearly five years, of expansion. Whereas the lengthy expansion period in the 1990s led some to believe that such economic cycles could be averted, there have been two strong downturns in the ensuing decade, the latest of which has fueled fears of a double-dip recession or a period of long stagnation or extremely slow growth. The following table presents a summary of the historic recession cycles. Taxable Hotel Revenue Projections for San José, CA Page 11

U.S. Historical Economic Cycles Time Since Previous Name Dates Duration (months) Recession (Months) Recession of 1949 11/48 - 10/49 11 37 Recession of 1953 7/53 - 5/54 10 45 Recession of 1958 8/57 - 4/58 8 39 Recession of 1960-61 4/60 - 2/61 10 24 Recession of 1969-70 12/69 - 11/70 11 106 1973-75 Recession 11/73 - 3/75 16 36 1980 Recession 1/80 - 7/80 6 58 Early 1980s Recession 7/81 - 11/82 16 12 Early 1990s Recession 7/90 - 3/91 8 92 Early 2000s Recession 3/01 - 11/01 8 120 Great Recession 12/07 - 6/09 18 73 Source: National Bureau of Economic Research

Historically, the San José lodging market has roughly mirrored the US economy in terms of cyclical performance. Since 1981, based on data from PKF Consulting, and since 1987 when Smith Travel Research (STR) data became available, the market has experienced growth cycles that have averaged approximately 5 years, while downturns have averaged approximately 2.5 years. The length of the hotel market downturns in comparison to a national recession points to lodging as a lagging indicator, rebounding only after the overall economy has had time to grow for an extended period.

The cyclical growth in the local lodging market reflects the “boom or bust” nature of the local economy. While the overall Compounded Annual Growth Rate (CAGR) for RevPAR from 1987 through 2009 has been a relatively moderate 2.0%, the actual yearly fluctuations tend to be much greater. Over the 22 years of the market data reported by STR, there have been 14 years with positive growth and in those years the average growth rate was 12.8%, while for the eight years in which the market RevPAR declined the average decrease 13.5%. The following chart shows the annual percentage change in hotel room nights occupied, average daily rate (ADR), and RevPAR from 1988 through 2009. Taxable Hotel Revenue Projections for San José, CA Page 12

San José Hotel Market Performance Annual % Change

30%

20%

10%

0% RevPAR 9 0 8 90 91 92 95 96 97 98 00 01 02 03 05 06 07 08 1 Demand 9 9 0 1988 19 19 19 1 1993 1994 19 19 19 1 1999 20 20 20 2 2004 20 20 20 20 2009 20 ADR -10%

-20%

-30%

Source: STR

As can be seen from this chart, these measures of market performance have been volatile throughout the past two decades, although the trend over the long-term has been a gradual increase in all categories, as discussed in the following section.

National Lodging Market Forecast As part of our research, we also evaluated projections being made for the lodging industry in general. Lodging industry forecasts by five firms indicate RevPAR nationally is projected to increase by 5.5% to 7.1% in 2011, as shown in the following table:

National Lodging Forecasts Annual RevPAR Growth Projection Firm Date 2011 Morgan Stanley 6-14-10 7.0% PKF Consulting (PKF) 1-7-11 6.3% Smith Travel Research (STR) 1-7-11 5.5% PriceWaterHouseCoopers (PWC) 8-30-10 6.7% HVS 1-7-11 7.1%

These national projections are well below what San José experienced as the market recovered from the previous recession of 2001. As San José’s economy is reliant in large part to a single sector, the high tech industry, its fluctuations have tended to be somewhat more pronounced than for the country overall. Following the events of 9/11 and the dotcom crash, the San José market RevPAR declined -26.1% in 2001, -27.3% in 2002, and -16.0% in 2003. Following these declines, RevPAR was up a slight 2.8% in 2004, and then up 11.1%, 20.6%, and 12.2% in 2005 through 2007, as shown in the previous graph. Taxable Hotel Revenue Projections for San José, CA Page 13

III. SAN JOSÉ LODGING MARKET Overview There are 77 hotels with a total of 8,892 guestrooms located within the City of San José, according to the City’s parcel database. The lodging market in San José has been tracked by Smith Travel Research (STR) since 1987. STR’s database is a nearly complete inventory of the City’s properties, with a total census of 71 hotels with 8,606 rooms as of year-end 2010, and approximately 87% of the total rooms reporting to STR on a monthly basis. The following discussion pertains strictly to the STR data. The following table presents the calendar year historical operating performance for the citywide group of properties as reported by STR for the period from 1987 through 2010.

City of San José Citywide Lodging Performance Annual Revenue Room Room Average Per Calendar Nights Nights Daily Available Year Available Occupied Occupancy Rate Room 1987 1,653,181 1,138,587 68.9% $53.08 $36.56 1988 1,811,495 1,250,785 69.0 59.68 41.21 1989 1,713,666 1,242,981 72.5 65.30 47.37 1990 1,744,253 1,192,990 68.4 67.87 46.42 1991 1,866,205 1,190,268 63.8 69.15 44.11 1992 1,955,713 1,238,799 63.3 67.95 43.04 1993 2,140,426 1,397,614 65.3 66.90 43.69 1994 2,150,920 1,478,549 68.7 69.99 48.11 1995 2,127,010 1,608,914 75.6 76.35 57.75 1996 2,150,215 1,711,785 79.6 87.37 69.55 1997 2,170,020 1,682,653 77.5 104.92 81.35 1998 2,310,252 1,692,612 73.3 114.62 83.97 1999 2,392,307 1,794,445 75.0 119.75 89.82 2000 2,487,455 2,026,252 81.5 138.58 112.88 2001 2,651,664 1,690,428 63.7 130.81 83.39 2002 2,786,552 1,572,178 56.4 107.48 60.64 2003 3,020,488 1,609,163 53.3 95.64 50.95 2004 3,134,640 1,761,465 56.2 93.20 52.37 2005 3,159,075 1,896,218 60.0 96.93 58.18 2006 3,159,075 2,087,613 66.1 106.19 70.17 2007 3,145,500 2,126,912 67.6 116.48 78.76 2008 3,156,147 2,033,492 64.4 119.29 76.86 2009 3,141,555 1,753,324 55.8 100.75 56.23 2010 3,141,249 1,988,523 63.3 99.40 62.92 CAGR1 2.8% 2.5% - 2.8% 2.4% % Chg – 2009-10 0.0% 13.4% - -1.3% 11.9% 1 Compounded Annual Growth Rate Source: STR

By 2000, at the end of the high tech boom and dotcom bubble, the market had sustained several years of double-digit rate growth and RevPAR peaked at $112.88, which was nearly double the RevPAR achieved in 1995. With the addition of new supply, the economic downturn resulting from the bursting of the tech bubble, and the impact on travel following the events of 9/11, market demand dropped dramatically in Taxable Hotel Revenue Projections for San José, CA Page 14

2001. The downturn continued through 2003, and RevPAR bottomed out at $50.95, less than half what it had been in 2000 and just slightly better than that achieved in 1994.

RevPAR steadily improved through 2007, but still had not returned to the 1997 level, indicating the continuing struggle the hotels in the market were facing despite a relatively robust economy. Then, beginning in the second half of 2008, the national economy suffered from the financial crisis and the local market was affected like most of the country with sharp drops in demand. Average Daily Rates (ADR) fell in concert with occupancy, and continued to fall through 2010.

The San José hotel market is beginning to recover from the downturn that began in late 2008. According to data from STR, demand in San José increased by 13.4% in calendar year 2010 versus the same period in 2009. And while the average daily rate (ADR) has continued to decline, by -1.3%, the increased demand and occupancy led to an overall gain in rooms revenue and revenue per available room (RevPAR) of 11.9% for the year. Furthermore, the increases have gained in the second half of the 2010 calendar year, with RevPAR from July through December (equal to the first half of the City’s fiscal year) growing by 12.5% over the prior year.

Interviews with managers of major hotels in the market indicate that the resurgence in individual business travelers has led the recovery. Group business has been slower to return but early indications are that it will follow suit beginning in 2011. Managers indicated expectations ranging from 3-12% growth in RevPAR in 2011, as the market continues to recover. Occupancy is expected to be the largest contributor to growth, although expectations are that rates have bottomed out and will begin to increase slightly in 2011. This is supported by the growth exhibited in the second half of 2010 calendar year, as since May the market has had growth in ADR in every month except August. For these eight months from May through December, the average monthly growth in ADR was 2.9%.

Historical Supply Growth As can be seen from the following table, there was fairly robust growth in hotel rooms supply from 1987 through 2004, after which it has mostly leveled off. Guestroom supply grew by 3.3% annually from 1991 - 1995, 3.7% from 1996 - 2000, 4.5% from 2001 - 2005, and decreased by -0.1% from 2006 - 2010. The following table presents the historical growth of the city’s hotel supply. Taxable Hotel Revenue Projections for San José, CA Page 15

City of San José Highlights of Supply Growth # of Rooms % Change Year Added in Supply Hotels Opened 1988 434 9.6% Fairmont (late 1987) 1991 334 7.0% Courtyard SJ Airport, Holiday Inn Silicon Valley, Staybridge Suites 1992 246 4.8% Homewood Suites 1993 506 9.4% Hilton San José 1998 384 6.5% Homestead, Residence Inn 2000 261 4.0% Extended Stay Deluxe 2001 449 6.6% 3 Extended Stay Americas, Towne Place Suites, Moorpark Hotel 2002 369 5.1% Hampton Inn & Suites, Comfort Suites, Fairmont Expansion 2003 641 8.4% Marriott San José, Hotel Valencia Note – Rooms added are adjusted for mid-year openings; SJCC opened in 1989 Source: STR

The two significant periods of growth in hotel supply were the early 1990s and the early 2000s, which were both periods that followed performance peaks. Given the lengthy lead-time for development projects, specifically for large full-service hotels, it is not uncommon for projects that are planned during boom periods to open during economic downturns, which further exacerbates market downturns. The market performance increased significantly between 1987 and 1989, before experiencing a downturn from 1990 through 1992. Throughout the remainder of the 1990s, the lodging market expanded significantly as the Silicon Valley led the way in technological innovation and the major tech companies in the region became some of the most powerful in the country.

The final big construction boom culminated with the opening of approximately 2,000 rooms between 2000 and 2004. Overall supply grew from 5,022 rooms in FY 1990 to its current 8,892 rooms in FY 2010, which equates to a CAGR of 2.9% room nights available over this 20-year period.

Hotel Stratification There are three broad categories of hotels in the San José market: Convention Hotels, Branded Hotels, and Independent Hotels. Team San José (TSJ), which acts as the convention and visitors bureau for the city, tracks the performance of 14 major hotels within the city, referred to as the Convention Hotels. These 14 Convention Hotels represent a total of 4,409 guestrooms, or approximately 49.6% of the total lodging inventory of the city, and include both the major downtown hotels as well as larger hotels in other parts of the city that serve the convention market and also attract their own group business. The second sector is the Branded Hotels, which includes 32 hotels with 3,199 guestrooms, or 36.0% of the total citywide supply. These Branded Hotels are either affiliated with the major brands or an upscale marketing association such as Preferred Hotels, but have limited meeting space and cater primarily to transient travelers. The third category, the Independent Hotels, are generally smaller and older, and these properties do not contribute their data to STR. These Independent Hotels make up the smallest component of the market, with 31 properties comprising 1,284 guestrooms, or 14.4% of the total. A table in the Addenda presents a complete list of the city’s hotels by category. Taxable Hotel Revenue Projections for San José, CA Page 16

The Convention Hotels tend to achieve the highest average rates due to the high quality of their facilities, the level of services provided, and the strong brand affiliation of several of these hotels. The Branded properties, generally smaller and more moderately priced, achieve the highest occupancy level of the hotel categories. The Independent Hotels trail the market in both occupancy and RevPAR as their age and condition is generally poorer than the other hotels and they lack the reservations systems provided by the national chains. The following estimates of the 2010 performance for the three categories is extrapolated using the data provided by STR and TSJ.

San José Hotels Performance by Category – Estimated Calendar Year 2010 Average Daily Revenue Per Category # of Rooms Occupancy Rate Available Room Convention Hotels 4,409 59% $117 $69 Branded Hotels 3,199 69 78 54 Independent Hotels 1,284 58 82 48 Source: STR, TSJ, Horwath Hospitality & Leisure LLC Taxable Hotel Revenue Projections for San José, CA Page 17

Future Supply Although this report assumes that no new hotels will join the CCFD, for the purpose of analyzing the potential revenues from the existing hotels in the CCFD it is necessary to evaluate the total citywide market and derive the resulting RevPAR. We have therefore reviewed the potential for new hotels to be opened within the city, regardless of their inclusion in the CCFD. Our projections further assume that no existing hotels in the CCFD will cease operating as hotel properties during the projection period.

One of the key factors leading to the recovery in lodging markets both nationally and in San José is the limited amount of new supply entering the market. In San José, there is one hotel that has been recently developed, which is the 160-room Hotel Sierra that opened on March 7, 2011 near the intersection Highway 237 and N. 1st Street in north San José. (This hotel has not annexed into the CCFD at present.) Beyond this, the lack of financing for real estate generally has limited any potential new developments, thus allowing the market to recover as the demand side improves.

While there will be limited additions to supply in the near term future, eventually the financial markets will return and new development projects will come to fruition. We have assumed that the two projects that are approved and awaiting financing (a Marriott Residence Inn/Fairfield Inn with 321 rooms located at N. 1st Street and Skyport in North San José, and the America Center project with 176 rooms located on Gold St. north of Highway 237 in the Alviso district) will be completed in 2013 and 2014, respectively. Beyond that, we have assumed approximately 400 rooms opening every five years, which results in an overall annual CAGR in supply of 0.8% for the 36-year period. The estimated CAGR for supply of 0.8% from FY 2010 through FY 2046 is well below the historical CAGR of 2.9% from FY 1990 through FY 2010. Our estimate of the potential future growth in supply is lower than the historical level due largely to the status of San José as a more mature market, where new real estate construction of all kinds is anticipated to occur at a slower pace than historically. Also, as a mature market San José now has a large base of hotel guestrooms, meaning future additions represent smaller percentage increases than historically.

As a mature market, there are greater limitations on the availability of land in San José suitable for new hotel development. Additions to supply can include expansion of existing properties (for example, the Holiday Inn has excess land and its owners have long discussed the possibility of expanding), demolishing older properties and replacing them with larger buildings, as well as new construction. Further, despite being a mature market, San José’s Envision 2040 planning document highlights several growth areas designed to accommodate new employment centers as well as housing, such as North San José, Downtown, and special plan areas such as Alviso and Rincon South. As these growth areas are expected to house concentrations of new office and commercial space, it is likely that much of the future hotel development will take place in these areas as well.

Demand Profile In addition to the availability of the STR data, the data that TSJ tracks for the 14 Convention Hotels includes monthly performance in terms of occupancy and ADR, as well as their mix of group and transient business. Over the past four years, the mix of business coming from the group segment has decreased from approximately 45% of the total to approximately 34%, primarily as a result of the disproportionate impact the economic downturn has had on group demand. The following table presents the market mix for this sample of properties over the past four fiscal years. Taxable Hotel Revenue Projections for San José, CA Page 18

GROUP vs. TRANSIENT SUMMARY BY FISCAL YEAR 14 SAN JOSÉ CONVENTION HOTELS Fiscal Year Group Rooms Transient Rooms Total Rooms Group % Transient % 2007 437,813 528,964 966,777 45.3% 54.7% 2008 428,700 575,603 1,004,303 42.7% 57.3% 2009 339,820 527,510 867,330 39.2% 60.8% 2010 305,290 586,240 891,530 34.2% 65.8% Source: Team San José

This pattern is reflected in most markets nationally, as companies have tightened their group travel budgets in a reaction to the perceived excesses of corporate events, often referred to as the AIG effect. In San José, this trend has been exacerbated by the declining competitiveness of the SJCC, as discussed later in this report. Over these past four years, these properties have averaged approximately 40% group business and 60% transient travelers.

As these hotels represent the largest and most group oriented of the hotels in the city, these results somewhat overstate the group market for the city overall. Transient demand in the market is generated primarily by the many corporations in the city, which attract business travelers. As San José is not considered a tourist destination, only a small portion of transient demand is leisure related, with people visiting friends and relatives and attending special events in the area.

Group business in San José is a combination of associations holding meetings either at SJCC or the larger hotels that can accommodate them, corporate group meetings, and SMERF (Social, Military, Educational, Religious, and Fraternal) group meetings. Overall, based on the data for the 14 convention hotels and the lower level of group business attracted by the other categories of properties in the market, we estimate that the citywide market is currently made up of approximately 75% transient demand and 25% group demand.

Transient demand grows primarily as a result of business activity created by the local corporate demand generators. For example, the numerous high-tech companies in Silicon Valley draw a wide variety of types of travelers ranging from sales calls to financial advisors and corporate executives. In 2010, as the economy has begun to improve, commercial travelers have led the recovery of occupancy at the city’s hotels and this business is expected to continue to grow as the economy strengthens further.

Group demand grows as a function of both the economic conditions in the local area and, in the case of national and regional associations, the wider region and nation. Attracting group demand is also more dependent upon the facilities able to accommodate the groups, as unlike corporate demand that needs to be close to the company being visited, meeting planners have a variety of locations they can choose from for their meetings. Group demand is expected to grow slowly until the completion of the SJCC expansion and renovation project, expected to be 2013.

Regional Lodging Market The hotels in San José also compete with other hotels in the neighboring cities within the Silicon Valley for corporate transient demand and group business. Milpitas, Santa Clara, and Sunnyvale all have hotels that compete directly for some of the major corporate demand generators in the area, as do some of the Taxable Hotel Revenue Projections for San José, CA Page 19 smaller nearby communities such as Campbell and Los Gatos. The SJCC and large convention hotels also compete for major group business with regional convention centers such as Santa Clara, Phoenix, Portland, Reno, Sacramento and Seattle. TSJ has also reported increased competition from the large Las Vegas casino hotels, which have been discounting heavily to try to build business during the downturn.

The regional market is tracked by STR as the San José-Santa Cruz region. In its sample, STR reports on 178 properties with a total of 22,966 guestrooms, or roughly 2.5 times the total guestroom census for the City of San José. The performance of this region as a whole, as well as the neighboring San Francisco- San Mateo region, is presented in the following table.

Regional Lodging Performance Calendar San José-Santa Cruz San Francisco-San Mateo Year Occ. % ADR RevPAR Occ. % ADR RevPAR 2005 62.4% $101.08 $63.04 71.6% $125.60 $ 89.91 2006 67.1 110.61 74.24 72.9 137.91 100.57 2007 69.3 118.94 82.41 75.2 148.59 111.75 2008 65.3 123.85 80.86 75.0 156.34 117.28 2009 56.7 105.76 59.99 71.2 133.41 95.02 2010 64.5 105.10 68.42 75.2 135.97 102.31 CAGR1 0.8% 1.7% 1.6% 2.6% 1 Compounded Annual Growth Rate Source: STR

As can be seen by comparing this table to the STR data for the City of San José presented earlier, the overall region tends to perform slightly higher than the city in both occupancy level and ADRs, but overall mirrors the city hotel performance fairly closely. The slightly stronger performance is primarily a result of the hotels in cities such as Santa Clara, Sunnyvale, and Cupertino being located closer to the largest corporations in Silicon Valley such as Google, Intel, Apple, Yahoo!, and Advanced Micro Devices. The following chart presents a comparison of the RevPAR for the San José-Santa Cruz region and the City of San José. The hotels in the San Francisco-San Mateo market perform at a higher level than those in the South Bay, due largely to the ability of San Francisco hotels to attract the tourist market as well as business travelers and groups. Despite the variance in ADR and RevPAR, however, the pattern of growth and decline in the market over the past five years is very similar to that of San José, indicating that the city’s hotels are subject to the same market forces as those in the region overall. Taxable Hotel Revenue Projections for San José, CA Page 20

San José v. Regional Hotel RevPAR

$140 $120 $100 San José-Santa Cruz $80 City of San José $60 $40 San Francisco-San Mateo $20 $0 2005 2006 2007 2008 2009 2010 Source: STR Calendar Year Taxable Hotel Revenue Projections for San José, CA Page 21

IV. SAN JOSÉ HISTORICAL TAXABLE HOTEL REVENUES Procedures The Hotel Transient Occupancy Tax is covered in Title IV of San José Municipal Code, Chapter 4.72, 4.74 and 4.75. Transient Occupancy Tax (TOT) is tax collected by the operator of the hotel/motel from customers who occupy or stay for less than thirty (30) days. A hotel guest is exempt from paying the tax on the 31st day and thereafter. In addition, foreign diplomats and federal government employees on official business are also exempt from the TOT.

The TOT collected by the hotel operators is due to the City on or before the last day of each month for the preceding calendar month. For those whose annual tax debt to the City is less than $100,000, they may elect to pay the taxes due on a quarterly basis. The due date for quarterly return is the last day of the month following each calendar quarter.

A ten percent late charge is added after the original due date. An additional ten percent is added once the tax became delinquent for thirty days. In addition to the late charges, a daily interest of 0.0004931507 or 18% annually is charged. Furthermore, a 25% penalty can be levied for fraudulent activities related to non-compliance with the TOT ordinance.

Each month a hotel files a TOT Report with the City reporting their income and exemptions, complete with backup paperwork. City employees check the Report for any math error or other discrepancies, and if such is found it is flagged for follow up. The City also periodically audits hotel TOT payments, which have a statute of limitations of three years. If discrepancies are found between the originally reported amounts and the audits, and the hotel after being notified agrees with the revised amount, the hotel pays a restitution including penalties and interest. The CCFD Special Tax, which is discussed in detail later in this report, will be collected and monitored in the same manner, but with slightly different penalty provisions, and with the ultimate remedy of judicial foreclosure.

Collections The City’s TOT rate is 10.0% of taxable hotel revenues (also referred to as rent), and has been the same rate for at least the past 20 years. The historical taxable hotel revenues and TOT collections for the City are presented in the following table: Taxable Hotel Revenue Projections for San José, CA Page 22

City of San José Historical Taxable Hotel Revenues and TOT Collections TOT Fiscal Year Taxable Hotel Collections Ending June 30 Revenues (10%) Percent Change 1990 $66,267,870 $6,626,787 - 1991 67,799,477 6,779,948 2.3% 1992 73,049,396 7,304,940 7.7 1993 78,076,149 7,807,615 6.9 1994 88,816,493 8,881,649 13.8 1995 97,198,923 9,719,892 9.4 1996 120,553,349 12,055,335 24.0 1997 147,031,794 14,703,179 22.0 1998 172,056,806 17,205,681 17.0 1999 185,488,980 18,548,898 7.8 2000 224,325,055 22,432,506 20.9 2001 255,415,480 25,541,548 13.9 2002 165,774,679 16,577,468 -35.1 2003 164,796,014 16,479,601 -0.6 2004 163,951,186 16,395,119 -0.5 2005 179,786,082 17,978,608 9.7 2006 211,536,136 21,153,614 17.7 2007 224,596,462 22,459,646 6.2 2008 267,250,158 26,725,016 19.0 2009 194,819,035 19,481,903 -27.1 2010 186,001,647 18,600,165 -4.5 Source: City of San José Dept. of Finance

The City’s taxable hotel revenues are a function of both the hotels’ RevPAR and the changes in the supply of guestrooms. Thus even in years in which the RevPAR in the market declined, such as 1990-91, the added supply resulted in an increase in revenue.

Monthly Taxable Hotel Revenues Over the past five years, with fluctuations due to the economic downturn as well as seasonal patterns, the overall monthly taxable hotel revenues have mostly remained within a range from approximately $13 million to $20 million. When analyzed for the five-year period, every month except November and December have seen revenues average over $16 million, with December being the low month at $14.6 million and March the high month with an average of over $19 million. The following table and chart show the monthly taxable hotel revenues over the past five years. Taxable Hotel Revenue Projections for San José, CA Page 23

City of San José Monthly Taxable Hotel Revenues (000) Month FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 Jul $ 14,830 $ 16,045 $ 19,239 $ 19,229 $ 13,228 Aug 14,031 17,282 20,113 18,613 13,598 Sep 14,594 17,470 19,100 19,864 13,824 Oct 15,197 20,560 20,371 16,932 14,880 Nov 15,943 15,431 17,925 14,664 12,769 Dec 12,785 14,577 17,885 14,933 13,057 Jan 16,196 18,368 19,398 14,323 12,404 Feb 17,875 17,770 20,397 12,752 14,717 Mar 21,820 21,788 21,612 14,690 16,050 Apr 15,953 18,647 19,478 12,435 13,825 May 15,812 19,184 19,517 12,260 16,939 Jun 18,162 21,834 21,665 12,901 15,728 Year-end Reconciliation1 18,339 5,641 30,551 11,223 14,981 Annual $211,536 $224,596 $ 267,250 $194,819 $186,002 1 Year-end reconciliation includes late payments, post-audit collections, and prior year adjustments. Source: City of San José Dept. of Finance

As shown, the taxable hotel revenues for FY 2010 were below the pace of FY 2009 until February, when the market began to pick up and the totals surpassed the prior year for the remaining months.

For the first six months of the current fiscal year (through December 2010), taxable hotel revenues have increased substantially over the prior year, as would be expected based on the STR performance indicators. The following table presents the monthly and cumulative data compared with the prior year.

City of San José Monthly Taxable Hotel Revenues (000) 1st Half 1st Half Percent Percent 1st Half FY 2010 1st Half FY 2011 Change - Change - Month FY 2010 Cumulative FY 2011 Cumulative Month Cumulative Jul $13,228 $13,228 $15,204 $15,204 14.9% 14.9% Aug 13,598 26,826 13,885 29,089 2.1% 8.4% Sep 13,824 40,650 15,504 44,593 12.1% 9.7% Oct 14,880 55,530 17,596 62,188 18.3% 12.0% Nov 12,769 68,299 15,246 77,434 19.4% 13.4% Dec 13,057 81,356 12,982 90,416 -0.6% 11.1% Source: City of San José Dept. of Finance

As shown, the cumulative revenue increase of 11.1% is very comparable to the 12.5% increase reported by STR for the second half of the 2010 calendar year.

Top 10 Contribution The top 10 hotels in terms of taxable hotel revenues and TOT contribution are listed in alphabetical order as follows: Taxable Hotel Revenue Projections for San José, CA Page 24

San José Top 10 TOT Contributors Number of Meeting Last Hotel Rooms Space Sq. Ft. Year Built Renovation Courtyard by Marriott 150 1,250 1990 2004 Crowne Plaza 240 6,760 1974 2008 Doubletree Hotel 505 30,000 1982 2004 Fairfield Inn & Suites 186 1,810 1969 2000 Fairmont Hotel 805 66,800 1987 2008 Hotel Valencia Santana Row 213 3,804 2003 2008 San José Airport Garden Hotel1 512 27,800 1961 1998 San José Hilton 355 7,621 1992 2002 San José Marriott 506 21,000 2003 2008 Wyndham Hotel 355 16,000 1974 2005 Total 3,827 1 Formerly Holiday Inn, converted as of end of October 2010 Source: STR, Hotel Travel Index

These 10 properties have a total of 3,827 rooms, comprising approximately 43% of the total rooms inventory in the city. The Fairmont with 805 rooms is the largest in the city, and the Doubletree and Marriott are both slightly over 500 rooms; together, these three hotels make up approximately 20% of the citywide total room inventory.

In terms of taxable hotel revenues generally and TOT revenues specifically, these ten hotels represent slightly over half (58.7%) of the total collections for the City over the past five years. The revenue production slightly exceeds their relative percentage of the total rooms in the city because these hotels tend to be more upscale and therefore higher priced, and perform with a higher ADR and RevPAR than the market overall. Of the 10 hotels, the Marriott, Hilton, Fairmont and Crowne Plaza are situated in Zone 1 of the CCFD, while the rest are in Zone 2. For 2010, the top 10 contributors represented a slightly higher proportion than their 5-year average at 58.7%. For comparative purposes, we have also included the revenue totals for the ten next largest contributors, which comprise only approximately 16.3% of total citywide TOT revenues. As shown in the table below, after the top 10 hotels the contribution per property drops significantly. The remaining 25% of TOT revenue is contributed by the other 57 hotels in the city’s inventory.

San José Top TOT Contributors Revenue Contribution Percentage FY 2010 % of Total Top 10 TOT Contributors $10,917,273 58.7% 11-20 TOT Contributors 3,032,271 16.3 Remaining TOT Contributors 4,650,620 25.0 City Total $18,600,165 100.0% Source: City of San José

Reconciliation with STR Data As mentioned above, the STR data for the city’s hotels samples the majority of hotels in San José, but not all. For the most part, the hotels in the city that do not contribute to STR’s database are small, older independent hotels. These hotels typically underperform the overall market, and therefore the STR figures are slightly inflated for the city overall. STR then extends its statistics calculated based on the Taxable Hotel Revenue Projections for San José, CA Page 25 survey respondents to the overall census of the citywide supply, thus inflating the total revenues. This was more evident in early years, when STR respondents tended to be the more upscale brands in the market; as STR’s sample has broadened over the years, the statistics more closely match the actual citywide performance. Furthermore, the STR data does not factor in any exemptions for long-term stays or government employees, which affects the Taxable Hotel Revenues but not the overall market.

The following table presents the original STR data used above but sorted for Fiscal Years, and compares it with the Taxable Revenue for the city. By factoring in the percentage of participation and making adjustments accordingly, an estimated total RevPAR for the city can be calculated. As can be seen, as the STR sample has covered a larger percentage of the citywide hotel rooms over time, growing from under 60% of the total in 1990 to nearly 90% for the past five years, the variance in revenues and RevPAR has narrowed.

City of San José Reconciliation of STR Data and Taxable Hotel Revenue City STR STR STR STR Taxable Var. fr City City Fiscal Sample Occ. STR RevPAR Revenue Revenue STR Occ. City RevPAR Year (%) (%) ADR ($) ($) ($000)1 ($000) (%) (%) ADR ($) ($) 1990 56.7 71.9 66.43 47.77 81,158 66,268 -22.5 69.5 51.99 36.15 1991 59.5 64.5 68.63 44.28 80,588 67,799 -18.9 62.4 56.95 35.51 1992 63.5 64.2 69.36 44.51 84,265 73,049 -15.4 62.2 58.32 36.25 1993 70.9 64.3 67.19 43.23 89,064 78,076 -14.1 62.7 57.83 36.28 1994 73.4 66.8 68.60 45.86 98,766 88,816 -11.2 65.4 60.41 39.48 1995 72.5 72.2 72.43 52.33 111,659 97,199 -14.9 70.7 61.30 43.34 1996 72.6 78.4 81.06 63.54 136,126 120,553 -12.9 76.8 69.95 53.76 1997 71.8 77.8 96.76 75.27 162,319 147,032 -10.4 76.2 85.21 64.94 1998 73.0 75.7 110.99 83.97 186,017 172,057 -8.1 74.1 99.05 73.40 1999 75.7 74.2 116.70 86.57 205,475 185,489 -10.8 72.8 103.71 75.55 2000 76.0 78.5 126.95 99.64 242,529 224,325 -8.1 77.1 114.34 88.18 2001 75.6 75.2 144.84 108.90 280,315 255,415 -9.7 73.8 129.40 95.53 2002 78.8 58.3 112.29 65.42 177,434 165,775 -7.0 57.0 102.94 58.72 2003 83.5 54.7 100.33 54.92 157,579 164,796 4.4 53.7 102.01 54.80 2004 86.2 53.5 93.82 50.22 156,171 163,951 4.7 52.7 97.71 51.53 2005 85.5 58.0 94.81 54.97 173,665 179,786 3.4 57.1 96.79 55.31 2006 87.4 63.8 102.01 65.13 205,742 211,536 2.7 63.1 102.78 64.83 2007 88.7 67.0 111.08 74.39 233,995 224,596 -4.2 66.3 104.11 68.97 2008 87.3 66.7 119.63 79.84 252,232 267,250 5.6 66.0 124.44 82.11 2009 88.5 57.8 110.21 63.68 200,444 194,819 -2.9 57.1 104.95 59.89 2010 88.0 60.5 98.14 59.40 186,602 186,002 -0.3 59.8 95.86 57.31 CAGR 5.3% 3.1% 2.3% 1 STR Revenue is based on data from sample contributors applied to the entire supply in the market. Source: STR, City of San José Dept. of Finance, Horwath Hospitality & Leisure LLC Taxable Hotel Revenue Projections for San José, CA Page 26

V. SJCC EXPANSION AND RENOVATION

The San José Convention Center opened in 1989, and, along with the new Fairmont Hotel, gave downtown San José the ability to market itself to associations and larger corporate groups that had previously not considered San José an option. With the new inventory of space and the burgeoning Silicon Valley high tech industry, San José was an obvious choice for a variety of technology conventions, trade shows, and other events. In 1993, the San José Hilton opened allowing for a bigger available downtown room block, and throughout the 1990s the downtown San José market, with the SJCC as a focus, was an inviting and successful convention destination.

In more recent years, however, the national convention market has become increasingly competitive as cities have added new convention centers and expanded existing facilities. Given the increasing competition, coupled with the eroding condition of the SJCC, the facility has had a more difficult time attracting the core association and corporate groups it needs to effectively serve the city’s lodging market. The competitive weaknesses of the facility have exacerbated the impact of the economic downturn on performance since 2008.

Convention Center attendance includes a variety of activities including meetings, conventions, consumer trade shows, banquets, and performances. Attendance at such events can be either completely housed at the Convention Center or spread across multiple venues. Total attendance grew from nearly 539,000 in FY 2005 to over 693,000 in FY 2008, before dropping down to 446,000 in FY 2010. The estimated economic impact of the Convention Center attendance has ranged from approximately $80 million to $105 million during this six-year period. The following table presents historical attendance figures and estimated economic impact since FY 2005.

San José Convention Center Historical Attendance and Economic Impact Fiscal Year Total Out of Town Estimated Ending June 30 Attendance Attendance Economic Impact 2005 538,881 88,174 $85,414,392 2006 479,488 92,786 106,518,871 2007 542,036 67,788 88,956,923 2008 693,510 75,199 98,535,127 2009 587,612 86,286 104,153,060 2010 446,069 58,240 78,714,542 Source: Team San José

Team San José is responsible for marketing San José as a destination, and books group business into the SJCC as well as for other venues within the city. In FY 2010, the SJCC generated approximately 120,000 room nights of group demand for the city’s hotels, according to TSJ data. This represents approximately 65% of the total group room nights (180,000) generated by TSJ for the city overall, which represents approximately 10% of the city’s overall rooms occupied. Room nights booked by TSJ grew from FY 2005 through FY 2007, before declining in FY 2008 and continuing to fall through FY 2010, as shown in the following table.

Taxable Hotel Revenue Projections for San José, CA Page 27

Team San José Historical Room Nights Generated Fiscal Year Room Nights – Room Nights – Convention Ending June 30 Total Convention Center Center % of Total 2005 164,731 114,877 69.7% 2006 201,618 131,086 65.0 2007 237,132 179,720 75.8 2008 222,091 172,637 77.7 2009 200,697 137,536 68.5 2010 182,452 120,501 66.0 Source: Team San José

Booking pace is a measure of future bookings, and can be measured against historical bookings for a comparable time period as well as budgets or targeted bookings. As of September 2010, advance bookings for 2011 for the SJCC are off the targeted pace by approximately 40,000 room nights, or 35%, as a result of the poor economic conditions in 2008-09 when the normal advance bookings for 2011 would have been made. The pace for 2012 is at approximately 80% of the targeted pace, increasing to 90% in 2013, indicating the advanced bookings are still below average but improving. Furthermore, tentative room nights appear to be fairly strong, although the ability to actually contract these room nights could be affected by the construction project. The table below presents the pace information for the period corresponding to the proposed construction project.

Team San José Advanced Bookings Pace 2011 2012 2013 Total Citywide Definite Room Nights 103,516 59,401 51,319 Pace Targets 130,538 79,389 54,556 Pace Percentage 79.3% 74.8% 94.1% Tentative Room Nights 54,400 81,814 58,127 Convention Center Definite Room Nights 65,560 53,938 44,151 Pace Targets 103,142 67,716 48,704 Pace Percentage 63.6% 79.7% 90.7% Tentative Room Nights 36,654 68,958 53,594 Source: Team San José, TrendsAnalysisProjections LLC

The SJCC competes with a number of convention centers in the western region. Team San José tracks its performance against a group of competitors through the TAP Peer Report, from TrendsAnalysisProjections LLC. The peer set selected by TSJ for the SJCC is comprised of Phoenix, Portland, Reno, Sacramento and Seattle. The TAP report measures the facility’s definite bookings relative to its pace targets, and compares the performance across the peer set. The report also tracks conversion percentage, which is a measure of the facility’s ability to capitalize on leads it gets for potential future business. The Pace Index and Conversion Index are benchmarks, with an index above 100 indicating performance above the competitive set, and below 100 indicating weaker performance. In the most recent report available, as of August 2010, SJCC was performing well below the peer set in most of Taxable Hotel Revenue Projections for San José, CA Page 28 the observable measures with a Pace Index of 82 in 2011, 76 in 2012, and 96 in 2013 and a Conversion Index of 92,80, and 112 for the same three years.

Team San José TAP Peer Set Rankings 2011 2012 2013 Pace Index 82 76 96 Pace Index Rank 6 of 6 6 of 6 4 of 6 Conversion Index 92 80 112 Conversion Index Rank 5 of 6 6 of 6 3 of 6 Source: Team San José, TrendsAnalysisProjections LLC

Another indication of the SJCC’s challenges is the Lost Business report the TSJ maintains for the property. TSJ management has tracked nearly 200,000 room nights worth of business lost between 2006 and 2012 due to a combination of insufficient space and the condition/appropriateness of facilities. Groups that have been lost include corporate groups such as Adobe Systems (19,495 room nights), IBM (6,040), and Salesforce.com (19,360), while associations that have been lost include the Nano Science and Technology Institute (3,817), SPIE – an optics organization – (38,532), and the Solar Electric Power Association (3,339).

Renovation Needs As the facility has become less competitive in the market, the SJCC renovation and expansion project has been under planning for several years, and the scope has evolved over that period. The project scope, as currently envisioned, calls for total spending to be no more than $120 million. The facilities renovation needs are spread over several categories, and have been known and planned for several years, but repairs have been deferred until the entire project can be undertaken. A property condition report conducted by Property Condition Assessments, LLC in 2007 highlighted approximately $16 million in repairs that were needed either immediately or by 2011. The major repairs noted included approximately $1.9 million for the building exterior, $1.8 million for roof repairs, $4.2 million for the interior including the acoustical wall systems, $4.3 million for the HVAC system, $0.4 million for plumbing, $0.8 million for electrical, $1.5 million for fire/life safety, $0.3 million for vertical transportation, and $0.6 million in food service equipment. Of these repairs, only a flat portion of the roof has been completed and the other items have continued to deteriorate as the repairs have been deferred.

In addition to renovating the existing facilities, the plan will add 35,000 square feet of new ballroom space and 25,000 square feet of additional breakout space. This addition of 60,000 square feet of new space will add approximately 30% to the existing base of 192,000 square feet.

The project is expected to take approximately two years to complete. The construction, and more importantly the renovation, will disrupt business at the facility during this period. The development team of Hunt Construction Group and Populous has been selected but not yet contracted. Final contracting and commencement of the construction project is expected to take place upon bond closing. We understand that the major components of the repairs will include the majority of the above items although the total scope is not finalized. Taxable Hotel Revenue Projections for San José, CA Page 29

Based on previous estimates prepared by TSJ in conjunction with Strategic Advisory Group, and adjusted for the reduced scope of the project, we have estimated there will be approximately 20,000 room nights of demand lost in the market per year due to the convention center construction project. When the project is completed, we have assumed a 25,000-room-night increase in demand annually, which is roughly 20% of the current room nights generated by the convention center. Given that the addition will comprise approximately a 30% increase in space plus a renovation of the existing space, which is needed to prevent further losses in the market, this is considered to be a conservative estimate of the potential increase in convention center business. Should the convention center be successful in getting back to historical or greater levels of business, as the project is intended to achieve, this would result in stronger citywide hotel performance than estimated herein. Taxable Hotel Revenue Projections for San José, CA Page 30

VI. CONVENTION CENTER FACILITIES DISTRICT The City has created the Convention Center Facilities District (CCFD), in which a special tax will be levied on all hotel properties within the district. Some or all of the Special Tax revenues will be used to repay the bonds issued for the renovation and expansion of the San José Convention Center (the Facility).

The CCFD categorizes all hotels in the city as either in Zone 1 or Zone 2. Zone 1 hotels are those within a 2¼ mile radius of SJCC, and Zone 2 includes all other hotels. The Base Special Tax Rate (Base Rate) for the two Zones are presented in the following table:

Zone 1 Base Zone 2 Base Term Special Tax Rate Special Tax Rate July 1, 2009 – December 31, 2009 4% 1% January 1, 2010 – June 30, 2010 4% 2% Fiscal Year 2010-2011 4% 3% Fiscal Year 2011-2012 and thereafter 4% 4%

The CCFD Special Tax is collected and monitored in the same manner as the TOT, as discussed earlier. Any Operator who fails to remit the Special Tax levied within the time required shall be subject to a penalty of ten percent (10%) of the amount delinquent in addition to the delinquent Special Tax. Delinquent Special Taxes will incur an additional 1½% penalty (applied to the amount originally levied without compounding) on the first day of each month that is more than six months after the date when the delinquent Special Tax was levied. The CCFD Special Tax has the ultimate remedy of judicial foreclosure.

The CCFD is comprised of hotel parcels in the district at the time it was created, and currently includes all hotels in San José. As new hotels are built over time, the new properties can be annexed into the CCFD if the owners elect to do so. It is possible that the owners of new hotels in the downtown, and larger full- service hotels in other parts of the city, would elect to join the CCFD in order to fully participate in the city’s convention and tourism community. For the purpose of this analysis, however, we have assumed that no new supply will enter the CCFD and no currently existing hotels will discontinue operating as hotels. Therefore, throughout the projection period the CCFD Special Taxes are estimated based solely on the existing base of hotels in the city.

In addition to the Base Rate, all the hotels in both zones are subject to an Additional Special Tax Rate (Blinker Tax) of 1.0% of Rent. The Blinker Tax is only to be applied in years in which the City’s Revenue Stabilization Reserve is less than the Revenue Stabilization Reserve Requirement specified in the bond documents.

Finally, the City may choose to appropriate all or a portion of the 1.5% of the total rent (or 15% of the 10.0% Transient Occupancy Tax collected citywide) that is currently allocated for marketing the city and Convention Center, to make the annual bond payments.

From July 2009 through January 2011, the City has collected approximately $7.1 million in CCFD Special Tax revenues. As discussed with the TOT reporting, the City conducts periodic audits of the reported Taxable Hotel Revenue Projections for San José, CA Page 31 income and can recover underreported income from prior periods. The CCFD Special Tax Revenues may be adjusted as a result of audits.

Of the total of 8,892 guestrooms located within the city, 28 properties with 3,157 rooms (35.5%) are located in Zone 1 of the CCFD, while Zone 2 contains 49 hotels with 5,735 rooms. The table in the Addenda showing all hotels in the City of San José also indicates which zone they are in. Taxable Hotel Revenue Projections for San José, CA Page 32

VII. TAXABLE HOTEL REVENUE FORECAST The city’s taxable hotel revenues are a function of the projected occupancy percentage, ADR, and RevPAR coupled with the assumed increases in supply over the projection period. As noted previously, while the CCFD revenue projections assume that no new hotels will be annexed into the CCFD, the estimated new supply in the city is considered for its potential impact on the citywide market performance. Furthermore, the new supply does factor into the total citywide taxable hotel revenues, which affects the potential 1.5% allocation to the project. While there will be limited additions to supply in the near term future, eventually the financial markets will return and new projects can get off the ground. We have assumed that the two projects that are approved and awaiting financing (a Marriott Residence Inn/Fairfield Inn with 321 rooms and the America Center project with 176 rooms) will be completed in 2013 and 2014, respectively. Beyond that, we have assumed approximately 400 rooms will open every five years during the projection period. This results in a CAGR for supply of 0.8% from 2010 through 2046, in comparison to a CAGR of 2.9% from 1990 through 2010. While we have included this new supply in our calculations used to derive the overall citywide RevPAR, the revenue from these new rooms has not been included in our estimates of CCFD revenue.

We have modeled our projections to reflect the cyclical nature of the boom and bust hotel market experienced over the past 20 years. We have assumed cycles with five years of growth, two years of downturn, and a flat year. We have also assumed that the cycles will moderate slightly as the market continues to mature, with both the growth periods and downturns exhibiting slightly lower rates of change. It should be noted that we are not economists and we are not projecting the specific timing of future economic recessions; rather, we are modeling long-term projections based on historical patterns in the market, which should average out in the long term.

Our projections of supply and demand indicate that over the projection period, supply growth will slightly outpace demand leading to lower occupancy levels over time. The estimated CAGR for supply is 0.8%, compared to 2.9% historically, and the estimated growth in demand is 0.7% as compared to 2.1% historically. Our estimate of overall growth in ADR is 1.7% annually, compared to 3.1% historically. The net result in RevPAR is a CAGR of 1.6% from FY 2010 through FY 2046, increasing from $57.31 to $100.43. This projection is significantly below the historical city RevPAR growth of 2.3% from 1990 through 2010, as shown previously. Over the projection period, the average annual growth in RevPAR during years of positive growth is 6.8%, while the average decline during downturns is -8.5%, although with growth cycles being longer than the downturns the net result is positive long-term growth. As RevPAR combines both occupancy and ADR, inflationary pressure is reflected as growth in average room rates over the period.

Recognizing that the revenues will escalate on a cyclical pattern but also that the timing of cycles is not predictable, we have compared our projections based on these cyclical assumptions with a trend line based on the historical data, as well as just using a flat growth rate of 2.3% mirroring historical performance over the 36-year period. As shown in the accompanying graph, the RevPAR projections fall consistently below the trend line as our growth projections are more conservative than the historical trend line would indicate. We believe this conservative projection is appropriate given the more recent trends in the market, and the general slower growth that occurs as a market matures. Taxable Hotel Revenue Projections for San José, CA Page 33

Historical and Projected RevPAR

$140

$120

$100

$80

$60

$40

$20

8 0 9 90 93 99 02 05 0 11 14 2 23 26 2 32 35 41 44 0 19 19 1996 19 20 20 20 20 20 2017 20 20 2 20 20 20 2038 20 20

Historical RevPAR RevPAR Projection RevPAR Trend Steady Growth

Overall, our projections for taxable hotel revenues show a CAGR of 1.6% from FY 2010 through FY 2046, as compared to 5.3% from 1990 through 2010. As noted above, the city’s taxable hotel revenues peaked in FY 2001 at $255.4 million. Our projections show the city exceeding this peak in FY 2014 and FY 2015, before declining and then again surpassing the peak in FY 2020 through the remainder of the period. The following table presents our projections of future growth in supply, demand, RevPAR, and citywide taxable hotel revenues through FY 2046 using our assumption of cyclical growth patterns. In addition, as discussed previously, we have taken into account the assumption that none of the new supply in the market will be added to the CCFD, and therefore calculated the potential taxable revenue within the CCFD based on the existing base of supply and the projected RevPAR for the market overall. Taxable Hotel Revenue Projections for San José, CA Page 34

San Josˇ Convention Center Renovation/Expansion Analysis Taxable Hotel Revenue Projections

Fiscal Year Base Cumulative Total Taxable CCFD Taxable Ending Supply New Supply Supply Occupied Average Annual Revenues Revenues % of Total June 30, Room Nights Room Nights Room Nights Room Nights Occupancy Daily Rate RevPAR % Change (000) Growth (000) City Revenue

Actual 2010 3,245,580 3,245,580 1,940,277 59.8% $95.86 $57.31 -4.3% $186,002 -4.5% $186,002 100.0% Projected 2011 3,245,580 24,333 3,269,913 2,095,001 64.1% $97.78 62.65 9.3% 204,851 10.1% 203,326 99.3% 2012 3,245,580 53,533 3,299,113 2,188,061 66.3% $100.23 66.50 6.2% 219,299 7.1% 215,831 98.4% 2013 3,245,580 116,983 3,362,563 2,251,675 67.0% $108.24 72.50 9.0% 243,729 11.1% 235,305 96.5% 2014 3,245,580 207,685 3,453,265 2,332,310 67.5% $117.99 79.75 10.0% 275,178 12.9% 258,835 94.1% 2015 3,245,580 239,805 3,485,385 2,393,757 68.7% $121.52 83.46 4.7% 290,900 5.7% 270,886 93.1% 2016 3,245,580 239,805 3,485,385 2,156,881 61.9% $111.80 69.19 -17.1% 241,145 -17.1% 224,554 93.1% 2017 3,245,580 239,805 3,485,385 2,071,606 59.4% $107.33 63.79 -7.8% 222,347 -7.8% 207,049 93.1% 2018 3,245,580 239,805 3,485,385 2,071,606 59.4% $107.33 63.79 0.0% 222,347 0.0% 207,049 93.1% 2019 3,245,580 312,805 3,558,385 2,225,101 62.5% $109.48 68.46 7.3% 243,598 9.6% 222,184 91.2% 2020 3,245,580 385,805 3,631,385 2,335,106 64.3% $112.21 72.16 5.4% 262,032 7.6% 234,193 89.4% 2021 3,245,580 385,805 3,631,385 2,392,859 65.9% $120.63 79.49 10.2% 288,651 10.2% 257,984 89.4% 2022 3,245,580 422,305 3,667,885 2,428,377 66.2% $130.88 86.65 9.0% 317,835 10.1% 281,241 88.5% 2023 3,245,580 458,805 3,704,385 2,464,427 66.5% $134.16 89.25 3.0% 330,617 4.0% 289,669 87.6% 2024 3,245,580 495,305 3,740,885 2,232,682 59.7% $124.09 74.06 -17.0% 277,063 -16.2% 240,379 86.8% 2025 3,245,580 531,805 3,777,385 2,155,413 57.1% $119.75 68.33 -7.7% 258,113 -6.8% 221,774 85.9% 2026 3,245,580 531,805 3,777,385 2,155,413 57.1% $119.75 68.33 0.0% 258,113 0.0% 221,774 85.9% 2027 3,245,580 568,305 3,813,885 2,293,890 60.1% $122.15 73.47 7.5% 280,189 8.6% 238,438 85.1% 2028 3,245,580 604,805 3,850,385 2,407,334 62.5% $125.20 78.28 6.5% 301,397 7.6% 254,055 84.3% 2029 3,245,580 641,305 3,886,885 2,454,981 63.2% $133.96 84.61 8.1% 328,878 9.1% 274,616 83.5% 2030 3,245,580 677,805 3,923,385 2,479,281 63.2% $144.68 91.43 8.1% 358,704 9.1% 296,734 82.7% 2031 3,245,580 677,805 3,923,385 2,503,824 63.8% $147.57 94.18 3.0% 369,500 3.0% 305,665 82.7% 2032 3,245,580 714,305 3,959,885 2,280,729 57.6% $137.24 79.05 -16.1% 313,016 -15.3% 256,553 82.0% 2033 3,245,580 750,805 3,996,385 2,213,058 55.4% $133.13 73.72 -6.7% 294,617 -5.9% 239,267 81.2% 2034 3,245,580 787,305 4,032,885 2,213,058 54.9% $133.13 73.05 -0.9% 294,617 0.0% 237,101 80.5% 2035 3,245,580 823,805 4,069,385 2,333,401 57.3% $135.79 77.86 6.6% 316,851 7.5% 252,708 79.8% 2036 3,245,580 823,805 4,069,385 2,448,821 60.2% $139.18 83.76 7.6% 340,837 7.6% 271,838 79.8% 2037 3,245,580 860,305 4,105,885 2,485,178 60.5% $148.23 89.72 7.1% 368,380 8.1% 291,194 79.0% 2038 3,245,580 896,805 4,142,385 2,497,479 60.3% $159.35 96.07 7.1% 397,969 8.0% 311,811 78.4% 2039 3,245,580 933,305 4,178,885 2,509,841 60.1% $161.74 97.14 1.1% 405,938 2.0% 315,276 77.7% 2040 3,245,580 969,805 4,215,385 2,298,630 54.5% $151.23 82.46 -15.1% 347,611 -14.4% 267,639 77.0% 2041 3,245,580 969,805 4,215,385 2,241,789 53.2% $147.44 78.41 -4.9% 330,540 -4.9% 254,495 77.0% 2042 3,245,580 1,006,305 4,251,885 2,241,789 52.7% $147.44 77.74 -0.9% 330,540 0.0% 252,310 76.3% 2043 3,245,580 1,042,805 4,288,385 2,363,713 55.1% $150.39 82.90 6.6% 355,487 7.5% 269,044 75.7% 2044 3,245,580 1,079,305 4,324,885 2,480,648 57.4% $154.15 88.42 6.7% 382,401 7.6% 286,970 75.0% 2045 3,245,580 1,115,805 4,361,385 2,505,205 57.4% $163.40 93.86 6.2% 409,357 7.0% 304,628 74.4% 2046 3,245,580 1,115,805 4,361,385 2,505,205 57.4% $174.84 100.43 7.0% 438,012 7.0% 325,952 74.4%

CAGR 1990 - 2010 2.9% 2.9% 2.1% 3.1% 2.3% 5.3% CAGR 2010-2046 0.0% 0.8% 0.7% 1.7% 1.6% 2.4% 1.6% 84.8%

Sources: City of San Josˇ, STR, Horwath HTL Taxable Hotel Revenue Projections for San José, CA Page 35

CCFD Revenue Projections Taxable Hotel Room Revenues within the CCFD, as presented above, are our basis for estimating the CCFD revenues for the 36-year projection period. Our projections for the CCFD tax are based on our projections of total citywide RevPAR and the existing base of room supply within the CCFD. The hotels in Zone 1 represent approximately 35% of the city’s current total hotel inventory (3,157 of 8,892), but based upon the first year of reporting for the CCFD these hotels receive approximately 40% of the city’s total taxable hotel revenues. This differential is a result of the downtown hotels being generally more upscale and higher priced than the hotels in the outlying areas of the city.

We have therefore applied the different Zone tax rates, and these percentages of revenue for the first two years, when the Base Rates differ, and calculated the total CCFD revenue accordingly. We have also calculated the CCFD revenues from the Base Rate, Blinker Tax, and 1.5% from total citywide TOT separately, and provided various totals and subtotals. These projections are shown in the following table.

CCFD Financing Analysis CCFD Revenue Stream - No New Supply Annexed - Cyclical Growth

Fiscal Year City Total CCFD Total Base Tax (4%) Ending Taxable TaxableCCFD Revenue Total w/o Total with City TOT Total with June30, Revenues Revenues Zone 1 Zone 2 Blinker Blinker (1%) Blinker 1.5% Portion City 1.5% TOT Actual 2010 $186,001,647 $186,001,647 $2,696,452 $1,510,395 $4,206,847 $1,860,016 $6,066,863 $2,790,025 $8,856,888 Projected 2011 $204,851,000 $203,326,000 $3,253,216 $3,659,868 $6,913,084 $2,033,260 $8,946,344 $3,072,765 $12,019,109 2012 219,299,000 215,831,000 3,453,296 5,179,944 8,633,240 2,158,310 10,791,550 3,289,485 14,081,035 2013 243,729,000 235,305,000 3,764,880 5,647,320 9,412,200 2,353,050 11,765,250 3,655,935 15,421,185 2014 275,178,000 258,835,000 4,141,360 6,212,040 10,353,400 2,588,350 12,941,750 4,127,670 17,069,420 2015 290,900,000 270,886,000 4,334,176 6,501,264 10,835,440 2,708,860 13,544,300 4,363,500 17,907,800 2016 241,145,000 224,554,000 3,592,864 5,389,296 8,982,160 2,245,540 11,227,700 3,617,175 14,844,875 2017 222,347,000 207,049,000 3,312,784 4,969,176 8,281,960 2,070,490 10,352,450 3,335,205 13,687,655 2018 222,347,000 207,049,000 3,312,784 4,969,176 8,281,960 2,070,490 10,352,450 3,335,205 13,687,655 2019 243,598,000 222,184,000 3,554,944 5,332,416 8,887,360 2,221,840 11,109,200 3,653,970 14,763,170 2020 262,032,000 234,193,000 3,747,088 5,620,632 9,367,720 2,341,930 11,709,650 3,930,480 15,640,130 2021 288,651,000 257,984,000 4,127,744 6,191,616 10,319,360 2,579,840 12,899,200 4,329,765 17,228,965 2022 317,835,000 281,241,000 4,499,856 6,749,784 11,249,640 2,812,410 14,062,050 4,767,525 18,829,575 2023 330,617,000 289,669,000 4,634,704 6,952,056 11,586,760 2,896,690 14,483,450 4,959,255 19,442,705 2024 277,063,000 240,379,000 3,846,064 5,769,096 9,615,160 2,403,790 12,018,950 4,155,945 16,174,895 2025 258,113,000 221,774,000 3,548,384 5,322,576 8,870,960 2,217,740 11,088,700 3,871,695 14,960,395 2026 258,113,000 221,774,000 3,548,384 5,322,576 8,870,960 2,217,740 11,088,700 3,871,695 14,960,395 2027 280,189,000 238,438,000 3,815,008 5,722,512 9,537,520 2,384,380 11,921,900 4,202,835 16,124,735 2028 301,397,000 254,055,000 4,064,880 6,097,320 10,162,200 2,540,550 12,702,750 4,520,955 17,223,705 2029 328,878,000 274,616,000 4,393,856 6,590,784 10,984,640 2,746,160 13,730,800 4,933,170 18,663,970 2030 358,704,000 296,734,000 4,747,744 7,121,616 11,869,360 2,967,340 14,836,700 5,380,560 20,217,260 2031 369,500,000 305,665,000 4,890,640 7,335,960 12,226,600 3,056,650 15,283,250 5,542,500 20,825,750 2032 313,016,000 256,553,000 4,104,848 6,157,272 10,262,120 2,565,530 12,827,650 4,695,240 17,522,890 2033 294,617,000 239,267,000 3,828,272 5,742,408 9,570,680 2,392,670 11,963,350 4,419,255 16,382,605 2034 294,617,000 237,101,000 3,793,616 5,690,424 9,484,040 2,371,010 11,855,050 4,419,255 16,274,305 2035 316,851,000 252,708,000 4,043,328 6,064,992 10,108,320 2,527,080 12,635,400 4,752,765 17,388,165 2036 340,837,000 271,838,000 4,349,408 6,524,112 10,873,520 2,718,380 13,591,900 5,112,555 18,704,455 2037 368,380,000 291,194,000 4,659,104 6,988,656 11,647,760 2,911,940 14,559,700 5,525,700 20,085,400 2038 397,969,000 311,811,000 4,988,976 7,483,464 12,472,440 3,118,110 15,590,550 5,969,535 21,560,085 2039 405,938,000 315,276,000 5,044,416 7,566,624 12,611,040 3,152,760 15,763,800 6,089,070 21,852,870 2040 347,611,000 267,639,000 4,282,224 6,423,336 10,705,560 2,676,390 13,381,950 5,214,165 18,596,115 2041 330,540,000 254,495,000 4,071,920 6,107,880 10,179,800 2,544,950 12,724,750 4,958,100 17,682,850 2042 330,540,000 252,310,000 4,036,960 6,055,440 10,092,400 2,523,100 12,615,500 4,958,100 17,573,600 2043 355,487,000 269,044,000 4,304,704 6,457,056 10,761,760 2,690,440 13,452,200 5,332,305 18,784,505 2044 382,401,000 286,970,000 4,591,520 6,887,280 11,478,800 2,869,700 14,348,500 5,736,015 20,084,515 2045 409,357,000 304,628,000 4,874,048 7,311,072 12,185,120 3,046,280 15,231,400 6,140,355 21,371,755 2046 438,012,000 325,952,000 5,215,232 7,822,848 13,038,080 3,259,520 16,297,600 6,570,180 22,867,780

As shown, the base CCFD tax revenue is projected to grow from $4.2 million in FY 2010 to $6.9 million in FY 2011, due to a combination of the rate increase in Zone 2 and the increased performance in the market. By 2046, the final year of the projection period, base CCFD tax revenue is projected to increase to just over $13 million. The average annual CCFD revenue over the 36-year period is $10.3 million.

As discussed, we have estimated the performance of the market based on anticipated cyclical fluctuations in the economy, but we cannot predict the exact timing of such cycles. We have therefore calculated our projected total CCFD taxable hotel revenues on an annual average basis, which equates to $10.3 million over the 36-year period, and created a model which yields the same result for the overall term on a straight-line basis. The use of a 1.7% annual growth rate yields the same annual average CCFD revenues of $10.3 million over the length of the term, and also closely mirrors the CAGR for taxable hotel revenues within the CCFD through 2046 of 1.6%. This alternative calculation is presented in the following table. Taxable Hotel Revenue Projections for San José, CA Page 37

CCFD Financing Analysis CCFD Revenue Stream - No New Supply Annexed - Constant Annual Growth

While the cyclical nature of the national and regional economy indicates that such a straight-line model is unlikely to occur, it provides a useful comparison to our cyclical model. The graph below compares our projections of citywide and CCFD Taxable Hotel Revenues with the steady growth model, as well as the trend line based on the historical growth rates. Taxable Hotel Revenue Projections for San José, CA Page 38

Taxable Hotel Revenues

$600

$500

$400

$300 Millions

$200

$100

9 2 05 08 011 014 1990 1993 1996 199 200 20 20 2 2 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044

Historical Citywide Taxable Revenue Trend Analysis CCFD Taxable Revenue CCFD - Steady Growth ADDENDA ADDENDUM A

LIST OF SAN JOSÉ HOTELS BY CATEGORY SAN JOSÉ HOTELS BY CATEGORY CONVENTION HOTELS HOTEL NAME # OF ROOMS ZONE Clarion 192 2 Crowne Plaza 240 1 Dolce Hayes Mansion 214 2 Doubletree 505 2 Fairfield Inn & Suites 186 2 Fairmont Hotel 805 1 Four Points San José Downtown 86 1 Hilton San José 355 1 Hotel De Anza 100 1 Marriott San José 506 1 Radisson Plaza 183 2 Sainte Claire 170 1 San José Airport Garden Hotel 512 2 Wyndham 355 2 Sub-total Convention Hotels 4,409

BRANDED HOTELS Best Western Lanai Garden Inn & Suites 52 2 Clarion Inn Silicon Valley 48 2 Comfort Inn San José 46 1 Comfort Suites San José Airport 51 2 Courtyard San José Airport 150 2 Days Inn San José Airport 62 2 Days Inn San José Convention Center 34 2 Extended Stay America San José Santa Clara 101 2 Extended Stay America San José South 121 2 Extended Stay Deluxe San José Downtown 138 2 Extended Stay Deluxe San José South Edenvale 98 2 Hampton Inn Suites San José 80 2 Holiday Inn Express & Suites International Airport 126 2 Holiday Inn Express San José Central City 57 2 Holiday Inn San José Silicon Valley 210 2 Homestead San José 152 2 Homewood Suites San José Airport 140 2 Howard Johnson Express San José 58 1 Joie De Vivre Moorpark Hotel 80 2 La Quinta Inn San José Airport 148 2 Motel 6 San José Airport 63 1 Motel 6 San José Airport 74 2 Motel 6 San José South 202 2 Preferred Hotel Valencia Santana Row 213 2 Ramada Limited San José 71 1 Residence Inn 80 2 Residence Inn San José South 150 2 Sleep Inn Silicon Valley 45 1 Staybridge Suites San José 114 2 Super 8 San José Airport Santa Clara 58 1 TownePlace Suites San José Cupertino 101 2 Vagabond Inn San José 76 2 Sub-total Branded Hotels 3,199 Taxable Hotel Revenue Projections for San José, CA A-2

SAN JOSÉ HOTELS BY CATEGORY (CONTINUED) INDEPENDENT HOTELS HOTEL NAME # OF ROOMS ZONE Alameda Motel 20 1 Americas Best Value Inn San José Convention Center 26 1 Arena Hotel 90 1 Best Western Airport Plaza 40 2 Bristol Hotel 47 2 California Motel 11 1 Capitol Hill Inn 30 2 Casalinda Motel 28 1 Charles Motel 10 1 City Center Motel 41 1 Executive Inn 25 2 Executive Inn Airport 57 2 E-Z 8 San José #1 81 2 E-Z 8 San José #2 89 2 Flamingo Motor Lodge 24 1 Fontaine Inn 54 2 Hedding Inn 24 1 Horizon Inn 41 2 Mission Motel 7 2 Palm Tree Inn Motel 26 2 Red Roof Inn 76 2 Regency Lodge 37 1 Sands Motel 21 1 Santa Clara Inn 55 2 Three A Motel 25 1 Townhouse Motel 40 1 Travelers Rest Motel 22 1 Valley Inn 26 2 Valley Park Hotel 55 2 White Way Motel 21 2 Mother Olson Inn (13 properties) 135 1 Sub-total Independent Hotels 1,284

Total Hotels 8,892