NEW ISSUE - BOOK-ENTRY ONLY RATING: MOODY'S: "Aaa" (See "RA TING" herein)
In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation. Special Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming certain representations and compliance with certain covenants and requirements described herein. the portion of each Installment Payment constituting interest (and original issue discount) is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and c01porations. In the fi1rther opinion of Special Counsel, the portion of each Installment Payment constituting interest (and original issue discount) is exempt from State of California personal income tax. In addition, the difference benveen the issue price of a Certificate (the first price at which a substantial amount of the Certificates of a maturityis to be sold to the public) and the stated redemption price at maturity with respect to the Certificate constitutes original issue discount. See "TAX MATTERS" herein with respect to certain tax'consequences with respect to the Certificates. The City has designated the Certificates as "bank qualified" under the provisions of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended. $5,680,000 CITY OF LOS BANOS REVENUE REFUNDING CERTIFICATES OF PARTICIPATION (1993 SEWER SYSTEM PROJECT)SERIES 2003 Dated: Date of Delivery Due: December 1, as shown below The Certificates arc being sold to refinance certain sewer facilities for the City of Los Banos, to fund a reserve fund and to pay certain delivery costs. The Certificates are being executed and delivered in fully registered form and when executed and delivered will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York. Individual purchases will be made in principal amounts of$5,000 and integral multiples thereof and will be in book-entry fonn only. Purchasers of the Certificates will not receive certificates representing their beneficial ownership in the Certificates but will receive credit balances on the books of their respective nominees. Interest represented by the Certificates, which will be payable on each June I and December 1, commencing June 1, 2004, and the principal thereof are payable by the Trustee to Cede & Co., and such interest and principal payments and premium, if any, are to be disbursed to the beneficial owners ofthe Certificates through their nominees. The Certificatesare subject to optional and extraordinary prepayment as more fully described herein. The Certificates are payable from Installment Payments payable by the City pursuant to the Installment Purchase Agreement, dated as of October 1, 2003, by and between the City and the Los Banos Public Financing Authority and amounts on deposit in certain funds and accounts established by the Trust Agreement, dated as of October 1, 2003, by and among the City, the Authority and BNY Western Trust Company, as Trustee. The obligation of the City to make Installment Payments under the Installment Purchase Agreement is a special obligation of the City payable solely from Net Revenues of the City Sewer System and is payable from such Net Revenues on a parity with the 1997 Installment Payments outstanding in the aggregate principal amount of $3,545,000. The scheduled payment of principal of and interest with respect to the Certificateswhen due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Certificatesby Federal Guaranty Insurance Company. Financial Guaranty lnsunmcc -IC •FG Company
The obligation of the City to pay Installment Payments does not constitute an obligation of the City forwhich the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any formof taxation. The obligation of the City to pay Installment Payments under the Installment Purchase Agreement does not constitute a debt of the City, the State of California or any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction. THIS COVER PAGE CONTAINS CERTAIN INFORMATIONFOR REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE. INVESTORS MUST READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION. MATURITY SCHEDULE Maturity Principal Interest Price or Maturity Principal Interest Price or (December I) Amount Rate Yield (December I) Amount Rate Yield 2004 $275,000 2.50% 101.434% 2012 $350,000 3.60% 99.237% 2005 290,000 2.50 102.400 2013 360,000 3.80 99.175 2006 300,000 2.50 102.654 2014 375,000 3.90 99.113 2007 305,000 2.50 101.927 2015 390,000 4.00 99.056 2008 315,000 2.50 100.707 2016 405,000 4.10 99.002 2009 320,000 2.60 99.446 2017 425,000 4.20 98.953 2010 330,000 2.90 99.369 2018 440,000 4.30 98.907 2011 340,000 3.30 99.301 2019 460,000 4.40 98.864 The Certificatesare offeredwhen, as, and ifdelivered and received by the U11de1writer, subject to the approval as to the validityof the Installment Purchase Agreement by Stradling Yocca Carlson & Rauth, a Professional Corporation, Special Counsel, and certain other conditions. Certain legal matters will be passed upon for the Undenvriter by its counsel Ballard Spahr Andrews & Ingersol/, LLP, Salt Lake City, Utah, for the City and the Authorityby the CityAttorney, for the Insurer by its counsel and for the Trustee by its counsel. It is anticipated that the Certificates will be available for deliverythrough the facilities of The Depository Trust Company, on or about November 19, 2003. CROCKERSECURITIES LLC Dated: November 6, 2003 :.! ;: C E I V E Li 03 DEC -2 AH 11 : 2 7 CALlFOi'. CITY COUNCIL Michael S. Amabile, Mayor Kevin Hudak, Mayor Pro Tern Richard Gerbi, Council Member Mike McAdam, Council Member Nikki Smith, Council Member CITY STAFF Stephen J. Rath, City Manager Lucy Mallonee, City Clerk Melinda J. Wall, City Treasurer SPECIAL COUNSEL Stradling Y occa Carlson & Rauth, a ProfessionalCorporation Newport Beach, California TRUSTEE BNY WesternTrust Company Los Angeles, California FINANCIALADVISOR Public Finance Resources Walnut Creek, California VERIFICATION AGENT Grant Thornton,LLP Minneapolis, Minnesota No dealer, broker, salesperson or other person has been authorized by the Authority, the City or theUnderwriter to give anyinformation or to make any representations other than those contained herein, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawfulfor such person to make such offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, projections, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of facts. The information and expressions of opinion herein are subject to change without notice, and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the information or opinions set forth herein or in the affairs of the Authority or the City since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The Underwriterhas provided the following sentence forinclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws applied to the facts and circumstances of this transaction, but the Underwriter does not guaranteethe accuracy or completeness of such information. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANYTIME. Other than with respect to information concerning Financial Guaranty Insurance Company (the "Insurer") contained under the caption "Bond Insurance" and Appendix F - "SPECIMEN MUNICIPAL BOND INSURANCE POLICY" herein, none of the information in this Official Statement has been supplied or verified by the Insurer and the Insurer makes no representation or warranty, express or implied, as to (i) the accuracy or completeness of such information; (ii) the validity of the Certificates; or (iii) the tax exempt status of the interest with respect to the Certificates. Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements." Such statements are generally identifiable by the terminology used, such as "plan," "expect," "estimate," "budget" or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Neither the Authority nor the City plans to issue any updates or revisions to those forward-lookingstatements if or when their expectations, or events, conditions or circumstanceson which such statements are based, occur. TABLE OF CONTENTS Page INTRODUCTION ...... 1 ESTIMATED SOURCES AND USES OF FUNDS...... 2 THE REFUNDINGPLAN ...... 3 THEPROJECT ...... 3 THE CERTIFICATES...... 3 General Provisions ...... 3 Book-Entry Only System ...... 4 Transfers and Exchanges Upon Termination of Book-Entry Only System ...... 4 Optional Prepayment ...... 5 Prepayment From Insuranceand Condemnation Proceeds ...... 5 Notice of Prepayment ...... 5 INSTALLMENT PAYMENTS...... 6 Schedule of Installment Payments ...... 6 INSTALLMENT PAYMENT SCHEDULE ...... 7 Obligation to Make Installment Payments ...... 7 SECURITY FOR THE CERTIFICATES...... 8 Pledge of Sewer System Revenues ...... 8 Limited Liability ...... 8 Rate Covenant ...... 9 Limitations on Superior and ParityObligations ...... 9 Reserve Fund ...... 11 BOND INSURANCE POLICY AND THE INSURER ...... 11 Bond Insurance ...... 11 THE CITY ...... 13 General...... 13 Governance and Management ...... 13 Land and Land Use ...... 14 Employees ...... 15 Budget Process...... 15 Insurance ...... 15 Outstanding Indebtedness ...... 15 THESEWER SYSTEM ...... 16 Environmental Compliance ...... 17 Historic Sewer System Usage ...... 17 Historic Sewer System Connections ...... '...... 17 Historic Sewer System Collection and Treatment Revenues ... : ...... 18 Largest Sewer System Users ...... 18 Sewer System Rates and Charges...... 18 Collection Procedures ...... ; ...... 20 TABLE OF CONTENTS (continued) Page Future Sewer System Improvements ...... 21 Projected Sewer System Connections ...... 21 Projected Sewer System Usage ...... 22 Projected Sewer System Collection andTreatment Revenues ...... 22 SEWER SYSTEM FINANCIAL INFORMATION ...... 22 Financial Statements ...... 22 Historic Operating Results ...... 23 Projected Operating Results ...... 24 CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES ...... 25 Article XIIIB...... 25 Proposition 218 ...... 25 Future Initiatives...... 27 TIIE AUTHORITY ...... 27 APPROVAL OF LEGAL PROCEEDINGS ...... 27 LITIGATION ...... 27 TAX MATTERS ...... 28 CONTINUING DISCLOSURE...... 29 RATING ...... 29 UNDERWRITING...... 29 VERIFICATION...... 30 MISCELLANEOUS ...... 30 APPENDIXA - FINANCIAL STATEMENTS FOR FISCAL YEARENDING JUNE 30, 2002 .. A-1 APPENDIXB - SUMMARYOF CERTAIN DOCUMENTS ...... B-1 APPENDIXC - FORM OF OPINION OF SPECIAL COUNSEL...... C-1 APPENDIXD - FORMOF CONTINUING DISCLOSURE CERTIFICATE ...... D-1 APPENDIXE - INFORMATION CONCERNINGDTC ...... E-1 APPENDIXF - SPECIMEN MUNICIPAL BOND INSURANCE POLICY...... F-1 ii SUMMARY STATEMENT This summary is subject in all respects to the more complete information contained in this Official Statement, and the offering of the Certificates to potential investors is made only by means of the entire OfficialStatement. Purpose. The Certificates are being sold to refinance certain sewer facilities for the City of Las Banos, to funda reserve fund andto pay certain delivery costs. Securityfor the Certificates. The Certificates are payable from Installment Payments payable by theCity pursuant to the Installment Purchase Agreement and amounts on deposit in certain funds and accounts established by the Trust Agreement. The obligation of the City to make Installment Payments under theInstallment Purchase Agreementis a special obligation of the City payable solely fromNet Revenues of the City Sewer System. THE OBLIGATION OF THE CITY TO PAY INSTALLMENT PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE CITY FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE OBLIGATION OF THE CITY TO PAY INSTALLMENTPAYMENTS UNDER THEINSTALLMENT PURCHASE AGREEMENTDOES NOT CONSTITUTE A DEBT OF THE CITY, THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDNISION THEREOF IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. Rate Covenant. The City has covenanted in the Installment Purchase Agreement, to the fullest extent permitted by law, to fix, prescribe and collect rates and charges for the Sewer Service which shall be at least sufficient to yield during each fiscalyear Net Revenues of the Sewer System equal to 115% of the Debt Service with respect to theSewer System for such fiscalyear. Additional Parity Obligations. The City may not incur obligations payable from Net Revenues of the Sewer System prior to the Installment Payments. The City may issue bonds or execute contracts the payments or installment payments under which are secured by a pledge of the Net Revenues of the Sewer System on a parity with the lien of the Installment Payments due under theInstallment Purchase Agreement and the 1997 Installment Payments outstanding in the aggregate principal amount of $3,545,000, subject to the conditions described herein. Reserve Fund. A Reserve Fund is established under the Trust Agreement as securityfor the Certificatesinitially fundedin an amount equal to the Series 2003 Reserve Fund Requirement in the amount of $482,230. Moneys in the Reserve Fund will be used and withdrawn by the Trustee solely forthe purposeof paying principal and interest withrespect to the Certificates. CertificateInsurance. The scheduled payment of principal of and interest with respect to the Certificates when due will be guaranteed under an insurance policy to be issued concurrentlywith the delivery of the Certificatesby Financial GuarantyInsurance Company. Prepayment. The Certificates are subject to prepayment as a whole or in part on any date fromthe net proceeds of insurance or condemnation award deposited with the Trustee at the principal amount thereof plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium. The Certificates with stated maturities on or after December 1, 2009, are subject to optional prepayment as a whole or in part on any date on or afterDecember 1, 2008 at the principal amount of such Certificates to be prepaid plus accrued interest evidenced and represented thereby to the date fixed forprepayment with a premium. City of Los Banos. The City is located in western Merced County approximately 70 miles northwest of the City of Fresno, 125 miles southeast of the City of San Francisco and 295 miles northwest of the City of Los Angeles. The City was first settled in the 1800's and was incorporated in 1907. The City contains approximately 4.7 square miles in total area and, as of January 1, 2003, had a current population of approximately 29,150. The City provides sewer service to approximately 8,500 residential, commercial and industrial customers. ii $5,680,000 CITY OF LOS BANOS REVENUE REFUNDING CERTIFICATES OF PARTICIPATION (1993 SEWER SYSTEM PROJECT) SERIES 2003 INTRODUCTION This Official Statement, including the cover page and all appendices hereto, provides certain information concerning the sale and delivery of City of Los Banos, Revenue Certificates of Participation (1993 Sewer System Project), Series 2003 (the "Certificates"), in the aggregate principal amount of $5,680,000. All descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each document for complete details of all terms and conditions. All statements herein are qualified in their entirety by reference to each document. Certain capitalized terms used herein and not defined herein shall have the meaning given such terms in Appendix B hereto entitled "SUMMARY OF CERTAIN DOCUMENTS." The Certificates represent the direct and proportionate interests of the registered owners thereof (the "Owners") in Installment Payments payable by the City of Los Banos(the "City"), as the purchase price for certain improvements to the sewer system of the City ( as more fully described under the caption "THE PROJECT," and referred to herein as the "Project"). The City is acquiring the Project pursuant to the Installment Purchase Agreement, dated as of October 1, 2003 (the "Installment Purchase Agreement"), by and between the City and the Los Banos Public Financing Authority(the "Authority"). The Certificates arebeing executed and delivered pursuant to a Trust Agreement, dated as of October 1, 2003 (the "Trust Agreement"), by and among the City, the Authority andBNY Western Trust Company, Los Angeles, California, as trustee (the "Trustee"). Pursuant to an Assignment Agreement, dated as of October 1, 2003 (the "Assignment Agreement"), by and between the Authority and the Trustee, the Authority has assigned to the Trustee forthe benefit of the Owners of the Certificates substantially all its rights under the Installment Purchase Agreement, including its right to receive Installment Payments payable under the Installment Purchase Agreement and its rights to enforcepayment by the City of such Installment Payments when due. The Certificates are being executed and delivered to refinance the Project, to fund a reserve fund and to pay certain delivery costs. See "ESTIMATED SOURCES AND USES OF FUNDS" herein. The Certificates are payable fromInstallment Payments payable by the City andamounts on deposit in certain funds and accounts established by the Trust Agreement. The obligation of the City to make the Installment Payments under the Installment Purchase Agreement is a special obligation of the City payable solely from Net Revenues of the sewer system of the City (as more fully described herein, the "Sewer System") on a parity with the obligation of the City to pay the installment payments (the "1997 Installment Payments") payable under the Installment Purchase Agreement - Sewer System, dated as of November 1, 1997 (the "1997 Installment Purchase Agreement"), by and between the City andthe Local Agency Installment Purchase Corporation ("the Corporation"), currently outstanding in a principal amount of $3,545,000 (the "1997 Certificates"). Under no circumstances shall the City be required to advance any moneys derived from any source of income other than the funds described above nor shall any other funds or property of the City be liable forthe payment of the Installment Payments. 1 The obligation of the City to make the Installment Payments from the sources described above is absolute and unconditional, and until such time as the Installment Payments shall have been paid in full ( or provision for the payment thereofshall have been made pursuant to the Installment Purchase Agreement), the City will not discontinue or suspend any Installment Payments required to be made by it when due, whether or not the Sewer System, or any part thereof is operating or operable, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and whether or not the Project has been completed. Such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever. Financial Guaranty Insurance Company (the "Insurer") has issued a commitment to issue, simultaneously with the delivery of the Certificates, a municipal bond insurance policy (the "Municipal Bond Insurance Policy") relating to the Certificates, effective as of the date of delivery of the Certificates. By the terms of the Municipal Bond Insurance Policy, the Insurer agrees to pay the principal of and interest evidenced by the Certificates which shall become due forpayment but shall be unpaid to the extent that the Trustee has not received sufficient funds fromthe City to make such payment. The City regularly prepares a variety of reports, including audits, budgets and related documents. Any Certificate owner may obtain a copy of publicly available information by contacting the Finance Director, City of Los Banos, 520 "J" Street, Los Banos, California 93635, Telephone (209) 827-7000. Additional information concerning the Official Statement may be obtained fromthe City or the Trustee. ESTIMATEDSOURCES AND USES OF FUNDS The following table sets forth the estimated sources and uses of funds with respect to the Certificates. Sources CertificateProceeds $ 5,680,000 Transferfrom 1993 Reserve Fund 477,427 Transferfrom 1993 Certificate Payment Fund 75,125 City Deposit (I) 700,159 Less Net Original Issue Discount (10.437) Total Sources $ 6,922,274 Uses: Deposit to Escrow Fund $ 6,136,965 Deposit to Reserve Fund 482,230 Costs of Issuance<2) 303.079 Total Uses $ 6,922,274 (l) Constitutes City money to be applied to the Water Fund share of the Refunded Certificates (as defined below) plus additional City contribution equal to principal and interest due on December 1, 2003, with respect to the Refunded Certificates. (2) Estimate includes insurance premium; legal andfinan cing costs; printing costs; initial fee of the Trustee; advertising costs; Special Counsel fees and certain other costs. 2 THE REFUNDING PLAN A portion of the proceeds from the sale of the Certificates, together with certain other funds, will be used to pay on December 1, 2003, the principal and interest due with respect to the outstanding $5,850,000 principal balance of City of Los Banos (Merced County, California) Refunding andRevenue Certificates of Participation, Series 1993 (the "Refunded Certificates") and to prepay the Refunding Certificates maturing thereafter. Under the refunding plan, the City shall cause to be deposited in escrow fund (the "Escrow Fund") to be held by BNY Western Trust Company, acting as escrow agent (the "Escrow Agent") under an Escrow Agreement, dated as of October 1, 2003 (the "Escrow Agreement"), by and between the City andthe Escrow Agent, funds from a portion of the net proceeds of the sale of the Certificates and certain other funds. The amounts deposited in the Escrow Fund will be sufficient and will enable the Escrow Agent to pay principal and interest with respect to the Refunded Certificates on December 1, 2003 and to prepay the Certificates maturing thereafter. Upon the deposit of such proceeds and said moneys into the Escrow Fund, the Refunded Certificates will no longer be deemed outstanding and the 1993 Installment Purchase Agreement shall be discharged. The types of securities which may be purchased for the Escrow Fund by the Escrow Agent are direct non-callable obligations of the United States of America (including obligations issued or held in book entryform on the books of the Department of Treasury of the United States of America) or noncallable obligations the timely payment of principal of and interest on which are fully and unconditionally guaranteed by the United States of America (collectively, the "Securities"). Such Securities will be irrevocably pledged under the Escrow Agreement to the payment of the principal of and interest with respect to the Refunded Certificates and will not be available to pay principal of and interest with respect to the Certificates. THE PROJECT The proceeds of the 1993 Certificates were used to finance the construction of three additional oxidation and adjacent storage ponds which supplemented the City Sewer System (the "Proj ect"). THE CERTIFICATES General Provisions The Certificates will be executed and delivered in the aggregate principal amount of $5,680,000, will be dated the date of initial delivery, will represent interest from suchdate at the rates per annum set forth on the cover page hereof, payable semiannually on June 1 and December 1 in each year, commencing June 1, 2004 (each, an "Interest Payment Date"), and will mature on the dates set forth on the cover page hereo£ The Certificates will be delivered only in fully registered formand, when executed and delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the Certificates. Ownership interests in the Certificates may be purchased in book-entry form only in denominations of $5,000 or any integral multiple thereof. See "- Book Entry Only System" below and Appendix E hereto. In the event the book-entry only system described below is discontinued, the principal and prepayment premium (if any) evidenced by any Certificates are payable by check or draft of the 3 Trustee upon presentation and surrenderthereof at maturity or upon prior prepaymentat the officeof the Trustee in Los Angeles, California (the "Office of the Trustee"). Interest evidenced by each Certificate is payable on each Interest Payment Date to the person whose name appears on the registration books maintained by the Trustee (the "Registration Books") as the Owner thereof as of the close of business on the fifteenth day of the calendar month preceding theInterest Payment Date (the "Record Date"), such interest to be paid by check or draftof the Trustee, sent by firstclass mail to the Owner at such Owner's address as it appears on the Registration Books. An Owner of $1,000,000 or more in principal amount of Certificatesmay, at such Owner's option, be paid interest by wire transfer of immediately available funds in accordance with written instructions provided to the Trustee by such Owner prior to the applicable Record Date. The principal and interest and premium evidenced by the Certificates shall be payable in lawful money of the United States of America. Interest with respect to any Certificate will be payable from the Interest Payment Date preceding the date of execution thereof, unless such date is after a Record Date and on or before the succeeding Interest Payment Date, in which case interest with respect thereto will be payable from such Interest Payment Date, or unless such date is on or beforeMay 15, 2004, in which case interest with respect thereto will be payable from thedate of initial delivery. Book-Entry Only System One fully-registered Certificate will be issued for each maturity of the Certificates in the principal amount of the Certificates of such maturity. It will be registered in thename of Cede & Co. and will be deposited with DTC. The City may decide to discontinue use of the system of book-entry transfers through DTC ( or a successor securities depository). In that event, the Certificates will be printed and delivered and will be governed by the provisions of the Trust Agreement with respect to payment of principal and interest and rights of exchange and transfer. The City cannot and does not give any assurances that DTC participants or others will distributepayments with respect to the Certificates received by DTC or its nominee as the registered Owner, or anyprepayment or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or that DTC will service and act in the manner described in this Official Statement. See Appendix E hereto foradditional information concerning DTC. Transfers and Exchanges Upon Termination of Book-Entry Only System In the event the book-entry system described above is abandoned, the Certificates will be printed and delivered. Thereafter, any Certificate may, in accordance with its terms, be transferred on the Registration Books by theperson in whose name it is registered, in person or by such person's duly authorized attorney, upon surrenderof such Certificateat the Officeof the Trustee accompanied by delivery of a duly executed instrument of transfer in a form approved by the Trustee. Upon the surrender of a Certificate for transfer, the Trustee is to execute and deliver a new Certificate or Certificates of the same maturity in the same aggregate principal amount. The Trustee shall require the Certificate Owner requesting any such transfer to pay any tax or other governmental charge required to be paid in connection therewith. Certificates may be exchanged at the Office of the Trustee for a like aggregate principal amount of Certificates of other authorized denominations of the same maturity. The Trustee shall 4 require the Certificate Owner requesting any such exchange to pay any tax or other governmental charge required to be paid in connection therewith. The Trustee shall not be required to register the transfer of or to exchange any Certificate during the period in which the Trustee is selecting Certificates for prepayment or of any Certificate that has been selected for prepayment. Optional Prepayment The Certificates with stated maturities on or after December 1, 2009, are subject to prepayment prior to their respective stated maturities, as a whole or in part on anydate in the order of maturity as directed by the City in a written request provided to the Trustee and by lot within each maturityin integral multiples of $5,000, on or after December 1, 2008, from amounts prepaid by the City pursuant to the Installment Purchase Agreement at a prepayment price ( expressed as percentage of the principal amount of the Certificates to be prepaid) plus accrued interest evidenced represented thereby to thedate fixedfor prepayment as set forthherein : Prepayment Date Prepayment Price December 1, 2008 through November 30, 2009 102% December 1, 2009 throughNovember 30, 2010 101 December 1, 2010 and thereafter 100 Prepayment From Insurance and Condemnation Proceeds The Certificates are subject to prepayment prior to their respective stated maturities, as a whole or in part on any date in the order of maturity as directed by the City in a written request provided to the Trustee and by lot within each maturity in integralmultiples of $5 ,000 from prepaid Installment Payments made by the City from Net Proceeds of casualty insurance or condemnation award upon the terms and conditions of, and as provided for in the Trust Agreement and the Installment Purchase Agreement at a prepayment price equal to the principal amount thereof plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium. Notice of Prepayment When prepayment is authorized or required, the Trustee shall give notice to the Owners of the Certificatesdesignated forprepayment. Such notice shall state thedate of notice, the prepayment date, the place or places of prepayment, and the prepayment price, shall designate the maturities, CUSIP numbers, if any, and, if less than all Certificates of anysuch maturity are to be prepaid, the serial numbers of theCertificates of such maturity to be prepaid by giving the individual number of each Certificate or by stating that all Certificates between two stated numbers, both inclusive, have been called for prepayment, and in the case of Certificatesto be prepaid in part only, the respective portions of the principal amount thereof to be prepaid. Each such notice will also state that on said date there will become due and payable on each of said Certificates the prepayment price thereof or of said specifiedportion of the principal represented thereby in the case of a Certificate to be prepaid in part only, together with interest accrued with respect thereto to the prepayment date, and that (provided that moneys for prepayment have been deposited with the Trustee) from and after such prepayment date interest with respect thereto shall cease to accrue, and shall require that such Certificatebe thensurrendered to theTrustee. 5 Notice of such prepayment shall be mailed, firstclass postage prepaid, not more than 60 days nor less than 30 days prior to said prepayment date, to the respective Owners of any Certificates designated for prepayment at their addresses appearing on the Certificate registration books. Any defect in the notice or the mailing thereof will not affect the validity of the prepayment of any Certificate. INSTALLMENT PAYMENTS Schedule of Installment Payments On or before May 15 and November 15 of each year (or, if any such date is not a business day, then the last business day of May and November of each year), the City will deposit with the Trustee an amount equal to the Installment Payments coming due on such Installment Payment Date. Any moneys on deposit in the Certificate Payment Fund on each Installment Payment Date ( other than amounts required for the payment of past due principal or interest with respect to any Certificates not presented forpayment) will be credited to the payment of the Installment Payments due andpayab le on such date. The Trust Agreement requires that the Trustee deposit such payments in the Certificate Payment Fund for application to make principal and interest payments due with respect to the Certificates according to the followingschedu le: 6 INSTALLMENT PAYMENT SCHEDULE 1997 Installment Installment Purchase AFQ:_eement Purchase In terest Payment Agreement Dates Principal In terest Total To tal (I) Total June 1, 2004 $ 104,722.67 $ 104,722.67 $ 83,622.50 $ 188,345.17 December 1, 2004 $ 275,000 98,177.50 373,177.50 228,622.50 601,800.00 June 1, 2005 94,740.00 94,740.00 80,432.50 175,172.50 December 1, 2005 290,000 94,740.00 384,740.00 235,432.50 620,172.50 June 1, 2006 91,115.00 91,1 15.00 76,945.00 168,060.00 December 1, 2006 300,000 91,115.00 391,115.00 236,945.00 628,060.00 June 1, 2007 87,365.00 87,365.00 73,265.00 160,630.00 December 1, 2007 305,000 87,365.00 392,365.00 238,265.00 630,630.00 June 1, 2008 83,552.50 83,552.50 69,387.50 152,940.00 December 1, 2008 315,000 83,552.50 398,552.50 244,387.50 642,940.00 June 1, 2009 79,615.00 79,615.00 65,187.50 144,802.50 December 1, 2009 320,000 79,615.00 399,615.00 250,187.50 649,802.50 June 1, 2010 75,455.00 75,455.00 60,655.00 136,110.00 December 1, 2010 330,000 75,455.00 405,455.00 250,655.00 656,110.00 June 1, 2011 70,670.00 70,670.00 55,905.00 126,575.00 December 1, 2011 340,000 70,670.00 410,670.00 255,905.00 666,575.00 June 1, 2012 65,060.00 65,060.00 50,855.00 115,915.00 December 1, 2012 350,000 65,060.00 415,060.00 260,855.00 675,915.00 June1, 2013 58,760.00 58,760.00 45,500.00 104,260.00 December 1, 2013 360,000 58,760.00 418,760.00 270,500.00 689,260.00 June 1, 2014 51,920.00 51,920.00 39,875.00 91,795.00 December 1, 2014 375,000 51,920.00 426,920.00 274,875.00 701,795.00 June 1, 2015 44,607.50 44,607.50 34,000.00 78,607.50 December 1, 20 15 390,000 44,607.50 434,607.50 279,000.00 713,607.50 June 1, 2016 36,807.50 36,807.50 27,875.00 64,682.50 December 1, 2016 405,000 36,807.50 441,807.50 287,875.00 729,682.50 June 1, 2017 28,505.00 28,505.00 21,375.00 49,880.00 December 1, 2017 425,000 28,505.00 453,505.00 29 1,375.00 744,880.00 June 1, 20 18 19,580.00 19,580.00 14,625.00 34,205.00 December 1, 2018 440,000 19,580.00 459,580.00 299,625.00 759,205.00 June 1, 20 19 10,120.00 10,120.00 7,500.00 17,620.00 December 1, 2019 460,000 10,120.00 470,120.00 307,500.00 777,620.00 Total $5,680,000 $1,998,645.17 $7,678,645.17 $5,019,010.00 $12,697,655.17 (I) Includesprincipal and interest. Obligation to Make Installment Payments The obligation of the City to make the Installment Payments from the sources described above is absolute and unconditional, and until such time as the Installment Payments shall have been paid in full ( or provision for the payment thereofshall have been made pursuant to the Installment Purchase Agreement), the City will not discontinue or suspend any Installment Payments required to be made by it when due, whether or not the Sewer System or any part thereof is operating or operable, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and whether or not' the Project has been completed, and such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon the performance or nonperformanceby any party of any agreement forany cause whatsoever. 7 SECURITY FOR THE CERTIFICATES Each Certificate represents an undivided interest in Installment Payments to be made by the City under the Installment Purchase Agreement. The Authority has assigned substantially all of its right, title and interest in the Installment Purchase Agreement to the Trustee, pursuant to the Assignment Agreement, for the benefit of the Owners of the Certificates, including its right to receive Installment Payments thereunder and its rights as may be necessaryto enforce payment of the Installment Payments when due or otherwise protect the interests of the Owners of the Certificates under the Installment Purchase Agreement. Pledge of Sewer System Revenues All Revenues of the Sewer System and all amounts on deposit in the Revenue Fund created under the Installment Purchase Agreement are irrevocably pledged to the payment of the Installment Payments and all other Contracts and Bonds as provided in the Installment Purchase Agreement, including, but not limited to, the 1997 Installment Purchase Agreement, and the Revenues of the Sewer System shall not be used for any other purpose while any of such Installment Payments remain unpaid except as described below. The pledge of Revenues of the Sewer System constitutes a lien on Revenues on a parity with the lien and pledge of the Revenues to the payment of the 1997 Installment Payments, and subject to application of amounts on deposit therein as permitted in the Installment Purchase Agreement, such Revenue Fund and the other funds and accounts created thereunder for thepayment of such Installment Payments and all other Contractsand Bonds relating to the Sewer System in accordance with the terms of the Installment Purchase Agreement and the Trust Agreement. Revenues include all amounts derived by the City fromcollection, treatment and disposal of wastewater, all connection and capital facilities fees, and including investment earnings on all such amounts and the City's Sewer Fund, all as more particularly described in the definition of Revenues in Appendix B hereto. Moneys in the Revenue Fund created under the Installment Purchase Agreement shall be used and applied by the City as provided therein. The City has covenanted, fromthe moneys in such Revenue Fund, to pay all Operation andMaintenance Costs of the Sewer System (including amounts reasonably required to be set aside in contingency reserves for Operation and MaintenanceCosts of the Sewer System, the payment of which is not then immediately required) as they become due and payable. Thereafter, all remaining moneys in such Revenue Fund shall be used and applied to pay Debt Service with respect to the Sewer System, including the Installment Payments due under the Installment Purchase Agreement and the installment payments payable under the 1997 Installment Purchase Agreement, and any Contracts or Bonds relating to the Sewer System, then to replenish the Reserve Fund and all reserve funds established for such Bonds or Contracts, and thereafter for any purpose permittedby law. Limited Liability Notwithstanding anything contained in the Installment Purchase Agreement, the City shall not be required to advance any moneys derived from any source of income other than the Revenues of the Sewer System, the Revenue Fund created under the Installment Purchase Agreement and the other funds provided in the Installment Purchase Agreement for the payment of amounts due thereunder or for the performance of any agreements or covenants required to be performed by it contained therein. The City may, however, advance moneys for any such purpose so long as such 8 moneys are derived from a source legally available forsuch purpose and may be legally used by the City forsuch purpose. The Installment Payments under the Installment Purchase Agreement are not secured by, and the Certificate Owner has no security interest in or mortgage on, the Project, the Sewer System or any other assets of the City. Default by the City will not result in loss of the Project, the Sewer System or any other assets of the City. Should the City default, the Authority, with the written consent of the Insurer so long as the Bond Insurance Policy is in full force a�d effect, may, andunder certain circumstances the Authority shall, with the written consent of the Insurer so long as the Bond Insurance Policy is in full force and effect,declare all principal components of the unpaid Installment Payments under the Installment Purchase Agreement and the accrued interest thereon to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable; and by mandamus or other action or proceeding or suit at law or in equity enforceits rights against the City, compel the City to perform and carry out its duties under the agreements and covenants required to be performed by it contained in the Installment Purchase Agreement or by suit in equity enjoin any acts or things which are unlawful or violate the rights of the Agency. See Appendix B - "SUMMARY OF CERTAIN DOCUMENTS - Definition and Summary of Certain Provisions of the Installment Purchase Agreement - Events of Default and Remedies of the Authority." THE OBLIGATION OF THE CITYTO PAY INSTALLMENT PAYMENTS DOES NOT CONSTITUTE AN OBLIGATION OF THE CITY FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE OBLIGATION OF THE CITY TO PAY INSTALLMENT PAYMENTS UNDER THE INSTALLMENT PURCHASE AGREEMENT DOES NOT CONSTITUTE A DEBT OR INDEBTEDNESS OF THE CITY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDNISIONS IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. Rate Covenant The City has covenanted in the Installment Purchase Agreement, to the fullest extent permitted by law, to fix, prescribe and collect rates and charges for the Sewer Service which will be at least sufficient to yield during each Fiscal Year Net Revenues of the Sewer System equal to one hundred fifteen percent (115%) of Debt Service with respect to the Sewer System for such Fiscal Year. Limitations on Superior and Parity Obligations Set forth below is a summary of the provisions of the Installment Purchase Agreement with respect to incurrence of superior obligations and execution of Contracts or issuance of Bonds on a parity with the Installment Payments. Obligations Superior to Installment Payments. The City has covenanted in the Installment Purchase Agreement that it will not, so long as any Certificates are Outstanding, issue or incur any obligations secured by a pledge of Revenues of the Sewer System and payable fromNet Revenues of the Sewer System prior or superior to theInstallment Payments due thereunder. 9 Obligations on a Parity with the Installment Payments. The City may at any time execute any Contract or issue any Bonds, as the case may be, relating to the Sewer System in accordance with the Installment Purchase Agreement, provided: (1) The Net Revenues of the Sewer System for any consecutive twelve calendar month period during theeighteen calendar month period preceding the date of adoption by the City Council of the resolution authorizing the issuance of such Bonds or the date of the execution of such Contract, as the case may be, as evidenced by a special report prepared by an independent certified public accountant or independent financial consultant on such calculation on file with the City, shall have produced a sum equal to at least one hundred fifteen percent (115%) of the Debt Service with respect to the Sewer System for such twelve month period; (2) The Net Revenues of the Sewer System for any consecutive twelve calendar month period during the eighteen calendar month period preceding the date of the execution of such Contract or the date of adoption by the City Council of the resolution authorizing the issuance of such Bonds, as the case may be, including adjustments to give effectas of thefirst day of such twelve month period to increases or decreases in rates and charges for the Sewer Service approved and in effect as of the date of calculation, as evidenced by a special report prepared by an independent certified public accountant or independent financial consultant on such calculation on file with the City, shall have produced a sum equal to at least one hundred fifteen percent (115%) of Maximum Annual Debt Service on all Contracts andBonds; and (3) The estimated Net Revenues of the Sewer System forthe then currentFiscal Year and for each Fiscal Year thereafterto and including the first complete Fiscal Year after the latest Date of Operation of any uncompleted project to be financed frompr oceeds of such Contracts or Bonds, as evidenced by a certificate of the Manager on filewith the City, including ( after giving effect to the completion of an such uncompleted projects), an allowance for estimated Net Revenues of the Sewer System for each of such Fiscal Years arising from any increase in the income, rents, fees, rates and charges estimated to be fixed, prescribed or received for Sewer Service and which are economically feasible and reasonably considered necessary based on projected operations for such period, as evidenced by a certificateof the Manager on filewith the City, shall produce a sum equal to at least one hundred fifteenpercent (115%) of the estimated Debt Service with respect to the Sewer System for each of such Fiscal Years, after giving effect to the execution of all Contracts and the issuance of all Bonds estimated to be required to be executed or issued to pay the costs of completing all uncompleted projects with respect to the Sewer System within such Fiscal Years, assuming that all such Contracts and Bonds have maturities, interest rates and proportionate principal repayment provisions similar to the Contract last executed or then being executed or the Bonds last issued or thenbeing issued forthe purposeof acquiring and constructing any of such uncompleted projects. Notwithstanding the conditions described above, (i) Bonds issued or Contracts executed to refund Bonds or Contracts may be delivered without satisfying anyof the conditions set forthabove if Debt Service with respect to the Sewer System in each Fiscal Year after the Fiscal Year in which such Bonds are issued or Contracts are executed is not greater than Debt Service with respect to the Sewer System would have been in each such Fiscal Year prior to the issuance of such Bonds or execution of such Contracts, and (ii) (a) no Bonds or Contracts may be delivered during the occurrence of an Event of Default under the Installment Purchase Agreement unless such Event of Default shall be cured simultaneously with such delivery and (b) the Series 1997 Reserve Fund Requirement shall be fully funded. 10 Reserve Fund A Reserve Fund is established by the Trust Agreement and is required to be funded from proceeds of the Certificates initially in an amount equal to $482,230.00, representing the Series 2003 Reserve Fund Requirement (the "Series 2003 Reserve Fund Requirement"). If one business day prior to any Interest Payment Date the moneys in the Certificate Payment Fund are insufficient to make the payments required by the Trust Agreement with respect to Certificates on such Interest Payment Date, the Trustee will transfer from the Reserve Fund to the Certificate Payment Fund the amount of such insufficiency. If the amount available and contained in theReserve Fund exceeds the Series 2003 Reserve Fund Requirement and if the City is not then in default under the Installment Purchase Agreement, the Trustee will semiannually on or before June 1 and December 1 withdraw such excess from the Reserve Fund andwill deposit such amount in the Certificate Payment Fund. In addition, the Trustee will, on the date all or any portion of the Certificates are defeased, value the Reserve Fund and withdraw the excess, if any, on deposit in the Reserve Fund and transfer such amount to or in accordance with the written direction of the City. Except for such withdrawals, all moneys in the Reserve Fund will be used and withdrawn by the Trustee solely for the purpose of paying principal and interest with respect to the Certificatesin the event that no other moneys of the City areavailable therefor. For the purpose of determining the amount in the Reserve Fund, all Permitted Investments credited to the Reserve Fund shall be valued at the lower of cost (inclusive of all interest accrued but not paid), or market value. The City may satisfythe Series 2003 Reserve Fund Requirement by the deposit of (i) a surety bond, (ii) a municipal bond insurance policy, (iii) an irrevocable letter of credit, or (iv) any other security device, in each case withthe written approval of the Insurer. BOND INSURANCEPOLICY AND THE INSURER The information under this caption has been prepared by the In surer fo r inclusion in this Offi cial Statement. Neither the City nor the Underwriter have reviewed this information nor does the City or the Un derwriter make any representation with respect to the accuracy or completeness thereof. Bond Insurance Concurrently with the execution and delivery of the Certificates, the Insurer will issue its Municipal Bond New Issue Insurance Policy (the "Policy") for the Certificates. The Policy unconditionally guarantees the payment of that portion of the principal of and interest with respect to the Certificates which has become due for payment, but shall be unpaid by reason of nonpayment by the City. The Insurer will make such payments to U.S. Bank Trust National Association, or its successor as its agent (the "Fiscal Agent"), on the later of the date on which such principal and interest is due or on thebusiness day next followingthe day on which the Insurer shall have received telephonic or telegraphic notice, subsequently confirmedin writ�ng, or written notice by registered or certifiedmail, from an ownerof Certificates or the Trustee of the nonpayment of such amount by the City. The Fiscal Agent will disburse such amountdue on any Certificateto its owner upon receipt by the Fiscal Agent of evidence satisfactory to the Fiscal Agent of the owner's right to receive payment of the principal, accreted value or interest (as applicable) due for payment and evidence, including 11 any appropriate instruments of assignment, that all of such owner's rights to payment of such principal, accreted value or interest (as applicable) shall be vested in the Insurer. The term "nonpayment"in respect of a Certificate includes anypayment of principal, accreted value or interest ( as applicable) made to an owner of a Certificate which has been recovered from such owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcyin accordance with a final, nonappealable order of a court having competentjurisdiction. The Policy is non-cancellable and the premium will be fully paid at the time of delivery of the Certificates. The Policy covers failureto pay principal or withrespect to the Certificates on their respective stated maturity dates or dates on which the same shall have been duly called for mandatory prepayment, and not on any other date on which the Certificatesmay have been otherwise called for prepayment, accelerated or advanced in maturity, and covers the failure to pay an installment of interest on the stated date forits payment. Generally, in connection with its insurance of an issue of municipal securities, the Insurer requires, among other things, (i) that it be granted the power to exercise any rights granted to the holders of such securities upon the occurrence of an event of default, without the consent of such holders, and that such holders may not exercise such rights without the Insurer's consent, in each case so long as the Insurer has not failed to comply with its payment obligations under its insurance policy; and (ii) that any amendment or supplement to or other modification of the principal legal documents be subject to the Insurer's consent. The specific rights, if any, granted to the Insurer in connection with its insurance of the Certificates are set forth in the description of the principal legal documents appearing elsewhere in this Official Statement. See Appendix B - "SUMMARY OF CERTAIN DOCUMENTS." Reference should be made as well to such description for a discussion of the circumstances, if any, under which the City is required to provide additional or substitute credit enhancement, andrelated matters. This Official Statement may contain a section regarding the ratings assigned to the Certificates and reference should be made to such section for a discussion of such ratings and the basis for theirassignment to the Certificates. Reference shouldbe made to the description of the City for a discussion of the ratings, if any, assigned to such entity's outstanding parity debt that is not secured by credit enhancement. The Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. The Insurer is a wholly-owned subsidiary of FGIC Corporation (the "Corporation"), a Delaware holding company. The Corporation is a subsidiary of General Electric Capital Corporation ("GE Capital"). Neither the Corporationnor GE Capital is obligated to pay the debts of or the claims against the Insurer. The Insurer is a monoline financial guaranty insurer domiciled in the State of New York and subject to regulation by theState of New York Insurance Department. As of June 30, 2003, the total capital and surplus of the Insurer was approximately $1.014 billion. The Insurer prepares financial statements on the basis of both statutory accounting principles and generally accepted accounting principles. Copies of such financial statements may be obtained by writing to the Insurer at 125 Park Avenue, New York, New York 10017, Attention: Communications Department (telephone number: 212-312-3000) or to the New York State Insurance Department at 25 Beaver Street, New York, New York 10004-2319, Attention: Financial Condition Property/Casualty Bureau (telephone number: 212-480-5187). 12 On August 4, 2003, General Electric Company ("GE") announced that its indirect, wholly owned subsidiary, FGIC Holdings, Inc. ("Holdings"), had entered into an agreement to sell the Corporation (and Financial Guaranty) to Falcons Acquisition Corp. ("Newco"), a newly-formed Delaware corporation owned by a consortium of investors consisting of The PMI Group, Inc. and private equity funds affiliated with Blackstone Group, Cypress Group and CIVC Partners, subject to receipt of regulatory approvals, written confirmations from Moody's, Standard & Poor's and Fitch that the Insurer's insurancefinancial strength rating will remain at Aaa, AAA and AAA, respectively, immediately following the closing of the contemplated transactions, and satisfaction of otherclosing conditions. Immediately following the closing, it is expected that Newco will be merged with and into the Corporation and that GE (through its subsidiaries) will retain $234.6 million of preferred stock, and less than 5% of the common stock, of the Corporation. THE CITY General The City is located in western Merced County approximately 70 miles northwest of the City of Fresno, 125 miles southeast of the City and County of San Francisco and 295 miles northwest of the City of Los Angeles. The City was first settledin the 1800' s andwas incorporated in 1907. The City contains approximately 4.7 square miles in total area and as of January 1, 2003, had a population of approximately 29,150. The City currently provides sewer service to approximately 8,500 residential, commercial and industrial customers. The City is the sole enterprise which provides sewer services within the boundaries of the City. Governance and Management The City is a general law City. The City is governed by 4 members of the City Council elected at large to serve 4-year overlapping terms at elections held every two years. The mayor is directly elected to serve a 2-year term. Councilmembers select a mayor pro-tern fromamong their number to serve a I-year term. The current mayor and city council members and their occupations are set forthbelow: Mayor, ViceMay or and CityCo uncilmembers Expiration of term Occupation Michael S. Amabile, Mayor November 2004 Restaurant Owner Kevin Hudak, MayorPro Tern November 2006 Chemical Salesman RichardGerbi, Councilmember November 2004 Construction and Property Manager Mike McAdam, Councilmember November 2006 Broadcaster Nikki Smith, Councilmember November 2006 Dental Hygienist A City Manager is appointed by the council and the mayor to administer daily affairs of the City and to implement policies established by the City Council. Set forth below is a brief resume of the City Manager: Stephen J. Rath is the City Manager of the City of Los Banos and has served in such capacity since 1999. Prior to working withthe City of Los Banos, he was a Managerfor PG&E. He has also 13 served as the Mayor and Councilmember of the City of Willows. He holds a Bachelor of Arts degree in Psychology. Lucy Mallonee is the elected City Clerk and the Human Resource Director for the City of Los Banos. She has been employed by the City since 1994. She started withthe City as an Account Clerk I and has received successive promotionsto Lead Clerk, StaffAccountant and to City Clerk in 2002. Prior to working with theCity of Los Banos, she was the Assistant City Clerk withthe City of Atwater. She has an Associate Arts Degree. Melinda J. Wall is the elected City Treasurer and the Finance Director for the City of Los Banos. She came to work forthe City in 1992 as an Accountant, promoted to Budget Accounting Supervisor 1997 and Finance Director in 1998 . She has a Bachelor's of Science in Business Administration. She is a current member of the California Society of Municipal Finance Officers and Soroptomist International. Land and Land Use The City is located in the western portion of Merced County near the Coastal Range Mountains that separates the City from the Santa Clara Valley. Although western Merced County has historically been an agricultural area, the City has seen an increase in population that commutes to the Santa Clara Valley and other areas to work. The City population was estimated to be 29,150 as of January 1, 2003, an increase of 3.2% from 2002 and an increase of 12.7% from 2000 and an increase of approximately 95.6% from19 90. The sphere of influence of the City (the "Sphere of Influence"), which is a projection, determined in accordance with state law, of what the ultimate boundaries of the City will be, provides an estimate of future Citygrowth. The current Sphere of Influenceincludes approximately 15 square miles. It is expected that the City will be annexing most of its current Sphere of Influence within the next 10 to 15 years. Development may occur over 20 years pursuant to the City's General Plan. Based upon currentMerced County andCity land use policies, the City's projected population at buildout is 52,000. Set forth below is a summary of assessed valuation of property in the City. The increases reflect both development of land within the City as well as annexations of additional property into the City. ASSESSED VALUATION OF PROPERTY WITHIN THE CITY Fiscal Year Ended June 30 To tal Assessed Valuation Increase 2002 $1 ,345 ,978,000 17.4% 2001 1,14 6,386 ,000 17.5 2000 975,852,000 11.7 1999 873,478,000 8.5 1998 805,242,000 4.7 Source: Merced CountyAudito r-Controllerand the City. 14 Employees The City currently employs approximately 146 full-time and 60 part-time and seasonal persons, of whom 10 fulltime persons work in the sewer department. Certain employees of the City belong to several different labor unions. The City currently is subject to 3-year contracts with such labor unions. No employees in the sewer department belong to a labor union and the City has not experienced any strike or other labor actions. Budget Process Prior to June1 of each year, the City Manager submits a proposed budget for theCity for the Fiscal Year commencing the following July 1 to the City Council. The City Council generally conducts public workshops to obtain comments from residents and ratepayers. Subsequent to the public workshops, the City Council approves thebudget prior to July 1. The City's budget is prepared on the accrual basis and includes the Sewer Fund. The City Council approved the operating budget for the current Fiscal Year on June 13, 2003 and since that date, there have been no material amendments to the approved budget. Insurance The City is insured for property damage through Allstate, a commercial insurance company, with a limit of replacement cost for the city hall, police station and two fire stations and with a limit of depreciated value for the City's remaining property. The City is a member of the Central San Joaquin Valley Risk Management Authority, a pooled, capitalized self-insurance pool ("RMA"),and maintains general, automobile and errors and omissions liability coverage through RMA with a limit of $1,000,000 per occurrence with a $25,000 self-insured retention with excess coverage provided through the California Joint Powers Risk ManagementAuthori ty, a pooled, capitalized self-insurance pool in an amountup to $1 0,000,000 per occurrence. General, automobile and errors and omissions liability are subject to a combined general aggregate limit of $1 0,000,000 in any policy year. The City also maintains worker's compensation insurance with RMA with coverage to the statutory limit. Outstanding Indebtedness City Indebtedness Payable from Sewer Fund Revenues. Other than the 1997 Installment Purchase Agreement, the City has no outstanding debt payable from Revenues of the Sewer System or Net Revenues of the Sewer System. City Indebtedness Payable from Sources Other Than Sewer Revenues. The City currently has outstanding an Installment Purchase Agreement, dated as of May 1, 2002, by and between the City and the Authority in the aggregate principal amount of $7 ,000,000 payable from net revenues of the City water system. The City currently has a loan agreementby and between the City andthe State of California, Division of Aeronautics dated as of June 2000 outstanding in the amountof $264,000 made pursuant to a loan agreement by and between the City and the State of California, Division of Aeronautics dated as of June 2000. The proceeds of the loan were used for8 airporthangers. The loan matures 15 on April 19, 2017 and bears interest at 5.6277% per annum. Such loan is payable from the City Airport Fund rent revenues. The City currently has outstanding a Lease Agreement, dated as of May 1, 2002, by and between the City and the Authority in the aggregate principal amount of $2,700,000. Proceeds of such Lease Agreement were used to acquire real property. Lease payments under the Lease Agreement are payable fromthe City General Fund. The City currently has outstanding an Installment Purchase Agreement, dated as of December 1, 1993, by andbetween the City and theAuthority in the aggregate principal amount of $995,000 payable from the City general fund forthe construction of the City's Administration and Fire Stations. The City general fund has an internal loan with the Sewer Fund, dated as of December 1, 1993, with the outstanding principal amount of$960,000 payable fromthe City's general fundfor the construction of the City Administrationand Fire Stations. The City currently has an outstanding note with the outstanding principal amount of $59,093 maturing in 2009. Proceeds of the note were used to acquire a buildingat Colorado Park acquired for governmental purposes. Such note is payable from amounts in the City Park and Recreation Fund. The Los Banos Redevelopment Agency (the "Redevelopment Agency'') has outstanding $8,450,000 aggregate principal amount of Los Banos Redevelopment Project 2001 Tax Allocation Bonds (Los Banos Redevelopment Project) (the "Tax Allocation Bonds"). Proceeds of the Tax Allocation Bonds were used for various redevelopment purposes. The Tax Allocation Bonds are payable solely from certain tax incrementreven ues received by the Redevelopment Agency. THE SEWER SYSTEM The City Sewer System consists of interceptors and pump stations for the conveyance of wastewater within the City, a treatment plant and storage and oxidation ponds. The City's interceptor system consists of approximately 108 miles of pipeline ranging from 6 to 30 inches in diameter, 13 pump stations and facilities for emergency power and odor control. Based on operating results and materials used, the City estimates that the interceptor system should last in excess of 20 years without additional major capital expenditures. The existing treatment plant occupies approximately 1,298 acres in the northeast portion of the City and provides primary treatment. The City's treatment plant was first constructed in 1963. Improvements to the original treatment plant have been added with an expansion in 1997. The treatment facilities are designed to handle 4.5 million gallons per day (mgd) during dry or wet weather. Surges and storm flow are handled by storm basin facilities. The effluentproduc ed by the plant is primarily disposed of by evaporation and application to approximately 600 acres of City owned pastureland included inthe total acreage stated above. All requirements imposed by the State of CaliforniaRegional Water Quality ControlBoar d, Central Valley Region (the "Regional Board") have been met consistently. 16 Environmental Compliance The present discharge requirements for the treatment plant are established by the Regional Board which administers and enforces all federal and State of California discharge requirements. The Regional Board administers regulations promulgated under the National Pollutant Discharge Elimination System by the United States Environmental Protection Agency (the "EPA") and Division 7 of the California Water Code and regulations adopted thereunder. The plant's present discharge permit (Waste Discharge Order No. 92-014) was adopted on January 24 , 1992 and has no set expiration date. The sewer department of the City is responsible for satisfying federal and State-mandated discharge requirements. The requirements include schedules for monitoring operations to assure discharge compliance and protection of the Citywater supply. Historic Sewer System Usage The City records the volume of wastewater treated by the Sewer System. The volume of wastewater treated by the City has increased from approximately 2.55 mgd in fiscal year 1996 to approximately 3 .40 mgd in fiscalyear 2003. The following table summarizes the volume of wastewater treated for the period June 30, 1999 through June 30, 2003. The City reports that daily average flowhas not increasedin proportion to theincrease in service connections due to lower average flow from new connections and industrial flow. CITY OF LOS BANOS HISTORIC SEWER SYSTEM USAGE Fiscal Ye ar Ending Ju ne 30 Daily Average Flow (mgd) In crease 2003 3.40 6.25% 2002 3.20 (0.02) 2001 3.26 10.14 2000 2.96 12.12 1999 2.64 (4 .00) Source: City. Historic Sewer System Connections The following table presents a summary of service connections to the Sewer System for the period June 30, 1999 throughJune 30, 2003. CITY OF LOS BANOS HISTORIC SEWER SYSTEM CONNECTIONS Fiscal Ye ar Ending June 30 Service Connections In crease 2003 8,446 4.95% 2002 8,047 4.50 2001 7,700 6.62 2000 7,222 6.36 1999 6,790 NIA Source: City. 17 Historic Sewer System Collection and Treatment Revenues The followingtable shows annual collection and treatment revenues of the SewerSystem for period June 30, 1999 through June 30, 2003. CITY OF LOS BANOS HISTORIC SEWER SYSTEM COLLECTION AND TREATMENT REVENUES Fiscal Ye ar Ending June 30 Collection and Treatment Revenues Increase 2003 $1,992,205(l) 7.29% 2002 1,856,879 34.04 2001 1,385,322 29.90 2000 1,066,467 8.78 1999 980,381 (6.83) Source: City. <1> Unaudited Largest Sewer System Users The followingta ble sets forth the ten largest users of the Sewer System as of June 30, 2003 as determined by annual payments. CITY OF LOS BANOS TEN LARGEST SEWER SYSTEM USERS User Typ e of Business Annual Payment California Dairies Dairy Food Processing $329,208 Kagome Food Processing 67,658 LBUSD Miano Elementary Elementary School 24,861 LBUSD High School HighSchool 24,041 Casa Mobile Home Park Mobile Homes 19,548 Peluso Cheese Cheese Processing 18,598 LBUSD Henry Miller Elementary School 11,512 Carrington Point Apartment Complex 11,230 Los Banos Apartments Apartment Complex 9,566 Los Banos Abattoir Meat Processing 8,388 Source: City. These ten largest users of theSewer System accounted forapp roximately 26% of collection and treatment fees and approximately 14% of all Sewer System Revenues received in Fiscal Year 2003. Sewer System Rates and Charges The City is not subject by statute to the jurisdiction of, or regulation by, the CaliforniaPu blic Utilities Commission or any other regulatory body. The City currently sets Sewer System service charges to recover operating expenses for the Sewer System with capital improvements and debt 18 service payments being funded from connection fees, development fees and service charges. The City staffannually determines the adequacy of the Sewer System service charge structure afterfull consideration of expected operations, maintenance and capital costs. For information concerning Proposition 218 which may affect the City's ability to increase sewer fees and charges, see "CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES - Proposition 218" herein. The City has separated its customer base into a variety of classes based on use. Rates charged to each class of customer varies. Sewer Charges. The current schedule of Sewer System rates for users of the City's Sewer System, described below and in effect since April 1, 2003 is set forthbelow: CITY OF LOS BANOS SEWER RATES Typ e of Us age Rates Single family residence (t) $11.70 2 Multiple family residence < ) 23.40 3 Commercial Users < ) 16.30 Source: City. (1) Rates areper month and includerates for treatmentand collection. <2l Rates are permonth and include rates for treatment and collection for condominium unit, apartment unit, mobile home and motel manager's quarters. <3l Represents rangeof base rates forcommer cial users. In addition, usage rates range from $.60 per 100 cubic feetof water to $1.02 per 100 cubic feet of water. These rates do not reflect a special rate formula for dairy products and meat packing plants. Effective April 1, 2003, the City Council approved a revision to sewer rate setting policy. Commencing on April 1, 2002, sewer rates were to be automatically increased by an amount that roughly corresponds with increases in the San Francisco/San Jose/Oakland Consumer Price Index, not to exceed 5% in any one year, on April 1st of each year. The most recent automatic sewer rate occurred April 1, 2003, when sewer rates were increased by approximately 1.9%. The chart below sets forth a comparison of the City monthly rates and charges for a single familyresidential userto those of nearby communities: CITY OF LOS BANOS COMPARATIVEMONTHLY SEWER SYSTEM RATES* Community Total Monthly Bill Turlock(}) $28.70 Atwater 20.03 Tracy 17.50 Merced 17.08 Ceres 16.75 Los Banos 11.70 Manteca 11.05 Source: City. * Includes sewer treatment and sewercollection fees. <1 l Turlock sewer rates are based upon fixture units, amountlisted above is based on 31-3 5 units. 19 Connection Fees. The City collects a connection fee for each new connection to the Sewer System. The current City connection feefor single-fa mily residences is $3,965. The City currently projects that the connection fee will increase over thenext six-year period based on the CityEngineer calculations of revenue needs. CITY OF LOS BANOS CONNECTION FEES Ye ar Connection Fee 2003 $3,965 2004 4,177 2005 4,400 2006 4,636 2007 4,884 2008 5,145 2009 5,420 The table below sets forth a comparison of City connection fee for the Sewer System a single-familyresidential unit to those of nearby communities as of June 30, 2003: CITY OF LOS BANOS COMPARATIVE SEWERSYSTEM CONNECTION CHARGES Community Connection Fee Los Banos $3,965 Atwater 3,667 1 Tracy< ) 3,100 Turlock 3,000 Manteca 2,429 Merced 2,032 Ceres 1,670 Source: City. (I) Vary accordingto city criteria. Development Fees. The City charges development feesat the time of finalmap approval for improvement or expansion of wastewater treatment facilities to meet the requirements of community growth. The current City development fe e is $2,000 per acre. The City does not currentlycharge a separate development fee on new development agreements as the development fee is incorporated into the connection fee. The City reports that other nearby communities which charge similar fees calculate such feeson a basis which is not comparable. Collection Procedures The City currently has a combined bill for water, sewer andsanitation services. The City is on a monthly billing cycle sending out bills on the first week of the month for the prior service cycle. Payment is due by the 20th day of the month and is considered delinquent if not paid by that date. Approximately 21% of the customers carry forward a delinquency balance on their next month's billing. If payment is not received after47 days of the initial billing, a 48-hour courtesy notice is sent 20 to the customer. As of September 20, 2003, approximately 9.71 % of the accounts received courtesy notices, which account for approximately 1 % of Sewer System service revenues. The City reports, however, that upon receipt of such notice almost all of its customers pay delinquent amounts within three days. Failure to pay within the three days of the notice results in the City discontinuing water service. If services are shut off, a customer must bring the account current and pay a $35 administrative feeto resumeservice. Future Sewer System Improvements Existing treatment plant capacity is expected to be adequate to serve approximately 1,900 additional residential hook-ups. City staffand consulting engineers are studying the need for additional expansion of treatment and disposal facilities for anticipated increases in residential and industrial discharge. The City expects to finance any such additional treatment and disposal facilities with proceeds of additional debt, connection fees, development fees or Sewer System service charges. The City is currently in the process of updating the Sewer Master plan. The City expects to complete the Sewer Master Plan update in 2004. Projected Sewer System Connections The following table shows the increase in the number of sewer connections to the Sewer System projected by the City for the current and next four fiscal years. The projected increase in connections for fiscal year 2004 is projected to be equal to the average annual increase in connections for the five-year period ending June 30, 2003. Thereafter, connections are projected to increase at the rate of approximately 4.0% per annum. CITY OF LOS BANOS PROJECTED SEWER SYSTEM CONNECTIONS Fiscal Year Ending June 30 Service Connections Increase 2004 8,543 NIA 2005 8,885 4.00% 2006 9,240 4.00 2007 9,609 4.00 2008 9,994 4.00 Source: City. 21 Projected Sewer System Usage The City currency estimates that Sewer System usage for the current and next four Fiscal Years will be as follows: CITY OF LOS BANOS PROJECTED SEWER SYSTEM USAGE Fiscal Year Ending June 30 Daily Average Flow (mgd) Increase 2004 3.5 0.0% 2005 3.6 2.7 2006 3.7 2.7 2007 3.8 2.6 2008 3.9 2.6 Source: City. Projected Sewer System Collection and Treatment Revenues The following table projects annual collection and treatment revenues of the Sewer System for the current and next four Fiscal Years, which projections are based on the increases in projected sewer connections described under "- Projected Sewer System Connections" above and approved rate increases. CITY OF LOS BANOS PROJECTED SEWER SYSTEM COLLECTION AND TREATMENT REVENUES Fiscal Year Ending Collection and Treatment June 30 Revenues In crease 2004 $1 ,977,600 0.74% 2005 2,096,256 6.00 2006 2,222,032 6.00 2007 2,355,354 6.00 2008 2,496,674 6.00 Source: City. SEWER SYSTEM FINANCIAL INFORMATION Financial Statements A copy of the most recent audited financial statements of the City for the fiscal year ending June 30, 2002, prepared by Nicholson & Olson, Roseville, California (the "City Auditor") are included as Appendix A hereto (the "Financial Statements"). The Financial Statements have been prepared on a combined basis and include the Sewer Fund. The obligation of the City to make Installment Payments under the Installment Purchase Agreement is limited to Net Revenues of the Sewer System and the City is not obligated to apply any other revenues to make such Installment Payments. The summary operating results contained under the caption "SEWER SYSTEM FINANCIAL INFORMATION - Historic Operating Results" below are derived from these 22 financial statements ( excluding certain non-cash items and after certain other adjustments) and are qualifiedin their entirety by referenceto such statements, including the notes thereto. The City Auditor's letter concludes that the audited financial statements present fairly, in all material respects, the financial position of the City and the results of its operations and cash flowsfor theyear then ending in conformitywith generally accepted accounting principles. Historic Operating Results The followingtable is a summary of operating results of the Sewer System of the City for the last five fiscal years. Except as noted, the results have been derived from the City's Financial Statements but exclude certain non-cash items and include certain other adjustments. The table has not been audited by the City Auditor. CITY OF LOS BANOS SEWER SYSTEM HISTORIC OPERATINGRESULTS FISCAL YEAR ENDED JUNE 30 2003(l) 2002 2001 2000 1999 Revenues Collection Fees $ 989,987 $ 918,940 $ 602,371 $ 431,097 $ 403,310 Treatment Fees 963,909 937,939 758,795 612,776 560,079 Connection Fees 1,400,738 598,480 1,145,396 1,127,577 739,699 Development Fees 0 61,043 145,534 180,922 199,456 Other 288,013 136,287 208,050 184,524 132,554 Total Revenues $3,642,647 $2,652,689 $2,860,146 $2,536,896 $2,035,098 Operation and Maintenance Expenses $1,765,952 $1,220,890 $ 975,075 $ 906,818 $ 993,667 Net Revenues $1,876,695 $1,431,779 $1,885,071 $1,630,078 $1,041,431 Debt Service 1993 Installment Purchase Agreement $ 522,702 $ 595,050 $ 599,789 $ 549,092 $ 308,872 1997 Installment Purchase Agreement 311,100 311,600 311,796 311,697 311,281 Total Debt Service $ 833,802 $ 906,650 $ 911,585 $ 860,789 $ 620,153 Coverage Ratio 2.25 1.58 2.06 1.89 1.68 BalanceAv ailable for Capital or Other Purposes $1,042,893 $ 525,149 $ 973,486 $ 700,711 $ 421,278 Source: City. (I) Unaudited. For fiscal year ending June30, 2003, the reserves available for Sewer System purposes was approximately $3,960,000. The reserve is· comprised of each fiscal year's available balances not used for capital or other purposes, and the reserve would be available to pay Installment Payments and to pay forcapital improvements. 23 Projected Operating Results The City's estimated projected operating results for the Sewer System for the fiscal years ending June 30, 2004 through June 30, 2008 are set forth below, reflecting certain significant assumptions concerning futureevents and circumstances. The financial forecast represents the City's estimate of projected financial results based upon its judgment of the most probable occurrence of certain important future events. The assumptions set forth in the footnotes to the chart set forth below are material in the development of the City's financial projections, and variations in the assumptions may produce substantially different financial results. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. CITY OF LOS BANOS SEWER SYSTEM PROJECTED OPERATING RESULTS FISCAL YEAR ENDED JUNE 30 2004 2005 2006 2007 2008 Revenues Collection Fees<1) $ 1,009,400 $ 1,069,964 $ 1,134,162 $ 1,202,212 $ 1,274,344 Treatment Fees<1) 968,200 1,026,292 1,087,870 1,153,142 1,222,330 Connection Fees<2> 1,219,970 1,586,000 1,737,632 1,900,800 2,086,200 Other<3l 54,150 55,775 57 448 59,171 60,946 Total Revenues $ 3,251,720 $ 3,738,031 $ 4,017,112 $ 4,315,325 $ 4,643,820 Operation and Maintenance Expenses<4) $ 1,924,261 $ 2,048,736 $ 2,151,173 $ 2,258,731 $ 2,371,667 Net Revenues $ 1,327,459 $ 1,689,295 $ 1,865,939 $ 2,056,594 $ 2,272,153 Debt Service 1993 Installment Purchase Agreement $ 384,165 $ $ $ $ 1997 Installment Purchase Agreement 310,255 309,055 312,378 310,210 307,653 2003 Installment Purchase Agreement 104,723 467,918 475,855 478,480 475,918 Total $ 799,143 $ 776,973 $ 788,233 $ 788,690 $ 783,571 Coverage Ratio 1.66 2.17 2.37 2.61 2.90 Balance Available for Capital Projects or Other Purposes $ 528,316 $ 912,322 $ 1,077,706 $ 1,267,904 $ 1,488,582 Source: City. (I) Projected fees based on projected increased connections as set forth under "THE SEWER SYSTEM - Projected Sewer System Connections." Collection and Development fees are based on a 4% growth with a yearly 2% CPI adjustmentto rates. <2> Building permits projected to increase 4% per annum each year, sewer connection rates set by City Engineer. <3) Other Revenues include penalties for exceeding permitted flow, late fees and pasture income. Projected to increase 3 % per annum. <4) Operation and Maintenance Expenses projected to increase at approximately 5% per annum. 24 CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES Article XIIIB Article XIIIB of the CaliforniaState Constitution limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and population. The base years foresta blishing such appropriation limit is the 1978-79 fiscalyear and the limit is to be adjusted annually to reflectcha nges in population and consumer prices. Adjustments in the appropriations limit of an entity may also be made if (i) the financial responsibility for a service is transferred to another public entity or to a private entity, (ii) the financial source for the provision of services is transferred from taxes to other revenues, or ( iii) the voters of the entity approve a change in the limit for a period of time not to exceed four years. Appropriations subject to Article XIIIB generally include the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions and refunds of taxes. Proceeds of taxes include, but are not limited to, all tax revenues and the proceeds to an entity of government from (i) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (ii) the investment of tax revenues. Article XIIIB includes a requirement that if an entity's revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. Certain expenditures are excluded from the appropnatlons limit including payments of indebtedness existing or legally authorized as of January 1, 1979, or of bonded indebtedness thereafter approved by the voters and payments required to comply with court or federal mandates which without discretion require an expenditure for additional services or which unavoidably make the providing of existing services more costly. The City is of the opinion that its sewer charges andwater charges do not exceed the costs it reasonably bears in providing sewer service and water service, respectively, and therefore are not subject to the limits of Article XIIIB. The City has covenanted in the Installment Purchase Agreement that it will collect Net Revenues sufficient to provide for payment of the Installment Payments due thereunder in each year. See "SECURITY FOR THE CERTIFICATES - Rate Covenant." Proposition 218 An initiative measure entitled the "Right to Vote on Taxes Act" (the "Initiative") was approved by the voters of the State of California at the November 5, 1996 general election. The Initiative added Article XIIIC and Article XIIID to the California Constitution. According to the "Title and Summary" of the Initiative prepared by the California Attorney General, the Initiative limits "the authority of local governments to impose taxes and property-related assessments, fees and charges." Article XIIID defines the terms "fee" and "charge" to mean "any levy other than an ad valorem tax, a special tax or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property-related service." A "property-related service" is defined as "a public service having a direct relationship to property 25 ownership." Article XIIID further provides that reliance by an agency on any parcel map (including an assessor's parcel map) may be considered a significant factor in determining whether a fee or charge is imposed as an incident of property ownership. Article XIIID requires that any agency imposing or increasing any property-related fee or charge must provide written notice thereof to the record owner of each identifiedparc el upon which such fee or charge is to be imposed and must conduct a public hearing with respect thereto. The proposed fee or charge may not be imposed or increased if a majority of owners of the identified parcels filewritten protests against it. As a result, if and to the extent that a fee or charge imposed by a local government for water service is ultimately determined to be a "fee" or "charge" as definedin Article XIIID, the local government's ability to increase such fee or charge may be limited by a majority protest. The City does not believe that the feesand charges imposed by the City for Sewer Service are imposed as an incident of property ownership within the meaning of Article XIIID and, as a result, does not believe that such provisions of Article XIIID apply to such fees and charges. In addition, Article XIIID includes a number of limitations applicable to existing fees and charges including provisions to the effect that (i) revenues derived from the fee or charge shall not exceed the funds required to provide the property-related service, (ii) such revenues shall not be used for any purpose other than that for which the fee or charge was imposed, (iii) the amount of a feeor charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel and (iv) no such fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. Property-related fees or charges based on potential or future use of a service are not permitted. The City believes that its current fees and charges for Sewer Service comply with these limitations. Stand-by charges, whether characterized as charges or assessments, are classified as assessments and cannot be imposed without compliance with the provisions of the Initiative pertaining to assessments. The Initiative provides that any assessment imposed exclusively to finance the capital costs or maintenance and operation expenses for sewer or water which is in effect on the effective date of the Initiative need not comply with the provisions thereof pertaining to assessments. However, future increases in such standby charges are subject to a majority protest election procedure described in the Initiative. At this time, the City does not impose any stand-by charges forits Sewer Service. Article XIIIC provides that the initiative power shall not be prohibited or otherwiselimited in matters of reducing or repealing any local tax, assessment, fee or charge and that the power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments. Article XIIIC does not define the terms "local tax," "assessment," "fee" or "charge," so it is unclear that the definitions set forth in Article XIIID referred to above will be applicable to Article XIIIC. Moreover, the provisions of Article XIIIC are not expressly limited to local taxes, assessments, feesand charges imposed after November 6, 1996. Therefore, in the absence of other limitations, said provisions could result in the reduction or repeal of existing local taxes, assessments, feesor charges. The Initiative has not yet been interpreted by the courts; however, Special Counsel is of the opinion that should the matter be properly briefed and presented to the court of competent jurisdiction, the court would hold that the provisions of Article XIIIC relating to the Initiative could not be used to reduce rates and charges necessary to provide Net Revenue sufficient to pay the 26 Installment Payments by reason of the impairment of contracts clauses of the United States Constitutionand the CaliforniaConstitu tion. In addition to the specific limitations on remedies contained in the applicable documents themselves, the rights and obligations under the Certificates, the Trust Agreement and the Installment Purchase Agreement are subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights, to the application of equitable principles if equitable remedies are sought, and to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against public agencies in the State of California. The various opinions of counsel to be delivered with respect to such documents, including the opinion of Special Counsel (the formof which is attached as Appendix C), will be similarly qualified. Future Initiatives Articles XIIIB, XIIIC and XIIID were each adopted as a measure thatqualified for theballot pursuant to California's initiative process. From time to time other initiatives could be proposed and adopted affectingthe City's revenues or ability to increase revenues. THE AUTHORITY The Authority was created by a Joint Exercise of Powers Agreement, dated as of April 16, 1997, by and between the City and the Los Banos Redevelopment Agency. Such agreement was entered into pursuant to the provisions of Articles 1 and 4 of Chapter 5 of Division 7 of Title 1 (commencing with Section 6484) of the California Government Code (the "JPA Law"). The Authority was created for the purpose of assisting the financing or refinancing of certain public capital facilities within the City. Under the JPA Law, the Authority has the power to purchase certificates issued by any local agency at public or negotiated sale and may sell such certificates to public or private purchasers at public or negotiated sale. The Authority is governed by a five-member board whose members are the same as the City Council. The Authority has no employees and all staff workis done by City staffor by consultants to the Authority. APPROVAL OF LEGAL PROCEEDINGS The legality and enforceability of the Installment Purchase Agreement andcertain other legal matters are subject to the approval of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, acting as Special Counsel. The proposed form of such legal opinion is attached hereto as Appendix C. Certain legal matters will be passed upon for the City and the Authority by the City Attorney, for the Underwriter by its counsel Ballard Spahr Andrews & Ingersoll, LLP, Salt Lake City, Utah, for the Insurer by its counsel and for the Trustee by its counsel. LITIGATION There is no action, suit or proceeding pending or, to the knowledge of the City, threatened at the present time seeking to restrain or to enjoin thesale or delivery of the Certificates or in any way contesting or affecting the validity or enforceability of the Certificates, the Trust Agreement or the Installment Purchase Agreement or any action of the City contemplated by any of said documents. 27 There are no pending suits contesting or affecting the collection of Revenues or which would have a material adverse effect on the Sewer System, the financialcondition of the City or the Sewer System, including the City's ability to make Installment Payments, or the receipt of Revenues. TAXMATTERS In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel, under existing statutes, regulations, rulings and judicial decisions, the portion of each Installment Payment constituting interest is excluded from gross income for fe deral income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Special Counsel, the portion of each Installment Payment constituting interest is exempt from State of California personal income tax. Special Counsel notes that, with respect to corporations, the portion of each Installment Payment constituting interest may be included as an adjustmentin the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations. In addition, the difference between the issue price of a Certificate (the first price at which a substantial amount of the Certificates of a maturity is to be sold to the public) and the stated prepayment price at maturity with respect to a Certificate constitutes original issue discount, and the amount of original issue discount that accrues to the owner of the Certificate is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federalalternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. A complete copy of the proposed opinion of Special Counsel is set forth in Appendix C - "FORM OF OPINION OF SPECIAL COUNSEL." Special Counsel's opinion as to the exclusion from gross income of the portion of each Installment Payment constituting interest (and original issue discount) is based upon certain representations of fact and certifications made by the City and others and is subject to the condition that theCity complies with all requirements of theInternal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the execution and delivery of theCertificates to assure that the portion of each Installment Payment constituting interest (and original issue discount) will not become includable in gross income for federalincome tax purposes. Failure to comply with such requirements of the Code might cause the portion of each Installment Payment constituting interest (and original issue discount) to be included in gross income for federal income tax purposes retroactive to the date of execution and delivery of the Certificates. The City has covenanted to comply with all such requirements. Special Counsel's opinions may be affected by actions taken (or not taken) or events occurring ( or not occurring) after the date hereof. Special Counsel has not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Trust Agreement and the Tax Certificaterelating to the Certificates permitcertain actions to be taken or to be omitted if a favorable opinion of Special Counsel is provided with respect thereto. Special Counsel expresses no opinion as to the exclusion from gross income of interest (and original issue discount) for federalincome tax purposes withrespect to any Certificate if any such action is taken or omitted based upon the advice of counsel other than Stradling Y occa Carlson & Rauth. Although Special Counsel has rendered an opinion that the portion of each Installment Payment constituting interest (and original issue discount) is excluded fromgross income forfederal income tax purposes provided that the City continues to comply with certain requirements of the Code, the ownership of the Certificates and the accrual or receipt of interest (and original issue discount) with respect to the 28 Certificates may otherwise affect the tax liability of certain persons. Special Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Certificates, all potential purchasers should consult their tax advisors with respect to collateral tax consequences with respect to the Certificates. CONTINUINGDISCLOS URE The City has covenanted in a Continuing Disclosure Certificate forthe benefit of the holders and beneficial owners of the Certificatesto provide certain financial information and operating data relating to the City by not later than the January 31 following the end of the City's Fiscal Year (currently its Fiscal Year ends on June 30) (the "Annual Report"), commencing with the report for Fiscal Year ending June 30, 2003, and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report and the notices of material events will be filed by the City with each Nationally Recognized Municipal Securities Information Repository. The specific nature of theinformation to be contained in the Annual Report and the notice of material events is set forth in Appendix D - "FORM OF CONTINUING DISCLOSURE CERTIFICATE" hereto. These covenants have been made in order to assist the Underwriter in complying with Rule 15c2-12(b)(5) promulgated under the Securities Exchange Act of 1934. In May 2002, the City filed four annual reports which had been required to be made in previous years in connection with $4, 710,000 Revenue Certificates of Participation (Sewer System Expansion Project), Series 1997, as required by S.E.C. Rule 15c2-12(b)(5). As of the date hereof, the City has filed all Annual Reports required under previous undertakings. RATING Upon issuance of the Policy, Moody's Investors Service ("Moody's") will assign the Certificates a rating of "Aaa." The rating is based upon the Policy. See "BOND INSURANCE POLICY AND THE INSURER" herein. In addition, Moody's has assigned its municipal bond rating of "Baa2" to the Certificates notwithstanding the delivery of the Policy. Generally, rating agencies base their ratings on information and material furnished directly to them and on investigations, studies and assumptions made by them. The rating reflects only the views of Moody's and an explanation of the significance of such rating may be obtained from Moody's Investors Service, 99 Church Street, New York, New York, 10007, (212) 553-0470. There is no assurance that the rating will continue for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agency, if, in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Certificates. UNDERWRITING The Certificates will be purchased by Crocker Securities LLC, as underwriter (the "Underwriter"), under a Contract of Purchase, dated November 6, 2003 (the "Purchase Contract"), pursuant to which theUnde rwriter agrees to purchase all of the Certificatesfor an aggregate purchase price of $5,598,563.40 (which represents the principal amount of the Certificates less net original issue discountof $10,436.60 and less Underwriter's discount of $71,000.00). The initial public offering prices stated on the cover of this Official Statement may be changed from time to time by the Underwriter. The Underwriter may offer and sell the Certificates to certain dealers (including dealers depositing Certificates into investment trusts), dealer banks, banksacting as agent and others at prices lower than said public offering prices. 29 VERIFICATION Upon delivery of the Certificates, Grant Thornton, LLP, Minneapolis, Minnesota, a firm of independent public accountants, will deliver a report on the mathematical accuracy of certain computations based upon certain information and assertions provided to them by the Underwriters relating to (a) the adequacy of the maturing principal of and interest on the Securities to pay all of the principal and prepayment premium represented by and the interest on the Refunded Certificates (see "THE REFUNDING PLAN" herein) as such principal, prepayment premium and interest becomes due and payable, and (b) the computations of yield of the Certificates and the Securities which support Special Counsel's opinion that the interest on the Certificates received by the Owners is excluded fromgross income for federal income tax purposes. MISCELLANEOUS Insofar as any statements made in this Official Statement involve matters of opinion or of estimates, whether or not expressly stated, they are set forth as such and not as representations of fact. No representation is made that any of such statements made will be realized. Neither this Official Statement nor any statement which may have been made verbally or in writing is to be construed as a contract with the Owners of the Certificates. The execution anddelivery of thisOf ficial Statement have been duly authorizedby the City. CITY OF LOS BANOS By: ____� ___ /s-/ =M=i�c_ha�e�l�S�.A___ma �b _ile___ �--��-- Mayor By: ______�/�s/�S=t=ep-h=e=n�J�·= R=ath=------City Manager 30 APPENDIX A FINANCIALSTATE MENTS FOR FISCAL YEAR ENDING JUNE30, 2002 CITY OF LOS BANOS CALIFORNIA Annual Financial Report June 30, 2002 A-1 CITY OF LOS BANOS LOS BANOS, CALIFORNIA JUNE 30, 2002 MAYOR AND CITY COUNCIL Michael S. Amabile Mayor Mike McAdam Mayor Pro Tern Susan Burnett-Hampson Council Member Kevin Hudak Council Member Nicola Smith Council Member ADMINISTRATION Steve Rath City Manager Sue Cardoza City Clerk Ray Desa Public Works Director Donald 0. Germino City Attorney Chester Guintini Fire Chief Mark B. Knapp Police Chief Timothy A. Miller Community Development Director Joe Sousa Public Services Director Melinda Wall City Treasurer/Finance Director Nicholson & Olson, CPAs City Auditor Stoddard & Associates City Engineer TABLE OF CONTENTS FINAN CIAL SECTION INDEPENDENT AUDITOR'S REPORT ...... 1 GENERAL PURPOSE FINANCIAL STATEMENTS Combined Balance Sheet - All Fund Types and Account Groups ...... 2-3 Combined Statement of Revenues, Expenditures and Changes in Fund Balances - All Governmental Fund Types and Expendable Trust Fund ...... 4 Combined Statement of Revenues and Expenditures - Budget and Actual - General and Special Revenue Funds ...... 5 Combined Statement of Revenues, Expenses and Changes in Retained Earnings - All Proprietary Fund Types ...... 6 Combined Statement of Cash Flows - All Proprietary Fund Types ...... 7 Notes to Financial Statements ...... 8-32 SINGLE AUDIT Schedule of Expenditures of Federal Awards ...... 33 Note to Schedule of Expenditures of Federal Awards ...... 34 Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ...... 35 Report on Compliance with Requirements Applicable to Each Major Program and InternalControl Over Compliance in Accordance with OMB Circular A-133 ...... 36-37 Schedule of Findings and Questio�ed Costs ...... 38-40 GANN APPROPRIATIONS LIMITATION SECTION Independent Accountant's Report on Agreed-Upon Procedures Applied to Appropriations Limit Worksheet ...... 41-42 Gann Appropriations Limitation Worksheet ...... 43 [THIS PAGE INTENTIONALLY LEFT BLANK] NICHOLSON &OLSON CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT 729 Sunrise venue,A Suite 303 Roseville, California 95661 The Honorable Members of the City Council City of Los Banos, California (916) 786-7997 We have audited the accompanying general-purpose financial statements of the City of Los Banos, California as of and for the year ended June 30, 2002, as listed in the table of contents. These general-purpose financial statements are the responsibility of the City of Los Banos' management. Our responsibility is to express an opinion on these general-purpose financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the general-purpose financial statements referred to above present fairly, in all material respects , the financial position of the City of Los Banos, as of June 30, 2002, and the results of its operations and the cash flows of its proprietary fund types for the year then ended in conformity with accounting principles generally accepted in the United States of America. Certified Public Accountants November 15, 2002 -1 - CITY OF LOS BANOS COMBINED BALANCE SHEET All Fund Types and Account Groups June 30, 2002 Governmental Fund Txees Special Capital Debt ASSETS AND OTHER DEBITS General Revenue Projects Service Assets: Cash and cash equivalents $ 2,818,710 $ 3,657,834 $ 4,052,364 $ 3,341 ,099 Receivables: Trade accounts 192,945 State and local taxes 109,722 171 ,597 (12,881) Interest 23,395 29,362 18,184 26,855 Grants 12,715 466,005 Other 20,041 4,250 16,534 Loans receivable 324,750 93,400 Due from other funds 938,720 384,726 295,416 Advance to general fund Inventories Restricted assets: Cash and cash equivalents Cash with fiscal agents 337,857 Interest receivable 140 General fixed assets Proprietary funds - fixed assets Accumulated depreciation Construction in progress Unamortized debt issuance costs Other debits: Amount available in debt service fund Amount to be provided for retirement of general long-term debt TOTAL ASSETS AND OTHER DEBITS $ 4,454,245 $ 5,038,524 $ 4,463,017 $ 3,367,954 See accompanying notes to fin anical statements -2- Page 1 of 2 Proprietary Fiduciary Fund Ttees Fund Txee Account Groues Totals Internal Expendable General Fixed General Long- (Memorandum :nterprise Service Trust Assets Term Debt OnM 2,674,125 $ 724,271 $ 463,967 $ $ $ 17,732,370 509,776 702,721 268,438 3,421 3,988 105,205 478,720 11,600 52,425 418,150 46 1,618,908 1,020,000 1,020,000 22,797 22,797 9,585,442 9,585,442 1,520,989 1,858,846 29,285 29,425 16,667,443 16,667,443 23,693,964 23,693,964 (6,521 ,024) (6,521 ,024) 612,058 612,058 158,636 158,636 3,367,954 3,367,954 12,254,181 12,254,181 33,317,694 $ 727,692 $ 467,955 $ 16,667,443 $ 15,622,135 $ 84,126,659 -2- CITY OF LOS BANOS COMBINED BALANCE SHEET All Fund Types and Account Groups June 30, 2002 Governmental Fund T�ees Special Capital Debt LIABILITIES: General Revenue Projects Service Accounts payable $ 594,388 $ 254,883 $ 48,488 $ 19,289 Accrued liabilities 208,464 15,790 3,757 Deposits payable 154,914 6,860 Deferred revenue 324,750 Due to other funds 1,182,131 146,989 Advance from water and sewer funds Compensated absences payable Obligations under capital leases Certificates of participation Unamortized discount and deferred charges Notes payable Other contractual obligations TOTAL LIABILITIES 957,766 1,777,554 206,094 19,289 EQUITY AND OTHER CREDITS: Contributed capital Investment in general fixed assets Retained earnings: Reserved for capital projects Reserved for debt service Unreserved Fund balances: Reserved for debt service 339,622 12,241 49,001 Reserved for capital improvements Unreserved - undesignated 3,156,857 3,248,729 4,207,922 3,348,665 TOTAL EQUITY AND OTHER CREDITS 3,496,479 3,260,970 4,256,923 3,348,665 TOTAL LIABILITIES, EQUITY AND OTHER CREDITS $ 4,454,245 $ 5,038,524 $ 4,463,017 $ 3,367,954 See accompanyin g notes to financial statements - 3 - Page 2 of 2 Proprietary Fiduciary Fund Tlees Fund Tiee Account Groues Totals Internal Expendable General Fixed General Long- (Memorandum :nte!:erise Service Trust Assets Term Debt Onll} 373,235 $ 10,375 $ 68,492 $ $ $ 1,369,150 39,187 267, 198 117,623 279,397 324,750 289,788 1,618,908 1,020,000 1,020,000 73,376 32 1 ,034 394,410 935,988 935,988 16,730,001 1,030,000 17,760,001 (1 ,382,737) (1,382,737) 276,000 12,315,113 12,591 ,113 8,598 8,598 16,525,071 10,375 68,492 15,622,135 35,1 86,776 11,118,812 11,1 18,812 16,667,443 16,667,443 353,413 353,413 1,522,956 1,522,956 3,797,442 717,317 4,514,759 400,864 399,463 399,463 13,962,173 16,792,623 717,317 399,463 16,667,443 48,939,883 33,317,694 $ 727,692 $ 467,955 $ 16,667,443 $ 15,622,135 $ 84,126,659 -3- CITY OF LOS BANOS COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES All Governmental Fund Types and Expendable Trust Fund Year Ended June 30, 2002 · Governmental Fund Types Special Capital Debt General Revenue Projects Service REVENUES: Taxes $ 4,831 ,635 $ 255,718 $ 703,865 $ Licenses and permits 696,474 Fines and forfeitures 35,499 84,028 Use of property and money 173,337 205,152 165,475 93,715 Intergovernmental revenues 1,560,179 1,711 ,666 Charges for services 3,660,509 1,168,444 Miscellaneous 249,353 9,992 229,984 Total Revenues 11,206,986 3,435,000 1,099,324 93,715 EXPENDITURES: Current: General government 2,437,549 Public safety 4,215,230 235,390 Sanitation 1,610,997 Highways and streets 725,462 2,533,498 Parks and recreation 822,999 573,979 Grant programs 589,209 Redevelopment Agency 63,250 888,294 Capital outlay 2,615,910 897,358 Debt service: Principal retirement 147,772 139,971 43,312 Interest 227,254 19,027 2,792,172 Total Expenditures 12,803,173 5,051,682 888,294 2,835,484 EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES (1 ,596,187) (1,616,682) 211 ,030 (2,741,769) OTHER FINANCING SOURCES (USES): Operating transfers in 1,189,453 3,083,106 303,138 Operating transfers (out) (608,176) (45,196) (257,942) (3,794,383) Proceeds from notes and capital lease 2,796,141 2,744 10,975 9,540,000 Total Other Financing Sources (Uses) 2,187,965 1,147,001 2,836,139 6,048,755 EXCESS (DEFICIENCY) OF REVENUES AND OTHER SOURCES OVER (UNDER) EXPENDITURES AND OTHER USES 591 ,778 (469,681 ) 3,047,169 3,306,986 FUND BALANCES • BEGINNING OF YEAR 2,904,701 2,064,678 2,875,727 41,678 Residual equity transfer 1,665,973 (1 ,665,973) FUND BALANCES - END OF YEAR $ 3,496,479 $ 3,260,970 $ 4,256,923 $ 3,348,664 See accompanying notes to financial statements -4- =iduciary und Type Totals cpendable (Memorandum Trust Only) $ 5,791,218 696,474 119,527 25,981 663,660 3,271,845 270,443 5,099,396 160 489,489 296,584 16,131,609 2,437,549 4,450,620 1,610,997 3,258,960 104,899 1,501 ,877 589,209 951 ,544 906,160 4,419,428 11,653 342,708 6,863 3,045,316 1,029,575 22,608,208 (732,991) (6,476,599) 50 4,575,747 (50) (4,705,747) 12,349,860 12,219,860 (732,991) 5,743,261 1,132,454 9,019,238 399,463 $ 14,762,499 -4- CITY OF LOS BANOS COMBINED STATEMENT OF REVENUES AND EXPENDITURES Budget and Actual General and Special Revenue Funds Year Ended June 30, 2002 General Fund Variance Favorable REVENUES: Bud9et Actual (Unfavorable) Taxes $ 5,022,923 $ 4,831 ,635 $ (191,288) Licenses and permits 865,600 696,474 (169, 126) Fines and forfeitures 35,100 35,499 399 Use of property and money 110,500 173,337 62,837 Intergovernmental revenues 1,353,046 1,560,179 207,133 Charges for services 3,748,823 3,660,509 (88,314) Miscellaneous 62,000 249,353 187,353 Total Revenues 11,1 97,992 11,206,986 8,994 EXPENDITURES: Current: General government 2,603,672 2,437,549 1 66, 123 Public safety 4,290,949 4,215,230 75,719 Sanitation 1,718,461 1,610,997 107,464 Highways and streets 789,651 725,462 64 ,189 Parks and recreation 959,972 822,999 136,973 Redevelopment Agency/Grant programs Capital outlay 409,672 2,615,910 (2,206,238) Debt service: Principal retirement 149,317 147,772 1,545 Interest 78,545 227,254 (148,709) Total Expenditures 11,000,239 12,803,173 ( 1 ,802,934) EXCESS (DEFICIENCY) OF REVENUES OVER (UNDER) EXPENDITURES 197,753 (1,596, 1 87) (1 ,793,940) OTHER FINANCING SOURCES (USES): Operating transfers in Operating transfers ( out) (387,600) (608,176) (220,576) Proceeds from notes and capital lease 150,000 2,796,141 2,646,141 Total Other Financing Sources (Uses) (237,600) 2,1 87,965 2,425,565 EXCESS (DEFICIENCY) OF REVENUES AND OTHER SOURCES OVER (UNDER) EXPENDITURES AND OTHER USES $ (39,847) $ 591,778 $ 631 ,625 See accompanying notes to financial statements - 5 - Special Revenue Funds Variance Favorable Budget Actual (Unfavorable} 91,51 1 $ 255,718 $ 164,207 70,000 84,028 14,028 103,815 205,152 101,337 2,174,063 1,711 ,666 (462,397) 1,549,262 1,1 68,444 (380,81 8) 600 9,992 9,392 3,989,251 3,435,000 {554,251) 5,000 5,000 198,795 235,390 (36,595) 4,143,225 2,533,498 1,609,727 890,976 573,979 316,997 622,318 652,459 (30,141) 647,500 897,358 (249,858) 85,293 139,971 {54,678) 34,405 19,027 15,378 6,627,512 5,051,682 1,575,830 (2,638,261) (1,616,682) 1,021 ,579 210,000 1,1 89,453 979,453 (45,196) (45,196) 2,744 2,744 210,000 1,147,001 937,001 (2,428,261) $ (469,681) $ 1,958,580 - 5 - CITY OF LOS BANOS COMBINED STATEMENT OF REVENUES, EXPENSES AN D CHANGES IN RETAINED EARNINGS All Proprietary Fund Types Year Ended June 30, 2002 Proprietary Fund Types Totals Internal (Memorandum Enterprise Service Only) OPERATING REVENUES: Charges forservices $ 4,749,894 $ 573,667 $ 5,323,561 Miscellaneous 239,180 239,180 Total operating revenues 4,989,074 573,667 5,562,741 OPERATING EXPENSES: Personnel services & benefits 1,147,304 1,147,304 Maintenance 135,346 135,346 Materials 372,841 372,841 Heat, light & power 477,860 477,860 Depreciation 618,051 618,051 Insurance 54,309 574,695 629,004 Administrative services 517,279 517,279 Franchise fees 482,022 482,022 Other 508,419 · 508,419 Total operating expenses 4,313,431 574,695 4,888,126 OPERATING INCOME (LOSS) 675,643 (1 ,028) 674,615 NONOPERATING REVENUES (EXPENSES) Investment income 134,608 14,129 148,737 Rent income 104,049 104,049 Grants 22,032 22,032 Interest expense & fiscal charges (618,433) (618,433} Debt issuance costs (12,298) (12,298) Total nonoperating revenues (expenses} (370,042} 14,129 (355,913) INCOME (LOSS) BEFORE TRANSFERS 305,601 13, 101 318,702 Operating transfers in ( out} 130,000 130,000 NET INCOME (LOSS} 435,601 13, 101 448,702 Depreciation charged to contributed capital 287,466 287,466 lncrease(decrease) in retained earnings 723,067 13, 101 736,168 RETAINED EARNINGS- BEGINNING OF YEAR 4,950,744 704,216 5,654,960 RETAINED EARNINGS - END OF YEAR $ 5,673,811 $ 717,317 $ 6,391,128 See accompanying notes to financialstatements -6- CITY OF LOS BANOS COMBINED STATEMENT OF CASH FLOWS All Proprietary Fund Types Year Ended June 30, 2002 Proerieta� Fund T�ees Totals Internal (Memorandum Entererise Service Onli} ,H FLOWS FROM OPERATING ACTIVITIES: irating income (loss) $ 675,643 $ (1,028) $ 674,615 Jstment to reconcile operating income (loss) to net 3Sh provided by operating activities - Depreciation 61 8,051 618,051 Amortization of COPs refunding costs (266,084) (266,084) rease) Decrease in: eceivables 72,063 1,277 73,340 ventories (9,507) (9,507) dvance to general fund 60,000 60,000 estricted interest receivable 13,955 13,955 ease (Decrease) in: ccounts payable and accrued liabilities 113,188 1,981 115, 169 eposits payable 13,068 13,068 1curred but not reported claims ompensated absences payable 18,514 18,514 1terfund payable/receivable 34,373 34,373 Cash Provided By Operating Activities 1,343,264 2,230 1,345,494 3H FLOWS FROM NONCAPITAL FINANCING ACTIVITES: ent 104,049 104,049 rants 22,032 22,032 perating transfers in 130,000 130,000 Cash Provided By Noncapital Financing Activities 256,081 256,081 3H FLOWS FROM CAPITAL AND RELATED FINANCING CTIVITIES: cquisition and construction of capital assets (1,706,610) (1,706,610) apital contributed by developers 989,816 989,816 roceeds from new COPs 7,000,000 7,000,000 rincipal paid on COPs (314,999) (314,999) rincipal paid on notes (124,775) (124,775) 1terest and fiscal fees (618,433) (618,433) Cash Provided By Capital and Related Financing Activities 5,224,999 5,224,999 3H FLOWS FROM INVESTING ACTIVITIES: 1vestment earnings 134,608 14, 129 148,737 Cash Provided By Investing Activities 134,608 14,129 148,737 r INCREASE IN CASH AND RESTRICTED CASH 6,958,952 16,359 6,975,31 1 3H AND RESTRICTED CASH - BEGINNING OF YEAR 6,821,604 707,912 7,529,516 3H AND RESTRICTED CASH - END OF YEAR $ 13, 780,556 $ 724,271 $ 14,504,827 · accompanying notes to financial statements - 7 - CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 The notes to the financial statements include a summary of significant accounting policies and other notes considered essential to fully disclose and fairly present the transactions and financial position of the City. Note 1 - Summary of Significant Accounting Policies Note 2 - Cash, Cash Equivalents and Investments Note 3 - Notes Receivable Note 4- Property, Plant and Equipment Note 5 - Long-Term Debt Note 6 - Contributed Capital Note 7 - Reservations of Fund Equity Note 8 - Defined Benefit Pension Plan Note 9 - Stewardship, Compliance and Accountability Note 10 - Segment Information forEnterprise Funds Note 11 - Commitments and Contingencies Note 12 - lnterfund Transfers Note 13 - lnterfund Receivables and Payables Note 14 - Risk Management -8- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies A. General Statement The City of Los Banos, California ("City") was incorporated on May 8, 1907. The City operates under a council-manager form of government and provides the following services as authorized by its charter: Public Safety - Police and Fire, Highways and Streets, Sanitation, Health and Social Services, Culture - Recreation, Public Improvements, Planning and Zoning, and General Administrative Services. The accounting and reporting policies of the City relating to the fu nds and account groups included in the accompanying financial statements conform to generally accepted accounting principles (GAAP) applicable to state and local governments. Generally accepted accounting principles for local governments include those principles prescribed by the Governmental Accounting Standards Board (GASB), the American Institute of Certified Public Accountants (AICPA) in the publication entitled Audits of State and Local Governmental Units and by the Financial Accounting Standards Board (FASB) (when applicable). The more significant of the City's accounting policies are described below. B. Financial Reporting Entity The City's financial statements include the accounts of all City operations as well as the Redevelopment Agency of the City of Los Banos (Redevelopment Agency). The criteria for including organizations as component units within the City's reporting entity, as set forth in Section 2100 of GAS B's Codification of GovernmentAcco unting and Financial Reporting Standards, include whether: • The organization is legally separate • The City holds the corporate powers of the organization • The City appoints a voting majority of the organization's board • The City is able to impose its will on the organization • The organization has the potential to impose a financial benefit/burden on the City • There is fiscal dependency by the organization on the City -9- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 • Summaryof Significant Accounting Policies (continued) 8. Financial Reporting Entity (continued) Based upon the application of these criteria, the following is a brief review of each component unit addressed in defining the City's reporting entity. Included in the reporting entity: Redevelopment Agency of the City of Los Banos - The Redevelopment Agency is a separate government entity whose purpose is to carry out plans fo r improvement, rehabilitation and redevelopment of blighted areas within the City. City Council members, in separate sessions, serve as the governing board, and all accounting and administrative functions are performed by the City. The Redevelopment Agency is reported as if it were part of the primary government because the City Council is the governing board, and is able to impose its will on the Redevelopment Agency. In accordance with GASS Statement No. 14, "The Financial Reporting Entity," the financial activities of this entity have been blended with the financial statements of the City. C. Basis of Presentation The accounts of the City are organized on the basis of funds and account groups, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self balancing accounts that comprise its assets, liabilities, and fund equity, revenues, and expenditures, or expenses, as appropriate. Government resources are allocated to and accounted for in individual funds based upon the purpose forwhich they are to be spent and the means by which spending activities are controlled. The followingfu nds and groups of accounts are used by the City. Governmental Fund Types: General Fund - The general fu nd is the general operating fund of the City. It is used to account fo r all financial resources except those required to be accounted forin another fund. Soecial Revenue Funds - Special revenue funds are used to account for proceeds of specific revenue sources (other than special assessments, expendable trusts, or major capital projects) that are legally restricted to expenditures fo r specific purposes. -1 0- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) C. Basis of Presentation (continued) Debt Service Funds - Debt service funds are used to account for the accumulation of resources for, and the payment of, general long-term debt, including capital lease obligations, principal, interest and related costs. Capital Project Funds - Capital project funds are used to account forfi nancial resources to be used for the acquisition or construction of major capital facilities (other than those financed by Proprietary and Trust Funds). Proprietary Fund Types: Enterprise Funds - Enterprise fu nds are used to account for operations (a) that are financed and operated in a manner similar to private business enterprises where the intent of the governing body is that the cost ( expenses, including depreciation) of providing goods or servicesto the general public on a continuing basis be fi nanced or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. Internal Service Funds - Internal service funds are used to account for the financing of goods or services provided by one department or agency to other departments, on a cost-reimbursement basis. FiduciaryFun d Types: Trust and Agency Funds - Fiduciary funds are used to account for assets held on behalf of outside parties, or on behalf of other funds within the City. When these assets are held under the terms of a formal trust agreement, either a pension trust fund, a non-expendable trust fund or an expendable trust fund is used. The terms "non-expendable" and "expendable" refer to whether or not the government is under an obligation to maintain the trust principal. Non expendable trust and pension trust funds are accounted for in essentially the same manner as proprietary funds since capital maintenance is critical. Expendable trust fu nds are accounted for in essentially the same manner as governmental funds. Agency funds generally are used to account forasse ts that the City holds on behalf of others as their agent. Agency funds are custodial in nature (assets equal liabilities) and do not involve measurement or results of operations. -1 1- CITYOF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) C. Basis of Presentation (continued) General Fixed Assets and General Long-Term Debt Account Groups: General Fixed Assets Account Group - The general fixed assets account group is used to account forfixed assets used in governmental fund type operations for control purposes. All fixed assets are valued at historical cost or estimated historical cost if actual historical cost is not available. Donated fixed assets are valued at their estimated fair value on the date of donation. No depreciation is recorded on general fixed assets, except for Redevelopment Agency assets. General Long-Term Debt Account Group - The general long-term debt account group is used to account forlon g-term liabilities to be financed from government funds. D. Measurement Focus/Basis of Accounting Measurement focus refers to what is being measured; basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focusappl ied. The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. All governmental funds are accounted for using a current financial resources measurement focus. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. Operating statements of these funds present increases (i.e., revenues and other financing sources) and decreases (i.e., expenditures and other financing uses) in net current assets. All proprietary funds are accounted for on a flow of economic resources measurement focus. With this measurement focus, all assets and liabilities associated with the operation of these funds are included on the balance sheet. Fund equity (i.e., net assets) is segregated into contributed capital and retained earnings components. Proprietary fund-type operating statements present increases (i.e., revenues) and decreases (i.e., expenses) in net total assets. -12- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) D. Measurement Focus/Basis of Accounting (continued) The modified accrual basis of accounting is used by all governmental fu nd types and agency funds. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual (i.e., when they become both measurable and available). "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. Expenditures are recorded when the related fund liability is incurred. Principal and interest on general long-term debt are recorded as fund liabilities when due or when amounts have been accumulated in the debt service fund for payments to be made early in the following year. Those revenues susceptible to accrual are property taxes, franchise taxes, special assessments, licenses, interest revenue and charges forservices. Sales taxes collected and held by the state at year-end on behalf of the City also are recognized as revenue. Fines and permits revenues are not susceptible to accrual because they are not measurable until received in cash. The accrual basis of accounting is utilized by proprietary fund types. Under this method, revenues are recognized when earned and expenses are recorded at the time liabilities are incurred. E. Budgets and Budgetary Accounting The City fo llows these procedures in establishing the budgetary data reflected in the financial statements: 1. The City Manager submits to the City Council a proposed operating budget for the fiscal year beginning on July 1 st_ The operating budget includes proposed expenditures and the means of financing them. 2. Public hearings are conducted to obtain taxpayer comments. 3. Prior to July 1 st, the budget is legally enacted through passage of a resolution. I 4. The City Manager is authorized to transfe r budgeted amounts between departments within any fund; however, any significant revisions that alter the total expenditures of any fund must be approved by the City Council. 5. Annual appropriated budgets are adopted for the City's departments. All annual appropriations unused lapse at year-end. -13- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) E. Budgets and Budgetary Accounting (continued) Annual budgets are adopted on a basis consistent with generally accepted accounting principles except for proprietary fund type budgets, which include debt service principal and capital outlay expenditures, but not depreciation. F. Encumbrances Encumbrances represent commitments related to unperformed contracts for goods or services. Encumbrance accounting, under which purchase orders, contracts and other commitments for the expenditure of resources are recorded to reserve that portion of the applicable appropriation, is utilized in the governmental fund types. For budgetary purposes appropriations lapse at fiscal year-end except fo r that portion related to encumbered amounts. Encumbrances outstanding at year end are reported as reservations of fund balances and do not constitute expenditures or liabilities because the commitments will be re appropriated and honored during the subsequent year. G. Cash, Cash Equivalents and Investments The City follows the practice of pooling cash and cash equivalents of all funds except for funds required to be held by outside fiscal agents under the provisions of bond indentures. Each fund type's portion of this pool is displayed on the combined balance sheet as "Cash and Cash Equivalents". Cash and cash equivalents are defined as currency on hand, demand deposits with banks and other financial institutions (including deposits in other kinds of accounts or cash management pools that have the general characteristics of demand deposit accounts), and short-term highly liquid investments that are readily convertible to known amounts of cash and mature within three months of their acquisition. Earnings from pooled cash and cash equivalents are allocated annually to each fu nd based on the fund's contribution to the pool. Interest income from cash and investments with fiscal agents is credited directly to the related fund. Investments in the Local Agency Investment Fund are stated at fair value in accordance with GASB Statement No. 31. The Local Agency Investment Fund, Pooled Money Investment Account Portfolio, has not invested in, and according to governing regulations will not invest in, derivative products as defined in general accounting definitions No. 1 & No. 2. State statutes authorize the City to invest in obligations of the U.S. Treasury, commercial paper, corporate bonds and repurchase agreements. -14- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) G. Cash, Cash Equivalents and Investments (continued) Investments are reported at fair value, which are determined using selected bases. Short-term investments are reported at cost, which approximates fair value. Securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates, and investments that do not have an established market are reported at estimated fairva lue. Cash deposits are reported at carrying amounts which reasonably estimate fair value. H. Inventories Inventories in the proprietary funds are valued at cost which approximates market, using the first-in/first-out (FIFO) method. The costs for inventories of governmental fund types are recorded as expenditures at the time individual inventory items are purchased. A fund balance reserve is established to indicate that the inventories do not constitute expendable financial resources available for appropriation. I. Restricted Assets Certain proceeds of enterprise fund debt and general long-term debt are classified as restricted assets on the balance sheet, because their uses are limited by debt covenants. Certain debt reserve funds are also shown, as restricted cash as they represent resources set aside to subsidize potential deficiencies on debt payments should they occur. J. Federal and State Grants, Entitlements and Shared Revenues Grants, entitlements or shared revenues are recorded as revenue in the General, special revenue and capital projects fu nds when they are received or susceptible to accrual. Grants awarded for proprietary fund operating purposes are recorded as non operating revenues when they are earned and are measurable. Grants awarded to proprietary funds which are restricted to the acquisition or construction of capital assets are recorded as contributed capital when earned. -15- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) K. Fixed Assets General fixed assets are not capitalized in the funds used to acquire or construct them. Instead, capital acquisition and construction are reflected as expenditures in governmental funds, and the related assets are reported in the general fixed assets account group. The costs of normal maintenance and repairsthat do not add to the value of the asset or materially extend asset lives are not capitalized, however improvements are capitalized. Public domain ("infrastructure") general fixed assets consisting of roads, bridges, curbs and gutters, streets and sidewalks, drainage systems and lighting systems are not capitalized. Assets in the general fixed assets account group are not depreciated. Depreciation of building, equipment and vehicles in the proprietary fund type is computed using the straight-line method over the fo llowing estimated useful lives. Sewer Plant 25 Years Buildings 20-25 Years Improvements 5-25 Years Equipment 3-80 Years Contributions of resources from grants, entitlements, or shared revenues externally restricted for capital acquisitions are recorded as contributions to equity. Depreciation on these acquisitions is recorded as an expense in the operating statement and then is charged to the related contributions account. Government Accounting Standards provide that the fixed assets classifications should include assets that are acquired under capital leases and the related lease obligation should be recorded as long-term debt. Outlays for capital lease obligations are included in expenditures as incurred. Capital leases entered into subsequent to July 1, 1989 are recorded as an asset and an obligation at an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term. -16- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summary of Significant Accounting Policies (continued) L. Compensated Absences City employees are granted vacation and sick leave in varying amounts. In the event of termination, an employee is reimbursed for accumulated vacation and sick leave at various rates as determined by the employee personnel manual. In governmental funds, compensated absences (including unpaid vacation and sick leave) are recorded as expenditures in the year paid, as it is the City's policy to liquidate any compensated absences payable at June 30, from future resources rather than from currently available expendable financial resources. Accordingly, the entire compensated absence liability for governmental fu nds are recorded in the general long-term debt account group. Unpaid compensated absences for proprietary fund types are recorded as expenses and liabilities in those funds as the benefits accrue to employees. M. Capitalization of Interest Interest expense that relates to the cost of acquiring or constructing fixed assets is capitalized. The amount of interest to be capitalized is that portion of interest expense incurred during the construction of the project reduced by interest earned on the investment of fu nds borrowed for construction. Interest capitalization ceases when the construction project is substantially complete. N. Certificates of Participation, Premiums, Discounts, and Issuance Costs For governmental fund types, Certificates of Participation (COPS) premiums and discounts, as well as issuance costs, are recognized during the current period. COPS proceeds are reported as other financing sources net of the applicable premium or discount. Issuance costs, whether or not withheld from the actual net proceeds received, are reported as debt service expenditures. For proprietary fund types, COPS premiums and discounts, as well as issuance costs are deferred and amortized over the life of the COPS using the straight-line method. COPS payable are reported net of the applicable COPS premium or discount. Issuance costs are reported as deferred charges on the balance sheet. -17- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) 0. Receivables and Payables Transactions between fu nds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either "lnterfund Receivables/Payables" (i.e., the current portion of interfund loans) or "Advances To/From Other Funds" (i.e., the non-current portion of the interfund loans). All other outstanding balances between funds are reported as "Due To/From Other Funds." Advances between funds are offset by a fu nd balance reserve account in applicable governmental funds to indicate they are not available fo r appropriation and are not expendable available financial resources. Trade accounts receivable are shown net of an allowance for uncollectible accounts. Trade accounts receivable in excess of 180 days comprise the trade accounts receivable allowance for uncollectibles. P. Long-Term Obligations Long-term debt is recognized as a liability of a governmental fund when due or when resources have been accumulated in the debt service fu nd for payment early in the following year. For other long-term obligations, only that portion expected to be financed from expendable available financial resources is reported as a fund liability of a governmental fund. The remaining portion of such obligations is reported in the general long-term debt account group. Long-term liabilities expected to be financed from proprietary fund operations are accounted for in those funds. Q. Fund Equity Contributed capital is recorded in proprietary funds that have received capital grants or contributions from developers, customers or other funds. Reserves represent those portions of fund equity not appropriable for expenditure or legally segregated for a specific future use. Designated fu nd balances represent tentative pla·ns by a fund or agency for future use of financial resources. -18- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) R. Total Columns on Combined Statements - Overview Total columns on the combined statements are captioned "memorandum only" to indicate that they are presented only to facilitate analysis. Data in these columns do not present financial position, results of operations, or changes in cash flows in conformity with generally accepted accounting principles. Data are not comparable to a consolidation, since interfund eliminations have not been made in the aggregation of these data. S. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. T. Statement of Cash Flows For presentation purposes of the Statement of Cash Flows, the Enterprise Fund considers all highly liquid investments (including restricted assets) with a maturity of three months or less when purchased to be cash equivalents. U. lnterfund Transactions Quasi-external transactions are accounted for as revenues, expenditures or expenses. Transactions that constitute reimbursements to a fund for expenditures or expenses initially made from it that are properly applicable to another fund are recorded as expenditures or expenses in the reimbursing fund and as reductions of expenditures or expenses in the fund that is reimbursed. All interfund transactions except quasi-external transactions and reimbursements are reported as transfers. Thus, non-recurring or non-routine permanent transfers of equity are reported as residual equity transfers; all other interfund transfers are reported as operating transfers. -19- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) V. Property Tax Calendar and Receivables Based on a lien date of March 1, property taxes are levied by the County Assessor by July 1, of each year forthe succeeding fiscal year. All levied secured property taxes are due on November 1 st each year, but may be paid in two equal installments. The first installment is considered delinquent if not th paid by December 1 o and the second installment is considered delinquent if not paid by April 10th each year. Taxes on unsecured property are due August 1 st and become delinquent if not paid by August 31 5t. Distributions of collected property taxes to the City are made by the County in accordance with the following schedule: Secured: 50% of tax levy December 45% of tax levy April Balance of first and second installment collections June/July Unsecured: 80% of tax levy August 10% of tax levy September/October 5% September-December collections February/March January-June collections August Historically, the City receives or accrues substantially all of the property taxes collected at June 30th. The Los Banos City Council adopted the implementation of the Alternative Method of Tax Apportionment ("Teeter Plan"). This plan applies to secured taxes only. It is intended to provide a consistent, predictable cash flow for the future years, as taxes will be apportioned as if the tax levy had been collected in full. -20- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 1 - Summaryof Significant Accounting Policies (continued) W. Post-Employment Health Care Benefits Retiree Benefits - In addition to the pension benefits described in Note 7, the City provides a Retiree Medical Insurance Program in accordance with a resolution approved by City Council. Post-retirement health care benefits are available to all employees who retire from the City and who are eligible to receive a retirement benefit from the Public Employees Retirement System (PERS) on or after attaining age 50. The City pays 100% of all premiums charged under a health benefit plan administered by PERS in which the individual selects, on an annual basis, an insurance carrier from a list of insurance carriers. The cost of retirees' health-care benefits is recognized as an expenditure as premiums are paid. COBRA Benefits - Under the Consolidated Omnibus Reconciliation Act (COBRA), the City provides healthcare benefits to eligible fo rmer employees and eligible dependents. Certain requirements are outlined by the Federal government forthi s coverage. The premium plus a 2% administration fee is paid in full by the insured on or before the tenth (10th) day of the month for the actual month covered. This program is offered fora duration of 18 months after the termination date. There is no associated cost to the City under this program, and there were no participants in the program as of June 30, 2002. Note 2 - Cash, Cash Equivalents and Investments Pooled Cash and Savings Accounts -All pooled cash and savings accounts are entirely insured or collateralized. The California Government Code Section 53652 requires California banks and savings and loan associations to secure deposits in excess of $100,000 made by state or local government units by pledging securities held in the form of an undivided collateral pool. The market value of pledged securities in the collateral pool must be at least 110% of the total amount deposited by public agencies. California law also allows financial institutions to secure City deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. Cash balances of less than $100,000 are fully insured by the Federal Deposit Insurance Corporation (FDIC). -21- CITYOF LOS BANOS Notes to Financial Statements June 30, 2002 Note 2-Cash, Cash Equivalents and Investments (continued) Authorized Investments - In accordance with Section 53601 of the California Government Code, the City may invest in the following types of investments: Obligations of the U.S. Government, or its Agencies Local Agency Investment Fund (State Pool) Deposits Passbook Savings Account Demand Deposits Certificates of Deposit Fair Value/Carryi ng Amount and Bank Balance of Deposits - In accordance with GASB No. 31 all invested cash is stated at "Fair Value" at year-end. "Fair Value" is defined as the amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Cash and cash equivalents at June 30, 2002 consisted of the following Fair Value/ Bank CarryingAmount Balance Cash in Checking Accounts $ 766,330 $ 988,144 Cash in Certificates of Deposit 829,541 829,541 Cash in Local Agency Investment Fund 22,379,146 22,379,146 Petty Cash 700 700 Total cash and cash equivalents $ 23.975.71 7 $ 24, 197,531 The difference between the bank balance and the carrying amount represents outstanding checks and deposits in transit. The City has no investments which would be classified as to credit risk in accordance with GASS Statement 3. Credit Risk - The City's deposits at June 30, 2002, as listed above are insured, registered, collateralized or held by the City or its agent in the City's name and as such they would be considered as Category 1 credit risks. Because of their nature, investments with the State Treasurer's Investment Pool (LAIF) are not required to be categorized. -22- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 3 - Notes Receivable CDBG Housing notes receivable of $324,750 consists of loans made for low - income housing purchases. The loans are collateralized by deeds of trust on the purchased properties, bear an annual interest rate of 0% and require no payment until the transfer of title or the loan reaches maturity. Note 4 - Property, anPl t and Equipment The following is a summary of changes in the general fixed assets during the fiscal year: Balance Balance July 1, 2001 Additions Reductions June 30, 2002 Fixed Assets $ 12,515,362 $ 4,407,056 $ (254,975) $ 16,667 ,443 Construction in Progress Total General Fixed Assets $ 12.51 5,362 $ 4,407,056 $ (254,975) $ 16,667,443 The following is a summary of proprietary fund-type fixed assets at June 30, 2002: Enterprise Internal Funds Service Fund Fixed Assets $ 23,693,964 $ Less: Accumulated Depreciation (6,521,024) Sub-Total 17, 1 72,940 Construction in Progress 612,058 Net Fixed Assets $ 17.784,998 $ Note 5 - Long-Term Debt Outstanding debt at June 30, 2002 consists of the following: Bonds: 2002 Lease Revenue Bonds; authorized and issued June 2002, annual maturities starting on August 1, 2003, in amounts from $60,000 to $105,000; interest rates from 2.70% to 5.30%; forthe purpose of the acquisition of real property. Balance due $ 2,700,000 -23- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 5 - Long-Term Debt (continued) 2001 Ta x Allocation Bonds; authorized and issued September 2001, annual maturities starting on September 1, 2002, in amounts from $105,000 to $235,000, interest rates from 3.00% to 5.40%; term bonds in amounts from $540,000 to $2,395,000 mature through September 1, 2031; for the purpose of refunding the 1997 Tax Allocation Notes and finance the undertakings in the Los Banos Redevelopment Project pursuant to the Redevelopment Plan. Balance due $ 9,540,000 Certificates of Participation: 2002 Revenue Certificates of Participation; serial certificates with annual maturities starting on December 1, 2004, in amounts from $265,000 to $400,000; interest rates from 2.10% to 4.50%; term certificate at 5.00% in the amount of $2,830,000 maturing December 1, 2022, interest payable in semi-annual installments .. Balance due $ 7,000,000 1997 Revenue Certificates of Participation; serial certificates with annual maturities startingon December 1, 1998, in amounts from $1 1 5,000 to $21 0,000; interest rates from 3.85% to 5.10%; term certificate at 5.00% in the amount of $1 ,820,000 maturing December 1, 2019, interest payable in semi-annual installments. Balance due $ 3,680,000 1993 Refunding Certificates of Participation; serial certificates with annual maturities starting on December 1, 2001, in amounts from $30,000 to $40,000; interest rates from 5.10% to 5.85%; term certificate at 6.00% in the amount of $840,000 maturing December 1, 2019, interest payable in semi-annual installments. Balance due $ 1,030,000 1993 Refunding and Revenue Certificates of Participation; serial certificates with annual maturities starting on December 1, 2001 , in amounts from $185,000 to $265,000; interest rates from 5.10% to 5.85%; term certificate at 6.00% in the amount of $5,285,000 maturing December 1, 2019, interest payable in semi-annual installments. Balance due $ 6,050,000 Notes Payable: Note payable in the amount of $96,090 payable to an individual for the purchase of land and building for police department expansion. Note issued June 1997, payable over 6 years at 7% interest. Balance due $ 18,841 -24- CITYOF LOS BANOS Notes to Financial Statements June 30, 2002 Note 5 - Long-Term Debt (continued) Note payable in the amount of $300,000; payable to the State of California Department of Transportation for Airport facility construction. Note issued March 21, 2001, payable over 17 years at 5.6277% interest. Balance due $ 276,000 Note payable in the amount of $72,000; payable to a bank, issued June 2001, payable over 10 years at 8.375% interest. Balance due $ 56,272 Capital Leases: As lessee, the City is obligated under certain capital lease agreements. In the governmental fu nds, the leased assets and related obligations are accounted for in the general fixed assets account group and the related general long-term debt account group, respectively. Balances due $ 936, 706 Future principal and interest debt servicereq uirements are as follows: Certificates of Notes Capital Ending June 30, Bonds Participation Payable Leases 2003 $ 822,270 $ 1,231,931 $ 58,651 $ 168,849 2004 808,941 1,249,047 38,800 156,537 2005 808,624 1,510,920 39,049 142,785 2006 856,294 1,512,969 39,240 142,785 2007 857,077 1,502,537 39,373 121,858 Thereafter 20,410,290 21, 1 53,454 315,316 682,014 24,563,496 28,160,858 530,429 1,414,828 Less interest (12,323,496) (1 0,400,858) (179,316) (478, 122) Total principal debt $ 12.240,000 $ 17.760,000 $ 351,113 $ 936,706 Transactions for the year ended June 30, 2002 are summarized as follows: Balance Balance July 1. 2001 Additions Maturities June 30, 2002 Bonds $ - $ 12,240,000 $ - $ 12,240,000 Certificatesof participation 11,10 5,000 7,000,000 345,000 17,760,000 Notes payable 2,552,867 2,201 ,754 351 , 113 Capital leases 1,015,724 96,000 175,018 936,706 Advance from water/sewer fu nds 1,080,000 60,000 1,020,000 Compensated absences payable 372,077 22,333 394,410 $ 16, 125,668 $ 19,358.333 $ 2.781.772 $ 32.702.229 -25- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 6 - Contributed Capital The changes in the City's contributed capital accounts for its proprietary funds were as follows: Balance Balance Fund DescriQtion July 1 z 2001 Contributions DeQreciation June 301 2002 Water Enterprise $ 3,224,976 $ 330,294 $ 70,042 $ 3,485,228 Sewer Enterprise 7,082,027 659,522 209,125 7,532,424 Airport Enterprise 109,459 8,299 101.160 Total i 10,416,462 � 989,816 i 287,466 Si11 ,1 18,812 Note 7 - Reservations of Fund Equity Reserves of fund equity represent those amounts which are not appropriable for expenditure in future periods or which are legally segregated for specific future uses. Descriptions of each reservation of fund equity are summarized below: Reserved for Capital Proiects In accordance with debt covenants, certain funds held by fiscal agents are restricted to capital projects as outlined in the debt instruments. Reserved for Debt Service An account used to segregate that portion of fund balance restricted to the payment of long-term debt principal and interest amounts maturing in future years. Reserved fo r Capital Improvements An account used to segregate funds set aside for future capital improvements. Note 8 - Defined BenefitPension Plan Plan DescriQtion The City of Los Banos contributes to the California Public Employees' Retirement System (PERS), an agent multiple-employer public employee defined benefit pension plan. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent fo r participating public entities within the State of California. Benefit provisions and all other requirements are established by state statute and city ordinance. Copies of PERS' annual financial report may be obtained fromits Executive Office, 400 "P" Street, Sacramento, CA 95814. -26- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 8 - Defined BenefitPension Plan (continued) Funding Status and Progress Participants are required to contribute 7% (9% for safety employees) of their annual covered salary. The City makes the contributions required of city employees on their behalf and for their account. The City is required to contribute at an actuarially determined rate; the current rate is 0.00% for non-safety employees and 6.526% for safety employees, of annual covered payroll. The contribution requirements of plan members and the City are established and may be amended by PERS. Annual Pension Cost For the fiscal year ended June 30, 2002, the City's annual pension cost of $462,243 was equal to the City's required and actual contributions. The required contribution was determined as part of the June 30, 2000, actuarial valuation using the entry age normal actuarial cost method. The actuarial assumptions included (a) 8.25% investment rate of return (net of administrative expenses}, (b) projected annual salary increases that vary by duration of service, and (c) 2.0% per year cost-of-living adjustments. Both (a) and (b) included an inflation component of 3.5%. The actuarial value of PERS assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a three-year period (smoothed market value). Three-Year Trend Informationfor PERS Fiscal Annual Pension Cost Percentage of Net Pension Year (APC) APC Contributed Obligation 6/30/2000 $ 41 0,871 100% $ 6/30/2001 429,800 100% 6/30/2002 462,243 100% -27- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 8 • Defined Benefit Pension Plan (continued) Required Supplementary Information - Funded Status of the Plans Miscellaneous Plan Entry Age Unfunded Valuation Normal Accrued Actuarial Value Liability Date Liability of Assets {Excess Assets) 6/30/98 $ 8,831 ,206 $ 10,945,908 $ (2, 114,702) 6/30/99 9,131 ,950 12,329,267 (3,197,317) 6/30/00 9,920,258 13,582,616 (3,662,358) UAAL Valuation Funded Covered As a%of Date Status Payroll Payroll 6/30/98 123.9% $ 1,834,721 (11 5.260%) 6/30/99 135.0% 2,016,419 (158.564%) 6/30/00 136.9% 2,021 ,695 (181.153%) Safety Plan Entry Age Unfunded Valuation Normal Accrued Actuarial Value Liability Date Liabilitv of Assets (Excess Assets) 6/30/98 $ 6,881,771 $ 7,247,729 $ (365,958) 6/30/99 7,446,668 8,365,926 (919,258) 6/30/00 8,237,058 9,403,252 (1,166, 194) UAAL Valuation Funded Covered As a%of Date Status Payroll Payroll 6/30/98 105.3% $ 1,329,468 (27.527%) 6/30/99 112.3% 1,403,633 (65.491%) 6/30/00 114.2% 1,526,118 (76.416%) -28- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 9 - Stewardship, Compliance and Accountability At June 30, 2002 certain funds had deficit fu nd equity balances. The City plans to correct the deficit balances in the Special Revenue and Capital Project Funds by transferring funds from the General Fund during the next fiscal year. The Special Assessment districts cannot raise assessments unless the property owners give their consent through a ballot vote. The City is exploring various options to reduce these deficits. Note 10 - Segment Information for Enterprise Funds The City maintains three enterprise funds that provide water, sewage treatment and airport activities, which are financed by user charges. Selected financial information for business segments of enterprise fu nds forthe year ended June 30, 2002 is presented as follows: Enterr2rise Funds Water Sewer Airport Total Operating revenues $ 2,857,440 $ 1,895,048 $ 236,586 $ 4,989,074 Operating income (loss) 644,210 232,228 (200,795) 675,643 Net earnings (loss) 669,719 (240, 1 65) (123,953) 305,601 Depreciation 137,470 426,915 53,666 618,051 Fixed asset additions 402,904 903,602 1,539 1,308,045 Long-term debt 7,436,929 9,363,992 279,084 17,080,005 Total equity 7,465,461 8,920,670 406,492 16,792,623 Note 11 - Commitments and Contingencies Litigation Various claims and lawsuits are pending against the City. In the opinion of the City's management, the potential loss on all claims and lawsuits will not be significant to the City's financial statements. -29- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 11 - Commitments and Contingencies (contin ued) Grant Audits The City receives fu nding from a number of federal, state and local grant programs for specific purposes that are subject to review and audit by the grantor agencies. Such reviews could lead to requests for reimbursements to the grantor agency for expenditures disallowed under the terms of the grant. In the opinion of the City's management no such disallowances are anticipated. Note 12 - lnterfund Transfers lnterfund transfers during the year ended June 30, 2002 were as follows: Operating Operating Fund Transfers In Transfers Out General Fund $ $ 608,176 Special Revenue Funds: Parks & Recreation 430,576 Redevelopment Agency 758,877 45,196 Capital Projects Funds: TrafficLigh ts 24,600 Community Center 23,000 Business Park 3,035,506 257,942 Debt Service Fund: Redevelopment Agency 303,138 3,794,383 Enterprise Fund: Airport 130,000 FiduciaryFund: Susan Spevak - Plant a Tree 50 Lindemann Memorial Trust 50 Totals $ 4,705,747 $ 4,705,747 -30- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 13 - lnterfund Receivables and Payables A reconciliation of the Due From/Due To Other Funds at June 30, 2002 is detailed below: Due From Due To Fund Other Funds Other Funds General Fund $ 938,720 $ Sp ecial Revenue Funds: Parks & Recreation 2,745 SB-325 146,989 RSTP 237,737 TOA 503,191 CDBG Grant 65,790 First Time Home Buyers 229,626 Ranchwood A. D. No. 1 73,639 Cresthills A. D. No. 2 45,857 College Green A D. No. 4 35,524 Orchard Terrace AD. No. 5 20,286 Bedford AD. No. 7 7,200 Park Manor A D. No. 9 127,876 Meadowlands A D. No. 11 51,547 Verona A D. No. 12 18,850 Capital Project Fund: CCID Greenway 146,989 Redevelopment Agency 295,416 Enterprise Fund: Water 46 Sewer 46 Airport 289,742 Totals $1,618,908 $ 1,618,908 Note 14 - Risk Management The City participates with other public entities in a joint venture under a joint powers agreement which establishes the Central San Joaquin Valley Risk Management Authority (CSJVRMA). The relationship between the City and CSJVRMA is such that CSJVRMA is not a component unit of the City forfinancial reporting purposes. -31- CITY OF LOS BANOS Notes to Financial Statements June 30, 2002 Note 14 - Risk Management (continued) The City is covered for the first $1,000,000 of each general liability claim and $350,000 of each worker's compensation claim through the CSJVRMA. The City has the right to receive dividends or the obligation to pay assessments based on a formula which, among other expenses, charges the City's account for liability losses under $1,000,000 and worker's compensation losses under $50,000. The CSJVRMA participates in excess pools which provide general liability coverage from $1,000,000 to $14,000,000 and Workers Compensation coverage from $350,000 to $500,000 and purchases excess insurance above the $500,000 to the statutory limit. The CSJVRMA is a consortium of fifty-four (54) cities in San Joaquin Valley, California. It was established under the provisions of California Government Code Section 6500 et seq. A Board of Directors governs the CSJVRMA, which meets 3-4 times per year, consisting of one member appointed by each member city. The day-to-day business is handled by a management group employed by the CSJVRMA. The annual financial report may be obtained from the consortium's executive office at 1020 - 19th Street, Sacramento, California 95621. -32- SINGLE AUDIT SECTION CITY OF LOS BANOS SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended June 30, 2002 Federal CFDA Federal Description and Program Title Number Expenditures DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Pass-through programs from the State Department of Housing and CommunityDevelopment: Community Development Block Grants/State's Programs 14.228 $ 185,674 HOME Investment Partnerships Program 14.239 357,832 DEPARTMENT OF JUSTICE Local Law Enforcement Block Grants Programs 16.592 22,949 DEPARTMENT OF TRANSPORTATION Airport Improvement Program 20.106 22,032 Total Expenditures of Federal Awards $ 588,487 Th e accompanying Note to Schedule of Exp enditures of Federal Awards is an integral partof this schedule -33- CITY OF LOS BANOS Note to Schedule of Expenditures of Federal Awards June 30, 2002 Note 1 - Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards, includes the federal grant activity of the City of Los Banos and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. -34- REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Honorable Members of the City Council City of Los Banos, California We have audited the financial statements of the City of Los Banos, California, as of and forthe year ended June 30, 2002, and have issued our reportther eon dated September 15, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in GovernmentAu diting Standards, issued by the ComptrollerGeneral of the United States. Compliance As part of obtaining reasonable assurance about whether the City of Los Banos' financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under GovernmentAud iting Standards. Internal ControlOver Financial Reporting In planning and performing our audit, we considered the City of Los Banos' internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting wo uld not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internalcontrol components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned fu nctions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. This report is intended for the information of the City Council, management, grant awarding agencies, the State of California Controller and is not intended to be and should not be used by anyone other than these specified parties. Certified Public Accountants September 15, 2002 -35- REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-1 33 The Honorable Members of the City Council City of Los Banos, California Compliance We have audited the compliance of the City of Los Banos with the types of compliance requirements described in the U. S. Office of Management and Budget (OMB) Circular A-133 Compliance ·Supplement that are applicable to each of its major federal programs forthe year ended June 30, 2002. The City of Los Banos' major program are identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to each of its major federal programs is the responsibility of the City of Los Banos' management. Our responsibility is to express an opinion on the City of Los Banos' compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A- 133, Audits of States, Local Governments, and Non Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City of Los Banos' compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the City of Los Banos' compliance with those requirements. In our opinion, the City of Los Banos complied, in all material respects, with the requirements referred to above that are applicable to each of its major federal programs, for the year ended June 30, 2002. -36- The Honorable Members of the City Council City of Los Banos, California Page Two Internal Control over Compliance The management of the City of Los Banos is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the City of Los Banos' internal control over compliance with requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-1 33. Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws, regulations, contracts and grants that would be material in relation to a major federal program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving internal control over compliance and its operation that we consider to be material weaknesses. This report is intended fo r the information of management, federal awarding agencies, and the Office of the Controller of the State of California and is not intended to be and should not be used by anyone other than these specified parties. Certified Public Accountants November 15, 2002 -37- CITY OF LOS BANOS Schedule of Findings and Questioned Costs Year Ended June 30, 2002 SECTION I • SUMMARY OF AUDITOR'S RESULTS Financial Statements Type of auditor's report issued: unqualified Internal control over financial reporting: Material weaknesses identified __Yes_x_N o Reportable conditions identified not considered to be material weaknesses __Yes _x_Nonereported Noncompliance material to financial statements noted __Yes_2(_No Federal Awards Internal control over major programs: Material weaknesses identified __Yes_x._No Reportable conditions identified not considered to be material weaknesses __Yes _2(_None reported Type of auditor's report issued on compliance forma jor programs: unqualified Any audit findings disclosed that are required to be reported in accordance with Section .510(a) of OMB Circular A-133 _x._ves_No Identification of major programs: CFDA Number Name of Federal Program or Cluster 14.239 Department of Housing and Home Investment Partnership Urban Development Program Dollar threshold used to distinguish Between Type A and Type B programs $300,000 Auditee qualifies as low-risk auditee: __Yes_2(_No -38- CITY OF LOS BANOS Schedule of Findings and Questioned Costs Year Ended June 30, 2002 SECTION II · FINANCIAL STATEMENT FINDINGS Current Year None Prior Year None SECTION Ill - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS Current Year Department of Housing and Urban Development 02-1 HOME Investment Partnership Program - CFDA No. 14.239; Contract No. 99- HOME-0383; pass-thro ugh the State Department of Housing and Community Development; Contract period - Year ended June 30, 2002. Criteria: Section 92.351 of the federal HOME Program requirements. Statement of Condition: The City has not taken measures to ensure nondiscriminatory treatment, outreach and access to program resources by adopting affirmative marketing requirements and procedures. Questioned Costs: None. Cause and Effect: There are no procedures to inform and solicit applications from persons in the housing market who are not likely to apply without special outreach. As a result, segments of the eligible community may not be aware of the program. Recommendations: The City should be corresponding with interested persons for the purpose of evaluating the City's policies and practices related to service to persons with disabilities. -39- CITY OF LOS BANOS Schedule of Findings and Questioned Costs Year Ended June 30, 2002 SECTION Ill -FEDERAL AWARD FINDINGS AND QUESTIONED COSTS (Continued) Current Year (continued) Response: The City will maintain records of affirmative marketing procedures that include documentation of their methods and procedures to inform the public about federal fair housing laws and the City's affirmative marketing policy. The City will collect data on each applicant, each served household, and each household denied service regarding their race, ethnicity, gender, disability, and age for all future grants. This data will be analyzed in comparison with overall City data to determine if there are any underserved segments of the overall population. If the analysis determines that there are underserved segments of the population, a plan to better serve them will be developed and implemented. Included in the plan will be correspondence with interested persons, the identification of procedures to inform and solicit application from persons in the housing market who are not likely to apply without special outreach. The City's plan will provide a description of how the City will assess the success of affirmative marketing actions and what corrective actions will be taken when affirmative marketing requirement are not met. Prior Year None -40- INDEPENDENT ACCOUNTANT'S REPORT ON AGREED-UPON PROCEDURES APPLIED TO APPROPRIATIONS LIMIT WORKSHEET The Honorable Members of the City Council City of Los Banos, California We have applied the procedures enumerated below to the accompanying Appropriations Limitation worksheet, shown as Exhibit A, of the City of Los Banos, California for the year ended June 30, 2002. These procedures, which were agreed to by the City of Los Banos, California, and the League of California Cities (as presented in their League publication entitled Article XIIIB Appropriations Limitation Uniform Guidelines) were performed solely to assist the City of Los Banos, California in meeting the requirements of Section 1.5 of Article XIIIB of the California Constitution. This engagement to apply agreed-upon procedures was performed in accordance with standards established by the American Institute of Certified Public Accountants. The sufficiency of the procedures is solely the responsibility of the specified users of the report. Consequently, we make no representation regarding the sufficiency of the procedures described below either fo r the purpose fo� which this report has been requested or foran y other purpose. The procedures performed and our findings were as follows: 1. We obtained the completed worksheets No. 1 through No. 7 presented in the Article XIIIB Appropriations Limitation Uniform Guidelines (or other alternative computations) and compared the limit and annual adjustment factors included in those worksheets to the limit and annual adjustment factors that were adopted by resolution of the City Council. We also compared the population and inflation options included in the aforementioned worksheets to ttmse that were selected by a recorded vote of the City Council. Finding: No exceptions were noted as a result of our procedures. 2. For the accompanying Appropriations Limit Worksheet, Exhibit A: we added last year's limit to total adjustments and agreed the resulting amount to this year's limit. Finding: No exceptions were noted as a result of our procedures. 3. We compared the current year information presented in the accompanying Appropriations Limit Worksheet, Exhibit A: to the other worksheets described in procedure No. 1 above. Finding: No exceptions were noted as a result of our procedures. -41- The Honorable Members of the City Council City of Los Banos, California Page Two 4. We compared the prior year appropriations limit presented in the accompanying Appropriations Limit Worksheet, Exhibit A to the prior year appropriations limit adopted by the City Council for the prior year. Finding: No exceptions were noted as a result of our procedures. We were not engaged to, and did not, perform an audit, the objective of which would be the expression of an opinion on the accompanying Appropriations Limit Worksheet, Exhibit A (or other alternative computation). Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been re ported to you. No procedures have been perfo rmed with respect to the determination of the appropriation limit forthe base year, as defined by the League publication entitled Article X/1/B Appropriations Limitation Uniform Guidelines. This report is intended solely forthe use of the City of Los Banos, Californiaand should not be used by those who have not agreed to the procedures and taken responsibility for the sufficiency of the procedures for their purposes. However, this is a matter of public record and its distribution is not limited. Certified Public Accountants November 15, 2002 -42- CITY OF LOS BANOS GANN APPROPRIATIONS LIMITATION WORKSHEET June 30, 2002 EXHIBIT A Appropriation Limit Calculation: Fiscal Year 2000-2001 Allowable Increase $ 32, 116, 146 California Per Capita Income 7.82% 1.0782 City Population 6.38% 1.0638 1.1470 2000-2001 Tax Related Appropriation Limit $ 36.837,219 .. -43- [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B SUMMARYOF CERTAINDO CUMENTS Thefo llowing is a summary of certain provisions of the Installment Purchase Agreement and the Tr ust Agreement which are not described elsewhere. Th is summary does not purport to be comprehensive and reference should be made to the respective agreement fo r a full and complete statement of the provisions thereof DEFINITION ANDSUMMARY OF CERTAINPRO VISIONS OF THE INSTALLMENT PURCHASE AGREEMENT DEFINITIONS Unless the context otherwise requires, the terms definedbelow will for all purposes of this Summary have the followingmeanin gs, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined below. All capitalized terms used below and not defined below shall have the meanings ascribed thereto in the Installment Purchase Agreement or the Trust Agreement. "Accountant's Report" means a report signed by an Independent CertifiedPu blic Accountant. "Agreement" or "Installment Purchase Agreement" means the Installment Purchase Agreement, by and between the City and the Authority, dated as of October 1, 2003, as originally executed and as it may from time to time be amended or supplemented in accordance withthe Agreement. "Authority" means the Los Banos Public Financing Authority, a joint exercise of powers agency organized and existing under the laws of the State of California. "Bonds" means all revenue bonds, certificates of participation, obligations or notes of the City authorized, executed, issued and delivered by the City, the payments of which are on a parity with the Series 2003 Installment Payments and which are secured by a pledge of and lien on the Revenues. "Certificates" means thecertificates of participation executed and delivered by theTrustee pursuant to the Trust Agreement. "City" means the City of Los Banos, a general law city duly organized and existing under and by virtue of the laws of the State of California. "Contracts" means the Installment Purchase Agreement and any amendments and supplements thereto, and all contracts of the City authorized and executed by the City, the Installment Payments under which are on a parity with the Series 2003 Installment Payments and which are secured by a pledge of and lien on the Revenues, including, but not limited to, the Series 1997 Installment Purchase Agreement. "Corporation" means Local Agency Installment Purchase Corporation, a nonprofit public benefit corporation duly organized and existing under and by virtue of the laws of the State of California. "Date of Operation" means, with respect to any uncompleted Project, the estimated date by which such Project will be completed and, in theopinion of an engineer, will be ready for commercial operation by or on behalf of the City. "Debt Service" means, for any period of calculation, the sum of: (1) the interest payable on all outstanding Bonds, assuming that all outstanding serial Bonds are retired as scheduled and that all outstanding term Bonds are prepaid or paid from sinking fund payments as scheduled ( except to the extent that such B-1 interest is capitalized); (2) that portion of the principal amount of all outstanding serial Bonds maturing in such period of calculation; (3) that portion of the principal amount of all outstanding term Bonds required to be prepaid or paid in such period of calculation; and (4) that portion of Contracts (except to the extent that the interest portion of such Contracts is capitalized); less the earnings derived from investment of moneys on deposit in any debt service reserve fund, including the Reserve Fund, created with respect to any Contracts or Bonds to the extent such earnings are deposited in a debt.service fund, including the Certificate Payment Fund; provided that, if any series or issue of such Bonds or Contracts represent interest at a variable rate the rate of interest so represented shall be assumed to be the highest of: (i) the actual rate on the date of calculation, or if such Bonds or Contracts are not yet outstanding, theinitial rate (if established and binding), (ii) if such Bonds or Contract have been outstanding for at least twelve months, the average rate over the twelve months immediately preceding the date of calculation, or if such Bonds or Contract were not outstanding for the twelve prior months, the average rate borne by reference to an index comparable to that to be utilized in determining the interest rate for such Bonds or Contract and (iii) (A) if interest on the Bonds or Contracts is excludable fromgross income under the applicable provisions of the Internal Revenue Code, the most recently published Bond Buyer "Revenue Bond Index" (or comparable index if no longer published), or (B) if interest is not so excludable, the interest on direct U.S. Treasury Obligations with comparable maturities; provided, however, that for purposesof provisions of the Installment Purchase Agreement under theheading "Amount of Rates and Charges" such interest shall be deemed to be at the actual rate per annum applicable during such period; and provided furtherthat if any series or issue of such Bonds or Contracts have twenty percent (25%) or more of the aggregate principal amount of such series or issue due in any one year, Debt Service shall be determined forthe Fiscal Year of determination as if the principal of and interest on such series or issue of such Bonds or Contracts were being paid from the date of incurrence thereof in substantially equal annual amounts over a period of twenty (20) years from the date of calculation with interest assumed to be equal to the most current interest rate set forth in The Bond Buyer Revenue Bond Index, notwithstanding the foregoing, the fullamount of such Bonds or Contracts will be included in thecalculation if the calculation is made within 12 months of the actual maturity of such Bonds or Contracts and no credit facility exists; and provided further that, as to any such Bonds or Contracts or portions thereof bearing no interest but which are sold at a discount and which discount accretes with respect to such Bonds or Contracts or portions thereof, such accreted discount shall be treatedas interest in the calculation of Debt Service; and provided furtherthat the amount on deposit in a debt service reserve fund on any date of calculation of Debt Service shall be deducted from the amount of principal due at the final maturity of the Bonds and Contracts forwhich such debt service reserve fundwas established and in each preceding year until such amount is exhausted. "Event of Default"means an event so described in the Agreement. "Fiscal Year" means the period beginning on July 1 of each year and ending on the last day of June of such year, or anyother twelve-month period selected and designated as the officialFisca l Year of the City. ''Independent CertifiedPublic Accountant" means any firm of certified public accountants appointed by the City, and each of whom is independent pursuant to the Statement on Auditing Standards No. 1 of the American Institute of CertifiedPublic Accountants. "Independent Financial Consultant" means a financial consultant or firm of such consultants appointed by the City, and who, or each of whom: (1) is in fact independent and not under domination of the City; (2) does not have any substantial interest, direct or indirect, with the City; and (3) is not connected with the City as an officeror employee of the City, but who may be regularly retained to make reports to the City. "Installment Payment Date" means any date on which Installment Payments are scheduled to be paid by the City under and pursuant to any Contract. The term "Series 2003 Installment Payment Date" means May 15 and November 15 of each year commencing on May 15, 2004, or if any such date is not a Business Day, the next succeeding Business Day. B-2 "Installment Payments" means the installment payments of interest and principal scheduled to be paid by the City under and pursuant to the Contracts. The term "Series 2003 Installment Payments" means the Installment Payments scheduled to be paid by the City under and pursuant to the Installment Purchase Agreement. "Law" means Articles 10 and 11 of Part 1 of Division 2 of the Government Code of the State of California and all laws amendatory thereof or supplemental thereto. "Manager" means the City Manager of the City, or any other person designated by the City Manager to act on behalf of the City Manager. "Maximum Annual Debt Service" means, as of the date of calculation, the largest amount of Debt Servicein the current or any futureFiscal Year. "Net Proceeds" means, when used with respect to any casualty insurance or condemnation award, the proceeds from such insurance or condemnation award remaining after payment of all expenses (including attorneys' fees) incurredin the collection of such proceeds. "1997 Installment Purchase Agreement" means the Installment Purchase Agreement - Sewer System dated July 1, 1997 by and between the City and the Corporation. "Net Revenues" means, for anyFiscal Year, the Revenues for such Fiscal Year lessthe Operation and Maintenance Costs for such Fiscal Year. "Operation and Maintenance Costs" means costs spent or incurred for maintenance and operation of the Sewer System calculated in accordance with generally accepted accounting principles, including (among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Sewer System in good repair and working order, and including administrative costs of the City that are charged directly or apportioned to the Sewer System, including but not limited to salaries and wages of employees, payments to the Public Employees Retirement System, overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys or engineers and insurance premiums, and including all other reasonable and necessary costs of the City or charges (other than debt service payments) required to be paid by it to comply with the terms of the Certificates or of the Agreement or any Contract or of any resolution or indenture authorizing the issuance of any Bonds or of such Bonds; but excluding in all cases depreciation, replacement and obsolescence charges or reserves thereforand amortization of intangibles or other bookkeeping entries of a similar nature and all capital charges. "Project" means any additions, betterments, extensions or improvements to the City's facilities designated by the City Council of the City as a Project, the acquisition and construction of which is to be paid forby the proceeds of any Contracts or Bonds. The term "1993 Project" means the additions, betterments, extensions and improvements to the Sewer System, including real property and buildings, if any, described in Exhibit A to the Agreement and as modified in conformance with the Agreement. "Purchase Price" means the principal amount plus interest thereon owed by the City to the Authority under the terms of the Agreement. "Revenue Fund" means the Sewer Fund of the City being maintained in accordance with the Agreement. "Revenues" means all income, · rents, rates, fees, charges and other moneys derived from the ownership or operation of the Sewer System, including, without limiting the generality of the foregoing, (1) all income, rents, rates, fees, charges or other moneys derived by the City from the collection, treatment and disposal of the wastewater or other services or facilities provided in the conduct or operation of the business of B-3 the Sewer System, (2) the proceeds of any stand-by or wastewater availability charges, development fees and connection charges collected by the City, or (3) the earnings on and income derived from the investment of amounts described in clauses (1) and (2) above and from Sewer Fund reserves, but excluding (y) customers' deposits or any otherdeposi ts or advances subject to refunduntil such deposits or advances have become the property of the City, and (z) any proceeds of taxes or assessments restricted by law to be used by the City to pay bonds or other obligations heretofore or hereafterissued. "Series 2003 Reserve Fund Requirement" means, initially, $ , and thereafter an amount equal to the lesser of (i) $ and (ii) the maximum Series 2003 InstallmentPayments due in the then current or any future Fiscal Year. "Series 1997 Installment Payments" means the Installment Payments scheduled to be paid by the City under and pursuantto the 1997 Installment Purchase Agreement. "Sewer Service" means the waste water collection, treatment and disposal service made available or provided by the Sewer System. "Sewer System" means the whole and each and every part of the sewer system of the City, including all real property and buildings, including the portion thereof existing on the date of the Agreement, and including all additions, betterments, extensions and improvements to such sewer system or any part thereof hereafteracquired or constructed. "Trust Agreement " means the Trust Agreement, dated as of October 1, 2003, by and among the City, the Authority and the Trustee, as originally executed and as it may from time to time be amended or supplemented in accordance withits terms. "Trustee" meansBNY Western Trust Company acting in its capacity as Trustee under and pursuant to the Trust Agreement, and its successors andassigns. SALE AND PURCHASEOF THE 1993 PROJECT Sale of the 1993 Project to the Authoritv. In consideration for the Authority's assistance in refinancing the 1993 Project, the City agrees to sell, and sells, to the Authority, and the Authority agrees to purchase and purchases, from the City, the 1993 Project in the manner and in accordance with the provisions of the Agreement. Purchase of the 1993 Project by the Citv. In consideration forthe portion of the Installment Payments as set forth in the Agreement, the Authority agrees to sell, and sells, to the City, and the City agrees to purchase, andpurc hases, fromthe Authority, the 1993 Project at the purchase price specified in the Agreement andotherw ise in the manner and in accordance with the provisions of the Agreement. Title. All right, title and interest in each component of the 1993 Project will vest in the City immediately upon execution and delivery of the Agreement. Such vesting shall occur without further action by the Authority or the City and the Authority will, if requested by the City or if necessary to assure such automatic vesting, deliver any and all documents required to assure such vesting. SERIES 2003 INSTALLMENTPAYMEN TS Series 2003 Installment Payments. The City will, subject to its rights of prepayment provided in the Agreement, pay the Authority the Purchase Price in installment payments of interest and principal in the amounts and onthe Series 2003 Installment Payment Dates as set forth in the Agreement. B-4 Each Series 2003 Installment Payment shall be paid to the Authority in lawful money of the United States of America. Inthe event the City fails tomake any of the payments required to be made by it under the Agreement, such payment shall continue as an obligation of the City until such amount shall have been fully paid and the City agrees to pay the same with interest accruing thereon at the rate or rates of interest then applicable to the remaining unpaid principal balance of the Series 2003 Installment Payments if paid in accordance with their terms. The obligation of the City to make the Series 2003 Installment Payments is absolute and unconditional, and until such time as the Purchase Price shall have been paid in full ( or provision for the payment thereof shall have been made pursuant to the Agreement), the City will not discontinue or suspend any Series 2003 Installment Payment required to be made by it under the Agreement when due, whether or not the Sewer System, or any part thereof is operating or operable or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and whether or not the 1993 Project has been completed, and such payments shall not be subject to reduction whether by offset or otherwise and shall not be conditional upon theperf ormance or nonperformanceby any party of any agreement forany cause whatsoever. SECURITY Allocation of Revenues. In order to carry out and effectuate the pledge and lien contained in the Agreement, the City agrees and covenants that all Revenues will be received by the City in trust under the Agreement and will be deposited when and as received in the Sewer Fund of the City, which fund is referred to as the "Revenue Fund" and which fund the City agrees and covenants to maintain and to hold separate and apart from otherfunds so long as any InstallmentPayments or Bonds remain unpaid. Moneys in the Revenue Fund will be used and applied by the City as provided in the Agreement. The City will, from the moneys in the Revenue Fund, pay all Operation and Maintenance Costs (including amounts reasonably required to be set aside in contingency reserves for Operation and Maintenance Costs, the payment of which is not then immediately required) as they become due and payable. All remaining moneys in the Revenue Fund will be set aside by the City at the following times in the following respective special funds in the following order of priority and all moneys in each of such funds will be held in trust and will be applied, used and withdrawn only forthe purposesauth orized below: (a) Certificate PaymentFund. On or before each Series2003 Installment Payment Date, the City will, fromthe moneys in the Revenue Fund, transferto the Trustee for deposit in the Certificate Payment Fund an amount equal to the portion of the next succeeding Series 2003 Installment Payment designated as interest and coming due on the next succeeding Series 2003 Installment Payment Date and 1/2 of the portion of the next succeeding Series 2003 Installment Payment designated as principal and coming due on the next applicable Series 1997 Installment Payment Date. The City will also, fromthe moneys in the Revenue Fund, transferto the applicable trustee for deposit in the applicable payment fund, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, any other Debt Service in accordance with the provisions of the Contract, resolution or indenture relating thereto. Any moneys on deposit in the Certificate Payment Fund on each Series 2003 Installment Payment Date ( other than amounts required for the payment of past due principal or interest with respect to any Certificates not presented for payment) shall be credited to the payment of the Series 2003 Installment Payments in accordance with the Trust Agreement. No deposit need be made in the Certificate Payment Fund as Series 2003 Installment Payments if the amount in the Certificate Payment Fund is at least equal to the amount of the Series 2003 Installment Payment due and payable on the next succeeding Series 2003 Installment Payment Date. (b) Reserve Fund. On or before each Series 2003 Installment Payment Date, the City will, from the remaining moneys in the Revenue Fund, thereafter, without preference or priority, and in the event of any insufficiency of such moneys ratably without any discrimination or preference, transfer to the Trustee for B-5 deposit in the Reserve Fund, that sum, if any, necessary to restore the Series 2003 Reserve Fund to an amount equal to the Reserve Fund Requirement and transfer to the applicable trustee for deposit to such other reserve fund or account for Bonds or Contracts an amount equal to the amount required to be deposited therein pursuant to such Bonds or Contracts. No transfer of moneys for deposit to the Reserve Fund in connection with the Series 2003 Installment Payments need be made if the amount contained therein is at least equal to the Series 2003 Reserve Fund Requirement. ( c) Surplus. Moneys on deposit in the Revenue Fund not necessary to make any ofthe payments required above may be expended by the City at any time for any purposepermitted by law. Investments. All moneys held by the City in the Revenue Fund will be invested in Permitted Investments and the investment earnings thereon will remain on deposit in such fund, except as otherwise provided in the Agreement. Notwithstanding anything contained in the Agreement, investment earnings on the Revenue Fund will not be deposited in the Revenue Fund unless the amount therein is not sufficient to pay Installment Payments when due in such Fiscal Year. COVENANTS OF THE CITY Compliance with Agreement and AncillaryAgreemen ts. The City will punctually pay the Series 2003 Installment Payments in strict conformity with the terms of the Agreement, and will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Agreement required to be observed and performed by it, and will not terminate theAgreement for any cause including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the 1993 Project commercial frustrationof purpose, anychange in the tax or other laws of the United States of America or of the State of California or any political subdivision of either or any failure of the Authority to observe or perform any agreement, condition, covenant or term contained in the Agreement required to be observed and performed by it, whether express or implied, or any duty, liability or obligation arising out of or connected herewith or the insolvency, or deemed insolvency, or bankruptcy or liquidation of the Authority or any force majeure, including acts of God, tempest, storm, earthquake, war, rebellion, riot, civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lock outs, lack of transportation facilities, fire, explosion, or acts or regulations of governmental authorities. The City will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Trust Agreement required to be observed and performed by it, and it is expressly understood and agreed by and among theparti es to the Agreement and the Trust Agreement that, subject to the severability clause contained in the Agreement, each of the agreements, conditions, covenants and terms contained in each such agreement is an essential and material term of the purchase of and payment for the 1993 Project by the City, pursuant to, and in accordancewith, and as authorized underthe Law. The City will faithfully observe and perform all the agreements, conditions, covenants and terms required to be observed and performedby it pursuant to all outstanding Contracts and Bonds as such may from time to time be executed or issued, as the case may be. Against Encumbrances. The City will not make any pledge of or place any lien on Revenues or the moneys in the Revenue Fund except as provided in the Agreement. The City may at any time, or from time to time, issue evidences of indebtedness or incur other obligations for any lawful purpose which are payable from and secured by a pledge of and lien on Revenues or any moneys in the Revenue Fund as may from time to time be deposited therein (as provided in certain provisions of the Agreement), provided that such pledge and lien will be subordinate in all respects to the pledge of andlien thereon provided in the Agreement. B-6 Against Sale or Other Disposition of Property. The City will not enter into any agreement or lease which impairs the operation of the Sewer System or any part thereof necessary to secure adequate Revenues for the payment of the Series 2003 Installment Payments, or which would otherwise impair the rights of the Authority under the Agreement or the operation of the Sewer System. Any real or personal property which has become nonoperative or which is not needed forthe efficient and proper operation of the Sewer System, or any material or equipment which has become worn out, may be sold if such sale will not impair the ability of the City to pay the Series 2003 Installment Payments and if the proceeds of such sale are deposited in the Revenue Fund. Nothing in theAgreement shall restrictthe ability of the City to sell any portion of the Sewer System if such portion is immediately repurchased by the City and if such arrangement cannot by its terms result in the purchaser of such portion of the Sewer System exercising any remedy which would deprive the City of or otherwise interfere with its right to own and operate such portion of the Sewer System. Against Competitive Facilities. The City will not, to the extent permitted by law, acquire, construct, maintain or operate and will not, to the extent permitted by law and within the scope of its powers, permit any other public or private agency, corporation, district or political subdivision or any person whomsoever to acquire, construct, maintain or operate within the City any wastewater system competitive with the Sewer System. Tax Covenants. The City covenants that, notwithstanding any other provision of the Agreement, it will make no use of the proceeds of theCertificates or of any other amounts, regardless of the source, or of any property or take any action, or refrain fromtaking any action, that would cause the Certificates to be "arbitrage bonds" within the meaningof Section 148 of the Internal Revenue Code of 1986, as amended (the "Code"). The City will not use or permit the use of the 1993 Project or any portion thereof by any person other than a governmental unit as such term is used in Section 141 of the Code, in such manner or to such extent as would result in the loss of exclusion from gross income for federal income tax purposes of the portion of the Series 2003 Installment Payments constituting interest under Section 103 of the Code. The City will not make anyuse of the proceeds of the Certificates or any other funds of the City, or take or omit to take any other action, that would cause the obligation provided in the Agreement to be "federallyguaran teed" withinthe meaning of Section 149(b) of the Code or "private activity bonds" within the meaning of Section 141 of the Code. To that end, so long as any Series 2003 Installment Payments are unpaid, the City, with respect to such proceeds and such other funds, will comply with all requirements of such Sections and all regulations of the United States Department of the Treasury issued thereunder and under Section 103 of the Internal Revenue Code of 1954, as amended, to the extent such requirements are, at the time, applicable and in effect. Maintenance and Operation of the Sewer System. The City will maintain and preserve the Sewer System in good repair and working order at all times and will operate the Sewer System in an efficient and economical manner and will pay all Operation and Maintenance Costs as theybecome due and payable. Payment of Claims. The City will pay anddischarge any and all lawfulclaims forlabor, materials or supplies which, if unpaid, might become a lien on the Revenues or the funds or accounts created under the Agreement or under the Trust Agreement or on any funds in the hands of the Citypledged to pay the Series 2003 Installment Payments or to the Owners prior or superior to the lien of the Series 2003 Installment Payments or which might impair the security of the Series 2003 Installment Payments. Compliance with Contracts. The City will comply with, keep, observe and perform all agreements, conditions, covenants and terms, express or implied, required to be performed by it contained in all contracts for the use of the Sewer System and all other contracts affecting or involving the Sewer System, to the extent that the City is a party thereto. B-7 Insurance. The City will procure and maintain or cause to be procured and maintained insurance on the Sewer System with responsible insurers in such amounts and against such risks (including accident to or destruction of the Sewer System) as are usually covered in connection with facilities similar to the Sewer System so long as such insurance is available at reasonable rates. Inthe event of any damage to or destruction of the Sewer System caused by the perils covered by such insurance, the Net Proceeds thereof will be applied to the reconstruction, repair or replacement of the damaged or destroyed portion of the Sewer System. The City will begin such reconstruction, repair or replacement promptly after such damage or destruction will occur, and will continue and properly complete such reconstruction, repair or replacement as expeditiously as possible, and will pay out of such Net Proceeds all costs and expenses in connection with such reconstruction, repair or replacement so that the same will be completed and the Sewer System will be freeand clear of all claims and liens. If such Net Proceeds exceed the costs of such reconstruction, repair or replacement, then the excess Net Proceeds will be applied in part to the prepayment of Series 2003 Installment Payments as provided in the Agreement and in part to such other fund or account as may be appropriate and used for the retirement of Bonds and Contracts in the same proportion which the aggregate unpaid principal balance of Series 2003 Installment Payments then bears to the aggregate unpaid principal amount of such Bonds and Contracts. If such Net Proceeds are sufficient to enable the City to retire the entire obligation evidenced by the Installment Purchase Agreement prior to the final due date of the Series 1997 Installment Payments as well as the entire obligations evidenced by Bonds and Contracts then remaining unpaid prior to their finalrespective due dates, the City may electnot to reconstruct, repair or replace the damaged or destroyedportion of the Sewer System, and thereupon such Net Proceeds will be applied to the prepayment of Series 2003 Installment Payments as provided in the Agreement and to theretirement of such Bonds and Contracts. The City will procure and maintain such other insurance which it shall deem advisable or necessary to protect its interests and the interests of the Authority, which insurance shall afford protection in such amounts and against such risks as are usually covered in connection with municipal water systems similar to the Sewer System. Any insurance required to be maintained by paragraph (a) above and, if the City determines to procure and maintain insurance pursuant to paragraph (b) above, such insurance, may be maintained under a self-insurance program so long as such self-insurance is maintained in the amounts and manner usually maintained in connection with wastewater systems similar to the Sewer System and is, in the opinion of an accredited actuary, actuarially sound. All policies of insurance required to be maintained in the Agreement will provide that the Authority or its assignee will be given thirty (30) days' written notice of any intended cancellation thereof or reduction of coverage provided thereby. Accounting Records, Financial Statements and Other Rtmorts. The City will keep appropriate accounting records in which complete and correct entries will be made of all transactions relating to the Sewer System, which records will be available for inspection by the Authority and the Trustee at reasonable hours and under reasonable conditions. The City will prepare and file with the Authority or its assignee and the Insurer annually within one hundred eighty (180) days after the close of each Fiscal Year (commencing with the Fiscal Year ending June 30, 2003) financial statements of the City for the preceding Fiscal Year prepared in accordance with generally accepted accounting principles, together with an Accountant' s Report thereon. Protection of Security and Rights of theAuthority. The City will preserve andprotect the security and the rights of the Authority to the Series 2003 Installment Payments under the Agreement and will warrant and defend such rights against all claims and demands of all persons. B-8 Payment of Tax.es and Compliance with Governmental Regulations. The City will pay and discharge all taxes, assessments and other governmental charges which may be lawfully imposed upon the Sewer System, or any part thereof or upon the Revenues when the same will become due. The City will duly observe and conform with all valid regulations and requirements of any governmental authority relative to the operation of the Sewer System, or any part thereof, but the City will not be required to comply with any regulations or requirements so long as thevalidity or application thereof shall be contested in good faith. Collection of Rates and Charges. The City will have in effect at all times by-laws, rules and regulations requiring each customer to pay the rates and charges applicable to the Sewer Service to such customer andproviding forthe billing thereof and for a due date anda delinquency date for each bill. In each case where such bill remains unpaid in whole or in part after it becomes delinquent, the City may discontinue such service from the Sewer System, and such service shall not thereafter be recommenced except in accordance with by-laws or rules and regulations governing such situations of delinquency. Eminent Domain Proceeds. If all or any part of the Sewer System shall be taken by eminent domain proceedings, the Net Proceeds thereofshall be applied as follows: (a) If (1) the City files with the Authority and the Trustee a certificate showing (i) the estimated loss of annual Net Revenues, if any, suffered or to be suffered by the City by reason of such eminent domain proceedings, (ii) a general description of the additions, betterments, extensions or improvements to the Sewer System proposed to be acquired and constructed by the City from such Net Proceeds, and (iii) anestimate of the additional annual Net Revenues to be derived from such additions, betterments, extensions or improvefi1ents, and (2) the City, on the basis of such certificate filed with the Authority and the Trustee, determines that the estimated additional annual Net Revenues will sufficiently offset the estimated loss of annual Net Revenues resulting from such eminent domain proceedings so that the ability of the City to meet its obligations under the Agreement will not be substantially impaired (which determination shall be final and conclusive), then the City will promptly proceed with the acquisition and construction of such additions, betterments, extensions or improvements substantially in accordance with such certificate and such Net Proceeds shall be applied for the payment of the costs of such acquisition and construction, and any balance of such Net Proceeds not required by the City for such purpose shallbe deposited in the Revenue Fund. (b) If the foregoing conditions are not met, then such Net Proceeds will be applied in part to the prepayment of Series 2003 Installment Payments as provided in the Agreement under the heading "Prepayment of Series 2003 Installment Payments" and in part to such other fund or account as may be appropriate and used for the retirement of Bonds and Contracts in the same proportion which the aggregate unpaid principal balance of Series 2003 Installment Payments then bears to the aggregate unpaid principal amount of such Bonds and Contracts. Further Assurances. The City will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Agreement and for the better assuring and confirming unto the Authority and the Insurer of the rights and benefitsprovided to it in the Agreement. Continuing Disclosure. The City has covenanted and agreed pursuantto the Trust Agreement that it will comply with and carry out all of its obligations under the continuing disclosure certificate to be executed and delivered by the City in connection with the execution and delivery of the Certificates. Notwithstanding any other provision of the Agreement, failure of the City to comply with the continuing disclosure certificate will not be considered an Event of Default. EVENTS OF DEFAULT AND REMEDIES OF THE AUTHORITY Events of Default and Acceleration of Maturities. If one or more of the following Events of Default shall happen, that is to say (a) if default shall be made by the City in the due and punctual payment of any B-9 Series 2003 InstallmentPayment or any Contract or Bond when and as thesame will become due and payable; (b) if default shall be made by the City in the performance of any of the agreements or covenants required in the Agreement to be performed by it, and such defaultwill have continued for a period of thirty (30) days after the City shall have been given notice in writing of such default by the Authority; or (c) if theCity shall file a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction shall approve a petition filed with or without the consent of the City seeking arrangement or reorganization under the federal bankruptcy laws or anyother applicable law of the United States of America or any state therein, or if under the provisions of any other law for the reliefor aid of debtors any court of competent jurisdiction shall assume custody or control of the City or of the whole or any substantial part of its property; or ( d) if payment of the principal of any Contract or Bond is accelerated in accordance with its terms; then and in each and every such case during the continuance of such Event of Defaultspecified in clauses ( c) and ( d) above, the Authority will, with the written consent of the Insurer so long as the Bond Insurance Policy is in full force and effect, and forany other such Event of Default the Authority may, with the written consent of the Insurer so long as the Bond Insurance Policy is in full force and effect, and shall, at the written direction of the Insurer so long as the Bond Insurance Policy is in full force and effect, by notice in writing to the City, declare the entire principal amount of the unpaid Series 1997 Installment Payments and the accrued interest thereon to be due and payable immediately, andupon any such declaration the same shall become immediately due and payable, anything contained in the Agreement to the contrary notwithstanding. This paragraph, however, is subject to the condition that if at any time after the entire principal amount of the unpaid Series 2003 Installment Payments and the accrued interest thereon shall have been so declared due and payable and before any judgment or decree for the payment of the moneys due shall have been obtained or entered the City will deposit with the Authority a sum sufficient to pay the unpaid principal amount of the Series 2003 Installment Payments or the unpaid payment of any other Contract or Bond referredto in clause (a) above due prior to such declaration and the accrued interest thereon, with interest on such overdue installments, at the rate or rates applicable to the remaining unpaid principal balance of the Series 2003 Installment Payments or such Contract or Bond if paid in accordance with their terms, and the reasonable expenses of the Authority, and any and all other defaults known to the Authority ( other than in the payment of the entire principal amount of the unpaid Series 2003 Installment Payments and the accrued interest thereon due and payable solely by reason of such declaration) shall have been made good or curedto the satisfaction ofthe Authority and the Insurer or provision deemed by the Authority to be adequate shall have been made therefor, then and in every such case the Authorityand the Insurer, by written notice to the City, may rescind and annul such declaration and its consequences; but no such rescission and annulment will extend to or will affect any subsequent default or will impair or exhaust any right or power consequent thereon. Application of Funds Upon Acceleration. Upon the date of thedecla ration of acceleration as provided in the Agreement, all Revenues thereafterreceived by the City shall be applied in the following order: First, payment of fees andexpenses of the Trustee (including fees and disbursements of counsel to the Trustee) incurred in and about the performance of its powers and duties under the Trust Agreement, and then to thepayment of the fees, costs and expenses of the Authority, if any, in carryingout the provisions described under the caption "EVENTS OF DEFAULT AND REMEDIES OF THE AUTHORITY," including reasonable compensation to their respective accountants and counsel and amounts payable to the Insurer pursuant to the Trust Agreement; Secong, to the payment of the Operation and Maintenance Costs; and Third, to the payment of the entire principal amount of the unpaid Series 2003 Installment Payments and the unpaid principal amount of all Bonds and Contracts and the accrued interest thereon, with interest on the overdue installments at the rate or rates of interest applicable to the Series 2003 Installment Payments and such Bonds and Contracts if paid in accordance with theirrespective terms. B-10 Other Remedies of the Authority. The Authority will have the right with the written consent of the Insurer so long as the Bond Insurance Policy is in full force and effect, and will, at the written direction of the Insurer so long as the Bond Insurance Policy is in full force and effect: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the City or any council member, officer or employee thereof, and to compel the City or any such council member, officer or employee to perform and carry out its or his duties under the Law and the agreements and covenants required to be performed by it or him contained in the Agreement; (b) by suit in equity to enjoin any acts or things which are unlawful orviola te the rights of the Authority; or ( c) by suit in equity upon the happening of an Event of Default to require the City and its directors, officers and employees to account as the trustee of an express trust. Notwithstanding anything contained in the Agreement, neither the Authority nor the Insurerwill have a security interest in or mortgage on the 2003 Project, the Sewer System or other assets of the City and no default under the Agreement shall result in the loss of the 2003 Project, the Sewer System, or other assets of the City. Non-Waiver. Nothing in the Agreement will affect or impair the obligation of the City, which is absolute and unconditional, to pay the Series 2003 Installment Payments to the Authority at therespective due dates or upon prepayment from the Net Revenues, the Revenue Fund and the other funds in the Agreement pledged for such payment, or will affect or impair the right of the Authority, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied in theAgreement. A waiver of any default or breach of duty or contract by the Authority will not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Authority to exercise any right or remedy accruing upon any default or breach of duty or contractshall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Authority by the Law or by the Agreement may be enforced and exercised from time to time and as often as shall be deemed expedient by the Authority. If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned or determined adversely to the Authority, the City and the Authority shall be restored to their former positions, rights and remedies as if such action,proceeding or suit had not been brought or taken. Remedies Not Exclusive. No remedy in the Agreement conferredupon or reserved to the Authority is intended to be exclusive of any other remedy, and each such remedy will be cumulative and shall be in addition to every other remedy given under the Agreement or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by the Law or any other law. DISCHARGE OF OBLIGATIONS Discharge of Obligations. When (a) all or any portion of the Series 2003 Installment Payments shall have become due and payable in accordance with the Agreement or a written notice of the City to prepay all or any portion of the Series 2003 Installment Payments shall have been filedwith the Trustee; and (b) there shall have been deposited with the Trustee at or prior to the Series 2003 Installment Payment Dates or date (or dates) specified for prepayment, in trust for the benefit of the Authority or its assigns and irrevocably appropriated and set aside to the payment of all or any portion of the Series 2003 Installment Payments, sufficientmoneys and non-callable securities described in the Trust Agreement, the principal of and interest on which when due will provide money sufficientto pay all principal, prepayment premium, if any, and interest of such Series 2003 Installment Payments to their respective Series 2003 Installment Payment Dates or prepayment date or dates, as the case may be; ( c) the City has met, or caused to be met, the requirements set forth in the Trust Agreement; and (d) provision shall have been made for paying all fees and expenses of the Trustee, then and in that event, the right, title and interest of the Authority in the Agreement and the B-11 obligations of the City under the Agreement will, with respect to all or such portion of the Series 2003 Installment Payments as have been so provided for, thereupon cease, terminate, become void and be completely discharged and satisfied (except for the right of the Trustee and theobligation of the City to have such moneys and such Permitted Investments applied to the payment of such Series 2003 Installment Payments). In such event, upon request of the City the Trustee shall cause an accounting for such period or periods as may be requested by the City to be prepared and filedwith the City and will execute and deliver to the City all such instruments as may be necessary or desirable to evidence such total or partial discharge and satisfaction, as the case may be, and, in the event of a total discharge and satisfaction,the Trustee will pay over to the City, afterpayment of all amounts due the Trustee pursuant to the Trust Agreement, as an overpayment of Series 2003 Installment Payments, all such moneys or such PermittedInvestments held by it pursuant to the Agreement other than such moneys and such Permitted Investments, as are required for the payment or prepayment of the Series 2003 Installment Payments, which moneys and Permitted Investments will continue to be held by the Trustee in trust for the payment of the Series 2003 Installment Payments and will be applied by the Trustee to thepayment of the Series 2003 Installment Payments of the City. Notwithstanding anything contained above, the Agreement shall not be discharged unless no Certificates remain outstanding under the Trust Agreement. MISCELLANEOUS Benefits of Installment Purchase A2t"eement Limited to Parties. Nothing contained in the Agreement, expressed or implied, is intended to give to any person other than the City or the Authority or the Insurer any right, remedy or claim under or pursuant to the Agreement, and any agreement or covenant required in the Agreement to be performed by or on behalf of the City or the Authority will be for the sole and exclusive benefitof the other partyand the Insurer. Waiver of Personal Liability. No director, officer or employee of the City will be individually or personally liable for the payment of the Series 2003 Installment Payments, but nothing contained in the Agreement will relieve any director, officer or employee of the City fromthe performance of any official duty provided by any applicable provisions of law or by the Agreement. Partial Invalidity. If any one or more of the agreements or covenants or portions thereofrequired by the Installment Purchase Agreement to be performed by or on the part of the City or the Authority shall be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof will be null and void and will be deemed separable from the remaining agreements and covenants or portions thereof and shall in no way affect thevalidity of the Agreement. The City andthe Authority declare that they would have executed the InstallmentPurch ase Agreement, and each and every other article, section, paragraph, subdivision, sentence, clause and phrase of theAgreement irrespective of the fact that anyone or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases of the Agreement or theap plication thereof to any personor circumstance may be held to be unconstitutional,unenfo rceable or invalid. Assignment. The Installment Purchase Agreement and any rights under the Agreement may be assigned by the Authority, as a whole or in part, without the necessity of obtaining the prior consent of the City. Net Contract. The Installment Purchase Agreement shall be deemed and construed to be a net contract, and the City shall pay absolutely net during the term of the Agreement the Series 2003 Installment Payments and all otherpayments required under theAgreement, free of any deductions and without abatement, diminution or set-off whatsoever. California Law. THE INSTALLMENT PURCHASE AGREEMENT SHALL BE CONSTRUED AND GOVERNED INACCORDANCE WITH THE LAWS OF THE STA TE OF CALIFORNIA. B-12 gr Indemnification of Authority. The City a ees to indemnify and hold harmless the Authority if and to the extent permitted by law, from and against all claims, advances, damages and losses, including legal fees andgr expenses, arising out of or in connection with the acceptance or the perforgrmance of its duties under the A eement, under the Trust Agreement, and under the Assignment A eement; provided that no indemngr ification will be madegr for willful misconduct, negligencegr or breach of an obligation under the A eement, under the Trust A eement or under the Assignment A eement by the Authority. Amendments Permitted. (a) The Agreement and the rights and obligations of the Authority and the City and of the Ownersgr of the Certificates and of the Trustee may be modifiedor amended at any time by an amendmentgrto the A eement which shall become binding when the written consents of the Owners of a majority in ag egate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualifiedas provided in the Trust Agreement, shall have been filed, together with the prior written consent of the Insurer so long as the Bond Insurance Policy is in full force and effect, with the Trustee. No such modification or amendment shall (1) extend the stated maturities of the Certificates, or reduce the rate of interest represented thereby, or extend the time of payment of interest, or reduce the amount of principal represented thereby, or reduce any premium payable on the prepayment thereof, without the consent of the Owner of each Certificate so affected, or (2) reduce the aforesaid percentage of Ownersgr of Certificates whose consent is required for the execution of anyamendment or modification of the A eement, or (3) modifyany of the rights or obligations of the Trustee or the Authority withoutits written consent thereto. (b) The Agreement and the rights and obligations of the Authority and the City and of the Owners of the Certificates maygr also be modified or amended at any time with the written consent of the Insurer by an amendment to the A eement which will become binding upon adoption, without the consent of the Owners of any Certificates, but only to the extent permittedgr by law and only for any one or more of the followinggr purposes: (1) to add to grthe covenants and a eements of the Authority or the City contained in the Agreement other covenants and a eements thereafter to be observed or to surrender any right or power in the A eement reserved to or conferredupon the Authority or the City, and which shall not adversgu ely affect the interests of the Owners of the Certificates; (2) to cure, correct or supplement anygr ambi ous or defective provision contained in the Agreement or in regard to questions arising under the A eement, as the Authority or the City may deem necessaryor desirable and which shall not adversely affectthe interests of the Owners of the Certificates; (3) to make such amendments or modifications as are necessarygr to effect the substitution of certain credit facilities in the Reserve Fund as permitted by the Trust A eement; and (4) to make such other amendments or modifications as may be in the best interests of the Owners of the Certificates. No amendment without consent of the Owners may modify any of the rights or obligations of the Trustee without the written consent of the Trustee thereto. gr The Trustee will promptly upon execution an delivery of any amendment pursuant to para aph (b) above send by firstclass mail a copy of such amendment to the Insurer. gr gr Rights of Insurer. grThe rights anted to the Insurer under their a eement to request, consent to or direct any action are rights anted to theInsurer in consideration of its issuance of the Bond Insurance Policy. Any exercise by the Insurer of such rights is merely an exercise of the Insurer's contractual rights and shall not be construed or deemed to be taken for the benefit or on behalf of the owners of Certificates nor does such action evidence any position of the Insurer, positive or negative, as to whether owners of Certificates' consent is required in addition to consent of the Insurer. B-13 DEFINITIONSAND SUMMARYOF CERTAINPROVISIONS OF THE TRUST AGREEMENT DEFINITIONS Unless the context otherwise requires, the terms defined below for all purposes of this Summary will have the meanings defined below, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined below. All capitalized terms used below and not defined below shall have the meanings ascribed thereto in the InstallmentPurch ase Agreement or the Trust Agreement: "Assignment Agreement" means that certain Assignment Agreement, by and between the Authority and the Trustee, dated as of October 1, 2003 as originally executed or as it may fromtime to time be amended or supplemented in accordance withits terms. "Business Day" means any day other than (i) a Saturday or Sunday or (ii) a day on which banking institutions in the State of New York or the State of California or the State in which the Principal Corporate Trust Office of the Trustee is located are authorized or required by law or executive order to remain closed. "CertificatePayment Fund" means the fundby that name established in the Trust Agreement. "Certificates"means the certificates of participation executed and delivered by theTrustee pursuantto the Trust Agreement. "Code" means the Internal Revenue Code of 1986, as amended, and the United States Treasury Regulations in effect with respect thereto. "Delivery Cost Fund" means the fundby that name established in the Trust Agreement. "Delivery Costs" means all items of expense directly or indirectly payable by or reimbursable to the City and related to the authorization, execution, sale and delivery of the Certificates, including but not limited to costs of preparation andreproduction of documents, printing expenses, filing and recording fees, initial fees and charges of the Trustee and counsel to the Trustee, legal fees and charges, fees and disbursements of consultants and professionals, rating agency fees, title insurance premiums, letter of credit fees and bond insurance premiums (if any), fees and charges for preparation, execution and safekeeping of the Certificates and any other cost, charge or fee in connection with the original execution and delivery of the Certificates. "Depository" or "DTC" means The Depository Trust Company, New York, New York, a limited purpose trust company organized under the laws of the State of New York in its capacity as securities depository for theCerti ficates. "Escrow Agent" means BNY WesternTrust Company. "Escrow Agreement" means an agreement by that name dated as of October 1, 2003 by and between the City and the Escrow Agent. "Escrow Fund" means the fundby that name established under �e Escrow Agreement. "Information Services" means Financial Information, Inc.'s "Daily Called Bond Service," 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services' "Called Bond Service," 65 Broadway, 16th Floor, New York, New York 10006; Moody's Investors Service "Municipal and Government," 99 Church Street, 8th Floor, New York, New York 10007, Attention: Municipal News Reports; Standard and Poor's Corporation "Called Bond Record," 25 Broadway, 3rd Floor, New York, New York 10004; and, in accordance withthen current guidelines of the Securities and Exchange B-14 Commission, such other addresses and/or such other services providing information with respect to called bonds as the City may designate in a Written Request of the Citydelivered to the Trustee. "Insurance Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a day on which the Insurer's Fiscal Agent or lending institutions in the State of New York are authorized or required by law or executive order to remain closed. "Insurance Policy" means the municipal bond new issue insurance policy issued by the Insurer that guarantees payment of principal and interest with respect to the Certificates when due. "Insurer" means Financial Guaranty Insurance Company, a New York stock insurance company, or any successor thereto. "Installment Payments" means the installment payments payable by the City pursuant to the Installment Purchase Agreement and in the amounts and at the times set forth in the Installment Purchase Agreement. "Installment Payment Date" means each date on which Installment Payments are scheduled to be paid by the City pursuantto the InstallmentPurchase Agreement. "Installment Purchase Agreement" means the Installment Purchase Agreement, dated as of October 1, 2003, by and between the City and the Authority, as originally executed or as it may from time to time be amended or supplemented in accordance with its terms. "Interest Fund" means the fundby that name established in theTrust Agreement. "Letter of Representations" means the letter of the City and the Trustee delivered to and accepted by the Depository on or prior to delivery of the Certificates as book-entry certificates setting forth the basis on which the Depository serves as depository for such book-entry certificates, as originally executed or as it may be supplemented or revised or replacedby a letter from the City and the Trustee delivered to and accepted by the Depository. "1993 Project" means-the additions, betterments, extensions and improvements to the sewer system of the City described in Exhibit A attached to the Installment Purchase Agreement. "Nominee" means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to the Trust Agreement. "Outstanding," when used as of any particular time with reference to Certificates, means (subject to the provisions of the Trust Agreement) all Certificates except: (1) Certificates canceled by the Trustee or delivered to the Trustee for cancellation; (2) Certificates paid or deemed to have been paid within the meaning of the Trust Agreement; and (3) Certificates in lieu of or in substitution forwhich other Certificates shall have been executed and delivered by the Trustee pursuantto the Trust Agreement; provided however, that Certificatespaid fromamounts paid by the Insurer shall not be considered paid or deemed paid forpu rposes of the Trust Agreement but shall remain outstanding until paid from Installment Payments. "Owner" or "Certificate Owner" or "Owner of Certificates" or any similar term, when used with respect to the Certificates, rp.eans any person who shallbe the registered owner of any Outstanding Certificate. "Participants" means those broker-dealers, banks andother financial institutions fromtime to time for which the Depository holds book-entry certificates as securities depository. B-15 "Payment Dates" means June 1 and December 1 in each year commencing June 1, 2004 and any date on which the unpaid Series 2003 Installment Payments are declared to be due and payable immediately and provided such declaration is not rescinded or annulled, all in accordance with the Installment Purchase Agreement. "Permitted Investments" means the following: 1. Direct obligations of the United States of America and securities fully and unconditionally guaranteed as to the timely payment of principal and interest by the United States of America ("U.S. Government Securities"). 2. Direct obligations* of the following federal agencies which are fully guaranteed by the full faith and credit of the United States of America: (a) Export-Import Bank of the United States - Direct obligations and fully guaranteed certificates of beneficial interest; (b) Federal Housing Administration - debentures; (c) General Services Administration - participation certificates; (d) ovemment National Mortgage Association - participation certificates; ( e) Small Business Administration - guaranteed participation certificates and guaranteed pool certificates; (f) U.S. Department of Housing and Urban Development - local authority bonds; (g) U.S. Maritime Administration - guaranteed Title XI financings; and (h) Washington MetropolitanArea Transit Authority - guaranteedtransit bonds. 3. Direct obligations* of the following federal agencies which are not fully guaranteed by the faith and credit of the United States of America: (a) Federal National Mortgage Association ("FNMAs") - senior debt obligations rated Aaa by Moody's Investors Service ("Moody's") and AAA by Standard & Poor's Ratings Services ("S&P"); (b) Federal Home Loan Mortgage Corporation ("FHLMCs") - participation certificates and senior debt obligations; (c) Federal Home Loan Banks - consolidated debt obligations; ( d) Student Loan Marketing Association - debt obligations; and ( e) Resolution Funding Corporation - debt obligations. 4. Direct, general obligations of any state of the United States of America or any subdivision or agency thereof whose uninsured andunguaranteed general obligation debt is rated, at the time of purchase, A2 or better by Moody's and A or better by S&P, or any obligation fully and unconditionally guaranteed by any state, subdivision or agency whose uninsured and unguaranteed general obligation debt is rated, at the time of purchase, A2 or betterby Moody's and A or betterby S&P. 5. Commercial paper (having original maturities of not more than 270 days) rated, at the time of purchase, P-1 by Moody's and A-1 or better by S&P. 6. Certificates of deposit, savings accounts or money market deposits in amounts that are continuously and fully insured by the Federal Deposit Insurance Corporation ("FDIC"), including the Bank Insurance Fund and the Savings Association Insurance Fund. 7. Certificates of deposit, deposit accounts, federal funds or bankers' acceptances (in each case having maturities of not more than 365 days following the date of purchase) of any domestic commercial bank or United States branch officeof a foreignbank, including the Trustee, its parent holding company, if any, and their affiliates, provided that such bank's short-term certificates of deposit are rated P-1 by Moody's and A-1 or better by S&P (not considering holding company ratings). • Thefo llowing are explicitly excludedfr om the securities enumerated in 2 and 3: all derivative obligations, including without limitation inverse floaters, residuals, interest-only, principal-only and (i) _ range notes; (ii) Obligations that have a possibility of returning a zero or negative yield ifheld to maturity; (iii) Obligations thatdo not have a fvc ed par value or those whose terms do not promise a fixeddo llar amount at maturity or call date; and (i v) Co llateralized Mortgage-Backed Obligations ("CMOs ''.). B-16 8. Investments in money-market funds rated AAAm or AAAm-G by S&P, including funds for which the Trustee, its parent holding company, if any, or any affiliates or subsidiaries of the Trustee or such holding company provide investment advisory or other managementservices. 9. State-sponsored investment pools rated AA- or better by S&P. 10. Investment agreements approved in writing by the Insurer. 11. The Local Agency Investment Fund of the State, created pursuant to Section 16429.1 of the California Government Code, to the extent the Trustee is authorized to register such investment in its name. 12. Maturity of lnvestments shall be governedby the following: (a) Investments of monies (other than monies in the Reserve Fund) shall be in securities and obligations maturing not later than the dates on which such monies will be needed to make payments; (b) Investments shall be considered as maturing on the first date on which they are redeemable without penalty at the option of the holder or the date on which the Trustee may require their repurchase pursuantto repurchase agreements; and ( c) Investments of monies in the Reserve Fund not payable upon demand shall be restricted to maturities of five years or less. "Prepayment Fund" means the fundby that name established in the Trust Agreement. "Prepayment Price" means, with respect to any Certificate (or portion thereof), the principal amount with respect to such Certificate ( or portion) plus the applicable premium, if any, payable upon prepayment thereof pursuant to the provisions of such Certificate and the Trust Agreement. "Principal Corporate Trust Office" means the principal corporate trust office of the Trustee in Los Angeles, California, except that with respect to presentation of Certificates for payment or forregist ration of transfer and exchange such term shall mean the office or agency of the Trustee at which, at any particular time, its corporategn trust agency business shall be conducted, or such other office as the Trustee may from time to time desi ate in writing to the City, theAuth ority and the Owners. "Principal Fund" means the fundby thatname established in the Trust Agreement. "Rebate Fund" means the fundby that name established in the Trust Agreement. "Record Date" means, with respect to any Payment Date for the Certificates, the fifteenth day of the calendarmonth prior to such Payment Date whether or not such day is a Business Day. "Reserve Fund" means the fundby that name established in the Trust Agreement. th "Securities Depositories" means: The Depository Trust Company, 55 Water Street, 50 Floor, New York, N.Y. 10041-0095, Attention: Call Notification Department; Fax: (212) 855-7232, and, in accordance with then current guidelines of the Securities and Exchange Commission, such other gnaddresses as such depositories may specify and/or such other securities depositories as the City may desi ate in a Written Request of the City delivered to the Trustee. gn "Special Counsel" means any attorney at law or firm of attorneys selected by the City, of nationally reco ized standing in matters pertaining to the federal tax exemption ofinterest on bonds issued by states and political subdivisions, and duly admitted to practice law before the highest court of any state of the United States of America. "State" means the State of California. gn "Statement of the Authority or City" means a statement si ed by or on behalf of (i) the Authority by its President or a Vice President or (ii) the City by the Mayor and by the City Clerk or by any two persons B-17 (whether or not members of the City Council) who are specifically authorized by resolution of the Cityto sign or execute such a document on its behalf. "Tax Certificate" means the Tax Certificate dated as of November _, 2003, concerning certain matters pertaining to the use and investment of proceeds of the Certificates executed by and delivered to the City on the date of execution and delivery of theCert ificates, including any and all exhibits attached thereto. "Trust Agreement" means the Trust Agreement, as originally executed or as it may fromtime to time be amended or supplemented as provided fortherein. "Trustee" means BNY Western Trust Company, a banking corporation duly organized and existing under and by virtue of the laws of the State of California. "Written Consent of the Authority or City," "Written Order of the Authority or City," "Written Request of the Authority or City," and "Written Requisition of the Authority or City'' mean, respectively, a written consent, order, request or requisition signed by or on behalf of (i) the Authority by its President or a Vice President or (ii) theCity by the Mayor or City Manager or its FinanceDirector or by theCity Clerk or by any two persons (whether or not members of the City Council) who are specificallyautho rized by resolution of the City to sign or execute such a document on its behalf. CERTIFICATES; TERMSAND PROVISIONS Transfer ofCertificat es. Any Certificate may, in accordance with its terms, be transferred, upon the books required to be kept pursuant to the provisions of the Trust Agreement, by the person in whose name it is registered, in person or by such person's duly authorized attorney, upon surrender of such Certificate for cancellation at thePrincipal Corporate Trust Office ofthe Trustee, accompanied by delivery of a duly executed written instrument of transfer in a form approved by the Trustee. Whenever any Certificate or Certificates shall be surrenderedfor transfer, the Trusteewill execute and deliver a new Certificate or Certificates of the same maturity, for a like aggregate principal amount and of authorized denomination or denominations. The Trustee may require the payment by any Certificate Owner requesting any such transfer of any tax or other governmental charge required to be paid with respect to such transfer. The cost of printing Bonds and any services rendered or expenses incurred by the Trustee in connection with any transfer shall be paid by the City. Following any transfer of Certificatesthe Trustee shall cancel and destroy the Certificates it has received. Exchange of Certificates. Certificates may be exchanged at the Principal Corporate Trust Office of the Trustee, fora like aggregate principal amount of Certificates of other authorized denominations of the same maturity. The Trustee may require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. Following any exchange of Certificates the Trustee shall cancel and destroythe Certificates it has received. The cost of printing Bonds and any services rendered or expenses incurred by the Trustee in connection with anyexchange shall be paid by the City. The Trustee will not be required to register the exchange, or transferpursuant to the Trust Agreement, of any Certificate (i) within 15 days preceding selection of Certificates for prepayment or (ii) selected for prepayment. Certificates Mutilated, Lost, Destroyed or Stolen. If any Certificate shall become mutilated, the Trustee will execute and deliver a new Certificate of like tenor, maturity and principal amountin exchange and substitution for the Certificate so mutilated, but only upon surrender to the Trustee of the Certificate so mutilated. B-18 Every mutilated Certificate so surrendered to the Trustee will be canceled by it and destroyed. If any Certificateshall be lost, destroyedor stolen, evidence of such loss, destruction or theftmay be submitted to the Trustee, and, if such evidence is satisfactory to the Trustee and indemnity satisfactory to the Trustee will be given indemnifying the Trustee, the Authority and the City, the Trustee, at the expense of the Certificate Owner, shall execute and deliver a new Certificate of like tenor and maturity, and numbered as the Trustee shall determine, in lieu of and in substitution for the Certificate so lost, destroyed or stolen. The Trustee may require payment of a sum not exceeding the actual cost of preparing each new Certificate executed under this paragraph and of the expenses which may be incurred by the Trustee under this paragraph. Any Certificate executed under the provisions of this paragraph in lieu of any Certificate alleged to be lost, destroyed or stolen shall be equally and proportionately entitled to the benefits of the Trust Agreement with all other Certificates secured by the Trust Agreement. The Trustee shall not be required to treat both the original Certificate and any replacement Certificate as being Outstanding for the purpose of determining the principal amount of Certificates which may be executed under the Trust Agreementgr or for the purpose of determining any percentage of Certificates Outstanding under the Trust A eement, but both the original and replacement Certificate shall be treated as one and the same. Notwithstanding any other provision of this paragraph, in lieu of delivering a new Certificate for a Certificate which has been mutilated, lost, destroyed or stolen and which has matured or has been selected for prepayment, the Trustee may make payment of such Certificate upon receipt of indemnity satisfactoryto the Trustee. DELIVERY OF CERTIFICATES; DELIVERY COST FUND Validityof Certificates. The validity of the execution and delivery of the Certificates is not dependent on and shall not be affectedin any way by any proceedings taken by the City, the Authority or the Trustee with respect to or in connection with the Installment Purchase Agreement. The recital contained in the Certificates that all acts, conditions and things required by the Constitution and statutes of the State of California and the Trust Agreement to exist, to have happened and to have been performed precedent to and in the delivery thereof do exist, have happened and have been performed in due time, form and manner as required by law shall be conclusive evidence of their validity and of compliance withthe provisions of law in their delivery. Delivery Cost Fund. There is established with the Trustee the Delivery Cost Fund which the Trustee will establish and maintain and hold in trust separate and apartfrom other fundsheld by it. The moneys in the Delivery Cost Fund will be used and withdrawn by the Trustee to pay Delivery Costs upon submission of Written Requisitions of theCity stating theperson to whom payment is to be made, the amount to be paid, the purpose forwhich the obligation was incurred, that such payment is a proper charge against said fund and that payment for such charge has not previously been made. Each such Written Requisition will be sufficient evidence to the Trustee of the facts stated therein and the Trustee will have no duty to confirmthe accuracy of such facts. On April 1, 2004, or upon the earlier Written Request of the City, all amounts remaining in the Delivery Cost Fund shall be transferredby the Trustee to the City for deposit in the Acquisition Fund. PREPAYMENT OF CERTIFICATES Selection of Certificates for Prepayment. Whenever less than all of the Certificates are called for prepayment, the Trustee will select the Certificates or portions thereof to be prepaid from the Outstanding Certificates in accordance with the Trust Agreement. The Trustee shall promptly notify the City in writing of thenumbers of the Certificates or portions thereof so selected forprepayment . Notice of Prepayment. Notice of prepayment of Certificates shall be given by the Trustee on behalf of and at the expense of the City. With regard to prepayment pursuant to the Trust Agreement in the event that funds required to pay the prepayment price are not on deposit under the Trust Agreement at the time the notice of prepayment is sent, the notice will include a statement to the effect that the prepayment is conditioned upon the receipt of the appropriate funds required to pay the prepayment price by the Trustee on or prior to the prepayment date. B-19 Partial Prepayment of Certificate. Upon surrender of any Certificate prepaid in part only, the Trustee will execute and deliver to the Owner thereof, at the expense of the City, a new Certificate or Certificates of authorized denominations equal in aggregate principal amount to the unprepaid portion of the Certificate surrenderedand of the same interest rate and maturity. Effect of Prepayment. When notice of prepayment has been duly given as aforesaid, and moneys for payment of the Prepayment Price of, together with interest accrued to the prepayment date with respect to, the Certificates (or portions thereof)so called forprepayment are held by the Trustee, the Certificates ( or portions thereof) so called for prepayment will, on the prepayment date designated in such notice, become due and payable at the Prepayment Price specified in such notice and interest accrued thereon to the prepayment date; and from and after theprepayment date interest represented by the Certificates so called forprepayment will cease to accrue, said Certificates ( or portions thereof) shall cease to be entitled to any benefitor security under the Trust Agreement, and the Owners of said Certificates will have no rights in respect thereof except to receive payment of said Prepayment Price and accrued interest. All Certificates prepaid pursuant to the Trust Agreement will be canceledup on surrender thereof and destroyed by the Trustee. INSTALLMENTPAYME NTS Pledge and Deposit of Installment Payments. All Installment Payments to which the Authoritymay at any time be entitled (including income or profit from investments as provided in the Trust Agreement) shall be paid directly to the Trustee pursuant to the terms of the Assignment Agreement, and if received by the Authority at any time shall be deposited by the Authority with the Trustee within one Business Day afterthe receipt thereof, and the Trustee shall deposit all InstallmentPayments as and when received in the Certificate Payment Fund. All moneys at any time deposited in theCertificate Payment Fund shall be held by the Trustee in trust for thebenefit of the Owners from time to time of the Certificates, but shall nevertheless be disbursed, allocated and applied solely forthe uses and purposesin the Trust Agreement set forth. Certificate Payment Fund and Reserve Fund. There is established with the Trustee each of the Certificate Payment Fund and theReserve Fund each of which the Trustee covenants to maintain and hold in trust separate and apart from other funds held by it so long as any Installment Payments remain unpaid. All moneys on deposit in the Certificate Payment Fund (including income or profit from investments) will be retained thereinexcept as expressly provided in the Trust Agreement. The Trustee will transferfrom the Certificate Payment Fund the following amounts at the times and in the manner provided in the Trust Agreement, and will deposit such amounts in one or more of the following respective funds, each of which the Trustee will establish and maintain and hold in trust separate and apart from other funds held by it, and each of which will be disbursed and applied only as authorized in the Trust Agreement. Such amounts will be so transferred to and deposited in the following respective funds in the followingorder of priority, the requirements of each such fundat the time of deposit to be satisfied before any transferis made to any fund subsequent in priority: (a) Interest Fund. The Trustee, on the last Business Day before each Interest Payment Date (commencing on thelast Business Day of May, 2004), will deposit in theInterest Fund an amount representing the portion of the Installment Payments designated as interest coming due on the next succeeding June 1 or December 1, as the case may be. No deposit need be made into the Interest Fund so long as there shall be in such fund moneys sufficient to paythe interest portion of all Certificates then Outstanding on the next June 1 or December 1, as the case may be. B-20 Except as provided in the Trust Agreement, moneys in the Interest Fund will be used and withdrawn by the Trustee solely for the purpose of paying the interest with respect to the Certificates when due and payable (including accrued interest on any Certificates prepaid prior to maturity pursuant to the Trust Agreement). (b) Principal Fund. The Trustee, on the last Business Day before eachDecember I (commencing on the last Business Day of November, 2003), shall deposit in the Principal Fund an amount equal to the principal coming due with respect to the Certificates on the next succeeding December 1. No deposit need be made into the Principal Fund so long as there shall be in such fund moneys sufficient to pay the portion of all Certificates then Outstanding designated as principal and coming due on the next succeeding December 1. Except as provided in the Trust Agreement, moneys in thePrincipal Fund shall be used and withdrawn by the Trustee solely for the purpose ofpaying the principal with respect to the Certificates when due and payable. ( c) Prepayment Fund. Moneys to be used forprepayment pursuant to the Trust Agreement and paid by the Citypursuant to certain provisions of the Installment Purchase Agreement will be transferred by the Trustee from the Certificate Payment Fund and deposited in the Prepayment Fund on the prepayment date specified in the Written Request of the City filed with the Trustee pursuant to the Installment Purchase Agreement. Said moneys will be set aside in the Prepayment Fund solely for the purpose of prepaying the Certificates in advance of their respective stated maturities and will be applied on or afterthe date specified for prepayment pursuant to the Trust Agreement to the payment of the Prepayment Price with respect to the Certificates to be prepaid upon presentation and surrender of such Certificates. Investment of Moneys in Special Funds. Any moneys in the Delivery Cost Fund, the Certificate Payment Fund, the Interest Fund, the Principal Fund, the Reserve Fund and the Prepayment Fund will be invested upon the Written Request of the City, by the Trustee, in Permitted Investments which will mature on or before the dates when such moneys are scheduled to be needed for payment from such fund. Securities acquired as an investment of moneys in a fund shall be credited to such fund. In the absence of written investment directionfrom the City, the Trustee will invest moneys held by it solely in Permitted Investments specifiedin clause 8 of the definition thereof. Except as otherwise expressly provided in the Trust Agreement, investments will be valued by the Trustee as frequently as reasonably deemed necessary by the Insurer, but not less often than annually, at the market value thereof, exclusive of accrued interest. Deficiencies in the amount on deposit in any fund or account resulting from a decline in market value will be restored no later than the succeeding annual valuation date. Any interest, profit or other income on such investments will be deposited when received by the Trustee in the Reserve Fund to the extent the amount available and contained therein is less than the Series 2003 Reserve Fund Requirement and thereafter in the Certificate Payment Fund established under the Trust Agreement. The Authority (and the City by its execution of the Installment Purchase Agreement) acknowledges that to the extent regulations of the Comptroller of the Currencyor other applicable regulatory entity grant the Authority or the City the right to receive brokerage confirmations of security transactions as they occur, the City or Authority specificallywaive receipt of such confirmations to the extent permitted by law. The Trustee will furnish the City and Authority periodic cash transaction statements which include detail for all investment transactionsmade by the Trustee under the Trust Agreement. The Trustee may sell or present for prepayment any obligations so purchased which directions shall comply with the provisions under the paragraph "Tax Covenants" (under "Covenants") whenever it shall be B-2 1 necessary in order to provide moneys to meet any payment, and the Trustee shall not be liable or responsible for any loss resulting from such investment. The Trustee may act as principal or agent in the acquisition or disposition of any investment. The Trustee may commingle any of the funds or accounts established pursuant to the Trust Agreement into a separate fund or funds for investment purposes only; provided, however, that all funds or accounts held by the Trustee under the Trust Agreement shall be accounted for separately notwithstanding such commingling. Notwithstanding anything contained in the Trust Agreement, the average weighted term to maturity of Permitted Investments in the Reserve Fund shall not exceed fiveyears . Reserve Fund. The Trustee will deposit in the Reserve Fund the amounts required to be deposited therein pursuant to the Installment Purchase Agreement and the Trust Agreement and apply moneys in the Reserve Fund in accordance with the Trust Agreement. If one Business Day prior to any Payment Date the moneys in the Certificate Payment Fund are insufficient to make the payments required by the Trust Agreement with respect to Certificates on such Payment Date, the Trustee will transferfrom the Reserve Fund to the Certificate Payment Fundthe amount of such insufficiency. In the event that the Trustee has transferred moneys fromthe Reserve Fund to the Certificate Payment Fund in accordancewith the Trust Agreement, upon receipt of the moneys from the City to increase the balance in the Reserve Fund to the Series 2003 Reserve Fund Requirement, the Trustee will deposit such moneys in the Reserve Fund. If the amount available and contained in the Reserve Fund exceeds an amount equal to the Series 2003 Reserve Fund Requirement and if the City is not then in defaultunder the Installment Purchase Agreement, the Trustee will semiannually on or before June 1 and December 1 withdraw the amount of such excess from the Reserve Fund and will deposit such amount in the Certificate Payment Fund, and for this determination the Trustee shall make a valuation of the Reserve Fund as often as it may deem appropriate, and in any event on or before June 1 and December 1 in each year. Inaddition, the Trustee will, on the date all or any portion of the Certificates are discharged in accordance with the Trust Agreement, value the Reserve Fund in accordance with this paragraph and withdraw the excess, if any, on deposit in theReserve Fund and transfer such amount to or in accordance with the written direction of the City. Except for such withdrawals, all moneys in the Reserve Fund shall be used and withdrawn by the Trustee solely for the purpose of paying principal and interest with respectto theCerti ficates in the event that no other moneys of the City are available therefor. The Trustee will notify the Insurer of any deficiency in the Reserve Fund when such valuations are made by the Trustee. For the purpose ofdeter mining the amount in the Reserve Fund, all Permitted Investments credited to the Reserve Fund will be valued at the lower of cost (inclusive of all interest accrued but not paid) or market value. In making any valuations of securities hereunder, the Trustee will utilize such securities pricing services as may be available to it, including thosewithin its regular accounting system. The City may satisfythe requirement (the "Reserve Fund Requirement") to deposit a specified amount in the Reserve Fund by the deposit of a surety bond, insurance policy or letter of credit as set forth below. The followingrequirements will be incorporated in the authorizing document forthe Certificates (the "Authorizing Document") in the event the Reserve Fund Requirement is fulfilled by a deposit of a credit instrument (other than a credit instrument issued by the Insurer) in lieu of cash: 1. A surety bond or insurance policy issued to the entity serving as trustee or paying agent (the "Fiduciary"), as agent of the bondholders, by a company licensed to issue an insurance policy guaranteeing the timely payment of debt service in respect to the Certificates (a "municipal bond insurer") may be deposited in the Reserve Fund to meet the Reserve FundRequirement if the claims paying ability of the issuer thereof shall be rated "AAA" or "Aaa" by S&P or Moody's, respectively. B-22 2. A surety bond or insurance policy issued to the Fiduciary, as agent of the Certificateholders, by an entity other than a municipal bond insurer may be deposited in the Reserve Fund to meet the Reserve Fund Requirement if the form and substance of such instrument and the issuer thereof will be approved by the Insurer. 3. An unconditional irrevocable letter of credit issued to the Fiduciary, as agent ofthe bondholders, by a bank may be deposited in the Reserve Fund to meet the Reserve Fund Requirement if the issuer thereof is rated at least "AA" by S&P. The letter of credit shall be payable in one or more draws upon presentation by the beneficiary of a sight draft accompanied by its certificate that it then holds insufficient funds to make a required payment of principal or interest on the bonds. The draws will be payable within two days of presentation of the sight draft. The letter of credit will be for a term of not less than three years. The issuer of the letter of credit will be required to notify the City and the Fiduciary, not later than 30 months prior to the stated expiration date of the letter of credit, as to whether such expiration date will be extended, and if so, shall indicate the new expiration date. 4. If such notice indicates that the expiration date will not be extended, the City shall deposit in the Reserve Fund an amount sufficient to cause the cash or permitted investments on deposit in the Reserve Fund together with any other qualifying credit instruments, to equal the Reserve Fund Requirement on all outstanding Certificates, such deposit to be paid in equal installments on at least a semi-annual basis over the remaining term of the letter of credit, unless the Reserve Fund credit instrument is replaced by a Reserve Fund credit instrument meeting the requirements in any of 1-3 above. The letter of credit will permit a drawin fullnot less than two weeks prior to theexpiration or termination of such letter of credit if the letter of credit has not been replaced or renewed. The Authorizing Document will, in turn, direct the Fiduciary to draw upon the letter of credit prior to its expiration or termination unless an acceptable replacement is in place or the Reserve Fundis fullyfunded in its required amount. 5. The use of any Reserve Fund credit instrument pursuant to this Paragraph will be subject to receipt of an opinion of counsel acceptable to the Insurer and in form and substance satisfactory to the Insurer as to the due authorization, execution, delivery and enforceability of such instrument in accordance with its terms, subject to applicable laws affecting creditors' rights generally, and, in the event the issuer of such credit instrumentis not a domestic entity, an opinion of foreign counsel in form and substance satisfactoryto the Insurer. In addition, the use of an irrevocable letter of credit will be subject to receipt of an opinion of counsel acceptable to the Insurer and in form and substance satisfactory to the Insurer to the effect that payments under such letter of credit would not constitute avoidable preferences under Section 547 of the U.S. Bankruptcy Code or similar state laws with avoidable preference provisions in the event of the filing of a petition forrelief under the U.S. Bankruptcy Code or similar state laws by or against the issuer of the bonds (or any other account party under the letter of credit). 6. The obligation to reimburse the issuer of a Reserve Fund credit instrument for any fees, expenses, claims or draws upon such Reserve Fund credit instrument will be subordinate to the payment of debt service on the bonds. The right of the issuer of a Reserve Fund credit instrument to payment or reimbursement of its fe es and expenses shall be subordinated to cash replenishment of the Reserve Fund, and, subject to the second succeeding sentence, its right to reimbursement for claims or draws shall be on a parity with the cash replenishment of the Reserve Fund. The Reserve Fund credit instrument will provide for a revolving feature under which the amountava ilable thereunder will be reinstated to the extent of any reimbursement of draws or claims paid. If the revolving feature is suspended or terminated for any reason, the right of the issuer of the Reserve Fund credit instrument to reimbursement will be further subordinated to cash replenishment of the Reserve Fund to an amount equal to the difference between the full original amount available under the Reserve Fund credit instrument and the amount then available for further draws or claims. If (a) the issuer of a Reserve Fund credit instrument becomes insolvent or (b) the issuer of a Reserve Fund credit instrument defaults in its payment obligations thereunder or ( c) the claims-paying ability of the issuer of the insurance policy or surety bond falls below a S&P "AAA" or a Moody's "Aaa" or (d) the rating of the issuer of the letter of credit falls below a S&P "AA", the obligation to reimburse the B-23 issuer of the Reserve Fund credit instrument will be subordinate to the cash replenishment of the Reserve Fund. 7. If (a) the revolving reinstatement feature described in the preceding paragraph is suspended or terminated or (b) the rating of the claims paying ability of the issuer of the surety bond or insurance policy fallsbelow a S&P "AAA" or a Moody's "Aaa" or (c) the rating of the issuer of the letter of credit falls below a S&P "AA", the City will either (i) deposit into the Reserve Fund an amount sufficient to cause the cash or permitted investments on deposit in the Reserve Fund to equal the Reserve Fund Requirement in respect to allep outstanding Certificates, such amount to be paid over the ensuing five years in equal installments d osited at least semi-annually or (ii) replace such instrument with a surety bond, insurance policy or letter of credit meeting the requirements in any of 1-3 above within six months of such occurrence. Inthe event (a) the rating of the claims-paying ability of the issuer of the surety bond or insurance policy falls below "A" or (b) the rating of the issuer of the letter of credit falls below "A" or (c) the issuer of the Reserve Fund credit instrument defaults in its payment obligationsep or (d) the issuer of the Reserve Fund credit instrument becomes insolvent, the City will either (i) d osit into the Reserve Fund an amount sufficient to cause the cash or permitted investments on deposit in the Reserve Fund to equal to Reserve Fund Requirement on all outstanding Certificates, such amount to be paid over the ensuing year in equal installments on at least a monthly basis or (ii) replace such instrument with a surety bond, insurance policy or letter of credit meeting the requirements in any of 1-3 above within six months of such occurrence. 8. Where applicable, the amount available for draws or claims under the Reserve Fund credit instrument may be reduced by the amount of cash or permitted investments deposited in the Reserve Fund pursuant to clause (i) of the preceding subparagraph 6. 9. If the City chooses the above described alternatives to a cash-fundedReserve Fund, any amounts owed by the City to the issuer of such credit instrument as a result of a draw thereon or a claim thereunder, as appropriate, will be included in anycalculation e. ofg., debt service requirements required to be made pursuant to the Authorizing Document for anypur pose, rate covenantor additional bonds test. 10. The Authorizing Document will require the Fiduciary to ascertain the necessity for a claim or draw upon the Reserve Fund credit instrument and to provide notice to the issuer of the Reserve Fund credit instrument in accordance with its terms not later than three days (or such longer period as may be necessary depending on thepermitted time period for honoring a draw under theReserve Fund credit instrument) prior to each interest payment date. 11. Cash on deposit in the Reserve Fund will be used (or investments purchased with such cash shall be liquidated and the proceeds applied as required) prior to any drawing on any Reserveep Fund credit instrument. If and to the extent that more than one Reserve Fund credit instrument is d osited in the Reserve Fund, drawings thereunder and repayments of costs associated therewith shall be made on a pro rata basis, calculated by reference to the maximum amounts available thereunder. ep Pledge of Moneys in Funds. All amounts on d osit in the Acquisition Fund, the Delivery Cost Fund, the Certificate Payment Fund, the Interest Fund, the Principal Fund, the Prepayment Fund and the Reserve Fund are irrevocably pledged to the Owners of the Certificates as provided in the Trust Agreement. Such pledge shall constitute a first and exclusiveep lien on the Delivery Cost Fund, the Certificate Payment Fund, the Interest Fund, the Principal Fund, the Pr ayment Fund and the Reserve Fund for the benefit of the Owners of the Certificates in accordance with the terms of the Trust Agreement and of the Installment Purchase Agreement. Rebate Fund. (a) The Trustee will establish a special fundto be known as theRebate Fund. All amounts at any time on deposit in the Rebate Fund will be held by the Trustee in trust, to the extent required to satisfy the B-24 requirement to make rebate payments to the United States (the "Rebate Requirement'') pursuant to Section 148 of the Code and the Proposed and Temporary Treasury Regulations promulgated thereunder. Such amounts shall be free and clear of any lien under the Agreement and shall be governed by the Agreement and by the Tax Certificate. The Trustee will be deemed conclusively to have complied with the Rebate Requirement if it follows the directions of the City, and shall have no independent responsibility to, or liability resulting from its failure to, enforce complianceby the City with the Rebate Requirement. (b) Within 45 days of theend of each Certificate Year, (1) the City shall calculate or cause to be calculated with respect to the Certificates the amount that would be considered the Rebate Amount within the meaning of Section 1.148-3 of the Treasury Regulations (the "Rebate Amount"), using as the "computation date" forthis purpose the end of such Certificate Year, and (2) upon the City's written direction, the Trustee shall deposit to the Rebate Fund from payments made by the City from the Revenue Fund, which the City agrees to make, if and to theextent required, amounts sufficientto cause the balance in the Rebate Fund to be equal to the Rebate Amount so calculated. The Trustee will not be required to deposit any amount to the Rebate Fund in accordance with the preceding sentence if the amount on deposit in the Rebate Fund prior to the deposit required to be made under this subparagraph (b) exceeds the Rebate Amount calculated in accordance with the preceding sentence. Such excess may be withdrawn from the Rebate Fund to the extent permitted under subparagraph (g) below. The City will not be required to calculate the Rebate Amount within the meaning of Section 1.148-3 of the Treasury Regulations, and the Trustee shall not be required to deposit anyamount to the Rebate Fundin accordance with this subparagraph (b) with respect to all or a portion of the proceeds of the Certificates (1) to the extent such proceeds satisfy one of the exceptions to the Rebate Requirement described, if applicable, in the Tax Certificate (e.g., the temporary investments exception of Section 148(f)(4)(B) and the construction expenditure exception of Section 148(f)(4)(C) of the Code or Section l.148-7(d) of the Treasury Regulations), (2) to the extent such proceeds are subject to an election by the City under Section 148(f)(4) (C) (vii) of the Code to pay a 1-1/2% penalty in lieu of arbitrage rebate in the event any of the percentage expenditure requirements of Section 148(f) (4) (C) are not satisfied, or (3) to the extent such proceeds qualify for the exception to arbitrage under Section 148(f) (4) (A) (ii) of the Code for amounts in a "bona fide debt service fund." In such event, and with respect to such amounts, the City will provide written direction to the Trustee that the Trustee will not be required to deposit any amount to the Rebate Fund in accordance with this subparagraph (b). (c) Any funds remaining in the Rebate Fund after prepayment of all the Certificates and any amounts described in paragraph (2) of subparagraph (d) below, including accrued interest and payment of any applicable fees to the Trustee, will be withdrawn by the Trustee and remitted to the City. (d) Upon the City's written direction, but subject to the exceptions contained in subparagraph (b) above to the requirement to calculate the Rebate Amount and make deposits to the Rebate Fund, the Trustee will pay to the United States, fromamounts on deposit in the Rebate Fund: (i) not later than 60 days after the end of (i) the fifth Certificate Year, and (ii) each fifth Certificate Year thereafter, an amount that, together with all previous rebate payments, is equal to at least 90% of the Rebate Amount calculated as of the end of such Certificate Year in accordance with Section 1.148-3 of the Treasury Regulations; and (ii) not later than 60 days afterthe payment of all Certificates, an amount equal to 100% of the Rebate Amount calculated as of the date of such payment ( and any income attributable to the rebatable arbitrage determined to be due and payable) in accordancewith Section 1.148-3 of the Treasury Regulations. ( e) In the event that,prior to the time of any payment required to be made fromthe Rebate Fund, the amount in the Rebate Fund is not sufficientto make such payment when such payment is due, the City will calculate the amount of such deficiency and direct the Trustee to deposit an amount received from the City equal to such deficiency intothe Rebate Fundprior to the time such payment is due. B-25 (f) Each payment required to be made pursuant to subparagraph (d) above will be made to the Internal Revenue Service Center, Ogden, UT 84201 on or beforethe date on which such payment is due, and shall be accompanied by Internal Revenue Service Form 803 8-T which will be prepared by or on behalf of the City. (g) In the event that immediately following the calculation required by subparagraph (b) above, but prior to any deposit made under said subparagraph, the amount on deposit in the Rebate Fund exceeds the "rebate amount" calculated in accordance with said subsection, upon written instructions from the City, the Trustee will withdraw the excess from the Rebate Fund and transfer such excess to the City for credit of such excess to the Revenue Fund. (h) The City will retain records of all determinations made under the Trust Agreement until six years after the retirement of the last obligation of theCertificate s. (i) Notwithstanding anything in the Trust Agreement to the contrary, the Rebate Requirement of the City will survive the defeasance of the Certificates. Payments Under the Insurance Policy. If, on the third Business Day prior to the related scheduled interest payment date or principal payment date or the date to which Certificate maturity has been accelerated ("Payment Date") there is not on deposit with the Trustee, after making all transfers and deposits required under the Trust Agreement, moneys sufficient to pay the principal of and interest with respect to the Certificates due on such Payment Date, the Trustee will give notice to the Insurer and to its designated agent (if any) (the "Insurer's Fiscal Agent") by telephone or telecopy of the amount of such deficiencyby 2:00 p.m., New York City time, on such Business Day. If, on the second Business Day prior to therelated Payment Date, there continues to be a deficiency in the amount available to pay the principal of and interest with respect to the Certificates due on such Payment Date, the Trustee will make a claim under the Insurance Policy and give notice to the Insurer and the Insurer's Fiscal Agent (if any) by telephone of theamount of such deficiency, and the allocation of such deficiency between the amount required to pay interest with respect to the Certificates and the amount required to pay principal of the Certificates, confirmed in writing to the Insurer and the Insurer's Fiscal Agent by 2:00 p.m., New York City time, on such second Business Day by filling in the form of Notice of Claim and Certificate delivered with theInsurance Policy. In the event the claim to be made is for a mandatory sinking fund prepayment, upon receipt of the moneys due, the Trustee will authenticate and deliver to affected Certificateholders who surrender their Certificates a newCertificate or Certificatesin an aggregate principal amount equal to the unprepaid portion of the Certificate surrendered. The Trustee will designate any portion of payment of principal on Certificates paid by the Insurer, whetherby virtue of mandatory sinking fundprepayment, maturity or other advancement of maturity, on its books as a reduction in the principal amount of Certificates registered to the then current Certificateholder, whether DTC or its nominee or otherwise, and will issue a replacement Certificate to the Insurer, registered in the name of Financial Guaranty Insurance Company, in a principal amount equal to the amountof principal so paid (without regard to authorized denominations); provided that the Trustee's failure to so designate any payment or issue any replacement Certificate shall have no effect on the amount of principal or interest payable by the City on any Certificate or the subrogation rights of the Insurer. The Trustee will keep a complete and accurate record of all funds deposited by the Insurer into the Policy Payments Account (as defined below) and the allocation of such funds to payment of interest on and principal paid in respect of any Certificate. The Insurer will have the right to inspect such records at reasonable times upon reasonable notice to the Trustee. Upon payment of a claim under the Insurance Policy the Trustee will establish a separate special purpose trust account for the benefit of Certificateholders referred to as the "Policy Payments Account" and over which the Trustee will have exclusive control and sole right of withdrawal. The Trustee will receive any amount paid under the Insurance Policy in trust on behalf of Certificateholders and will deposit any such B-26 amount in the Policy Payments Account and distribute such amount onlyfor pur poses of making the payments for which a claim was made. Such amounts will be disbursed by the Trustee to Certificateholders in the same manner as principal and interest payments are to be made with respect to the Certificatesunder the sections of the Trust Agreement regarding payment of Certificates. It shall not be necessary for such payments to be made by checks or wire transfers separate from the check or wire transfer used to pay debt service with other funds available to make such payments. Funds held in the Policy Payments Account will not be invested by the Trustee and may not be applied to satisfyany costs, expenses or liabilities of the Trustee. Any funds remaining in the Policy Payments Account following a Certificate payment date will promptly be remittedto the Insurer. The Insurer will, to the extent it makes any payment of principal of or interest with respect to the Certificates, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Insurance Policy. The City will pay or reimburse the Insurer any and all charge, fees, costs and expenses which the Insurer may reasonably pay or incur, on or after an Event of Default, in connection with (i) the administration, enforcement, defense or preservation of any rights or security in the Trust Agreement or the Installment Purchase Agreement (ii) the pursuit of any remedies under the Trust Agreement or the Installment Purchase Agreement or otherwise afforded by law or equity, (iii) any amendment, waiver or other action with respect to, or related to, whether or not executed or completed, (iv) the violationby the City of any law, rule or regulation, or any judgment, order or decree applicable to it or (v) any litigation or other dispute in connection with the Trust Agreement or the Installment Purchase Agreement or the transactions contemplated thereby, other than amounts resulting fromthe failure of the Insurer to honor its obligations under the Insurance Policy. COVENANTS Authority and City to Perform Under Installment Purchase Agreement. The Authority and City covenant and agree withthe Owners of the Certificates to perform all obligations and duties imposed on them under the Installment Purchase Agreement and, together with the Trustee, to enforce such Installment Purchase Agreement against the otherparty thereto in accordance with its terms. The Authority and the City will in all respects promptly and faithfully keep, perform and comply with all the terms, provisions, covenants, conditions and agreements of the Installment Purchase Agreement to be kept, performed and complied with by it. The Authority and the City agree not to do or permit anything to be done, or omit or refrain from doing anything, in any case where any such act done or permitted to be done, or any such omission of or refraining from action, would or might be a ground for cancellation or termination of the Installment Purchase Agreement. Budgets. On or prior to the fifteenth day of each Fiscal Year,the City will certifyto the Trustee that the amounts budgeted for payment of Installment Payments are fully adequate for the payment of all Installment Payments due under the Installment Purchase Agreement for such Fiscal Year. If the amounts so budgeted are not adequate for the payment of Installment Payments due under the Installment Purchase Agreement, the City will take such action as may be necessary to cause such annual budget to be amended, corrected or augmented so as to include therein the amounts required to be raised by the City in the then ensuing Fiscal Year forthe payment of Installment Payments due under the Installment Purchase Agreement and will notifythe Trustee of theproceed ings then takenor proposed to be takenby the City. Tax Covenants. Notwithstanding any other provision of the Trust Agreement, absent an opinion of Special Counsel that the exclusion from gross income of interest as evidenced by the Certificates will not be adversely affected for federal income tax purposes, the Authority and the City covenant to comply with all B-27 applicable requirements of theCode necessary to preserve such exclusion from gross income and specifically covenants, without limiting the generality of the foregoing, as follows: Private Activity. The Authority and the City will take no action or refrain from taking any action or make any use of the proceeds of the Certificates or of any other moneys or property which would cause the Certificatesto be "private activity bonds" within the meaning of Section 141 of the Code; Arbitrage. The Authorityand the City will make no use of the proceeds of the Certificates or of any other amounts or property, regardless of the source, or take any action or refrain from taking any action which will cause the Certificatesto be "arbitrage bonds" within the meaning of Section 148 of the Code; Federal Guaranty. The Authority and the City will make no use of the proceeds of the Certificates or take or omit to take any action that would cause the Certificates to be "federally guaranteed" within the meaning of Section 149(b) of the Code; Information Reporting. The Authority and the City will take or cause to be takenall necessaryaction to comply with the informational reporting requirement of Section 149( e) of the Code; Hedge Bonds. The Authority and the City will makeno use of the proceeds of the Certificates or any other amounts or property, regardless of the source, or take any action or refrain from taking any action that would cause eitherthe Certificates to be considered "hedge bonds" within the meaning of Section 149(g) of the Code unless the Authority and the City take all necessary action to assure compliance with the requirements of Section 149(g) of the Code to maintain the exclusion fromgross income of interest on the Certificatesfor federalincome tax purposes; and Miscellaneous. The Authority and the City will take no action or refrain from taking any action inconsistent with its expectations stated in that certain Tax Certificate executed by the Authority and the City in connection with each issuance of Certificates and will comply with the covenants and requirements stated therein and incorporated by reference in the Trust Agreement. Accounting Records and Reports. The Trustee will keep or cause to be kept proper books of record and account in which complete and correct entries shall be made of all transactions made by it relating to the receipts, disbursements, allocation and application of the Installment Payments, and such books will be available upon reasonable prior notice forinspection by the City andby any Owner of Certificates, or his agent or representative, at reasonable hours and under reasonable conditions. Each month, so long as the Certificates are Outstanding, the Trustee shall furnish to the City a statement covering receipts, disbursements, allocation and application of amountson deposit in the funds and accounts created under the Trust Agreement held by it. Compliance with Trust Agreement. The Trustee will not execute, or permit to be executed, any Certificates in any manner other than in accordance with the provisions of the Trust Agreement, and the City will not suffer or permit any default by it to occur under the Agreement, but will faithfully observe and perform all the covenants, conditions and requirements of the Trust Agreement. Observance of Laws and Regulations. To the extent necessary to assure their performance under the Trust Agreement, the Authority and the City will well and truly keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on them by contract, or prescribed by any law of the United States of America, or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enj oyment of any and every right, privilege or franchise now owned or hereafter acquired by the Authority or the City, respectively, including its right to exist and carry on its business, to the end that such contracts, rights and franchises shall be maintained and preserved, and will not become abandoned, forfeited or in any manner impaired. B-28 Compliance with Contracts. The City shall comply with the terms, covenants and provisions, express or implied, of all contracts forthe use of the 1993 Project by the City, and all other contracts and agreements affecting or involving the 1993 Project to the extent that the City is a party thereto and shall not enter into any contracts or take any action impairing or prejudicing the rights of the Insurer under the Trust Agreement or the security forthe Installment Payments withoutthe written consent of the Insurer. Prosecution and Defense of Suits. The City will promptly, upon request of the Trustee or any Certificate Owner, from time to time take such action as may be necessary or proper to remedy or cure any defect in or cloud upon the title to the Sewer System or any part thereof, whether now existing or hereafter developing, shall prosecute all such suits, actions and other proceedings as may be appropriate for such purpose and will indemnify and save the Trustee (including all of its employees, officers and directors), the Authority and every Certificate Owner harmless from all loss, cost, damage and expense, including attorneys' fees, whichthey or any of them may incur by reason of any such defect, cloud, suit, action or proceeding. The City will defendagainst every suit, action or proceeding at any timebrought against the Trustee (including all of its employees, officers and directors), the Authorityor any Certificate Owner upon any claim arising out of the receipt, application or disbursement of any of the Installment Payments or involving the rights of the Trustee, the Authority or any Certificate Owner under the Trust Agreement; provided that the Trustee, the Authority or any Certificate Owner at such party' s election may appear in and defend any such suit, action or proceeding. The City will indemnify and hold harmless the Trustee, the Authority and the Certificate Owners against any and all liability claimed or asserted by any person, arising out of such receipt, application or disbursement, and shall indemnify and hold harmless the Certificate Owners against any attorneys' feesor other expenses which any of them may incur in connection with any litigation(including pre litigation activities) to which any of them may become a party by reason of ownership of Certificates. The City will promptly reimburse the Authority or any Certificate Owner in the full amount of any attorneys' fees or other expenses which the Authority or such Owner may incur in litigation or otherwise in order to enforce such partying rights under the Trust Agreement or the Certificates, provided that such litigation shall be concluded favorablyto such party'scontentions therein. Recordation and Filing. The Trustee, upon written direction of the City, will record, register, file, renew, refile and re-record all such documents, including financing statements, as may be required by law in order to maintain a security interest in the Trust Agreement and the Assignment Agreement, all in such manner, at such times and in such places as may be required by, and to the extent permitted by, law in order fully to preserve, protect and perfect the security of the Certificate Owners and the rights and security interests of the Trustee. The Trustee, upon written direction of the City, will (subj ect to certain provisions of the Agreement) do whatever else may be necessary or be reasonably required in order to perfect and continue the lien of the Trust Agreement and the Assignment Agreement. Notwithstanding anything to the contrary above, the Trustee will have no duty or liability whatsoever to monitor or notify any partywith respect to the timeliness, sufficiency or validity of any such recording, re recording, filing, filing of continuation statements and the like with respect to the Trust Agreement; it being expressly understood and agreed that the Trustee's duties described above shall be exclusively limited to following the express written filing or recording instructions of the City, from time to time with respect to the above described actions so long as the City will supply said recording or filinginstrument s. Eminent Domain. If all or any part of the 1993 Project shall be taken by eminent domain proceedings (or sold to a government threatening to exercise the power of eminent domain), the Net Proceeds therefrom will be applied in the manner specifiedin the Installment Purchase Agreement. Further Assurances. Whenever and so oftenas requested so to do by the Trustee or any Certificate Owner, the Authority and the City will promptly execute and deliver or cause to be executed and delivered all such other and further instruments, documents or assurances, and promptly do or cause to be done all such other and further things, as may be necessary or reasonably required in order to further and more fully vest in B-29 the Trustee and the Certificate Owners all rights, interest, powers, benefits, privileges and advantages conferred or intended to be conferredupon them by the Trust Agreement. Continuing Disclosure. The City covenants and agrees that it will comply with and carry out all of its obligations under the continuing disclosure certificate to be executed and delivered by the City in connection with the delivery of the Certificates. Notwithstanding any other provision of the Trust Agreement, failure of the City to comply with the continuing disclosure certificate shall not be considered an Event of Default; however, any Owner or Beneficial Owner 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 such obligations. For purposes of this paragraph, "Beneficial Owner" means anyperson which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Certificates (including persons holding Certificatesthrough nominees, depositories or other intermediaries). DEFAULT AND LIMITATION OF LIABILITY Notice of Non-Payment. Inthe event of delinquency in the payment of any Installment Payments due by the City pursuant to the Installment Purchase Agreement, the Trustee will, after one Business Day following the date upon which such delinquent Installment Payment was due, as soon as practicable give written notice of the delinquency and the amount of the delinquency to the City, the Authority and theInsurer. Action on Default or Termination. Upon the occurrence of an Event of Default (as that term is defined in the Installment Purchase Agreement), which event shall constitute a default under the Trust Agreement, and in each and every such case during the continuance of such Event of Default, the Trustee (upon being indemnifiedto its reasonable satisfaction) or the Owners of not less than a majority in aggregate principal amount of Certificates at the time Outstanding will be entitled, with the written consent of the Insurer so long as the Insurance Policy is in full force and effect upon notice in writing to the City, to exercise the remedies provided to the Authority in the Installment Purchase Agreement. Upon declaration of the entire principal amount of the unpaid Installment Payments and the accrued interest thereonto be due and payable immediately and provided such declaration is not rescinded or annulled, all in accordance with the Installment Purchase Agreement, the Trustee will apply (i) all moneys received as Installment Payments and all moneys held in any fund or account under the Trust Agreement and (ii) if directed in writing by the Insurer, all amounts made available to theTrustee by theInsurer, to the payment of the entire principal amount of the Certificates and theaccrued interest with respect thereto, with interest on the overdue Certificates at the rate or rates of interest applicable to the Certificates if paid in accordancewith their terms. In the event that the Insurer has paid to the Trustee amounts sufficient to pay the principal of and interest due to Certificate owners upon such acceleration, the Insurer's obligations under the Insurance Policy shall be discharged. Other Remedies of the Trustee. The Trustee will at the written direction of theInsurer so long as the Insurance Policy is in full force and effect: (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the City or any council member, officer or employee thereof, and to compel the City or any such council member, officeror employee to perform or carry out its or his duties under law and the agreements and covenants required to be performed by it or him contained in the Trust Agreement; (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Trustee; or (c) by suit in equity upon the happening of any default under the Trust Agreement to require the City and its directors, officersand employees to account as thetrustee of anex press trust. Non-Waiver. A waiver of any default or breach of duty or contract by the Trustee will not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construedto be a waiver of any such defaultor breach of duty or contract or anacq uiescence therein, and every B-30 right or remedy conferred upon the Trustee by law or by theTrust Agreement may be enforcedand exercised from time to time and as often as shall be deemed expedient by theTrus tee. If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee, the Trustee and the City shall be restored to their formerpositions, rights and remedies as if such action, proceeding or suit had not been brought or taken. Remedies Not Exclusive. No remedy conferred in the Trust Agreement upon or reserved to the Trustee is intended to be exclusive of any other remedy, and each such remedy will be cumulative and shall be in addition to every other remedy given under the Trust Agreement or now or hereafter existing in law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any law. No Obligation by the Cityto Owners. Except for the payment of Installment Payments when due in accordance with the Installment Purchase Agreement and the performance of the other covenants and agreements of the City contained in said InstallmentPur chase Agreement and in the Trust Agreement, the City will have no obligation or liability to the Owners of the Certificateswith respect to the Trust Agreement or the execution, delivery or transfer of the Certificates, or the disbursement of Installment Payments to the Owners by the Trustee; provided however that nothing set forth above shall affect the rights, duties or obligations of the Trustee expressly set forth in the Trust Agreement. Trustee Appointed Agent for Certificate-owners: Direction of Proceedings. The Trustee is appointed the agent and attorney of the Owners of all Certificates outstanding under the Agreement for the purpose of filing any claims relating to the Certificates. The Owners of a maj ority in aggregate principal amount of the Certificates Outstanding under the Trust Agreement will, upon tender to the Trustee of reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such direction, have the right to direct the method and place of conducting all remedial proceedings by the Trustee, provided such direction shall be in accordance with law and the provisions of the Trust Agreement and that the Trustee will have the right to decline ·to follow any such direction which in the opinion of the Trustee would be unjustly prejudicial to Certificate-owners not parties to such a direction. Power of Trustee to Control Proceedings. In the event that the Trustee, upon the happening of an Event of Default, shall have taken anyaction, by judicial proceedings or otherwise, pursuantto its duties under the Trust Agreement, whether upon its own discretion or upon the request of the Owners of a majority in aggregate principal amount of the Certificates then outstanding, it will have full power, in the exercise of its discretion for the best interests of the Owners of the Certificates, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee will not, unless there no longer continues an Event of Default under the Trust Agreement, discontinue, withdraw, compromise or settle, or otherwise dispose of, any litigation pending at law or in equity, if at the time there has been filed withit a written request signed by the Owners of at least a majority in principal amount of the Certificates Outstanding under the Trust Agreement opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation. Limitation on Certificate-Owners' Right to Sue. No Owner of any Certificate executed and delivered under the Trust Agreement will have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon the Trust Agreement, unless (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default under the Trust Agreement; (b) the Owners of at least a majority in aggregate principal amount of all the Certificatesthen Outstanding will have made written request upon the Trustee to exercise the powers granted or to institute such action, suit or proceeding in its own name; (c) said Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and ( d) the Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee. B-31 Such notification, request, tender or indemnity and refusal or omission are declared, in every case, to be conditions precedent to the exercise by any Owner of Certificates of any remedy under the Trust Agreement; it being understood and intended that no one or more Owners of Certificates will have any right in any manner whatever by his or their action to enforce any right under the Trust Agreement, except in the manner provided in the Agreement, and that all proceedings at law or in equity to enforce any provision of the Trust Agreement will be instituted, had and maintained in the manner provided in the Trust Agreement and for the equal benefitof all owners of the Outstanding Certificates. The right of any Owner of any Certificateto receive payment of the principal of (andpremium, if any) and interest on such Certificate out of Revenues, as in the Trust Agreement and thereinprovided, on and after the respective due dates expressed in such Certificate, or to institute suit for the enforcement of any such payment on or aftersuch respective dates, shall not be impaired or affected without the consent of such Owner, notwithstanding the foregoingprovisions or any other provision of the Trust Agreement. No Obligation with Respect to Performance by Trustee. Neither the Citynor the Authority will have any obligation or liability to any of the other parties to the Trust Agreement or to the Owners of the Certificates with respect to the performance by the Trustee of any duty imposed upon it under the Trust Agreement. No Liability to Owners for Payment. The Authority will not have any obligation or liability to the Owners of the Certificates with respect to the payment of the Installment Payments by the. City when due, or with respect to the performance by the City of any other covenant made by it in the Installment Purchase Agreement or in the Trust Agreement. Except as provided in the Trust Agreement, the Trustee will not have any obligation or liability to the Owners of the Certificates with respect to the payment of the Installment Payments by the City when due, or with respect to the performance by the City of any other covenant made by it in the Installment Purchase Agreement or in the Trust Agreement. No Responsibility for Sufficiency. The Trustee will not be responsible forthe sufficiencyof the Trust Agreement, the Installment Purchase Agreement, or of the assignment made to it by the Assignment Agreement of rights to receive Installment Payments pursuant to the Installment Purchase Agreement, or the value of or title to the 1993 Project. The Trustee will not be responsible or liable forselection or liquidation of investments or any loss suffered in connection with any investment of funds made by it under the terms of and in accordancewith the Trust Agreement. Indemnification of Trustee. The City will indemnify the Trustee (including all of its employees, officers and directors) and hold it harmless against any loss, liability, expenses or advances, including but not limited to fees and expenses of counsel and other experts, incurred or made without negligence or willful misconduct on the part of the Trustee, (i) in the exercise and performance of any of the powers and duties under the Trust Agreement or under the Installment Purchase Agreement by the Trustee, (ii) relating to or arising out of the 1993 Project, or the conditions, occupancy, use, possession, conduct or management of, or work done in or about, or from the planning, design, acquisition, installation or construction of the 1993 Project or any part thereof, or (iii) arising out of or relatingto any untrue statement or alleged untruestatement of any material fact or omission or alleged omission to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading in any official statement or other offering circular utilized in connection with the sale of the Certificates, including the costs and expenses of defending itself against any claim of liability arising under the Agreement. Such indemnity shall survive payment of the Certificates and discharge of the Trust Agreement or resignation or removal of the Trustee. Insurer's Rights. Anything in the Trust Agreement to the contrary notwithstanding, upon the occurrence and continuance of an Event of Default the Insurer will be entitled to control and direct the enforcement of all rights and remedies granted to the Owners or the Trustee for the benefit of the Owners under the Trust Agreement. B-32 Notwithstanding anything in the InstallmentPurc hase Agreement or the Trust Agreement, the Trustee, in determining whether an Event of Default has occurred in the due and punctual payment of any Installment Payment or whether a payment on any Installment Payment has been made under the Installment Purchase Agreement, no effect will be given to payments made under the Insurance Policy. THE TRUSTEE Trustee: Duties, Removal and Resignation. By executing and delivering the Trust Agreement, the Trustee accepts the duties and obligations of the Trustee provided in the Trust Agreement, but only upon the terms andconditions set forthin the Trust Agreement. The City may, by written request to the Trustee, remove the Trustee and appoint a successor Trustee; provided, however, that if theCity is in defaultunder the Installment Purchase Agreement, the Insurer, so long as the Insurance Policy is in full force and effect, may, by writtennotice to the Trustee, remove theTrustee and appoint a successor Trustee. Any such successor shall be a bank, corporation or trust company doing business and having a corporate trust office in California, which has (or the parent holding company of which has) a combined capital (exclusive of borrowed capital) and surplus of at least twenty million dollars ($20,000,000) and subject to supervision or examination by federal or state authorities. If such bank, corporation or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purposes of the Trust Agreement the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. gn The Trustee may at any time resi bygn giving written notice to theCity and the Insurer and by giving to the Certificate Owners notice of suchgn resi ation by mail at the addresses shown on the registration books maintained by the Trustee. Any resi ation or removal of the Trustee and appointment of a successor Trustee will become effective upon acceptance of appointment by the successor Trustee and upon receipt of written approval of the Insurer. Upon such acceptance, the successor Trustee will mail notice thereof to the Owners at their respective addresses set forth on the Certificategn registration books maintained pursuant to the Trust Agreement. Upon receiving such notice of resi ation, the City will promptly appoint a successor Trustee by an instrument in writing; provided, however, that in the event thatgn the City does not appoint a successor Trustee within thirty (30) days following receiptof such notice of resi ation, the resigning Trustee may at the expgnense of the City petition the appropriate court having jurisdiction to appoint a successor Trustee. Any resi ation or removal of the Trustee and appointment of a successor Trustee shall become effective upon written acceptance of appointment by the successor Trustee. Compensation of the Trustee. The City will fromtime to time, subject to any agreement in effect with the Trustee, pay to the Trustee reasonable compensation for its services and will reimburse the Trustee (including all of its employees, officers and directors) for all its advances and expenditures, including but not limited to advances to and fees and expenses of independent appraisers, accountants, consultants, counsel, agents and attorneys-at-law or other experts employed by it in the exercise and performance of its powers and duties under the Trust Agreement. Such compensation and reimbursement shall be paid by the City. The Trustee shall not otherwise have any claims, except in accordance with certain provisions of the Trust Agreement and the Installment Purchase Agreement, or lien for payment of compensation for its services against any other moneys held by it in the funds oraccounts established under theTrust Agreement but may take whatever legal actions are lawfullygn available to it directly against the City. The obligations of the City described above will survive resi ation or removal of the Trustee and payment of the Certificates and discharge of the Agreement. Protection of the Trustee. The Trustee will be protected and shall incur no liability whatsoever in acting or refraining from acting or proceeding in good faith upon any resolution, notice, telegram, request, consent, waiver, certificate, statement, affidavit, voucher, bond, requisition or other paper or document which it shall in good faith believe tobe genuine andto have been adopted, executed or delivered by the proper party B-33 or pursuant to any of the provisions of the Trust Agreement, and the Trustee will be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. The Trustee will not be bound to recognize any person as an Owner of any Certificate or to take any action at the request of any such person unless such Certificate shall be deposited with the Trustee or satisfactory evidence of the ownership of such Certificate shall be furnished to the Trustee. The Trustee may consult with counsel, who may be counsel to the Authority or the City, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it under the Trust Agreement in good faith in accordance therewith. Whenever in the administration of its duties under the Trust Agreement, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action under the Trust Agreement, such matter (unless other evidence in respect thereof be specifically prescribed in the Trust Agreement) shall be deemed to be conclusively proved and established by a certificate of the Authorityor the City and such certificate shall be full warranty to the Trustee for any action taken or suffered under the provisions of the Trust Agreement upon the faith thereof, but in its discretion the Trustee may (but shall have no duty), in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable. The Trustee may buy, sell, own, hold and deal in anyof the Certificates provided pursuantto the Trust Agreement, and may join in any action which any Owner may be entitled to take with like effect as if the Trustee were not a party to the Trust Agreement. The Trustee, either as principal or agent, may also engage in or be interested in any financial or other transaction with the City or the Authority, and may act as depository, trustee, or agent for any committee or body of Owners of Certificates or of obligations of the Authority or the City as freely as ifit were not Trustee under the Trust Agreement. The Trustee may, to the extent reasonably necessary, execute any of the trusts or powers of the Trust Agreement and performthe duties required of it under the Trust Agreement by or through attorneys, agents, or receivers, and shall be entitled to advice of counsel concerning all matters of trust andits duties under the Trust Agreement, and the Trustee shall not be answerable forthe default or misconduct of any such attorney, agent or receiver selected by it with reasonable care. The Trustee shall not be answerable for the exercise of any discretion or power under the Trust Agreement or in the performance of its duties under the Trust Agreement or for anything whatever in connection with the funds and accounts established under the Trust Agreement, except only for its own willful misconduct or negligence. The recitals, statements and representations by the City or the Authority contained in the Trust Agreement or in the Certificates shall be taken and construed as made by and on the part of the City or Authority and not by the Trustee and the Trustee does not assume, and shall not have, any responsibility or obligations for the correctness of any thereof. The Trustee undertakes to perform such duties, and only such duties as are specificallyset forth in the Trust Agreement and no implied duties or obligations shall be read into the Trust Agreement against the Trustee. No provision in the Trust Agreement will require the Trustee to risk or expend its own funds or otherwise incur any financial liability in the performance of any of its duties under the Trust Agreement if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not assured to it. In accepting the trust created under the Trust Agreement, the Trustee acts solely as Trustee for the Owners and not in its individual capacity and all persons, including without limitation the Owners and the City or the Authority having any claim against the Trustee arising from the Trust Agreement shall look only to the funds and accounts held by the Trustee under the Trust Agreement for payment except as otherwise provided B-34 in the Trust Agreement. Under no circumstances will the Trustee be liable in its individual capacity for the obligations evidenced by the Certificates. The Trustee makes no representation or warranty, express or implied as to the title, value, design, compliance with specifications or legal requirements, quality, durability, operation, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the City or the Authority of the Project. In no event will the Trustee be liable for incidental, indirect, special or consequential damages in connection with or arising fromthe InstallmentPurchase Agreement or the Trust Agreement for the existence, furnishingor use of the Project. The Trustee will not be deemed to have knowledge of any Event of Default under the Trust Agreement or under the Installment Purchase Agreement unless and until it shall have actual knowledge thereof or have received notice thereof at its corporate trust office at the address set forth in the Trust Agreement. The Trustee shall, during the existence of any Event of Default(which has not been cured) use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Trustee will not be accountable for the use or application by the City, or the Authority or any other partyof any funds which the Trustee has released in accordance with the terms of the Trust Agreement. The Trustee will have no responsibility or liability with respect to any information, statements or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of these Certificates. The Trustee will be under no obligation to exercise any of the rights or powers vested in it by the Agreement at the request, order or direction of any of the Owners or Insurer pursuant to the provisions of the Trust Agreement unless such Owners or Insurer shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. Notwithstanding any otherprovision of the Trust Agreement, in determiningwhether the rights of the Owners or Insurer will be adversely affected by anyaction taken pursuant to the terms and provisions of the Trust Agreement, the Trustee will consider the effect on the Owners or Insurer as if there were no Insurance Policy. The Trustee may rely upon a facsimile transmission with regard to any instruction for a transfer, disbursement or investment of funds held by the Trustee. The Authority and the City will confirm such transmission promptly in writing by mail. Merger or Consolidation. Any company into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business (provided such company is eligible underthe Trust Agreement), will be the successor to the Trustee without the execution or filing of any paper or further act, anything in the Trust Agreement to the contrary notwithstanding. Insurer Voting. Notwithstanding anything contained in the Trust Agreement, so long as the Bond Insurance Policy is in full force and effect, the Insurer will be deemed to be the owner of all Certificates for purposes of exercising any voting right or privilege or giving any consent or direction or taking any other action pursuant to certain provisions of the Trust Agreement, including provisions summarized under this caption. B-35 AMENDMENT OF TRUST AGREEMENT Amendments Permitted. (a) The Trust Agreement and the rights and obligations of the City and of the Owners of the Certificates and of the Trustee may be modified or amended at any time by an amendment to the Trust Agreement which will become binding when the written consents of the Owners of a maj ority in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided in the Trust Agreement, and withthe written consent of the Insurer so long as the InsurancePolicy is in full force and effect, shall have been filed with the Trustee. No such modification or amendment shall (1) extend the stated maturities ofthe Certificates, or reduce the rate of interest represented thereby, or extend the time of payment of interest, or reduce the amount of principal represented thereby, or reduce any premium payable on the prepayment thereof, without the consent of the Owner of each Certificate so affected, or (2) reduce the aforesaidpercentage of Owners of Certificates whose consent is required forthe execution of any amendment or modification of the Trust Agreement, or (3) modify any of therights or obligations of either the Trustee or the Authoritywithout its written consent thereto. (b) The Trust Agreement and the rights and obligations of the Authority and the City and of the Owners of the Certificates may also be modified or amended at any time by an amendment to the Trust Agreement which shall become binding upon adoption, without the consent of the Owners of any Certificates, but with the written consent of theInsurer so long as the Insurance Policy is in fullforce and effect, but only to the extent permitted by law and only for anyone or more of the following purposes: (i) to add to the covenants and agreements of the Authority or the City contained in the Trust Agreement othercovenants and agreements thereafterto be observed or to surrender any right or power in the Trust Agreement reserved to or conferredupon the Authority or the City, andwhich shall not adversely affect the interests of the Owners of the Certificates; (ii) to cure, correct or supplement any ambiguous or defectivepro vision contained in the Trust Agreement or in regard to questions arising under the Trust Agreement, as the Authority or the City may deem necessaryor desirable and which shall not adversely affect the interests of the Owners of the Certificates; and (iii) to make amendments or modifications necessary to effect the substitution of certain credit facilities in the Reserve Fund as permitted by the Trust Agreement. (iv) to make such other amendments or modifications as may be in the best interests of the Owners of the Certificates. The Trustee will promptly upon execution anddelivery of any amendment pursuant to paragraph (b) above send by firstclass mail a firstclass copy of such amendmentto the Insurer. Endorsement or Replacement of Certificates After Amendment or Supplement. After the effective date of anyaction taken as provided in the Trust Agreement, the Trustee may determine that the Certificates may bear a notation by endorsement in form approved by the Trustee as to such action, and in that case upon demand of the Trustee to the Owner of any Outstanding Certificate and presentation of such Owner's Certificate for such purpose at the Principal Corporate Trust Officeof the Trustee a suitable notation as to such action shall be made on such Certificate. If the Trustee shall so determine, new Certificates so modified as in theopinion of the Trustee shall be necessaryto conform to such action shall be prepared, and in that case upon demand of the Trustee to theOwner of any Outstanding Certificates such new Certificates will be exchanged at the Principal Corporate Trust Office of the Trustee without cost to each Owner for Certificates then Outstanding upon surrender of such Outstanding Certificates. B-36 Amendment of Particular Certificates. The provisions described ab ove will not prevent any Owner from accepting any amendments to the particular Certificates held by him, provided that due notation thereof is made on such Certificates. Notice to Rating Agencies. Copies of all amendments to the Trust Agreement shall be mailed by first class mail to Standard & Poor's Ratings Services and Moody's Investors Service at least 10 days prior to the effective date of such amendment. DEFEASANCE Discharge of Trust Agreement. (a) If the Trustee shall pay or cause to be paid from amounts on deposit in the funds and accounts created hereunder, or there shall otherwise be paid to the Owners of all such Outstanding Certificates the interest and principal represented thereby at the times and in themanner stipulated herein and therein, or (b) if there shall be on deposit with the Trustee funds which are sufficient to pay the interest and principal represented by such Certificates payable on the payment date or date of prepayment prior thereto date, or (c) in case any of such Certificates are to be paid or prepaid on any date on or prior to their payment date, there shall be on deposit with the Trustee either moneys in an amount which shall be sufficient or Permitted Investments described in clause 1 of the definition thereof, or otherwise approved by the Insurer the interest on and principal of which when paid will provide money which, together with the money, if any, deposited with the Trustee at the same time, shall be sufficient to enable the Trustee to pay when due, the interest, principal and prepayment premiums, if any, represented by such Certificates on and prior to the payment date or thedate of prepayment prior thereto, as the case may be, then and in that case and after payment or provision for payment of all fees and expenses of the Trustee and Insurer in accordance with the Trust Agreement, the obligations created by the Trust Agreement will thereupon cease, terminate and become void except for the obligation of the City to apply moneys on deposit in the Rebate Fund as described in the Trust Agreement which will continue until such moneys are so applied and the right of the Owners to have applied and the obligation of the Trustee to apply such moneys and Permitted Investments to the payment of the Certificates as in the Trust Agreement set forth, and subject to application of moneys on deposit in theRebate Fund as provided in the Trust Agreement, the Trustee will tum over to the City, after provision for payment of amounts due the Trustee under the Trust Agreement, as an overpayment of Installment Payments, any surplus in the CertificatePayment Fund and all balances remaining in any other funds or accounts other than moneys and Permitted Investments held for the payment of the Certificates at maturity or on prepayment, which moneys and Permitted Investments will continue to be held by the Trustee in trust for thebenefit of the Owners and will be applied by the Trustee to the payment, when due, of the principal and interest and premium, if any, represented by the Certificates, and after such payment, the Trust Agreement shall become void. If moneys or securities described in clause 1 of the definition of Permitted Investments are deposited withand held by the Trustee as provided in the Trust Agreement, the Trustee will within thirty (30) days after such moneys or Permitted Investments shall have been deposited with it, mail a notice, first class postage prepaid, to the Owners at the addresses listed on the registration books keptby the Trustee, setting forth (a) the date fixed for prepayment of the Certificates, (b) a description of the moneys or securities described in clause (b) of the definition of Permitted Investments so held by it, and ( c) that the Trust Agreement has been released in accordance with thepro visions described above. Notwithstanding anythingprovided above, in the event that the principal and/or interest with respect to the Certificates shall be paid by the Insurer pursuant to the Insurance Policy, the Certificates will remain Outstanding for all purposes,not be defeased or otherwise satisfiedand not be considered paid by the City, and the assignment and pledge of the Installment Payments and all covenants, agreements and other obligations of the City to the Owners will continue to exist and shall run to the benefit of the Insurer, and the Insurer shall be subrogated to therights of such Owners. B-37 Deposit of Money or Securities with Trustee. Whenever in the Trust Agreement or the Installment Purchase Agreement it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or prepay any Certificates,the money or securities to be so deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Trust Agreement and will be: (a) lawful money of the United States of America in an amount equal to the principal amount represented by such Certificates and all unpaid interest represented thereby to maturity, except that, in the case of Certificates which are to be prepaid prior to maturity and in respect of which notice of such prepayment shall have been given as provided in the Agreement or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or PrepaymentPrice and all unpaidinterest to such date of prepayment if any, represented by such Certificates; or (b) non-callable securities described in clause 1 of the definition of Permitted Investments which will provide money sufficient to pay the principal at maturity or upon prepayment plus all accrued interest to maturity or to the prepayment date, as the case may be, represented by theCertificates tobe paid or prepaid, as such amounts become due, plus premium, if any, provided that, in the case of Certificates which are to be prepaid prior to the maturity thereof, notice of such prepayment shall have been given as in the Trust Agreement provided or provision satisfactory to the Trustee shall have been made for the giving of such notice. The Trustee will not be responsible for non-callable securities provided being sufficient to pay the principal at maturity or prepayment plus all accrued interest to maturity or to the prepayment date. Unclaimed Moneys. Anything contained in the Trust Agreement to the contrary notwithstanding, any moneys held by the Trustee in trust for the payment and discharge of the interest or principal or Prepayment Price represented by any of the Certificates which remain unclaimed for two years after the date of deposit of such moneys if deposited with the Trustee after the date when the interest and principal or Prepayment Price represented by such Certificates havebecome payable, will be repaid by theTrustee to the City as its absolute property free fromtrust, and the Trustee will thereupon be released and discharged with respect thereto and the Owners shall look only to the City for the payment of the interest and principal or Prepayment Price represented by much Certificates; provided, however, that beforebeing required to make any such payment to the City, theTrustee will, at the written request andexp ense of the City, first maila notice to theowners of the Certificates so payable that such moneys remain unclaimed and that after a date named in such notice, which date shall not be less than thirty (30) days after the date of the mailing of such notice, the balance of such moneys then unclaimed will be returned to the City. MISCELLANEOUS Benefits of Trust AgreementLimited to Parties. Nothing contained in the Trust Agreement, expressed or implied, is intended to give to any person otherthan the City, the Trustee, the Authority, the Insurerand the Owners any claim, remedy or right under or pursuant to the Trust Agreement, and any agreement, condition, covenant or term required in the Agreement to be observed or performed by or on behalf of the City shall be for the sole and exclusive benefitof the Trustee, the Authority, theInsurer and the Owners. Execution of Documents by Owners. Any declaration, request or other instrument which is permitted or required in the Trust Agreement to be executed by Owners may be in one or more instruments of similar tenor and may be executed by Owners in person or by their attorneys appointed in writing. The fact anddate of the execution by any Owner or such Owner's attorney of any declaration, request or other instrument or of any writing appointing such attorney may be proved by the certificate of any notary public or other officer authorizedto take acknowledgments of deeds to be recorded in the state or territory in which he purports to act that the person signing such declaration, request or other instrument or writing acknowledged to him the execution thereof, or by an affidavit of a witness of suchexecution duly sworn to before suchnotary public or other officer, orby such otherproof as the Trustee may accept which it may deem sufficient. B-38 The ownership of any Certificates and the amount, payment date, number and date of owning the same may be proved by the books required to be kept by the Trustee. Any declaration, request or other instrument in writing of the Owner of any Certificate shall bind all future Owners of such Certificate with respect to anything done or suffered to be done by the City or the Trustee in good faith and in accordance therewith. DisqualifiedCertifica tes. Certificates owned or held by or forthe acc ount of the Authority or the City (but excluding Certificates held in any pension or retirement fund) shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Certificates provided for in the Trust Agreement, and shall not be entitled to consent to or take any other action provided for in the Agreement. The Trustee may adopt appropriate regulations to require each Owner of Certificates, before his consent provided forin the Trust Agreement will be deemed effective, to reveal if the Certificates as to which such consent is given are disqualified as provided in the Trust Agreement. Waiver of Personal Liability. No council member, director, officer or employee of the City or the Authority will be individually or personally liable for the payment of the interest or principal or the prepayment premiums, if any, represented by the Certificates, but nothing contained in the Trust Agreement will relieve any council member, director, officer or employee of the City or Authority from the performance of any official dutyprovided by any applicable provisions of law or by the Installment Purchase Agreement or by theTrust Agreement. Acquisition of Certificates by City: Destruction of Certificates. All Certificates acquired by the City, whether by purchase or gift or otherwise will be surrendered to the Trustee for cancellation. Whenever in the Trust Agreement provision is made for the cancellation by the Trustee of any Certificates, the Trustee will destroy such Certificates and upon written request deliver a certificate of such destructionto the City. B-39 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX C FORMOF OPINION OF SPECIAL COUNSEL Upon execution and delivery of the Certificates, Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California, Special Counsel, proposes to render its final approving opinion in substantially the following form: November _, 2003 City of Los Banos 520 J Street Los Banos, California 93635 Members of the City Council: We have acted as Special Counsel to the City of Los Banos (the "City") in connection with the execution and delivery of $ aggregate principal amount of Revenue Refunding Certificates of Participation (1 993 Sewer System Project) Series 2003 (the "Certificates") each evidencing and representing an interest of the registered owner thereof in the right to receive Installment Payments ( as that term is defined in the Trust Agreement hereinafter mentioned) under and pursuant to that certain Installment Purchase Agreement (the "Agreement"), dated as of October 1, 2003, by and between the City and the Los Banos Public Financing Authority (the "Authority"), which right to receive such Installment Payments have been assigned by the Authority to BNY WesternTrust Company, as trustee (the "Trustee"), pursuant to the Assignment Agreement, dated as of October 1, 2003, by and between theTrustee and the Authority. The Certificates have been executed by the Trustee pursuant to the terms of the Trust Agreement, dated as of October 1, 2003 (the "Trust Agreement"), by and among theCity, the Authority and the Trustee. In connection with our representation we have examined a certified copy of the proceedings relating to the Certificates. As to questions of fact material to our opinion, we have relied upon the certified proceedings and other certifications of public officials furnished to us without undertaking to verifythe same by independent investigations. Based upon the foregoing and after examination of such questions of law as we have deemed relevant in the circumstances, but subject to the limitations set forth herein, we are of the opinion that: 1. The proceedings show lawful authorityfor theexecution and delivery by the City of the Agreement and the Trust Agreement under the laws of the State of California now in force, and the Agreement and the Trust Agreement have been duly authorized, executed and delivered by the City, and, assuming due authorization, execution and delivery by the Trustee and the Authority, as appropriate, are valid and binding obligations of the Cityenforceable against the City in accordance with their respective terms. 2. The Certificates, assuming due execution and delivery by the Trustee, are entitled to the benefitsof the Trust Agreement. C-1 3. The obligation of the City to make the Installment Payments from Net Revenues (as defined in the Agreement) is an enforceable obligation of the City and does not constitute a debt of the City, or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limit or restriction, anddoes not constitute an obligation for which the City is obligated to levy or pledge any form of taxation or for which the Cityhas levied or pledged any formof taxation. 4. Under existing statutes, regulations, rulings and judicial decisions, the portion of each Installment Payment constituting interest is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations; however, it should be noted that, with respect to corporations, the portion of each Installment Payment constituting interest may be included as an adjustment in the calculation of alternative minimum taxable income, which may affect the alternative minimum tax liability of corporations. 5. The portion of each Installment Payment constituting interest is exempt from State of Californiapersonal income tax. 6. The difference between the issue price of a Certificate (the first price at which a substantial amount of the Certificates of a maturity are to be sold to the public) and the stated prepayment price at maturity with respect to such Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Certificate Owner before receipt of cash attributableto such excludable income. The amount of original issue discount deemed received by a Certificate Ownerwill increase the Owner's basis in the applicable Certificate. Original issue discount that accrues to the Certificate Owner is excluded from the gross income of such owner forfederal income tax purposes,is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. The opinions expressed herein as to the exclusion from gross income of the portion of each Installment Payment constituting interest (and original issue discount) are based upon certain representations of fact and certifications made by the City andothers and are subject to the condition that the City complies with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfiedsubsequent to the execution and deliveryof the Certificates to assure that such portion of each Installment Payment constituting interest (and original issue discount) will not become includable in gross income for federalincome tax purposes. Failure to comply with such requirements of the Code might cause the portion of each Installment Payment constituting interest ( and original issue discount) to be included in gross income for federal income tax purposes retroactive to the date of execution and delivery of the Certificates. The City has covenanted to comply with all such requirements. The opinions expressed herein may be affectedby actions taken ( or not taken)or events occurring( or not occurring) after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur. The Trust Agreement, the Agreement and the Tax Certificate permit certain actions to be taken or to be omitted if a favorable opinion of Special Counsel is provided with respect thereto. No opinion is expressed herein as to the exclusion from gross income of the portion of each Installment Payment constituting interest (and original issue discount) for federal income tax purposes with respect to any Certificate if any such action is taken or omitted based upon the opinion or advice of counsel other than ourselves. Other than expressly stated herein, we express no other opinion regarding tax consequences with respect to the Certificates. C-2 The opinions expressed herein are based upon our analysis and interpretation of existing laws, regulations, rulings andjudicial decisions and cover certain matters not directly addressed by such authorities. We call attention to the fact that the rights and obligations under the Trust Agreement, the Agreement, and the Certificates are subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similarlaws affecting creditors' rights, to the application of equitable principles if equitable remedies are sought, to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against public agencies in the State of California. Respectfully submitted, C-3 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX D FORMOF CONTINUINGDI SCLOSURE CERTIFICATE This Continuing Disclosure Certificate (the "Disclosure Certificate") is executed and delivered by the City of Los Banos (the "City") in connection with the execution and delivery of the $ City of Los Banos, Revenue Refunding Certificates of Participation (19 93 Sewer System Project), Series 2003 (the "Certificates"). The Certificates are being issued pursuant to a Trust Agreement dated as of October 1, 2003 (the "Indenture") by and among the City, the Los Banos Public Financing Authority and BNY Western Trust Company, as trustee (the "Trustee"). The City covenants and agreesas follows: 1. Purpose of this Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City forthe benefit of theHolders and BeneficialOwners of the Certificatesand in order to assist the ParticipatingUnderwriter in complying with the Rule. 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have thefollowing meanings: "Annual Report" shall mean any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4 of thisDisclosure Certificate. "Beneficial Owner" shall mean any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Certificates (including persons holding Certificates throughnominees, depositories or other intermediaries), or (b) is treated as the owner of anyCertificates for federalincome tax purposes. "Fiscal Year" shall mean the one-year period ending on the last day of June of each year. "Holder" means a registered owner of theCertificates. "Listed Events" shall mean any of the events listed in Section 5(a) of this Disclosure Certificate. "National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. Currently, the National Repositories are the four entities approved by the Securities and Exchange Commission, a current list of which is maintained on the Internet at http://www.sec.gov/info lmunicipal/nrmsir.htm. "Participating Underwriter" shall mean the original underwriterof theCertificates required to comply with the Rule in connection with offering of the Certificates. "Repository" shallmean each National Repositoryand each State Repository. "Rule" shall mean Rule 15c2-12 adopted by the Securities and Exchange Commission under theSecurities Exchange Act of 1934, as the same may be amended from time to time. "State" shall mean the State of California. D-1 "State Repository" shall mean any public or private repository or entity designated by the State as a state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of this Disclosure Certificate,there is no State Repository. 3. Provision of Annual Reports. (a) The City shall provide not later than 270 days following the end of its Fiscal Year (commencing with the Fiscal Year 2003) to each Repository an Annual Report relating to the immediately preceding Fiscal Year which is consistent with the requirements of Section 4 of this Disclosure Certificate, which Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate. (b) If the City is unable to provide to each Repository an Annual Report by the date required in subsection (a), the City shall send to each Repository a notice in substantially the form attached hereto as Exhibit A. 4. Content of Annual Reports. The Annual Report shall contain or incorporate by referencethe following: ( a) The audited financial statements of the City for the prior fiscal year, 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 time the Annual Report is required to be filed pursuant to Section 3(a), theAnnual Report shall contain unaudited financial statementsin a format similar to thefinancial statements contained in the final OfficialStatement, and theaudited financialstatements shall be filedin the same manneras the Annual Report when they come available. (b) Principal amount of the Certificatesoutstanding. ( c) An update of the financial information and operating data relating to the City for the most recently ended fiscal year of the type included in the following tables located in the Official Statement for the Certificates, as follows (to the extent not included in the City's audited financial statements); (i) "Assessed Valuation of Property Within the City" on page _ of the Official Statement; (ii) "Historic Sewer System Usage" on page _ of the Official Statement; (iii) "Historic Sewer System Connections" on page _ of the OfficialStateme nt; (iv) "Historic Sewer System Collection and Treatment Revenues" on page _ of the OfficialStatement; (v) "Ten Largest Sewer System Users" on page _ of the Official Statement; (vi) "Sewer Rates" on page _ of theOfficial Statement; D-2 (vii) "Sewer System Historic Operating Results" on page _ of the Official Statement; 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 have been submitted to each of the Repositories; provided, that if any document included by reference is a final officialstatement, it must be available from the Municipal Securities Rulemaking Board; and provided further, that the City shall clearly identify each such document so included by reference. 5. Reporting ofSignificant Events. (a) Pursuant to the provisions of this Section 5, the City shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates,if material: (1) principal and interest payment delinquencies. (2) non-payment related defaults. (3) modifications to rights of Certificateholders. (4) optional, contingent or unscheduled Certificatecalls. (5) defeasances. ( 6) rating changes. (7) adverse tax opinions or events affecting the tax-exempt status of the Certificates. (8) unscheduled draws on the debt service reserves reflecting financial difficulties. (9) unscheduled draws on the credit enhancements reflecting financial difficulties. (10) substitution of the credit or liquidity providers or their failureto perform. (11) release or substitution of property securing repayment of the Certificates. (b) Whenever the City obtains knowledge of the occurrence of a Listed Event, the City shall as soon as possible determine if such event would be material under applicable federal securities laws. (c) If the City determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the City shall promptly file a notice of such occurrence with the Repositories. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(4) and (5) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affectedCertificates pursuant to the Indenture. D-3 6. Customarily Prepared and Public Information. Upon request, the City shall provide to any person financial information and operating data regarding the City which is customarily prepared by the Cityand is publicly available. 7. Termination of Obligation. The City's obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior prepayment or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the City shall give notice of such terminationin thesame manner as fora Listed Event under Section 5( c ). 8. 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, in the opinion of nationally recognized bond counsel, such amendment or waiver is permitted by the Rule. 9. 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 anyother means of communication, or including any other information in any 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 notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall not thereby have any obligation under this Disclosure Certificate to update such informationor include it in any futurenotice of occurrence ofa Listed Event. 10. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate, anyHolder or Beneficial Owner of the Certificates 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 thisDisclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Trust Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificateshall be an action to compel performance. No Holder or Beneficial Owner of the Certificates may institute such action, suit or proceeding to compel performance unless they shall have first delivered to the City satisfactory written evidence of their status as such, and a written notice of and request to cure such failure, and the City shall have refusedto comply therewith within a reasonable time. 11. Beneficiaries. This Disclosure Certificateshall inure solely to the benefitof the City, the Participating Underwriter and Holders and Beneficial Owners from time to time of the Certificates,and shall create no rightsin any other person or entity. Dated: November _, 2003 CITY OF LOS BANOS By: ��������������� Its: City Manager D-4 EXHIBIT A NOTICE TO REPOSITORIES OF FAILURETO FILEANNUAL REPORT Name of Obligated Person: CITY OF LOS BANOS Name of lssue: CITY OF LOS BANOS REVENUEREFUNDING CERTIFICATES OF PARTICIPATION (1993 SEWER SYSTEM PROJECT) SERIES 2003 Date of Execution and Delivery: November_, 2003 NOTICE IS HEREBY GNEN that the Obligated Person identified above has not provided an Annual Report with respect to the above-named issue as required by the Continuing Disclosure Certificate approved pursuant to Resolution No. __ adopted by the City Council of the City of Los Banos on October 15, 2003. The Obligated Person anticipates that the Annual Report will be filedby Dated: ------CITY OF LOS BANOS BY------� D-5 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX E INFORMATIONCONCE RNING OTC The Depository Trust Company ("OTC"), New York, NY, will act as securities depository for the Certificates (the "Certificates"). The Certificates 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 OTC. One fully-registered certificatewill be issued for each maturityof the Certificates,each in the aggregate principal amountof such maturity, and will be deposited with OTC. OTC, the world's largest 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. OTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC's participants ("Direct Participants") deposit with OTC. OTC also facilitates the post-trade settlement among Direct Participants of sales andother 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. OTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the OTC 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"). OTC has Standard & Poor's highest rating: AAA. The OTC Rules applicable to its Participants are on filewith the Securities and Exchange Commission. Purchases of Certificates under the OTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in tumto be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from OTC 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, fromthe Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates 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 Certificates, except in the event that use of the book-entry system forthe Certi:�icates is discontinued. To facilitate subsequent transfers, all Certificates deposited by Direct Participants with OTC are registered in the name of DTC's partnershipnominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Certificates with OTC and their E-1 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 Certificates; DTC's records reflectonly the identity of theDirect Participants to whose accounts such Certificates arecredited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible forkeeping accountof their holdings on behalf of theircustomers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, andby Direct Participants andIndirect 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 Certificates may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Certificates, such as prepayments, tenders, defaults, andproposed amendments to the Certificate documents. For example, Beneficial Owners of Certificates may wish to ascertain that the nominee holding the Certificates 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 registrarand request that copies of notices be provided directly to them. Prepayment notices shall be sent to DTC. If less than all of the Certificateswithin a maturity are being prepaid, DTC 's practice is to determine by lot the amount of the interest of each Direct Participant in such maturityto be prepaid. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Certificates unless authorized by a Direct Participant in accordance with DTC' s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible afterthe record date. The Omnibus Proxy assigns Cede & Co. 's consenting or voting rights to those Direct Participants to whose accounts Certificates are credited on the record date (identified in a listing attached to theOmnibus Proxy). Prepayment proceeds, distributions, and dividend payments on the Certificates 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 the City or the Trustee, on payment date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governedby standing instructions and customarypractices, as is the case with securitiesheld for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant andnot of DTC nor its nominee, theTrustee, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of prepayment 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 the Trustee, 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. A Beneficial Owner shall give notice to elect to have its Certificates purchased or tendered, through its Participant, to the Trustee, and shall effect delivery of such Certificates by causing the Direct Participant to transfer the Participant's interest in the Certificates, on DTC's records, to the Trustee. The requirement for physical delivery of Certificates in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Certificates are E-2 transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Certificatesto the Trustee's OTC account. OTC may discontinue providing its services as depository with respect to the Certificates at any time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, physical Certificates are required to be printed and delivered. The District may decide to discontinue use of the system of book-entry transfers through OTC (or a successor securities depository). In that event, physical Certificates will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof. THE TRUSTEE, AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE CERTIFICATES, WILL SEND ANY NOTICE OF PREPAYMENT OR OTHER NOTICES TO OWNERS ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY OTC PARTICIPANT, OR OF ANY DTC PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITYOF SUFFICIENCYOF THE PROCEEDINGS RELATING TO THE PREPAYMENT OF THE CERTIFICATES CALLED FOR PREPAYMENTOR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE. E-3 [THIS PAGE INTENTIONALLY LEFT BLANK] Financial Guaranty Insurance = Company, doing business in California APPENDIX F FGIC.. as FGIC Insurance Company 125 Park Av enue SPECIMEN MUNICIPAL BOND INSURANCE POLICY New York, NY 10017 (212) 312-3000 (800) 352-0001 Municipal Bond New Issue Insurance Policy Issuer: Policy Number: Control Number: 0010001 Bonds: Financial Guaranty Insurance Company ("Financia , New York stock insurance company, in E consideration of the payment of thepremium nd · ect to terms of this Policy, hereby unconditionally and irrevocably agrees to pay to U.S. Bank Tru ssociation or its successor, as its agent (the "Fiscal � Agent"), for the benefit of Bondholders of the principal and interest on the above-described debt obligations (the "Bonds") which shall bg Due forPayment but shall be unpaid by reason of Nonpayment by the Issuer. Financial Guaranty will make such payments to the Fiscal Agent on the date such principal or interestbecomes Due for Payment or on the Business Day next following the day on which Financial Guaranty shall have received Notice of Nonpayment, whichever is later. The Fiscal Agent will disburse to the Bondholder the face amount of principal and interest which is then Due for Payment but is unpaid by reason of Nonpayment by the Issuer but only upon receipt by the Fiscal Agent, in form reasonably satisfactory to it, of (i) evidence of the Bondholder's right to receive payment of the principal or interest Due forPayment and (ii) evidence, including any appropriate instruments of assignment, that all of the Bondholder's rights to payment of such principal or interest Due for Payment shall thereupon vest in Financial Guaranty. Upon such disbursement, Financial Guaranty shall become the owner of the Bond, appurtenant coupon or right to payment of principal or interest on such Bond and shall be fully subrogated to all of the Bondholder's rights thereunder, including the Bondholder's right to payment thereof. This Policy is non-cancellable for any reason. The premium on this Policy is not refundable for any reason, including the payment of the Bonds prior to their maturity. This Policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Bond. As used herein, the term "Bondholder" means, as to a particularBond, the person other thanthe Issuer who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof "Due for Payment" means, when referring to theprincipal of a Bond, thes�ted maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fundredemption and does not refer to any earlier date on which payment is due by reason of call for redemption ( other than by mandatory sinking fund redemption), acceleration or other advancement of maturity and means, when referring to interest on a Bond, the stated date FGIC is a registered servicemark used by FinancialGuaranty Insurance Company under license from its parent company, FGIC Corporation. Form 9000 (10/93) Page l of2 Financial Guaranty Insurance Company, doing business in California FGIC, as FGIC Insurance Company 125 Park Avenue New York, NY 10017 (212) 312-3000 (800) 352-0001 Municipal Bond New Issue Insurance Policy for payment of interest. "Nonpayment" in respect of a Bond means the failure of the Issuer to have provided sufficient funds to the paying agent for payment in full of all principal and interest Due for Payment on such Bond. "Notice" means telephonic or telegraphic notice, subsequently confirmed in writing, or written noticeby registered or certified mail, from a Bondholder or a paying a e t ti the Bonds to Financial Guaranty. "Business Day" means any day other than a Saturday, Sunday or �ich the Fiscal Agent is authorized by law to remain closed. � � In Witness Whereof, Financial Guaranty has cadltitls�� to\e affixed with its corporate seal andto be signed by its duly authorized officer in fac�E .. �e effective and binding upon Financial Guaranty by virtue of the countersignature of its duly �e resentative. <:>"" President Effective Date: AuthorizedRe presentative U.S. Bank Trust National Association, acknowledges that it has agreed to perform the tiesdu of Fiscal Agent under this Policy. Authorized Officer FGIC is a registered service mark used by Financial Guaranty InsuranceCompany under license from its parent company, FGIC Corporation. Form 9000 (10/93) Page 2 of2 Financial Guaranty Insurance Company, doing business in California FGIC. as FGIC Insurance Company 125 Park Avenue New York, NY 10017 (2 12) 312-3000 (800) 352-0001 Endorsement To Financial Guaranty Insurance Company Insurance Policy Policy Number: Control Number: 0010001 It is further understood that the term ''Nonpayment" in resp ct m ludes any payment of principal or interest made to a Bondholder by or on behalf of the issuer f s d which has been recovered fromsuch � Bondholder pursuant to the United States Bankruptr.�J a trustee in bankruptcy in accordance with a final,nonappeala ble order of a court having co��\i' tion. NOTHINGHEREIN SHALL BE CON lD�W AIVE, ALTER, REDUCE OR AMEND COVERAGE � IN ANY OTHER SECTION OF THE P . IF FOUND CONTRARY TO THE POLICY LANGUAGE, THETERMS OF THIS ENDORSEME UPERSEDE THE POLICY LANGUAGE. In Witness Whereof, Financial Guaranty has caused this Endorsement to be affixed with its corporate seal and to be signed by its duly authorized officer in facsimile to become effective and binding upon Financial Guaranty by virtue of thecountersignature of its duly authorized representative. President Effective Date: Authorized Representative Acknowledged as of the EffectiveDate written above: Authorized Officer U.S. Bank Trust National Association, as Fiscal Agent FGIC is a registered service mark used by Financial Guaranty Insurance Companyunder license fromits parent company, FGIC Corporation. Form E-0002 (10/93) Page 1 of 1 Financial Guaranty Insurance Company, doing business in California FGIC_ as FGIC Insurance Company 125 Park Avenue New York, NY 10017 (212) 312-3000 (800) 352-0001 Mandatory California State Amendatory Endorsement To Financial Guaranty Insurance Company Insurance Policy Policy Number: 0010001 The insurance provided by this Policy is not co'r1�' ifornia Insurance Guaranty Association (CaliforniaInsurance Code, Article 14.2). \__J\ NOTHING HEREIN SHALL BE CON �WAIVE, ALTER, REDUCE OR AMEND COVERAGE INANY OTHER SECTION OF THE� Y. IF FOUND CONTRARY TO THE POLICY LANGUAGE, THE TERMS OF THIS ENDORSEME ERSEDE THE POLICY LANGUAGE. In Witness Whereof, Financial Guaranty has caused this Endorsementto be affixed with its corporate seal and to be signed by its du ly authorized officer in facsimile to become effective and binding upon Financial Guaranty by virtue of the countersignature of its duly authorizedre presentative. President Effective Date: Authorized Representative Acknowledged as of the Effective Date written above: Authorized Officer U.S. Bank Trust National Association, as Fiscal Agent FGIC is a registered service mark used by Financial Guaranty Insurance Company underlicense fromits parent company, FGIC Corporation. Form E-0059 (10/93) Page 1 of 1 Financial Guaranty Insurance Company, doing business in California FGIC, as FGIC Insurance Company 125 Park Av enue New York, NY 10017 (212) 312-3000 (800) 352-0001 Mandatory California State Amendatory Endorsement To Financial Guaranty Insurance Company Insurance Policy PolicyNumber: Con ber: 0010001 u:� Notwithstanding the terms and conditions in his P 1�� · ·s her understood that there shall be no acceleration of payment due under such Policy ess �� acceleration is at the sole option of Financial Guaranty. � NOTHING HEREIN SHALL BE CON�-QD TO WAIVE, ALTER, REDUCE OR AMEND COVERAGE IN ANY OTHER SECTION OF THE �- IF FOUNDCONTRARY TO THE POLICY LANGUAGE, THE TERMS OF THIS ENDORSEMENT SUPERSEDE THE POLICY LANGUAGE. In Witness Whereof, Financial Guaranty has caused this Endorsement to be affixedwith its corporate seal and to be signed by its duly authorized officer in facsimile to become effective and binding upon Financial Guaranty by virtue of the countersignature of its duly authorized representative. President EffectiveDate: Authorized Representative Acknowledged as of the Effective Date written above: Authorized Officer U.S. Bank Trust National Association, as Fiscal Agent FGIC is a registered service mark used by Financial GuarantyInsurance Company under license fromits parent company, FGIC Cmporation. Form E-0075 (3/94) Page 1 of 1 [THIS PAGE INTENTIONALLY LEFT BLANK]