City of Winston-Salem, North Carolina

This Preliminary Official Statement and the information contained herein are subject to completion or amendment. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration, qualification or filing under the securities laws of any such jurisdiction. available fordeliverythrough thefacilitiesofDTConoraboutApril13,2016against paymenttherefor. the UnderwritersbyMoore &VanAllenPLLC,Charlotte,NorthCarolina.Itisexpected thatthe2016Bondswillbe will be passed upon for the City by its City Attorney, Angela I. Carmon, Esq., Winston-Salem, North Carolina, and for Wye RiverGroup,Incorporated,Annapolis,Maryland, servesastheCity’sfinancialadvisor.Certainlegalmatters by ParkerPoeAdams&BernsteinLLP,Charlotte,North Carolina,asBondCounsel,andcertainotherconditions. modification orwithdrawaloftheofferwithoutsale, and subjecttotheapprovalofvaliditycertainothermatters other thanoftheCitytoextentaforementioned TrustEstate. deemed tobeanobligationoftheCityorState ofNorthCarolinaoranypoliticalsubdivisionthereof subdivision thereofispledgedforthepayment ofthe2016Bonds,norwillBondsbeor Neither thegeneralcreditnortaxingpowerof theCityorStateofNorthCarolinaanypolitical the Trust Estate described herein, including Revenues of the City’s Water and Sewer Utilities System. 2016B Bondsarenotsubjecttoredemptionbeforetheirstatedmaturities. June 1andDecember1. the 2016Bonds. Sewer System Revenue Bonds,Series2010A, maturing onandafterJune 1, 2021and(4)payingthe costs ofissuing Sewer SystemRevenueBonds,Series2009,maturingonandafterJune1,2020,(3)refundingtheCity’sWater and and RevenueRefundingBonds,Series2007A,maturingonafterJune1,2018,(2)refundingtheCity’sWater and Bonds” andcollectivelywiththe2016ABonds,“2016”)areissuableasfullyregisteredbonds. (the “2016ABonds”)anditsTaxableWaterSewerSystemRevenueRefundingBonds,Series2016B * Dated: March__, 2016 Dated: DateofDelivery FULL BOOK-ENTRY-ONLY NEW ISSUE herein. (3) interestonthe2016BondsisexemptfromStateofNorthCarolinaincometaxation.See corporations, (2)interestonthe2016BBondsistaxableasordinaryincomeforfederaltaxpurposes,and not anitemoftaxpreferenceforpurposesthefederalalternativeminimumimposedonindividualsand interest onthe2016ABonds(a)isexcludablefromgrossincomeforfederaltaxpurposesand(b) compliance bytheCitywithcertainrequirementsofInternalRevenueCode1986,asamended(the“Code”),

Preliminary, subjectto change. The 2016Bondsareofferedwhen,asandifexecuted, deliveredandissuedbytheCity,subjecttopriorsale, The 2016BondsarespecialobligationsoftheCity,payablesolelyfromandsecuredbyapledge of The 2016ABondsaresubjecttooptionalredemptionbeforetheirstatedmaturitiesasdescribedherein. The 2016BondswillbearinterestfromtheirdatepayableonJune1,2016,andsemiannuallythereaftereach The 2016Bondsarebeingissuedforthepurposeof(1)refundingCity’sWaterandSewerSystemRevenue The City of Winston-Salem, North Carolina Water and Sewer System Revenue Refunding Bonds, Series 2016A In theopinionof Parker PoeAdams & Bernstein LLP, Bond Counsel, under existing law (1)assuming

RAYMOND JAMES Revenue RefundingBonds, PRELIMINARY OFFICIAL STATEMENT DATED MARCH 9, 2016 Water andSewerSystem BAIRD CITY OF WINSTON-SALEM, NORTH CAROLINA $118,400,000*

Series 2016A

$129,735,000* Taxable WaterandSewerSystem RICE FINANCIAL PRODUCTS COMPANY Revenue RefundingBonds, (See “MISCELLANEOUS–Ratings”herein) Series 2016B $11,335,000* J.P. MORGAN RATINGS: S&P: Due: Asshownbelow “TAX TREATMENT” Moody’s: Fitch:

2016B AAA AA+ Aa1

MATURITY SCHEDULE*

______

$118,400,000 Water and Sewer System Revenue Refunding Bonds, Series 2016A

Due Principal Interest Due Principal Interest June 1 Amount Rate Yield CUSIP(1) June 1 Amount Rate Yield CUSIP(1) 2018 $790,000 2029 $5,235,000 2019 815,000 2030 5,500,000 2020 3,405,000 2031 5,775,000 2021 6,570,000 2032 6,070,000 2022 6,805,000 2033 6,370,000 2023 7,140,000 2034 6,680,000 2024 4,105,000 2035 7,020,000 2025 4,305,000 2036 7,365,000 2026 4,530,000 2037 7,740,000 2027 4,755,000 2038 6,125,000 2028 4,985,000 2039 6,315,000

$11,335,000 Taxable Water and Sewer System Revenue Refunding Bonds, Series 2016B

Due Principal Interest Due Principal Interest June 1 Amount Rate Yield CUSIP(1) June 1 Amount Rate Yield CUSIP(1) 2016 $30,000 2018 $3,860,000 2017 205,000 2019 7,240,000

______

(1) CUSIP is a registered trademark of the American Bankers Association. CUSIP Global Services is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright©2014 CUSIP Global Services. All rights reserved. CUSIP data herein is provided by S&P Capital IQ, a division of McGraw-Hill Financial, Inc. CUSIP data herein is provided for convenience of reference only. Neither the City or the Underwriters take responsibility for the accuracy of such data.

* Preliminary, subject to change.

No dealer, broker, salesman or any other person has been authorized by the City or the Underwriters to give any information or to make any representation, other than the information and representations contained in this Official Statement, in connection with the offering of the 2016 Bonds, and, if given or made, such information or representation must not be relied upon as having been authorized by any of the foregoing. The information in this Official Statement is subject to change without notice, and neither the 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 affairs of the City or others since the date hereof. This Official Statement does not constitute an offer to sell or a solicitation of any offer to buy any of the securities offered hereby in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. This Official Statement is submitted in connection with the sale of securities as referred to herein, and may not be reproduced or be used, in whole or in part, for any other purpose.

The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their respective responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

These securities have not been registered with the Securities and Exchange Commission by reason of the provisions of Section 3(a)(2) of the Securities Act of 1933, as amended. The registration or qualification of these securities in accordance with applicable provisions of securities laws of the states in which these securities have been registered or qualified and the exemption from registration or qualification in other states, shall not be regarded as a recommendation thereof. Neither these states, nor any of their agencies have passed upon the merits of the securities or the accuracy or completeness of this Official Statement. Any representation to the contrary may be a criminal offense.

In connection with this offering, the Underwriters may over-allot or effect transactions that stabilize or maintain the market price of the 2016 Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time and, if discontinued, may be recommenced at any time.

This Official Statement contains forecasts, projections, and estimates that are based on current expectations but are not intended as representations of fact or guarantees of results. If and when included in this Official Statement, the words “expects,” “forecasts,” “projects,” “intends,” “anticipates,” “estimates,” and analogous expressions are intended to identify forward-looking statements as defined in the Securities Act of 1933, as amended, and any such statements inherently are subject to a variety of risks and uncertainties, which could cause actual results to differ materially from those contemplated in such forward-looking statements. These forward-looking statements speak only as of the date of this Official Statement. The City disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the City’s expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

For purposes of compliance with Rule 15c2-12 of the United States Securities and Exchange Commission, as amended, and in effect on the date hereof, this Preliminary Official Statement constitutes an official statement of the City that has been deemed final by the City as of its date except for the omission of no more than the information permitted by Rule 15c2-12.

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TABLE OF CONTENTS Page INTRODUCTION ...... 1 Purpose...... 2 The 2016 Bonds ...... 2 The City ...... 2 Security ...... 2 The 2015 Bonds ...... 2 Additional Bonds ...... 3 Book-Entry Only System ...... 3 Tax Treatment ...... 3 Professionals ...... 3 Continuing Disclosure ...... 4 THE 2016 BONDS ...... 4 Authorizations ...... 4 General ...... 4 Book-Entry Only System ...... 4 Redemption Provisions ...... 5 THE PLAN OF FINANCE ...... 5 ESTIMATED SOURCES AND USES OF FUNDS ...... 6 HISTORICAL DEBT SERVICE COVERAGE ...... 7 DEBT SERVICE REQUIREMENTS ...... 8 SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS ...... 9 The Trust Estate; Pledge of Revenues ...... 9 The Rate Covenant ...... 9 Amendments to General Indenture ...... 11 Additional Bonds ...... 11 Subordinate Indebtedness and Other Indebtedness ...... 13 The Reserve Fund ...... 14 Limited Liability ...... 14 THE CITY ...... 14 THE SYSTEM ...... 14 Management ...... 14 Overview of City Service Area ...... 16 Regulations ...... 18 Demand for Services ...... 18 Rates and Charges ...... 21 Regional Retail Rate Comparison ...... 23 Capital Improvement Program ...... 24 Billing and Collections ...... 25 2015-2016 Budget ...... 25 Financial Information ...... 25 CONTINUING DISCLOSURE ...... 26 VERIFICATION ...... 28 LEGAL MATTERS ...... 29 Litigation ...... 29 Existing and Future Legislation ...... 29 Approval of Legal Proceedings ...... 29 TAX TREATMENT ...... 30 2016A Bonds ...... 30 2016B Bonds ...... 33

MISCELLANEOUS ...... 35 Ratings ...... 35 Underwriting of 2016 Bonds ...... 35 Amendments ...... 36 City Financial Statements ...... 36

APPENDIX A - INFORMATION CONCERNING THE CITY APPENDIX B - FINANCIAL STATEMENTS OF THE CITY APPENDIX C - THE NORTH CAROLINA LOCAL GOVERNMENT COMMISSION APPENDIX D - FORM OF BOND COUNSEL OPINION APPENDIX E - SUMMARY OF THE INDENTURE APPENDIX F - BOOK-ENTRY-ONLY SYSTEM

State of North Carolina Department of State Treasurer

JANET COWELL State and Local Government Finance Division GREG C. GASKINS TREASURER DEPUTY TREASURER and the Local Government Commission

OFFICIAL STATEMENT

City of Winston-Salem, North Carolina

$118,400,000* $11,335,000* Water and Sewer System Taxable Water and Sewer System Revenue Refunding Bonds, Revenue Refunding Bonds, Series 2016A Series 2016B

INTRODUCTION

This Official Statement, which includes the cover and the appendices, provides certain information relating to the $118,400,000* Water and Sewer System Revenue Refunding Bonds, Series 2016A (the “2016A Bonds”) and $11,335,000* Taxable Water and Sewer System Revenue Refunding Bonds, Series 2016B (the “2016B Bonds” and together with the 2016A Bonds, the “2016 Bonds”) of the City of Winston-Salem, North Carolina (the “City”).

This introduction provides certain limited information to serve as a guide to this Official Statement and is expressly qualified by this Official Statement as a whole.

The descriptions of the 2016 Bonds, the General Trust Indenture dated as of October 1, 1988 (as supplemented and amended, the “General Indenture”) between the City and NCNB National Bank of North Carolina, the successor to which is The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), Series Indenture, Number 16, dated as of April 1, 2016 (the “Sixteenth Series Indenture” and together with the General Indenture, as previously supplemented and amended, the “Indenture”) between the City and the Trustee, and the other documents described in this Official Statement do not purport to be definitive or comprehensive. All references to those documents are qualified in their entireties by reference to the approved forms of those documents. Capitalized, undefined terms used herein will have the meanings given them in the Indenture. Certain terms used herein are defined in Appendix E to this Official Statement.

* Preliminary, subject to change.

Purpose

The proceeds of the 2016 Bonds will be used to (1) refund the City’s Water and Sewer System Revenue and Revenue Refunding Bonds, Series 2007A maturing on and after June 1, 2018, (2) refund the City’s Water and Sewer System Revenue Bonds, Series 2009 maturing on and after June 1, 2020, (3) refund the City’s Water and Sewer System Revenue Bonds, Series 2010A maturing on and after June 1, 2021 and (4) pay the costs of issuing the 2016 Bonds. See “THE PLAN OF FINANCE.”

The 2016 Bonds

The 2016 Bonds will be dated the date of their delivery, and will bear interest from their date payable on June 1, 2016, and semiannually thereafter on each June 1 and December 1, at the rates shown on the inside cover. Principal on the 2016 Bonds will be payable on June 1 in the years and amounts shown on the inside cover subject to redemption as described herein. The 2016 Bonds are offered in denominations of $5,000 and integral multiples thereof. The 2016A Bonds are subject to optional before their stated maturities. The 2016B Bonds are not subject to redemption before their stated maturities. See “THE 2016 BONDS.”

The City

See the caption “THE CITY” herein and Appendices A and B hereto for certain information regarding the City.

Security

The 2016 Bonds are special obligations of the City, payable solely from the Trust Estate pledged under the General Indenture and described under the caption “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS - The Trust Estate; Pledge of Revenues” herein. The principal of, premium, if any, and interest on the 2016 Bonds are not payable from the general funds of the City, nor do they constitute a legal or equitable pledge, charge, lien, or encumbrance upon any of its property or upon any of its income, receipts, or revenues, except the Trust Estate pledged under the General Indenture. Neither the credit nor the taxing power of the City or the State of North Carolina or any political subdivision thereof is pledged for the payment of the principal of, premium, if any, or interest on the 2016 Bonds, and no Owner of 2016 Bonds has the right to compel the exercise of the taxing power by the City, or the forfeiture of any of its property in connection with any default on the 2016 Bonds. The 2016 Bonds will be payable solely from the Trust Estate on parity with other Outstanding Bonds. After issuance of the 2016 Bonds, $428,685,000* aggregate principal amount of Bonds issued under the General Indenture will be Outstanding (including the 2016 Bonds).

The 2015 Bonds

On August 19, 2015, the City issued its Water and Sewer Refunding Bonds, Series 2015A, B and C (together, the “2015 Bonds”), for the purpose of refunding the City’s (1) Water and Sewer Revenue Bonds, Series 2002B (the “2002B Bonds”), (2) Water and Sewer System Revenue Refunding Bonds, Series 2002C (the “2002C Bonds”) and (3) Water and Sewer Refunding Bonds, Series 2007B (the “2007B Bonds”). The 2015 Bonds bear interest at variable rates equal to 69% of the monthly USD- LIBOR-BBA plus .44% to .47%. The City had entered into interest rate swap agreements related to each of the 2002B Bonds, the 2002C Bonds and the 2007B Bonds. See Note 3 “Detailed Notes on All Funds – G. Long-term Liabilities – Interest Rate Swap” in the City’s Audited Financial Statements in Appendix B

* Preliminary, subject to change.

hereto. In connection with the issuance of the 2015 Bonds, each of these interest rate swap agreements was modified. The fixed interest rate of 3.69% in the interest rate swap agreement related to the 2002B Bonds was reduced to 3.64%. The fixed interest rate of 3.00% in the interest rate swap agreement related to the 2002C Bonds was reduced to 2.96%. Prior to the issuance of the 2015 Bonds Citigroup Inc. paid the City the Securities Industry and Financial Markets Association (SIFMA) index variable rate under the interest rate swap agreement related to the 2007B Bonds. That agreement was modified so that Citigroup, Inc. now pays the City a floating rate of 69% of the monthly USD-LIBOR-BBA. As modified, the City now pays Citigroup, Inc., 3.706% of the notional amount of the related 2015 Bonds rather than 4.083%. Taking into account the modified interest rate swap agreements, the 2015 Bonds bear interest at a blended rate of 3.98%.

Additional Bonds

Under the circumstances described herein and in the General Indenture, the City may issue Additional Bonds payable from Revenues on parity with the 2016 Bonds and other Outstanding Bonds. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS - Additional Bonds.” The 2016 Bonds, other Outstanding Bonds, and any Additional Bonds are referred to collectively herein as the “Bonds.”

Book-Entry Only System

The 2016 Bonds will be issued initially in book-entry form, without physical delivery of the 2016 Bonds to beneficial owners of the 2016 Bonds (the “Beneficial Owners”). The Trustee will make principal, redemption premium, if any, and interest payments to The Depository Trust Company (“DTC”), New York, New York, which will in turn remit such payments to its participants for subsequent distribution to Beneficial Owners. See Appendix F hereto.

Tax Treatment

In the opinion of Parker Poe Adams & Bernstein LLP, Bond Counsel, under existing law (1) assuming compliance by the City with certain requirements of the Internal Revenue Code of 1986, as amended (the “Code”), interest on the 2016A Bonds (a) is excludable from gross income for federal income tax purposes and (b) is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, (2) interest on the 2016B Bonds is taxable as ordinary income for federal income tax purposes, and (3) interest on the 2016 Bonds is exempt from State of North Carolina income taxation. See “TAX TREATMENT” herein.

Professionals

Robert W. Baird & Co., J.P. Morgan Securities LLC, Raymond James & Associates, Inc. and Rice Financial Products Company (collectively, the “Underwriters”), are underwriting the 2016 Bonds. Parker Poe Adams & Bernstein LLP, Charlotte, North Carolina, is serving as Bond Counsel to the City. Wye River Group, Incorporated, Annapolis, Maryland, serves as the City’s financial advisor. Moore & Van Allen PLLC, Charlotte, North Carolina, is serving as counsel to the Underwriters. Angela I. Carmon, Esq., Winston-Salem, North Carolina, is City Attorney. The Bank of New York Mellon Trust Company, N.A., Jacksonville, Florida, is serving as the Trustee.

Continuing Disclosure

The City has undertaken in the Sixteenth Series Indenture to provide continuing disclosure of annual financial information and operating data and material events. See “CONTINUING DISCLOSURE.”

THE 2016 BONDS

Authorizations

The 2016 Bonds are authorized by The State and Local Government Revenue Bond Act (General Statutes of North Carolina, Section 159-80 et seq., as amended) (the “Act”), the General Indenture, a bond order and resolution of the City adopted by the City Council of the City on February 15, 2016, and the Sixteenth Series Indenture.

The City’s issuance of the 2016 Bonds has received the required approval of the North Carolina Local Government Commission (the “LGC”). The LGC is a division of the North Carolina State Treasurer’s office charged with the general oversight of local government finance in the State of North Carolina (the “State”). The LGC’s approval is required for substantially all local government financing arrangements in the State.

Under the Act, in determining whether to allow bonds to be issued, the LGC has wide discretion to consider the need for and feasibility of the issuance of the bonds, the local government’s capability to repay the amount financed from the pledged revenue sources, and the local government’s general compliance with State budget and finance laws. Under the Act, the LGC is also responsible, with the issuing unit’s approval, for selling bonds issued pursuant to the Act. See Appendix C hereto for further information about the LGC.

General

The 2016 Bonds are issuable solely as fully registered bonds without coupons in denominations of $5,000 or any integral multiple thereof. The 2016 Bonds will mature on June 1 of the years and in the amounts and will bear interest (computed on the basis of a 360-day year of twelve 30-day months) as shown on the inside cover page of this Official Statement. The 2016 Bonds will be dated the date of their issuance. The initial Paying Agent for the 2016 Bonds will be The Bank of New York Mellon Trust Company, N.A.

Book-Entry Only System

The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the 2016 Bonds. The 2016 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered 2016 Bond will be issued for each maturity of each series of the 2016 Bonds, each in the aggregate principal amount of such maturity of such 2016 Bond, and will be deposited with DTC. See Appendix F hereto.

Redemption Provisions

The 2016A Bonds maturing on or before June 1, 20__, are not subject to call and redemption before their stated maturities. The 2016A Bonds maturing on or after June 1, 20__ may be redeemed prior to their stated maturities, at the option of the City, from any funds that may be available for such purpose, either in whole or in part on any date on or after June 1, 20__ at the Redemption Price of 100% of the principal amount of the 2016A Bonds to be redeemed plus accrued interest thereon to the Redemption Date.

The 2016B Bonds are not subject to redemption prior to their stated maturities.

If less than all of the 2016A Bonds are called for optional redemption, the City shall determine the maturities and amounts thereof to be redeemed. If a book-entry system through DTC is used for determining beneficial ownership of the 2016A Bonds and less than all the 2016A Bonds of any maturity are called for redemption, DTC shall select the 2016A Bonds to be redeemed pursuant to its rules and procedures or, if the book-entry system through DTC or any other securities depository for determining beneficial ownership of the 2016A Bonds has been discontinued, the Trustee shall select the 2016A Bonds to be redeemed by lot in such manner as the Trustee in its discretion may deem proper, but, in any event, the portion of any 2016A Bond to be redeemed must be in an Authorized Denomination.

THE PLAN OF FINANCE

The proceeds of the 2016 Bonds will be used to (1) refund certain obligations as described below and (2) pay certain expenses incurred in connection with the issuance of the 2016 Bonds.

The City previously issued its $57,605,000 Water and Sewer System Revenue and Revenue Refunding Bonds, Series 2007A (the "2007A Bonds"), of which $47,590,000 is currently outstanding. Proceeds of the 2016 Bonds will be used to refund the 2007A Bonds maturing on and after June 1, 2018 (the "2007A Refunded Bonds"). The Refunded Bonds will be called for redemption on June 1, 2017 (the "2007A Redemption Date") at a Redemption Price equal to 100% of the principal amount of the 2007A Refunded Bonds plus interest accrued to the 2007A Redemption Date.

The City previously issued its $109,030,000 Water and Sewer System Revenue Bonds, Series 2009 (the "2009 Bonds"), of which $99,725,000 is currently outstanding. Proceeds of the 2016 Bonds will be used to refund the 2009 Bonds maturing on and after June 1, 2020 (the "2009 Refunded Bonds"). The 2009 Refunded Bonds will be called for redemption on June 1, 2019 (the "2009 Redemption Date") at a Redemption Price equal to 100% of the principal amount of the Refunded Bonds plus interest accrued to the 2009 Redemption Date.

The City previously issued its $28,505,000 Water and Sewer System Revenue Bonds, Series 2010A (the "2010A Bonds"), of which $23,525,000 is currently outstanding. Proceeds of the 2016 Bonds will be used to refund the 2010A Bonds maturing on and after June 1, 2021 (the "2010A Refunded Bonds"). The 2010A Refunded Bonds will be called for redemption on June 1, 2020 (the "2010A Redemption Date") at a Redemption Price equal to 100% of the principal amount of the Refunded Bonds plus interest accrued to the 2010A Redemption Date.

A portion of the proceeds of the 2016 Bonds will be deposited in the Escrow Fund created under the Escrow Agreement dated as of April 1, 2016 (the "Escrow Agreement") between the City and The Bank of New York Mellon Trust Company, N.A., as escrow agent (the "Escrow Agent"). Funds on deposit with the Escrow Agent will be used to purchase certain Federal Securities maturing at the time and in amounts sufficient to provide funds, together with funds deposited with the Escrow Agent and

remaining uninvested, to pay (1) the principal amount of the 2007A Refunded Bonds plus interest on the 2007A Refunded Bonds to the 2007A Redemption Date, (2) the principal amount of the 2009 Refunded Bonds plus interest on the 2009 Refunded Bonds to the 2009 Redemption Date and (3) the principal amount of the 2010 Refunded Bonds plus interest on the 2010A Refunded Bonds to the 2010A Redemption Date. Upon the execution of the Escrow Agreement and the deposit of funds with the Escrow Agent as described above, the 2007A Refunded Bonds, the 2009 Refunded Bonds and the 2010A Refunded Bonds will no longer be Outstanding or secured by the Indenture, but will be payable solely from, and secured solely by, such Federal Securities and cash deposited in the Escrow Fund. The 2016 Bonds will not be secured by the Escrow Fund.

ESTIMATED SOURCES AND USES OF FUNDS

The sources and uses of funds in connection with the issuance of the 2016 Bonds and the refunding of the 2007A Refunded Bonds, the 2009 Refunded Bonds and the 2010A Refunded Bonds are estimated below.

Estimated Sources of Funds:

Principal Amount of 2016 Bonds $______City Contribution1 ______[Plus/Less] Original Issue [Premium/Discount] ______

Total Sources of Funds $______

Estimated Uses of Funds:

Deposit to Escrow Fund $______Costs of Issuance2 ______

Total Uses of Funds $______1 Includes a contribution of the City into the Escrow Fund for the purpose of paying interest on the Refunded Bonds through the delivery date of the 2016 Bonds. 2 Includes Underwriters’ discount, rating agency, legal, accounting, financial advisor, verification agent and other fees and expenses of issuance.

HISTORICAL DEBT SERVICE COVERAGE

The following table presents historical financial information on the System including Net Revenues available for debt service and historical debt service coverage ratios for the five fiscal years from 2011 through 2015. For more detailed financial information, see Appendix B hereto. For a discussion on the calculation of the Rate Covenant, see “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS – The Rate Covenant” herein.

HISTORICAL DEBT SERVICE COVERAGE FOR THE SYSTEM (Thousands of Dollars)

2011 2012 2013 2014 2015

Net Revenues Available for Debt Service $39,895 $44,835 $53,391 $50,908 $56,745 12% of Liquid Assets 11,487 11,070 11,914 12,915 14,245

Net Revenues Available for Debt Service and 12% of Liquid Assets $51,382 $55,905 $65,305 $63,823 $70,990

Debt Service on Revenue Bonds 26,627 34,346 37,377 39,777 39,437

Debt Service on General Obligation Indebtedness and Other Indebtedness1 373 335 314 384 622

Total Debt Service on Revenue Bonds, General Obligation Indebtedness and Other Indebtedness $27,000 $34,681 $37,691 $40,161 $40,059

Debt Service Coverage on Revenue Bonds, Excluding any Liquid Assets 1.50x 1.31x 1.43x 1.28x 1.44x

Debt Service Coverage on Revenue Bonds, Including 12% of Liquid Assets 1.93x 1.63x 1.75x 1.60x 1.80x

Debt Service Coverage on Revenue Bonds, General Obligation Indebtedness and Other Indebtedness, Including 12% of Liquid Assets 1.90x 1.61x 1.73x 1.59x 1.77x

Debt Service Coverage on Revenue Bonds, General Obligation Indebtedness and Other Indebtedness, Based on Net Revenues, Excluding any Liquid 1.48x 1.29x 1.42x 1.27x 1.42x Assets

______1 Includes a note payable to the U.S. Army Corps of Engineers that financed construction costs related to the Kerr Scott Reservoir. As of June 30, 2015 the balance on the note was $30,756. The current balance of $15,581 is due August 31, 2016. This obligation is payable from Net Revenues after payment of principal of and interest on the Bonds but is not secured by any lien on Net Revenues.

DEBT SERVICE REQUIREMENTS

The following table shows the debt service requirements with respect to the 2016 Bonds and other Outstanding Bonds, not including the Refunded 2007A Bonds, the Refunded 2009 Bonds and the Refunded 2010A Bonds to be refunded with proceeds of the 2016 Bonds. For purposes of calculating the principal payable in any year, the relevant maturity or mandatory redemption amount is used. In some cases, totals in the following table may not foot due to rounding.

(Thousands of dollars)

Fiscal Debt Service on Year Other Debt Service on Debt Service on Combined Ended Outstanding 2016A Bonds 2016B Bonds Principal and Interest June 30 Bonds1 Principal Interest Principal Interest Requirements 2016 $ $ $ $ $ $ 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040

Total $ $ $ $ $ $ ______1 Does not include Subordinate Indebtedness and Other Indebtedness as defined in the General Indenture. See “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS -- Subordinate Indebtedness and Other Indebtedness.” Interest on the 2015 Bonds is calculated using the blended swap rate of 3.98% See “INTRODUCTION – The 2015 Bonds.”

SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS

The Trust Estate; Pledge of Revenues

Pursuant to the General Indenture, the City pledges the Revenues and certain other moneys held under the Indenture (the “Trust Estate”) to the Trustee for the equal and ratable benefit, protection, and security of all Owners of Bonds.

Revenues are defined in the General Indenture as all rates, fees, rentals or other charges or other income received by the City in connection with the ownership, management and operation of the System, and all parts thereof, including any amounts contributed by the City, all as calculated in accordance with generally accepted accounting principles except as otherwise provided in the Indenture, but excluding (1) amounts received from the investment of moneys in any Fund or Account, (2) assessments restricted by their terms to capital improvements, (3) net proceeds of insurance or condemnation awards or other extraordinary items, (4) any amounts collected by the City representing sales or use taxes that may be required by law or agreement to be paid to the State or a governmental unit thereof or (5) refundable deposits made by customers of the System. As described below under “--Amendments to the General Indenture,” after the Amendments take effect, Revenues will not include, among other things, certain bond debt service subsidy payments received by the City from the United States Treasury. See also “AMENDMENTS TO GENERAL INDENTURE” in Appendix E.

The System is defined in the General Indenture as the complete water and sewer system of the City operated by the Utility Commission, or subsequently constructed and acquired either from the proceeds of the Bonds or from any other sources at any time, and includes (1) all wells, pumping stations, purification plants and other sources of supply of water and all pipes, mains, and other parts of the facilities for the distribution of water and all equipment and property used in connection therewith, (2) all sanitary sewers, all waste water disposal and purification plants, and all equipment used in connection therewith, all facilities for the collection, treatment, and disposal of sewage and waste matter, including industrial wastes, and (3) all other facilities of any nature or description, real or personal, now or hereafter owned or used by the Utility Commission in the supply, distribution, and treatment of water or sewage by its municipally owned water and sewer system.

No real or personal property of the City will be mortgaged, assigned, or pledged for the benefit of the Owners of the Bonds, but under the General Indenture, the City has covenanted that the System will be transferred only under certain circumstances.

The Rate Covenant

The General Indenture provides that, before the commencement of each fiscal year, the City will fix, establish, and maintain or cause to be fixed, established, and maintained such rates and charges for the provision of services of the System, and revise or cause to be revised the same, as necessary, as will produce (1) Revenues, plus 12% of the Liquid Assets as shown in the most recent audited financial statements, at least equal in such fiscal year to the total of (a) the Operating Expenses budgeted for such fiscal year, as may be amended from time to time, plus (b) 125% of (1.25 times) the Debt Service on the Bonds to become due during that fiscal year plus (c) 100% of (1.00 times) the Debt Service for Subordinate Indebtedness to become due in such fiscal year plus (d) 100% of (1.00 times) the Debt Service for General Obligation Indebtedness to become due in such fiscal year plus (e) 100% of (1.00 times) the Debt Service for Other Indebtedness to become due in such fiscal year plus (f) 100% of (1.00 times) the amount required to reimburse the provider of a Qualified Reserve Fund Substitute for any

amounts owing thereunder; and (2) Revenues at least equal in such fiscal year to the total of 110% of (1.10 times) the requirements therefor established in the Indenture as described below in the FIRST through NINTH paragraphs under “FUNDS AND ACCOUNTS-Revenue Fund” in Appendix E.

“Operating Expenses” means the current expenses, paid or accrued, of operation, maintenance, and current repair of the System, as calculated in accordance with sound accounting practice, and includes, without limiting the generality of the foregoing, insurance premiums, any Rebate Deposit, administrative expenses of the City relating solely to the System, labor, executive compensation, the cost of materials and supplies used for current operations, and charges for the accumulation of appropriate reserves for current expenses not annually recurrent, but which are such as may reasonably be expected to be incurred in accordance with sound accounting practice. “Operating Expenses” does not include any allowance for depreciation or replacements of capital assets of the System or contractual obligations relating to the System with a term greater than one year.

“Debt Service” means, with respect to any particular fiscal year, an amount equal to the sum of (1) all interest payable on the Bonds during such fiscal year, excluding any capitalized interest payable from the proceeds of a Series of Bonds, plus (2) any Principal Installments of the Bonds during such fiscal year. For purposes of computing “Debt Service,” the rate of interest used to determine (1) above will be a rate per annum equal to (a) with respect to Bonds that bear interest at a fixed rate, the rate of interest borne or to be borne by such Bonds, and (b) with respect to Bonds that bear interest at a variable or periodically determined rate of interest, the rate that is equal to the greater of (i) the average of all the interest rates in effect on the Bonds (or that would have been in effect on the Bonds had such Bonds been Outstanding) during the immediately preceding twelve month period or (ii) the average of all the interest rates in effect on the Bonds (or that would have been in effect on the Bonds had such Bonds been Outstanding) during the immediately preceding one month period. If the City has entered into a Derivative Agreement under which it will receive payments calculated on a notional amount equal to all or a portion of the aggregate Principal amount of a Series of the Bonds and will make payments calculated on the same notional amount, the interest used to calculate (a) above will be the amount to be paid by the City, and the amount to be received will be deducted; payments on a variable or periodic basis under such an agreement will be calculated in accordance with clause (b) above. For purposes of computing “Debt Service,” the Principal Installments used to determine (2) above will be, with respect to Bonds or other obligations with a term in excess of one Year, the amount equal to the outstanding principal amount of such Bonds or other obligations less the amount of unencumbered cash or other assets of the System on hand and available for the payment of such Bonds or other obligations, divided by the number of full years in the remaining term of such Bonds or other obligations; and, with respect to notes or other obligations with a term of less than one year that are issued in anticipation of the issuance of Bonds or other obligations described above (the “Take Out Obligations”), the amount equal to the outstanding principal amount of such notes or other obligations less the amount of unencumbered cash or other assets of the System on hand and available for the payment of such notes or other obligations, divided by the number of full years expected to be in the term of the Take Out Obligation as certified to the Trustee by the Chief Financial Officer.

“Debt Service for General Obligation Indebtedness” means, with respect to any particular fiscal year, an amount equal to the sum of (1) all interest payable on the General Obligation Indebtedness during such fiscal year excluding any capitalized interest payable from the proceeds of such General Obligation Indebtedness, plus (2) any principal of the General Obligation Indebtedness during such fiscal year. Principal and interest for purposes of this definition will be computed in the manner in which the principal of and interest on the Bonds is calculated under the definition of “Debt Service.”

“Debt Service for Other Indebtedness” means, with respect to any particular fiscal year, an amount equal to the sum of all payment obligations with respect to Other Indebtedness during such fiscal year excluding any capitalized interest payable from the proceeds of such Other Indebtedness. If the payment obligation under any Other Indebtedness is stated in terms of principal and interest, such principal and interest will be computed for purposes of this definition in the manner in which the principal of and interest on the Bonds is calculated under the definition of “Debt Service.”

“Debt Service for Subordinate Indebtedness” means, with respect to any particular fiscal year, an amount equal to the sum of (1) all interest payable on Subordinate Indebtedness during such fiscal year excluding any capitalized interest payable from the proceeds of such Subordinate Indebtedness, plus (2) any principal of Subordinate Indebtedness during such fiscal year. Principal and interest for purposes of this definition will be computed in the manner in which the principal of and interest on the Bonds is calculated under the definition of “Debt Service.”

See Appendix E for definitions of other capitalized terms used above and not defined under this caption.

Amendments to General Indenture

By purchasing the 2016 Bonds, the Owners thereof (1) consent to certain amendments to the General Indenture effected by the Sixteenth Series Indenture (the "Amendments") and (2) appoint Robert W. Baird & Co. as their attorney-in-fact for the purpose of executing an instrument of consent to the Amendments. The Amendments, among other things, (1) remove certain bond debt service subsidy payments received by the City from the United States Treasury from the definition of Revenues, (2) remove certain bond debt service subsidy payments received by the City from the United States Treasury from the definition of Debt Service and (3) require the City to use those subsidy payments to pay interest on the City’s Taxable Water and Sewer System Revenue Bonds, Series 2010B and its Taxable Water and Sewer System Revenue Bonds, Series 2010C for which the City received the subsidy payments. The Amendments will not become effective unless and until the Owners of all the City’ 2007A Bonds have consented to the Amendments or the 2007A Bonds are no longer Outstanding on June 1, 2017. See “AMENDMENTS TO GENERAL INDENTURE” in Appendix E for further explanation of the Amendments.

Additional Bonds

After issuance of the 2016 Bonds, the City will have approximately $428,685,000* aggregate principal amount of Bonds issued under the General Indenture payable from the Revenues of the System. The City may issue Additional Bonds on parity with the 2016 Bonds and such other Outstanding Bonds payable from the Trust Estate under the conditions set forth in the General Indenture and described below.

(a) The City will not issue any other obligations, except on the conditions and in the manner provided in the Indenture, payable from the Revenues, having priority to or being on a parity with the lien of the Bonds issued pursuant to the Indenture, nor voluntarily create or cause to be or suffer to be created any debt, lien, pledge, assignment, encumbrance or any other charge having priority to or being on a parity with the lien of the Bonds issued pursuant to the Indenture.

(b) The City may issue Bonds to refund all or any principal amount of the Bonds; if, however, the Debt Service in any fiscal year on the Outstanding Bonds

* Preliminary, subject to change.

remaining Outstanding after the issuance of the refunding Bonds will increase as a result of such refunding or if the maximum annual Debt Service on the Bonds after the issuance of the refunding Bonds exceeds the maximum annual Debt Service on the Bonds before the issuance of the refunding Bonds, then the City must satisfy the requirements in paragraph (d) below.

(c) If the City has issued Bonds, the proceeds of which were used to acquire or construct any portion of the System and such proceeds are insufficient to pay the Costs of Construction, the City may issue a Series of Bonds in an amount equal to (1) the insufficiency, (2) any required deposit to the Reserve Fund with respect to such Series and (3) the Costs of Issuance related thereto.

(d) No Series of Bonds, other than the Bonds described in paragraph (b) and (c) above, will be issued under the General Indenture unless

EITHER:

(1) the Net Revenues, plus moneys received from the investment of moneys in any Fund or Account, as shown in the most recent audited financial statements, adjusted in the manner hereinafter provided, were at least equal to (A) 125% of (1.25 times) the maximum Debt Service on the Bonds, including the Series of Bonds to be issued, (B) 100% of (1.00 times) the Debt Service for Subordinate Indebtedness in that fiscal year, (C) 100% of (1.00 times) the Debt Service for General Obligation Indebtedness in that fiscal year and (D) 100% of (1.00 times) the Debt Service for Other Indebtedness in that fiscal year;

(2) (A) the Net Revenues, plus amounts received from the investment of moneys in any Fund or Account, as shown in the most recent audited financial statements, were at least equal to (i) 125% of (1.25 times) the Debt Service on the Bonds for such fiscal year, excluding the Series of Bonds to be issued, (ii) 100% of (1.00 times) the Debt Service for Subordinate Indebtedness in such fiscal year, (iii) 100% of (1.00 times) the Debt Service for General Obligation Indebtedness in such fiscal year and (iv) 100% of (1.00 times) the Debt Service for Other Indebtedness in such fiscal year; and

(B) (i) the Net Revenues, plus amounts received from the investment of moneys in any Fund or Account, as projected by a report of a Consultant filed with the Trustee, for the first two fiscal years following (a) the date capitalized interest, if any, provided from the proceeds of the proposed Series of Bonds is expended in the case of the acquisition of assets for or construction of improvements to the System or (b) the date the proposed Series of Bonds is issued in any other case, are at least equal to (I) 125% of (1.25 times) the Debt Service on the Bonds, including the Series of Bonds to be issued, for such fiscal years, (II) 100% of (1.00 times) the Debt Service for Subordinate Indebtedness to become due in such fiscal years, (III) 100% of (1.00 times) the Debt Service for General Obligation Indebtedness to become due in such fiscal

years and (IV) 100% of (1.00 times) the Debt Service for Other Indebtedness to become due in such fiscal years and (ii) Revenues, as projected by a Consultant to be filed with the Trustee, for the two fiscal years following (a) the date capitalized interest, if any, provided from the proceeds of the proposed Series of Bonds is expended in the case of the acquisition of assets for or construction of improvements to the System or (b) the date the proposed Series of Bonds is issued in any other case, are at least equal in such fiscal years to the total of 110% (1.10 times) the requirements therefor established in as described below in the FIRST through NINTH paragraphs under FIRST through NINTH paragraphs under “FUNDS AND ACCOUNTS-Revenue Fund” in Appendix E;

AND

(3) no Event of Default under the Indenture has occurred and is continuing.

(e) For purposes of calculating Net Revenues in subparagraph (d)(1) above, (1) if any rates, fees or charges of the System have been increased since the date of such audited financial statements or will be increased on or before the date the proposed Series of Bonds is issued, the Chief Financial Officer may add to the Net Revenues his estimate of the additional Revenues that would have been included in the calculation of Net Revenues if such rates, fees and charges had been in effect in such fiscal year and (2) if users of the System have been added as a result of an acquisition of assets from another provider of water or sewer services or as a result of a contract with another governmental unit, the Chief Financial Officer may add to the Net Revenues his estimate of the additional Revenues that would have been included in the calculation of Net Revenues if such users had been a part of the System as of the beginning of such fiscal year.

(f) An additional Series of Bonds issued after May 1, 2001, may be issued (1) with its own Account in the Reserve Fund, (2) without any right in the Reserve Fund or (3) with rights in the Parity Account of the Reserve Fund.

“Consultant” means a firm of engineers, accountants, or water and sewer consultants with recognized expertise for advising municipalities with respect to the setting of rates and charges for the use of water and sewer systems selected by the City.

“Liquid Assets” means unencumbered cash or marketable securities of the System, as shown in the audited financial statements of the City, and available for the payment of the Bonds or other obligations.

See Appendix E hereto for definitions of other capitalized terms used above and not defined under this caption.

Subordinate Indebtedness and Other Indebtedness

The City has incurred multiple revolving loans from the State payable from Net Revenues on a basis subordinate to the Bonds. The loans constitute “Subordinate Indebtedness” under the General Indenture and are secured by Net Revenues after payment of the principal of and interest on the Bonds. As of the date hereof the City has received commitments for up to $91,476,690 in such revolving loans and a letter indicating an intent to fund an additional $19,908,386. Each loan is payable over a term of 20

years from the date of completion of the project financed by such loan. As of the date hereof the City has not been required to make any debt service payments on its revolving loans.

The City has also issued a promissory note payable to the U.S. Army Corps of Engineers that financed construction costs related to the Kerr Scott Reservoir. As of June 30, 2015 the balance on the note was $30,756. The current balance of $15,581 is due August 31, 2016. The note constitutes “Other Indebtedness” under the General Indenture and is payable from Net Revenues after payment of principal of and interest on the Bonds. The note is not secured by any lien on Net Revenues.

The Reserve Fund

None of the Bonds are secured by the Reserve Fund.

Limited Liability

Neither the general credit nor the taxing power of the City or the State of North Carolina or any political subdivision thereof is pledged for the payment of the 2016 Bonds. The 2016 Bonds are special obligations of the City payable solely from the Trust Estate.

THE CITY

The City is a municipal corporation of the State, which is located in the County of Forsyth (the “County”). The City, located in the northwestern section of North Carolina, is the fourth largest city in the State. Information about the City is presented in Appendices A and B hereto.

THE SYSTEM

Management

In 1976, the City and the County consolidated their separate water and sewer systems under the newly established Winston-Salem/Forsyth County Utility Commission (the “Utility Commission”). The System functions as a department of the City under the supervision of the City Manager’s office and is operated as a consolidated water and sewer system for the residents of the City and portions of the County by the Utility Commission. The System provides water and sewer service to the City, a portion of the County and some areas outside the County. The Utility Commission sets the rates, charges and assessments for the System that are incorporated into a System budget to be approved by City Council. See “THE SYSTEM –Rates and Charges – Rate Setting Process.” The City owns all property of the System, approves the annual budget and capital improvement plan, and issues debt for the benefit of the System.

The Utility Commission has 11 members, with five appointed each by the City Council and the County Commissioners. The Chairperson is appointed jointly by the Mayor of the City and the Chairman of the Board of County Commissioners. The five appointees by the City must be residents of the City. The five appointees by the County must reside within the County. The appointments are made on a staggered basis with the City and the County making one appointment each, annually. Each member serves a five-year term and is eligible to serve two consecutive terms. This ensures there is always a majority of the membership with experience and knowledge of the Commission’s affairs. The City Manager, appointed by the City Council, appoints the Assistant City Manager, who serves as the administrative director of the System.

The Water and Sewer Utility Division of the City is organized into seven units, consisting of Administration, Water Treatment, Wastewater Treatment, Distribution and Collection, Plan Review and Permitting, Engineering/Construction Management, and Solid Waste Disposal Operations. All System workers are employed by the City.

ORGANIZATIONAL CHART

Winston-Salem Forsyth County City Council Commissioners City County Utility Commission

Office of the City Manager Lee D. Garrity

Assistant City Manager Gregory M. Turner

Utilities Director Ron Hargrove

Deputy Solid Waste Director Capital Projects Administrator Engineer

Distribution Plan Engineering/ Solid Waste Water Wastewater and Review & Construction Disposal Treatment Treatment Collection Permitting Management Operations

The professional background of the highest management officials of the System follows:

Lee D. Garrity has served as City Manager of the City since 2006. In this capacity, he reports to and is accountable to the Mayor and the City Council for the operation of city government, which operates a full range of municipal services. Since joining the City in 1990, he has served as budget and evaluation analyst, senior budget and evaluation analyst, organizational effectiveness director, and assistant city manager. Before joining the City, he worked in Washington, D.C., first as a staff member for the U.S. Senate Committee on Finance, and subsequently on the staff of the Federal Elections Commission. Mr. Garrity holds graduate and undergraduate degrees in public administration from George Mason University in Virginia. Mr. Garrity is a member of the International City/County Management Association, where he holds the designation of ‘credentialed’ manager, and is a member of the North Carolina City/County Management Association.

Gregory M. Turner has served as Assistant City Manager since December 2002, and has worked for the City since 1982. He has administrative responsibility for seven major departments of the City with more than 770 employees. Prior to that responsibility, Mr. Turner held positions of progressive responsibility in the City’s Department of Transportation, culminating with the position of Director of Transportation. He holds a Bachelor of Science degree in Electrical Engineering from North Carolina State University. He is a registered professional engineer, and he is an active member of the International Institute of Transportation Engineers and the American Public Works Association.

Ron Hargrove has served as Utilities Director for the System since April 2013. He has administrative responsibility for the water, sewer and solid waste disposal programs of the City with more than 360 employees. Prior to that responsibility, Mr. Hargrove held positions of progressive responsibility in the Utilities Division including the Deputy Utilities Director position. He holds a Bachelor of Science degree in Microbiology from Clemson University and has completed graduate-level course work in Civil Engineering at The University of North Carolina at Charlotte. He is an ‘A’ certified Water Treatment Operator and an active member of the American Water Works Association, Water Environment Federation and the Solid Waste Association of North America.

Overview of City Service Area

General. In 1776, the Town of Salem established one of the first water distribution systems in the United States. Today the water utility has grown into a regional utility serving residents of the City, the Village of Clemmons (“Clemmons”), the Town of Kernersville (“Kernersville”), the Town of Lewisville (“Lewisville”), the Town of Rural Hall (“Rural Hall”), the Town of Walkertown (“Walkertown”), and a significant portion of the County.

Water Service. The System currently serves approximately 116,374 billing locations in areas inside and outside the City’s limits. Water for the System comes from two sources, the Yadkin River and Salem Lake. The Yadkin River is capable of supplying all of the area’s water needs for the foreseeable future. The Yadkin River is currently flowing on average at 43 times the average demand, and the water supply exceeds the projected demand of the 2050 planning year by 20 times. The R.W. Neilson Plant (“Neilson Plant”) and the P.W. Swann Water Treatment Facility (“Swann Plant”), are supplied raw water via raw water pump stations on the Yadkin River. The Neilson Plant is supplied by the Idol’s Dam pumping facility and the Swann Plant is supplied by a dam and intake located on the Yadkin River, one mile north of the old US 421 bridge. The R.A. Thomas Plant (“Thomas Plant”) can be supplied by either the Yadkin River via a pipeline from the raw water storage facilities at the Neilson Plant or a gravity fed pipeline from Salem Lake, which has a capacity of approximately 1.2 billion gallons. The property surrounding Salem Lake has been restricted under a watershed protection program to ensure the quality of the supply for the future. The water distribution system consists of 2,266 miles of distribution and transmission mains. Currently three plants have a peak capacity of 91 million gallons per day (“MGD”) and treat an average of 36.1 MGD.

In addition, through agreements with the U.S. Army Corps of Engineers and Wilkes County, North Carolina, the System can draw up to 30 feet of water from the Kerr Scott Reservoir, which amounts to approximately 11 billion gallons. Assuming the System required 60 MGD, this reserved storage would last over 183 days.

All three of the System’s water treatment plants employ conventional treatment consisting of the following raw water storage or impoundment, coagulation, flocculation, sedimentation, and filtration. Chemical treatment at each facility consists of chlorination to kill harmful bacteria, corrosion control, pH adjustment and fluoridation to prevent dental caries.

The Neilson Plant, the largest water treatment plant in the System, was constructed in 1964 with an initial capacity of 24 MGD. The plant has been expanded twice, in 1985 and 1991, increasing the capacity by 12 MGD each time for a total current capacity of 48 MGD. The facility was designed to have an ultimate capacity of 72 MGD. The plant has undergone several upgrades including most recently, new chemical storage and feed systems.

The Yadkin River water is delivered to the Neilson Plant’s storage reservoirs by the Idol’s Dam Raw Water Pump Station. Water is pumped through two raw water pipelines (48-inch diameter) by three 2,100-horsepower pumps. The water is stored in two reservoirs with a total capacity of 30 million gallons, which feed the Neilson and Thomas Plants by gravity. Under extreme conditions, booster pumps located at the raw water reservoirs can be used to increase the supply to the Thomas Plant, which is fed by a 10.3-mile, 36-inch diameter concrete main, from 14 MGD (gravity) to 20 MGD.

The Thomas Plant site was originally developed for water treatment in 1901. The site was chosen as it could receive water by gravity from Salem Lake. In the early 1950s, a supply of water from the Yadkin River was piped to the site. In 2008, the existing plant was decommissioned and a new, modern 18 MGD plant was built in its place. The new Thomas Plant began operations in 2011. The plant has the same treatment processes as the Swann Plant with the exception of the raw water storage. Since the plant is gravity fed by Salem Lake and the reservoirs at the Neilson Plant, no onsite storage is necessary.

The Swann Plant was constructed in 2004. The Swann Plant, as well as the Thomas Plant, are the most automated facilities in the System and could be operated by one person at each site. The plant has six days of raw water storage on-site and is rated at a capacity of 25 MGD. The Swann Plant was designed to include the infrastructure such that it could be easily expanded to double its current size with minimal additional expense. The only requirements would be to construct the new filter complex and to add pumps and chemical feed equipment.

Once treated, water is pumped by pumping stations located at the plants to a series of ground storage tanks, elevated storage tanks, and booster stations to supply customers located in five different pressure zones within the County. There are ten elevated tanks in the System that store a total of 7.15 million gallons (“MG”). There are four ground storage tanks, which have a total storage capacity of 27 MG. There are eight booster stations within the System in addition to the pump stations located at the water treatment plants.

The Utility Commission utilizes a computer model of the distribution system, storage tanks, and pump stations to make operational and planning decisions about system expansion and maintenance. Periodically, a consultant is engaged to perform model calibration and conduct long range planning (for a 20-year period) based on population and industrial growth trends. The Utility Commission is currently updating the model calibration and water distribution system master plan. This process allows the staff to plan capital expenditures for treatment and distribution expansions.

Sewer Service. The sewer system currently serves 88,600 billing locations. Sanitary sewer treatment is provided by two wastewater treatment plants, the Elledge Wastewater Treatment Plant and the Lower Muddy Creek WWTP (together, the “WWTPs”). Both WWTPs are staffed 24 hours a day and operate under National Pollution Discharge Elimination System (“NPDES”) Permits. The sanitary sewer collection system that brings flow to the plants consists of 1,750 miles of collection and interceptor mains and 49 sanitary sewer pump stations. The WWTPs have a combined capacity of 51 MGD and currently treat an average daily flow of 29.2 MGD.

The Elledge WWTP is rated for 30 MGD and is the larger of the two plants. The plant was originally started in 1959 and was most recently upgraded in 2011. That upgrade included four new primary clarifying basins, a new control building, a new influent pumping station to allow the sewage to flow through the plant by gravity, and upgrades to the plant’s electrical system. The treatment process at the plant includes pretreatment basins for the processing of high strength industrial waste, primary treatment, activated sludge basins, clarification, chlorination, and dechlorination. Anaerobic digestion is used to treat the sludge that is produced by the plants. After digestion the sludge is dewatered and then pumped to a thermal drying facility that began operations in 2008. The dewatered sludge is transformed into a 92% solid pellet that is then land applied at agronomic rates to farmland. Chemical feed systems have been upgraded to replace chlorine gas disinfection with sodium hypochlorite.

The Lower Muddy Creek WWTP was completed and placed into service in 1986. The plant was up-rated to 21 MGD in 2000. The plant process is similar to the Elledge WWTP with the exception of not having industrial pretreatment capabilities. The Lower Muddy Creek WWTP has the ability to pump liquid digested sludge to the Elledge Plant where it is blended with the liquid sludge at Elledge WWTP and then processed in the thermal drying facility.

Both plants are able to utilize digester-produced methane gas to offset energy costs associated with plant operations. The Elledge WWTP uses the digester gas to fuel the thermal drying facility. The Lower Muddy Creek WWTP uses the digester gas to operate plant process equipment that allows it to reduce electrical power costs by peak shaving during daily demand periods.

The collection system consists of 1,750 miles of pipe ranging from 6-inch to 66-inch diameters. There are 49 pump stations that are monitored by a cellular-based telemetry system that monitors equipment and operational problems so that preventive maintenance can be performed before major problems arise. Resources available to maintenance forces include television inspection equipment, hydraulic and mechanical cleaning equipment, a full range of construction equipment including trucks, backhoes, excavators, cranes, and heavy equipment. The City is continuing a sewer audit program that combines inflow and infiltration investigations with preventive maintenance inspections of the collection system to improve the efficiency of the collection system. This program, combined with data collected by the wastewater pump station telemetry system, allows staff to organize and prioritize preventive maintenance work orders and measure program performance.

Regulations

The City is regulated by the United States Environmental Protection Agency (“EPA”) and the North Carolina Department of Environmental Quality (“DEQ”). The City currently complies with or exceeds all federal and state environmental legislation and regulations, and meets all Stage II Disinfection Byproduct Rules under the Safe Drinking Water Act. A capital improvement plan has been developed in an effort to prepare the System to comply with all currently anticipated changes in regulation.

Demand for Services

Due to its location in the Piedmont Triad area of North Carolina, the City has experienced substantial growth, especially in unincorporated areas of the County. Since consolidating in 1976 to form the Utility Commission, the City and the County have experienced substantial organic growth as well as growth by acquisition. The City acquired the water and sewer facilities of Kernersville in 1995, Clemmons in 1996, Rural Hall in 1996, and Walkertown in 2002.

The water system has grown into a regional utility serving residents of the City, Clemmons, Kernersville, Lewisville, Rural Hall, Walkertown, and unincorporated portions of the County. The Utility Commission has interlocal agreements with Stokes County and the Town of Stokesdale to provide potable drinking water. The Utility Commission also provides potable drinking water via metered connections to the Davidson County Rural Water Company and the City of Greensboro. The Utility Commission continues to receive internal and external requests for the extension of its service area.

There is a national trend in the water industry of decreasing per capita usage due to a number of factors including conservation efforts and increasingly efficient appliances. This trend in decreasing usage extends across the customer base, from retail customers to large industrial customers. Like other utilities across the country and in the State, the System has experienced this trend and expects it to continue but for the pace of decline to decrease. The demand for wastewater services is largely a function of water demand; however, the demand for wastewater services has declined less relative to the decline in the demand for water service. Partially in response to trends in demand, in 2014 the Utility Commission retained an outside financial consultant to evaluate rates and rate structures. See “Rates and Charges – Rate Setting Process” below.

The following charts present information on the number of active water and sanitary sewer service accounts at the end of each of the last five fiscal years:

HISTORICAL WATER CUSTOMER STATISTICS

Billed Fiscal Year Billed Percent Consumption Percent June 30 Accounts Growth (CCF) Growth

2011 113,639 0.26% 15,817,151 -1.05% 2012 114,143 0.44% 15,636,205 -1.14% 2013 114,792 0.57% 15,012,084 -3.99% 2014 115,482 0.60% 14,502,207 -3.40% 2015 116,374 0.77% 15,045,742 3.75%

HISTORICAL SEWER CUSTOMER STATISTICS

Billed Fiscal Year Billed Percent Consumption Percent June 30 Accounts Growth (CCF) Growth

2011 85,634 0.11% 11,895,947 -2.83% 2012 86,292 0.77% 11,925,238 0.25% 2013 87,028 0.85% 11,737,941 -1.57% 2014 87,717 0.79% 11,452,956 -2.43% 2015 88,600 1.01% 11,636,872 1.61%

The following two tables present the City’s ten largest water and sewer customers and their percentage of revenues in fiscal year 2015. No independent investigation has been made, and consequently no representation can be made as to, the stability or financial condition of any of the customers listed below or that such customers will continue to maintain their status as major customers of the System. There has been no substantial water or sewer customers added to the System since June 30, 2015.

TEN LARGEST WATER CUSTOMERS Percentage of Sales Total Water Name of Customer Type of Enterprise Revenues1 Revenues2 Reynolds American, Inc. Manufacturer $1,467,972 3.07% Corn Products International Manufacturer 1,193,062 2.50 WS/FCS Board of Education Education 491,308 1.03 WFU Baptist Medical Center Health Care 457,091 0.96 Novant Health, Inc. Health Care 374,002 0.78 Wake Forest University Education 318,396 0.67 Pepsi Cola Company Manufacturer 308,787 0.65 Winston-Salem State University Education 218,139 0.46 Microfibres, Inc.3 Manufacturer 213,611 0.45 Rexam Beverage Cans Manufacturer 204,905 0.43

Totals $5,247,273 11.00% ______1 Totals may not foot due to rounding. 2 Based on total water revenues of $47,756,744 in fiscal year 2015. 3 Microfibres, Inc. closed its manufacturing operations in the City in February 2016.

[Intentionally left blank.]

TEN LARGEST SEWER CUSTOMERS Percentage of Sales Total Sewer Name of Customer Type of Enterprise Revenues1 Revenues2

Reynolds American, Inc. Manufacturer $2,458,899 5.81% Corn Products International Manufacturer 1,917,781 4.54 City of King Local Government 1,147,953 2.71 Davie County Water, Inc. Local Government 796,308 1.88 Dairy Fresh, Inc. Manufacturer 740,447 1.75 Pepsi Cola Company Manufacturer 431,949 1.02 WFU Baptist Medical Center Health Care 390,958 0.92 Novant Health, Inc. Health Care 374,189 0.88 Hanes Dye and Finishing Manufacturer 339,722 0.80 Microfibres, Inc.3 Manufacturer 335,296 0.79

Totals $8,933,500 21.10% ______1 Totals may not foot due to rounding. 2 Based on total sewer revenues of $42,287,822 in fiscal year 2015. 3 Microfibres, Inc. closed its manufacturing operations in the City in February 2016.

Rates and Charges

General. As an enterprise fund, water and sewer operations are financed and operated as a distinct business, which is intended to operate on a self-sustaining basis. The Utility Commission’s user charge structure for water and sewer service consists of the following:

• Separate base charge fees for water and sewer accounts that vary by meter size that account for meter maintenance/repair/replacement, meter reading, billing, and readiness to serve;

• A hybrid increasing four block rate structure with a decreasing (discount) fifth block for large industrial water users based on water volume charges that vary by location; and

• Uniform volume charges for sewer that varies by location.

Rate Setting Process. The City maintains a financial model to project rate increases needed to maintain the financial stability of the System and provide sufficient revenues to meet its rate covenant. The Utility Commission is responsible for adopting appropriate rates, charges, assessments and other charges to be paid by customers for water and sewer services, according to classes of service and/or areas of service in order to generate sufficient revenue to meet all costs of operating and maintaining the System, all debt service costs, all operating capital and a reasonable reserve for improvements, and all other costs or expenses necessary for carrying out the provision of water and sewer services. The authority is provided by the City-County Agreement that established the Utility Commission in 1976. Based on the financial model, the Utility Commission approves needed rate increases on an annual basis

that are incorporated into a System budget to be approved by City Council. The rate increases are effective October 1 of each year.

As referenced above with respect to demand trends, in 2014 the Utility Commission retained an outside financial consultant to undergo a cost-of-service study and evaluate the existing cost basis for utility operations. The consultant made recommendations for rate and rate structure adjustments that meet the Commission’s revenue requirements and pricing objectives. The outcome of the study yielded that some changes were needed in the rate structure to achieve more fixed revenues from charges thus limiting exposure from the volatility of volumetric rate charges. In addition, the consultants determined that more revenues were needed from sewer charges based on the cost to serve sewer customers. Both of these recommended adjustments were first implemented with the rates that became effective on October 1, 2014.

Base Charges. These charges vary by meter size. The following table summarizes the current base charges.

CURRENT CITY MONTHLY WATER AND SEWER BASE CHARGES (PER CCF) EFFECTIVE OCTOBER 1, 2015

Meter Size Water Sewer 5/8” or 3/4” $ 6.00 $ 6.53 1” 7.68 8.23 1.5” 10.25 11.11 2” 13.77 14.51 3” 103.38 23.64 4” 134.66 33.90 6” 211.43 62.42 8” 300.48 96.63 10” 394.17 136.57 12” 548.32 250.67

Volume Charges. The new rate structure, which was first implemented in October 1, 2014, includes five tiers. The first four tiers for every water service are increasing block, which means that the cost per unit increases based on the customer’s increase in consumption. The final tier is a decreasing block tier set for heavy industrial use. The monthly cutoff for the fifth tier is 200 Ccf (or approximately 149,600 gallons), so residential customers effectively consume within the first four tiers. All irrigation services are strictly increasing block with no fifth decrease tier. Sewer volume charges are uniformly billed based upon 100% of water consumption, exclusive of consumption metered through separate irrigation meters.

MONTHLY VOLUMETRIC RATES (CITY) EFFECTIVE OCTOBER 1, 2015

Consumption Range Rate per in cubic feet 100 cubic feet Water Tier 1 0-300 $1.99 2 301-600 2.96 3 601-900 2.96 4 901-20,000 3.29 5 20,001+ 2.00

Irrigation Tier

1 0-300 $1.99 2 301-600 2.96 3 601-900 2.96 4 Above 900 3.29

Sewer All usage 0+ $3.03

Regional Retail Rate Comparison

The City has historically had some of the lowest rates in the State. The table below shows a comparison of water and sewer bills with other representative communities as of October 1, 2015. Each city’s projected bill is based on a residential customer with a 5/8” meter located inside the respective city using 600 Ccf on a monthly basis and billed bimonthly. As shown in the table, the City continues to have low, competitive rates for the region, which is expected to remain the case even with the projected rate increases.

WATER AND SEWER BILL COMPARISON Total Bill

Raleigh $60.59 Durham $53.01

Charlotte $51.90 Winston-Salem $41.37

Greensboro $40.59

CURRENT RATE INDICES FOR OTHER SERVICE AREAS

Rate Municipality/Unincorporated Area Service(s) Multiplier1 Feasibility Rate2 Water/Sewer 1.5 Forsyth County Water/Sewer 1.5 Town of Kernersville Water 1.2 Town of Kernersville Sewer 2.487 Town of Rural Hall Water/Sewer 1 Village of Clemmons Water 1 Village of Clemmons Sewer 1.2 Town of Walkertown Water 2 Town of Walkertown Sewer 2 Town of Stokesdale Water 2 Davidson County Sewer 2 Davie County Sewer 2 King Sanitary District Sewer 1.5 Stokes County Water-Sewer Authority Water 2

Notes: 1 Multiplier applied to City rates. 2 The Feasibility Rate multiplier applies to an area outside of the incorporated City that is not governed by an existing interlocal agreement. In addition to the Feasibility Rate, customers in some other service areas pay a debt service fee for a period of 22 years.

Historical and Projected Rate Increases. The table below summarizes historical and projected rate increases.

HISTORICAL AND PROJECTED RATE INCREASES Fiscal Year Ended June 30 Actual Projected 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Water 8% 9.75% 7% 4.5% 5.3% 7% 7% 5% 5% 5% Sewer 9% 9.75% 7% 6.7% 5.3% 7% 7% 5% 5% 5%

Capital Improvement Program

Each year the City updates a multi-year capital improvement program for the System as part of the annual budget process. A significant portion of the capital improvement program addresses changes that may be necessary as a result of The Clean Water Act, which prohibits discharging "pollutants" through a "point source" into a "water of the United States" without a National Pollutant Discharge Elimination System (NPDES) permit. These permits, which must be renewed at least every five years, specify an acceptable level of a pollutant or pollutant parameter in a discharge. Other proposed projects

address other regulatory requirements that affect the water, sewer, and solid waste disposal facilities and operations.

In addition, the staff, working with a consultant, continues to work on a sewer collection system master plan that will meet the anticipated capacity needs for the next 30 years within the System’s service area. The planning for the South Fork basin has been completed and proposes some significant capital spending within the basin. The proposed capital improvement budget reflects the major infrastructure projects needed within the South Fork basin and includes improvements identified as necessary for the Muddy Creek basin.

During fiscal years 2017 and 2018, capital improvements to the System are estimated at approximately $152 million. The City expects to finance approximately $63 million of the System’s capital needs with state revolving loans. The balance of the capital improvements are expected to be funded from Revenues of the System and a series of Additional Bonds, currently expected to be issued during 2017. The City’s 2015-2020 Adopted Capital Plan can be found on the City’s website at http://www.cityofws.org/Departments/Budget.

Billing and Collections

The City is responsible for all billing and collections. Residential accounts are billed on a bimonthly basis and larger industrial/commercial accounts which consume large quantities of water are billed on a monthly basis. The System has over 125,000 metered locations with bills being produced twice per week. A request for new service requires an evaluation of the customer’s credit score through a collection agency. If the score returned is low, a deposit is required to establish service.

Upon receipt of a bill, a customer is given 28 days to pay the balance without penalty. Twenty- nine days after the bill date, a 10% penalty is added. Thirty-five days after the bill date a termination notice is issued and a disconnection of the service will occur on the fifth day with a $20 fee added to the account. Several methods are used to collect accounts that become delinquent when termination of service has not been effective or the account is in final status. The account may be turned over to a collection analyst who sends out a higher level of collection correspondence and makes telephone calls in an attempt to work with the customer to get delinquent balances paid. If payment is not received, the water meter may be removed from the location. Accounts may also be sent to an outside collection agency or submitted to the North Carolina Debt Service Program where delinquent balances will be garnished from any State income tax refund or State lottery winning. The City annually analyzes and records a bad debt reserve for accounts that may be uncollectable. Customers who have delinquent account balances from prior locations are not given service at a new location without payment in full of the delinquent accounts.

2015-2016 Budget

The water and sewer operations budget for the fiscal year ending June 30, 2016 continues a trend of minimal annual increases, with an overall increase of $504,690 or 1.2%.

Financial Information

For financial information on the System for the fiscal year ended June 30, 2015, see Appendix B hereto.

CONTINUING DISCLOSURE

In the Sixteenth Series Indenture, the City undertook, for the benefit of the Owners and Beneficial Owners of the 2016 Bonds, to provide:

(a) by not later than seven months after the end of each fiscal year, commencing with the fiscal year ending June 30, 2016, to the Municipal Securities Rulemaking Board (the “MSRB”) in an electronic format as prescribed by the MSRB, the audited financial statements of the City for the preceding fiscal year, if available, prepared in accordance with Section 159-34 of the General Statutes of North Carolina, as it may be amended from time to time, or any successor statute, or if such audited financial statements are not then available, unaudited financial statements of the City for such fiscal year to be replaced subsequently by audited financial statements of the City to be delivered within 15 days after such audited financial statements become available for distribution;

(b) by not later than seven months after the end of each fiscal year, commencing with the fiscal year ending June 30, 2016, to the MSRB, (a) the financial and statistical data as of a date not earlier than the end of the preceding fiscal year for the type of information included in this Official Statement (i) under “HISTORICAL DEBT SERVICE COVERAGE” in the table entitled “HISTORICAL DEBT SERVICE COVERAGE FOR THE SYSTEM” and (ii), under “THE SYSTEM” the information shown in the tables entitled “TEN LARGEST WATER CUSTOMERS,” “TEN LARGEST SEWER CUSTOMERS,” and a description of monthly water and sewer rates as set forth under “Rates and Charges—Base Charges” and “Rates and Charges – Volume Charges”, in each case to the extent such items are not included in the audited financial statements referred to in paragraph (1) above;

(c) in a timely manner to the MSRB, notice of the occurrence of any of the following events with respect to the 2016 Bonds:

(1) principal and interest payment delinquencies;

(2) non-payment related defaults, if material;

(3) unscheduled draws on the debt service reserves reflecting financial difficulties;

(4) unscheduled draws on any credit enhancements reflecting financial difficulties;

(5) substitution of any credit or liquidity providers, or their failure to perform;

(6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the 2016 Bonds or other material events affecting the tax status of the 2016 Bonds;

(7) modification of the rights of the Beneficial Owners of the 2016 Bonds, if material;

(8) call of any of the 2016 Bonds, if material, and tender offers;

(9) defeasance of any of the 2016 Bonds;

(10) release, substitution or sale of any property securing repayment of the 2016 Bonds, if material;

(11) rating changes;

(12) bankruptcy, insolvency, receivership or similar event of the City;

(13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to such actions, other than pursuant to its terms, if material;

(14) Appointment of a successor or additional trustee or the change of name of a trustee, if material; and

(d) in a timely manner, to the MSRB, notice of a failure of the City to provide required annual financial information described in (a) or (b) above on or before the date specified.

The City agreed to provide all the documents described above in an electronic format as prescribed by the MSRB and accompanied by all identifying information as prescribed by the MSRB.

At present, Section 159-34 of the General Statutes of North Carolina requires the City’s financial statements to be prepared in accordance with generally accepted accounting principles and to be audited in accordance with generally accepted auditing standards.

The Sixteenth Series Indenture also provides that if the City fails to comply with its Rule 15c2-12 undertakings described above, the Trustee or any Owner or beneficial owner may take action to protect and enforce the rights of all Owners and beneficial owners with respect to such undertaking, including an action for specific performance of the City’s obligations, but a failure by the City to comply with its Rule 15c2-12 undertakings will not be an event of default under the Indenture and will not result in acceleration of the payment of the 2016 Bonds.

Pursuant to the Sixteenth Series Indenture, the City reserved the right to modify from time to time the information to be provided to the extent necessary or appropriate in the judgment of the City, provided that:

(1) any such modification may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of the City;

(2) the information to be provided, as modified, would have complied with the requirements of Rule 15c2-12 issued under the Securities Exchange Act of 1934 (“Rule 15c2-12”) as of the date of this Official Statement, after taking into account any amendments or interpretations of Rule 15c2-12, as well as any changes in circumstances; and

(3) any such modification does not materially impair the interests of the Owners or the Beneficial Owners of the 2016 Bonds, as determined by Bond Counsel or by approving vote of the Owners of a majority in principal amount of the 2016 Bonds pursuant to the terms of the General Indenture, as it may be amended from time to time, at the time of the amendment.

Any annual financial information containing modified operating data or financial information is required to explain, in narrative form, the reasons for the modification and the impact of the change in the type of operating data or financial information being provided.

The undertaking described above will terminate upon payment, or provision having been made for payment in a manner consistent with Rule 15c2-12, in full of the principal and interest on all of the 2016 Bonds.

With respect to the City’s Storm Water Fee Revenue Bonds, Series 2013, some operating data was inadvertently omitted from the annual disclosure report filed in January 2014. The City made a corrective filing upon learning of the omission. This undertaking was the first of its type for the City, and the City subsequently instituted procedures to avoid similar omissions in the future. In addition, since 2008, the rating agencies have periodically downgraded the claims-paying ability of municipal bond insurers and the ratings of financial institutions providing credit or liquidity support to governmental financings several times without giving notice of such downgrades to the City. The City has learned of some downgrades through general media sources and, when it did so, filed the appropriate material event notice related to such ratings downgrades to the extent they were applicable to the City’s indebtedness; however, it is possible that the City either was unaware of a downgrade or did not learn of a downgrade in order to file a notice in a timely fashion. The City is not aware of any other instances in the last five years in which it has failed to comply, in any material respect, with an undertaking made pursuant to Rule 15c2- 12.

VERIFICATION

The accuracy of (1) the mathematical computations of the adequacy of the maturing principal and interest with respect to the Federal Securities deposited in the Escrow Fund to pay, together with any uninvested cash held in the Escrow Fund, when due, principal and interest with respect to the Refunded Bonds and (2) the mathematical computations supporting the conclusion that the 2016 Bonds are not “arbitrage bonds” under the Code will be verified by Barthe & Wahrman, P.A. Such verification will be based, among other things, on mathematical computations supplied by the Underwriters. Bond Counsel will rely on such verification in rendering its opinion as to the exclusion of interest with respect to the 2016 Bonds from gross income of the recipients thereof for purposes of federal income taxation.

LEGAL MATTERS

Litigation

There is no litigation pending against the City or the System or, to the knowledge of its officers, threatened that in any way questions or affects the validity of the 2016 Bonds or any proceedings or transactions relating to its authorization, issuance, sale, or delivery. There is no litigation pending against the City or the System or, to the knowledge of its officers or counsel, threatened that, if successful, would, in the opinion of counsel to the City and the System, materially adversely affect the operation or financial condition of the City or the System.

Existing and Future Legislation

Chapter 246 of the 2015 North Carolina Session Laws became effective August 1, 2016; among other things, the legislation provides that a property owner must be given a private drinking water well permit on request:

(1) For undeveloped property, even if a public utility has lines that can serve the property; or

(2) For developed property, unless the public utility has installed lines directly available to the property or will have lines available to the owner when the development needs to be connected;

Once a well permit is issued, a public utility can only mandate connection if:

(1) The well fails and cannot be repaired;

(2) The well water is contaminated or likely to become contaminated;

(3) The public utility is being managed financially by the Local Government Commission; or

(4) until July 1, 2017, the public utility will have lines available to the property within 24 months.

The City does not anticipate that the legislation will have a material adverse effect on its Revenues. THE CITY CAN, HOWEVER, GIVE NO ASSURANCES THAT SIMILAR LEGISLATION MAY NOT BE ENACTED IN THE FUTURE BY THE NORTH CAROLINA GENERAL ASSEMBLY WHICH WILL HAVE A MATERIAL ADVERSE EFFECT ON ITS REVENUES.

Approval of Legal Proceedings

The legal opinion concerning the authorization, delivery, and sale of the 2016 Bonds, and with regard to the tax-exempt status thereof under existing laws, regulations, rulings, and judicial decisions, is to be delivered by Parker Poe Adams & Bernstein LLP, Charlotte, North Carolina, Bond Counsel. Copies of such opinion will be available at the time of the delivery of the 2016 Bonds. Certain legal opinions will be delivered for the City by its City Attorney, Angela I. Carmon, Esq., Winston-Salem, North Carolina, and for the Underwriters by Moore & Van Allen PLLC, Charlotte, North Carolina.

TAX TREATMENT

2016A Bonds

General. On the date of issuance of the 2016A Bonds, Parker Poe Adams & Bernstein LLP, Charlotte, North Carolina (“Bond Counsel”), will render an opinion that, under existing law (1) assuming compliance by the City with certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”), interest on the 2016A Bonds (a) is excludable from gross income for federal income tax purposes, and (b) is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and (2) interest on the 2016A Bonds is exempt from State of North Carolina income taxation. Bond Counsel expresses no opinion regarding whether the interest on the 2016A Bonds will be taken into account in determining the adjusted current earnings of certain corporations (as defined for federal income tax purposes) for purposes of determining federal alternative minimum taxable income.

The interest on the 2016A Bonds will be taken into account in determining adjusted current earnings of certain corporations (as defined for federal income tax purposes), and such corporations are required to include in the calculation of federal alternative minimum taxable income 75% of the excess of such corporation’s adjusted current earnings over its federal alternative minimum taxable income (determined without regard to this adjustment and prior to reduction for certain net operating losses). The Code imposes various restrictions, conditions and requirements relating to the exclusion of interest on obligations, such as the 2016A Bonds, from gross income for federal income tax purposes, including, but not limited to, the requirement that the City rebate certain excess earnings on proceeds and amounts treated as proceeds of the 2016A Bonds to the United States Treasury, restrictions on the investment of such proceeds and other amounts, and restrictions on the ownership and use of the facilities financed or refinanced with proceeds of the 2016A Bonds. The foregoing is not intended to be an exhaustive listing of the post-issuance tax compliance requirements of the Code, but is illustrative of the requirements that must be satisfied by the City subsequent to issuance of the 2016A Bonds to maintain the excludability of the interest on the 2016A Bonds from gross income for federal income tax purposes. Bond Counsel’s opinion is given in reliance on certifications by representatives of the City as to certain facts material to the opinion and the requirements of the Code. The City has covenanted to comply with all requirements of the Code that must be satisfied subsequent to the issuance of the 2016A Bonds in order that the interest on the 2016A Bonds be, or continue to be, excludable from gross income for federal income tax purposes. The opinion of Bond Counsel assumes compliance by the City with such covenants, and Bond Counsel has not been retained to monitor compliance by the City with such covenants subsequent to the date of issuance of the 2016A Bonds. Failure to comply with certain of such requirements may cause the interest on the 2016A Bonds to be included in gross income for federal income tax purposes retroactive to the date of issuance of the 2016A Bonds. No other opinion is expressed by Bond Counsel regarding the federal tax consequences of the ownership of or the receipt or accrual of interest with respect to the 2016A Bonds.

If the interest on the 2016A Bonds subsequently becomes included in gross income for federal income tax purposes due to a failure by the City to comply with any requirements described above, the City are not required to redeem the 2016A Bonds or to pay any additional interest or penalty.

The Internal Revenue Service has established an ongoing program to audit tax-exempt obligations to determine whether interest on such obligations is includible in gross income for federal income tax purposes. Bond Counsel cannot predict whether the Internal Revenue Service will commence an audit of the 2016A Bonds. Prospective purchasers of the 2016A Bonds are advised that, if the Internal Revenue

Service does audit the 2016A Bonds, under current Internal Revenue Service procedures, at least during the early stages of an audit, the Internal Revenue Service will treat the Board as the taxpayer, and the owners of the 2016A Bonds may have limited rights, if any, to participate in such audit. The commencement of an audit could adversely affect the market value and liquidity of the 2016A Bonds until the audit is concluded, regardless of the ultimate outcome.

Prospective purchasers of the 2016A Bonds should be aware that ownership of the 2016A Bonds and the accrual or receipt of interest on the 2016A Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property or casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, certain Subchapter S Corporations with “excess net passive income,” foreign corporations subject to the branch profits tax, life insurance companies and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry the 2016A Bonds. Bond Counsel does not express any opinion as to any such collateral tax consequences. Prospective purchasers of the 2016A Bonds should consult their own tax advisors as to the collateral tax consequences.

Proposed legislation is considered from time to time by the United States Congress that, if enacted, would affect the tax consequences of owning the 2016A Bonds. No assurance can be given that any future legislation, or clarifications or amendments to the Code, if enacted into law, will not contain provisions which could cause the interest on the 2016A Bonds to be subject directly or indirectly to federal or State of North Carolina income taxation, adversely affect the market price or marketability of the 2016A Bonds or otherwise prevent the owners of the 2016A Bonds from realizing the full current benefit of the status of the interest on the 2016A Bonds.

Bond Counsel’s opinion is based on existing law, which is subject to change. Such opinion is further based on factual representations made to Bond Counsel as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinion to reflect any facts or circumstances that may thereafter come to Bond Counsel’s attention, or to reflect any changes in law that may thereafter occur or become effective. Moreover, Bond Counsel’s opinion is not a guarantee of a particular result, and is not binding on the Internal Revenue Service or the courts; rather, such opinion represents Bond Counsel’s professional judgment based on its review of existing law, and in reliance on the representations and covenants that Bond Counsel deems relevant to such opinion. Bond Counsel’s opinion expresses the professional judgment of the attorneys rendering the opinion regarding the legal issues expressly addressed therein. By rendering its opinion, Bond Counsel does not become an insurer or guarantor of the result indicated by that expression of professional judgment, of the transaction on which the opinion is rendered, or of the future performance of the City, nor does the rendering of such opinion guarantee the outcome of any legal dispute that may arise out of the transaction.

Original Issue Discount. As indicated on the inside cover page, the 2016A Bonds maturing on June 1, 20__ (the “OID Bonds”), are being sold at initial offering prices which are less than the principal amount payable at maturity. Under the Code, the difference between (a) the initial offering prices to the public (excluding bond houses and brokers) at which a substantial amount of each maturity of the OID Bonds is sold and (b) the principal amount payable at maturity of such OID Bonds, constitutes original issue discount treated as interest which will be excluded from the gross income of the owners of such OID Bonds for federal income tax purposes.

In the case of an owner of an OID Bond, the amount of original issue discount on such OID Bond is treated as having accrued daily over the term of such OID Bond on the basis of a constant yield compounded at the end of each accrual period and is added to the owner’s cost basis of such OID Bond in determining, for federal income tax purposes, the gain or loss upon the sale, redemption or other

disposition of such OID Bond (including its sale, redemption or payment at maturity). Amounts received upon the sale, redemption or other disposition of an OID Bond which are attributable to accrued original issue discount on such OID Bonds will be treated as interest exempt from gross income, rather than as a taxable gain, for federal income tax purposes, and will not be a specific item of tax preference for purposes of the federal alternative minimum tax imposed on corporations and individuals. However, it should be noted that with respect to certain corporations (as defined for federal income tax purposes), a portion of the original issue discount that accrues to such corporate owners of OID Bonds in each year will be taken into account in determining the adjusted current earnings for the purpose of computing the federal alternative minimum tax imposed on such corporations and may result in other collateral federal income tax consequences for certain taxpayers in the year of accrual. Consequently, corporate owners of an OID Bond should be aware that the accrual of original issue discount on any OID Bond in each year may result in a federal alternative minimum tax liability or other collateral federal income tax consequences, even though such corporate owners may not have received any cash payments attributable to such original issue discount in such year.

Original issue discount is treated as compounding semiannually at a rate determined by reference to the yield to maturity of each individual OID Bond. The amount treated as original issue discount on an OID Bond for a particular semiannual accrual period is equal to (a) the product of (i) the yield to maturity for such OID Bond (determined by compounding at the close of each accrual period) and (ii) the amount which would have been the tax basis of such OID Bond at the beginning of the particular accrual period if held by the original purchaser, less (b) the amount of interest payable on such OID Bond during the particular accrual period. The tax basis is determined by adding to the initial public offering price on such OID Bond the sum of the amounts which have been treated as original issue discount for such purposes during all prior accrual periods. If an OID Bond is sold between semiannual compounding dates, original issue discount which would have accrued for that semiannual compounding period for federal income tax purposes is to be appointed in equal amounts among the days in such compounding period.

The Code contains additional provisions relating to the accrual of original issue discount in the case of owners of the OID Bonds who subsequently purchase any OID Bonds after the initial offering or at a price different from the initial offering price during the initial offering of the 2016A Bonds. Owners of OID Bonds should consult their own tax advisors with respect to the precise determination for federal and state income tax purposes of the amount of original issue discount accrued upon the sale, redemption or other disposition of an OID Bond as of any date and with respect to other federal, state and local tax consequences of owning and disposing of an OID Bond. It is possible that under the applicable provisions governing the determination of state or local taxes, accrued original issue discount on an OID Bond may be deemed to be received in the year of accrual even though there will not be a corresponding cash payment attributable to such original issue discount until a later year.

Original Issue Premium. As indicated on the inside cover page, the 2016A Bonds maturing on June 1, 20__ (the “Premium Bonds”) are being sold at initial offering prices which are in excess of the principal amount payable at maturity. The difference between (a) the initial offering prices to the public (excluding Bond houses and brokers) at which a substantial amount of the Premium Bonds is sold and (b) the principal amount payable at maturity of such Premium Bonds constitutes original issue premium, which original issue premium is not deductible for federal income tax purposes. In the case of an owner of a Premium Bond, however, the amount of the original issue premium which is treated as having accrued over the term of such Premium Bond is reduced from the owner’s cost basis of such Premium Bond in determining, for federal income tax purposes, the taxable gain or loss upon the sale, redemption or other disposition of such Premium Bond (whether upon its sale, redemption or payment at maturity). Owners of Premium Bonds should consult their tax advisors with respect to the determination, for federal

income tax purposes, of the “adjusted basis” of such Premium Bonds upon any sale or disposition and with respect to any state or local tax consequences of owning a Premium Bond.

2016B Bonds

General. On the date of issuance of the 2016B Bonds, Bond Counsel will render an opinion that, under existing law, interest with respect to the 2016B Bonds is taxable as ordinary income for federal income tax purposes. Bond Counsel expresses no opinion regarding any other federal income tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest with respect to, the 2016B Bonds.

Set forth below is a general summary of the anticipated material federal income tax consequences of the purchase, ownership and disposition of the 2016B Bonds. Such summary does not address every aspect of the federal income tax laws that may be relevant to prospective purchasers of 2016B Bonds in light of their personal investment circumstances or to certain types of owners subject to special treatment under the federal income tax laws (for example, banks and life insurance companies) and is generally limited to investors who will hold 2016B Bonds as capital assets within the meaning of Section 1221 of the Code. In addition, this summary does not address alternative minimum tax issues or the indirect consequences to a holder of an equity interest in a prospective purchaser. Accordingly, prospective purchasers of the 2016B Bonds should consult their own tax advisors regarding federal, state, local, foreign and any other tax consequences with respect to the purchase, ownership and disposition of the 2016B Bonds in their own particular circumstances. Such summary is based on the provisions of the Code, as amended, the Treasury Regulations thereunder, and published rulings and court decisions in effect as of the date hereof, all of which are subject to change, possibly retroactively. No ruling on any of the issues summarized below has been or will be sought from the IRS, and no assurance can be given that the IRS will not take contrary positions and will not prevail with such positions.

Prospective purchasers of the 2016B Bonds should be aware that the acquisition, ownership or disposition of, and the accrual or receipt of interest with respect to, the 2016B Bonds may result in collateral federal income tax liability consequences to certain taxpayers as well as any tax consequences that may arise under the laws of any state, local or foreign jurisdiction. The extent of such other collateral tax consequences will depend upon the owner’s particular tax status or other items of income or deduction and prospective purchasers of the 2016B Bonds, particularly prospective purchasers that are dealers in securities or currencies, traders in securities, persons holding 2016B Bonds as a hedge, straddle, conversion or other integrated transaction for federal income tax purposes, insurance companies, financial institutions, tax-exempt organizations and United States holders whose functional currency is not United States dollars, should consult their own tax advisors as to the collateral tax consequences of acquiring, owning or disposing of, and the accrual or receipt of interest with respect to, the 2016B Bonds. Bond Counsel expresses no opinion regarding any such collateral tax consequences.

The Code requires debt obligations, such as the 2016B Bonds, to be issued in registered form and denies certain benefits to the issuer and the holders of debt obligations failing such registration requirement. Such registration requirement with respect to the 2016B Bonds is expected to be satisfied. Subject to certain exceptions, the portion of the Installment Payments designated and paid as interest to the owners of 2016B Bonds will be reported to the IRS. Such information will be filed each year with the IRS on Form 1099 (or such other applicable form), which reflects the name, address and taxpayer identification number of each registered owner of the 2016B Bonds. A copy of Form 1099 (or such other applicable form) will be sent to each registered owner of the 2016B Bonds for federal income tax reporting purposes.

Tax Classification of 2016B Bonds. Bond Counsel is of the opinion that, under existing law, the 2016B Bonds will be treated for federal income tax purposes as indebtedness, and the interest on the 2016B Bonds will be included in the income of the owner as it is paid (or, if the owner is an accrual method taxpayer, as it is accrued) as interest.

Market Discount. The resale of any 2016B Bond by any owner of such 2016B Bond may be affected by the “market discount” provisions of the Code. For such purpose, the market discount on any 2016B Bond will generally be equal to the amount, if any, by which the stated prepayment price at maturity of such 2016B Bond immediately after its acquisition by such owner exceeds such owner’s adjusted tax basis in such 2016B Bond. Subject to a de minimis exception, such market discount provisions generally require an owner of a 2016B Bond which is acquired by such owner at a market discount to treat any payment on, or any gain recognized on the sale, exchange, prepayment or other disposition of, such 2016B Bond as ordinary income to the extent of any “accrued market discount” on such 2016B Bond which has not previously been included in income at the time of sale or other disposition by such owner. In general, any market discount on 2016B Bond will be treated as accruing on a straight-line basis over the term of such 2016B Bond, or, at the election of the owner of such 2016B Bond, under a constant yield method. Prospective purchasers of 2016B Bonds should consult their own tax advisors as to the tax consequences of acquiring, owning or disposing of, and the accrual or receipt of interest with respect to, 2016B Bonds acquired at a market discount.

Premium. If a 2016B Bond is purchased by an owner at a premium, the owner may be entitled to amortize such premium as an offset to interest income (with a corresponding reduction in the owner’s basis) under a constant yield method over the term of the 2016B Bond if an election under Section 171 of the Code is made or is previously in effect.

Sale of 2016B Bonds. If a 2016B Bond is sold or redeemed, the seller will recognize gain or loss equal to the difference between the amount realized on the sale or redemption and the seller’s adjusted basis in the 2016B Bond. Such adjusted basis generally will equal the cost of the 2016B Bond to the seller, increased by any market discount included in the seller’s gross income and decreased by any payments on the 2016B Bond. Except with respect to market discount, gain or loss recognized on a sale, exchange or prepayment of a 2016B Bond will generally give rise to capital gain or loss if the 2016B Bond is held as a capital asset and will be long-term if the holding period is more than one year. The holding period analysis may be affected by the determination of whether the 2016B Bonds are treated as a single debt instrument or a series of debt instruments and prospective purchasers are especially encouraged to consult with their own tax advisers on this subject.

Foreign Investors. Generally, payments of the interest on the 2016B Bonds to an owner of 2016B Bonds that is a nonresident alien individual, foreign corporation or other non-United States person (a “foreign person”) not engaged in a trade or business within the United States will not be subject to federal income or withholding tax if such foreign person complies with certain identification requirements (including the delivery of a statement, signed by such owner under penalty of perjury, certifying that such owner is a foreign person and providing the name and address of such owner). Foreign investors should consult their own tax advisors regarding the potential imposition of withholding taxes. The summary herein assumes that the owners of the 2016B Bonds are not foreign persons. Special rules may apply to foreign persons with respect to the information reporting requirements and withholding taxes and foreign persons should consult their tax advisors with respect to the application of such reporting requirements and withholding taxes.

Backup Withholding. Payments made to an owner with respect to the 2016B Bonds and proceeds from the sale of the 2016B Bonds will ordinarily not be subject to withholding of federal income

tax if such owner is a United States person. However, even a United States person will be subject to withholding of such tax at a rate of 28% under certain circumstances. Except in the case of certain “exempt payees” as defined in the Code, such backup withholding will generally be applicable if an owner (1) fails to furnish to the City such owner’s social security number or other taxpayer identification number (collectively, “TIN”), (2) furnishes the City an incorrect TIN, (3) fails to report properly interest, dividends or other “reportable payments” as defined in the Code, or (4) under certain circumstances, fails to provide the City with a certified statement, signed under penalty of perjury, that the TIN provided to the City is correct and that such owner is not subject to backup withholding.

State Taxation of 2016B Bonds. Bond Counsel is further of the opinion that, under existing law, the interest on the 2016B Bonds is exempt from State of North Carolina income taxation.

MISCELLANEOUS

Ratings

Moody’s, S&P and Fitch have assigned the 2016 Bonds the ratings shown on the cover. Such ratings reflect only the opinions of the rating agencies and are not recommendations to buy, sell, or hold the 2016 Bonds. Any explanation of the significance of such ratings may only be obtained from Moody’s, Standard & Poor’s or Fitch. There is no assurance that any rating will remain the same for any given period of time or that any rating will not be revised downward or withdrawn entirely by the relevant rating agency, if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of either rating may have an adverse effect on the market price of the 2016 Bonds.

Underwriting of 2016 Bonds

The Underwriters have agreed to purchase the 2016 Bonds under a Purchase Contract at a purchase price equal to the aggregate principal amount of the 2016 Bonds ______[plus/less] original issue [premium/discount] less an Underwriters’ discount equal to $______. The Underwriters are committed to take and pay for all of the 2016 Bonds if any are taken. The 2016 Bonds were offered for sale to the public at the prices shown on the inside cover page of this Official Statement.

J.P. Morgan Securities LLC (“JPMS”), one of the Underwriters of the 2016 Bonds, has entered into negotiated dealer agreements (each, a “Dealer Agreement”) with each of Charles Schwab & Co., Inc. (“CS&Co.”) and LPL Financial LLC (“LPL”) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to each Dealer Agreement, each of CS&Co. and LPL may purchase 2016 Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any 2016 Bonds that such firm sells.

Parker Poe Adams & Bernstein LLP serves as bond counsel for the City and, from time to time it and Moore & Van Allen PLLC, counsel to the Underwriters, have represented the Underwriters as counsel in other financing transactions. Neither the City nor the Underwriters have conditioned the future employment of either of these firms in connection with any proposed financing issues for the City or for the Underwriters on the successful issuance of the 2016 Bonds.

The Underwriters retained Underwriters’ counsel based, in part, on the recommendations of the City.

Amendments

Notwithstanding anything in the General Indenture or the Sixteenth Series Indenture to the contrary, (1) any initial purchaser, underwriter or remarketing agent holding any 2016 Bonds or another series of the Bonds issued after the issuance of the 2016 Bonds may, regardless of its intent to sell or distribute such Bonds in the future, consent as the Owner of such Bonds to any amendment or supplemental indenture as required or permitted by the General Indenture, including any amendment or supplemental indenture that adversely affects the interests of other Owners, and (2) any such holder providing its consent is not entitled to receive, nor is the City required to provide, any prior notice or other documentation regarding such amendment or supplemental indenture. This amendment will become effective if all of the Owners of 2007 Bonds Outstanding consent to the amendment or once the 2007 Bonds are no longer Outstanding.

City Financial Statements

The City’s basic financial statements have been audited by independent certified public accountants for each fiscal year through June 30, 2015. Copies of these financial statements containing the unqualified reports of the independent certified public accountants (as to the conformity of the financial statements to generally accepted accounting principles, as applicable, consistently applied) are available from the City’s Chief Financial Officer at 101 North Main Street (27101), Post Office Box 2511, Winston-Salem, North Carolina 27102, (336) 727-2608. The City’s basic financial statements and the notes thereto, drawn from the City’s comprehensive annual financial report for the fiscal year ended June 30, 2015, are included as Appendix B. The City has not requested nor obtained the consent of its auditor to the inclusion of these financial statements in this Official Statement.

APPENDIX A

INFORMATION CONCERNING THE CITY

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APPENDIX A

THE CITY

GENERAL DESCRIPTION

The merger of Salem, founded in 1766, and Winston, founded in 1849, formed the City in 1913. The City has an area of approximately 131.9 square miles and is located approximately 210 miles from the Atlantic shore, 250 miles southwest of Washington, D.C., and 290 miles northeast of Atlanta, Georgia. Local business activity includes health care, biotechnology, financial services, manufacturing, apparel, textiles, transportation, computer-related services, electrical/industrial equipment, tobacco products, education, and tourism.

The City, the county seat of Forsyth County (“County”), is part of a larger region known as the “Piedmont Triad” that includes Greensboro to the east and High Point to the south. The region’s growth is actively promoted through the Piedmont Triad Partnership, a nonprofit organization chartered specifically for regional business recruitment, leadership development, and regional strategic planning throughout the 12-county region. The City is a part of the Greensboro-Winston-Salem-High Point, North Carolina Combined Statistical Area (“CSA”), a region of nearly 1.6 million people.

Honors in the last five years include being named one of America’s Most Affordable Cities by Mercer’s annual cost of living survey and one of the best places to retire by CNN Money and Forbes magazines. The City is receiving increasing attention for its attractiveness as a retirement destination. The City was named to a prestigious list of the most livable communities in the United States for travel, business investment, relocation, learning, retiring, and living by Partners for Livable Communities, a national nonprofit organization that compiles its list every 10 years. For 10 years in a row, the City has received the President’s Circle Award from Keep America Beautiful. Local affiliate Keep Winston- Salem Beautiful has received national recognition for the many innovative programs it has developed, such as the annual Community Roots Day, a day for planting trees and shrubs in parks, greenways, and rights-of-way throughout the City.

In the fall of 2015, the City was named for the 14th year in a row by the Center for Digital Government as one of the top 10 most technology-advanced cities (population of 125,000 to 249,999) in the United States. The City’s website allows citizens to interact with City government by requesting services, reporting problems, paying bills online, getting information, and even watching City Council meetings.

DEMOGRAPHIC CHARACTERISTICS

The United States Department of Commerce, Bureau of the Census, has recorded the population of the City as follows:

1990 2000 2010 143,485 185,776 229,617

The North Carolina Office of State Budget and Management has estimated the population of the City as follows:

2012 2013 2014 233,232 235,527 237,905

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Personal per capita income for the City and the State as of June 30 is presented in the following table:

Year City(1) State (2) 2011 $34,996 $36,622 2012 35,526 38,655 2013 36,416 37,774 2014 37,625 39,171 2015 37,943 n/a ______(1) Source: The City’s 2015 Comprehensive Annual Financial Report. (2) Source: United States Department of Commerce, Bureau of Economic Analysis.

COMMERCE AND INDUSTRY

General. The City has a diversified economic profile drawing from health care, biotechnology, financial services, manufacturing, apparel, textiles, transportation, computer-related services, electrical/industrial equipment, tobacco products, education and tourism. While in the past manufacturing was the major economic sector, the service sector has surpassed it, currently accounting for approximately 40% of the work force. The City is home to two Fortune 500 companies, Branch Banking and Trust Company and Reynolds American Inc., the parent company of R.J. Reynolds Tobacco Company. Other major private employers in the City include Wake Forest Baptist Health, Novant Health, Inc., Wells Fargo Bank, and Wake Forest University (Reynolda Campus).

Health Care. The dynamic growth of the health care industry has provided the area with significant economic gains in recent years, surpassing traditional tobacco, textile and furniture industries. The health care sector has become the City’s largest industry. The City is home to the second and fourth largest hospitals in North Carolina and continues to maintain its position as the preeminent center for medical services for the northwest section of the State and southwest area of Virginia. There are three hospitals located in the City: Wake Forest Baptist Health (comprised of multiple facilities), Forsyth Medical Center and Medical Park Hospital, the last two of which are part of the Novant Health Triad Regional network.

Wake Forest Baptist Health (“WFBH”) is the largest employer in the City with approximately 12,870 employees in the County as of July 2015. WFBH is an academic health system comprised of North Carolina Baptist Hospital, Brenner Children’s Hospital, Wake Forest University Physicians and Wake Forest University Health Sciences, which operates Wake Forest University’s School of Medicine and Wake Forest Innovation Quarter, a research and technology park. WFBH has one of only 45 Comprehensive Cancer Centers in the nation as designated by the National Cancer Institute. It is the region’s only Level 1 trauma center, equipped to manage the most complex medical cases and the state’s only Level 1 Pediatric Trauma Center.

WFBH is the only academic medical center in western North Carolina. It is an integrated health care system that operates 1,004 acute care, rehabilitation and psychiatric care beds, outpatient services, and community health and information centers. For the last 23 years, U.S. News and World Report ranked WFBH as one of the top 50 “America’s Best Hospitals” in the specialties of cancer, gastroenterology, geriatrics, nephrology, neurology/neurosurgery, pulmonology and urology. It is one of only four North Carolina hospitals ranked in one or more specialties. Approximately 92% of the physicians in the County are on the medical staff of WFBH. Other locations that are part of the Wake

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Forest Baptist Health system include Lexington Medical Center in Lexington, Davie Medical Center in Mocksville and in Bermuda Run, Medical Plaza Clemmons and Medical Plaza Country Club.

The City is also home to Novant Health, Inc. (“Novant Health”), a private, not-for-profit holding company that primarily serves North and South Carolina and parts of Virginia and Georgia. Novant Health consists of 15 medical centers, including two located in the City, Forsyth Medical Center and Medical Park Hospital, and 343 clinic locations in North Carolina, Virginia, South Carolina, and Georgia. Novant Health also includes MQ Associates, Inc. (“MedQuest”), a national diagnostic imaging company that owns and/or operates 78 outpatient centers. Novant Health employs 1,123 physicians located at its 343 sites.

Novant Health employs approximately 8,145 health care workers locally. Forsyth Medical Center, with 921 beds, is the flagship of Novant Health and a tertiary referral center for patients from a 12-county service area. Forsyth Medical Center offers a full range of medical, surgical, rehabilitative, and behavioral services, including the following centers of excellence: Forsyth Rehabilitation Center, Maya Angelou Center for Women’s Health and Wellness, Forsyth Cardiac & Vascular Center affiliated with the Cleveland Clinic, Derrick L. Davis Forsyth Regional Cancer Center, Forsyth Stroke & Neurosciences Center, Forsyth Regional Orthopedic Center, and Forsyth Medical Center Behavioral Health. Close to 40,000 surgical procedures, including more than 6,500 general surgery procedures, 7,000 orthopedic and neurological procedures and 700 open-heart surgeries are performed each year at Forsyth Medical Center and Medical Park Hospital. The Maya Angelou Center is the region’s first center to coordinate comprehensive healthcare and wellness services specifically designed to meet the unique needs of women through every stage of life. The center is the region’s first to employ women’s health navigators to help coordinate the vast array of women’s services available throughout the medical center around the specific needs of women. It is the largest birthing center in the region, and the second largest in the State, with more than 6,000 births per year. Medical Park Hospital, a 22-bed hospital, specializes in elective inpatient and outpatient surgeries.

In 2013, Forsyth Medical Center was the first hospital in this region to earn the Advanced/Comprehensive Stroke Center designation from the Joint Commission and the American Health Association/American Stroke Association. The hospital also is North Carolina’s first nationally certified Primary Stroke Care Center.

In addition to acute inpatient care, Novant Health provides long-term care, behavioral health services and outpatient services such as diagnostic imaging, outpatient surgery and physical, occupational and speech therapies. Salem MRI Center is a freestanding outpatient facility providing magnetic resonance imaging services in the City. The Breast Center provides services to more than 40,000 women each year, including screening and diagnostic mammography, ultrasound, needle localizations, biopsies, and osteoporosis screening, as well as mobile mammography service. Two nursing homes, Springwood Care Center of Forsyth and The Oaks of Forsyth, provide residential care, therapies, and recreation for more than 350 long-term or transitional patients. Forsyth Medical Center Behavioral Services provides adult inpatient treatment, including geriatric and medical psychiatric services and intensive outpatient substance abuse recovery services.

Novant also operates a 50-bed community hospital in Kernersville, Novant Health Kernersville Medical Center. The Center provides an array of health services including emergency, surgery, cardiovascular and cancer care to eastern Forsyth County and beyond.

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The newest facility in Novant’s local service area is Novant Health Clemmons Medical Center, serving Clemmons, Lewisville, and Davie County. The $25.8 million hospital opened in 2013 and includes emergency, surgical, and imaging services.

Novant Health and its staff received the 2006 and the 2011 President’s Award for commitment to service excellence for patients, physicians, and employees. Professional Research Consultants, a nationally known healthcare research company, presents this highest recognition each year to only one healthcare organization in the nation. Novant Health also has been recognized as one of North Carolina Family-Friendly 50 Companies by Charlotte Parent and Piedmont Parent magazines. The health system has been recognized by the Joint Commission for the quality and safety of its patient care and its hospitals are listed among the best in the country in U.S. News & World Report’s “Best Hospitals.”

Biotechnology. The Piedmont Triad is the second largest biotechnology cluster in the State with more than 50 life science and biotech companies, professional firms and organizations. In 1994, Wake Forest University helped form Wake Forest Innovation Quarter (“WFIQ”), originally called Piedmont Triad Research Park and renamed in 2013, as a 12-acre research and technology park located downtown that supports laboratory, office and mixed use space. WFBH continues to own and operate much of the park, which is expected to grow to nearly 200 acres at build-out.

WFIQ is one of the fastest-growing and largest urban-based research parks in the United States with a master plan for as much as six million square feet of office, laboratory and mixed-used space. By the end of 2015, more than 50 technology companies and 20 academic departments and entities are employing more than 3,000 scientists, engineers, and other professionals in 1.1 million square-feet of world-class facilities in WFIQ, which is surrounded by 2,200 apartments, lofts, and condominiums.

The WFIQ’s biggest project opened in 2012, the $100 million, 242,000 square-foot Wake Forest BioTech Place. Wake Forest University Health Sciences (“WFUHS”) occupies about 85% of BioTech Place with about 25,000 square feet set aside for wet laboratories for startup companies. Wet laboratories are laboratories where chemicals, drugs, or other material or biological matter are tested and analyzed in liquid solutions or volatile phases, which requires water, direct ventilation, and specialized piped utilities. This project was a public-private partnership among WFUHS, Wexford Science and Technology LLC, the City, and the County.

In April 2014, Inmar, a local technology firm that offers consulting and software services, moved its headquarters and 900 employees to WFIQ. Wexford Science & Technology LLC, the developer of BioTech Place, will occupy space on the Inmar campus, and work to recruit startup businesses.

In June 2014, the $75 million, 234,000 square-foot building known as 525@vine opened at WFIQ. The new complex also was developed by Wexford Science & Technology LLC and is connected to the Inmar headquarters. Tenants in education, software development and exercise occupy the building, including Wake Forest University School of Medicine’s Division of Public Health Sciences and Department of Physician Assistant Studies, which relocated to WFIQ bringing approximately 450 staff, faculty and students. PHS researchers are involved in studies to improve specific aspects of public health. The PA program is rated by U.S. News & World Report as one of the nation’s top physician assistant programs. Forsyth Technical Community College’s Business & Industry Services division also moved to WFIQ in October 2014 and is expected to serve more than 1,200 students annually.

Biotech companies with a presence at WFIQ include ALR Technologies Inc., which makes medication reminder devices; Kucera Pharmaceutical Co., which is developing AIDS and cancer drugs; Anasazi Biomedical Research, which is developing new cancer imaging technology; Charter Medical, which is headquartered in the City and produces medical containers and bags used for such things as

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blood transfusions; Ocular Systems, which in 2011 processed its 10,000th cornea for transplant and received FDA clearance to market a device that helps surgeons during corneal transplantation; GlycoMark, Inc., which developed an FDA-approved blood test for the intermediate-term screening of glycemic control in people with diabetes; Childress Institute for Pediatric Trauma, which conducts research on new techniques for the care of children; C Change Surgical, which developed a sterile field thermal control technology for use during surgery; and Nanomedica, Inc., which performs research in areas of biomedical applications of nanotechnology and molecular biology. AsinEx, a Russian medicinal chemistry company, has established its North American headquarters at WFIQ. Two new tenants are Blue Atom Technologies Inc., which provides technology analytics to life-science companies, and Biolucidation LLC, which provides non-clinical testing to the same industry.

WFIQ is also home to the Wake Forest Institute for Regenerative Medicine (“Institute”), the largest freestanding facility dedicated to regenerative medicine. The Institute created the world’s first laboratory-engineered organ, bladder tissue, which has been successfully implanted in children and adults. The Institute also focuses on cellular therapies for treatment of diabetes, heart disease and other maladies.

The Wet Lab LaunchPad provides early-stage start-up companies with affordable laboratory space. There are several tenants one of which is Tengion, Inc., a biotechnology company that develops cell tissues that can be used to create human organs.

In addition to Wake Forest University, the University of North Carolina System has a presence at WFIQ with the opening of The Center for Design Innovation in spring 2015. The Center is sharing the new facility with The University of North Carolina School of the Arts, Winston-Salem State University (“WSSU”) and Forsyth Technical Community College (“FTCC”) to offer creative research and development services to the business community in training the next generation of design professionals. WSSU also is leading a task force to establish a state-of-the-art supercomputing center to provide high speed informatics, visualization and computational infrastructure for WFIQ. The facility includes a 60 x 60 foot space known as “the Cube” one of the largest dedicated spaces for motion-capture research in the Southeast. First used in the entertainment industry, motion-capture technology is now benefiting fields as diverse as manufacturing, engineering, ergonomics, athletics, rehabilitation, and medicine. “Rapid prototyping” refers to a process of creating digital models of objects that are then output from 3D printers.

Local educational institutions are actively assisting the City’s biotechnology efforts outside WFIQ. Near its Reynolda campus, the Center for Nanotechnology and Molecular Materials at Wake Forest University conducts research in areas such as alternative energy, biomedical nanotechnologies (also known as nanomedicine), and novel nanomaterials. FTCC, which serves over 600 companies, has the largest program in health technology and the largest biotechnology degree program in the State. The FTCC Center for Emerging Technologies will provide training for technicians in biotechnology and nanotechnology to support the growing research and development efforts centered in this area.

Wake Forest University and Virginia Polytechnic Institute (“Virginia Tech”) have a joint biomedical engineering program that draws on the strengths of both institutions – Wake Forest University in medicine and Virginia Tech in engineering.

Financial Services. The City is headquarters to BB&T, which is among the nation’s largest financial services organizations with $209.9 billion in assets and market capitalization of $29.5 billion as of December 31, 2015. BB&T operates approximately 2,139 financial centers in 15 states and Washington, D.C., and offers a full range of consumer and commercial banking, securities brokerage, asset management, mortgage, and insurance products. A Fortune 500 company, BB&T is consistently

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recognized for outstanding client satisfaction by J.D. Power and Associates, the U.S. Small Business Administration, Greenwich Associates, and others. In 2012 BB&T acquired the life and property and casualty insurance divisions of New Jersey-based Crump Group Inc. The acquisition made BB&T the largest independent wholesale distributor of life insurance and the second largest provider of wholesale commercial insurance brokerage and specialty programs in the United States. It has been named one of the World’s Strongest Banks by Bloomberg Markets Magazine, one of the top three in the U.S. and the top 15 globally.

In addition, Wells Fargo Bank, National Association, which is part of Wells Fargo & Company, houses its Carolinas Wealth Management and the Carolinas technology operations in the City. Wells Fargo & Company is the fourth largest financial holding company in the United States based on $1.8 trillion in assets as of December 31, 2015. Wells Fargo Bank, National Association is the largest financial services employer in the City.

There are more than three dozen other state and nationally chartered banks, savings and loans, and credit unions located in the County. Allegacy Federal Credit Union was founded in the City in 1967 to serve the employees of R.J. Reynolds Tobacco Co. It now has 110,000 members throughout the world and about $1 billion in assets. Current members include the employees, retirees, and families of over 600 companies in the U.S. is one of the largest credit unions in the State. Truliant Federal Credit Union, with 30 member financial centers in four states, is headquartered in the City and currently serves more than 195,000 member-owners with assets nearing $2 billion and provides services to more than 1,100 organizations throughout the Carolinas and Virginia. The Carolina Farm Credit Service (successor to the Federal Land Bank and the Production Credit Association) also maintains offices in the City. This institution offers long and short-term financing to farmers and rural homeowners.

Piedmont Federal Savings Bank, founded in the City in 1903, continues to be one of the nation’s soundest banks. Piedmont Federal has received a five-star rating (the highest possible) for it financial strength and stability from Bauer Financial for more than 25 years. As of December 31, 2015, Piedmont Federal Savings Bank had assets of more than $920 million and operated nine retail branches in Forsyth, Wilkes and Watauga counties.

Manufacturing. Although manufacturing is no longer the largest employment sector in Winston-Salem and Forsyth County, it continues to be a major player, employing approximately 11% of the population. Reynolds American, Inc., the parent company of R.J. Reynolds, is a long-time corporate citizen of Winston-Salem and employs around 3,000 workers. Reynolds American purchased Lorillard, Inc. for $29.25 billion in June 2015, making it one of the largest acquisitions in the history of the tobacco industry which gives Reynolds the number 2, 3, and 4 cigarette brands in the nation: Newport (from Lorillard), Camel and Pall Mall. Reynolds kept Newport but sold the rest of Lorillard’s operations to Imperial Tobacco Group PLC. Reynolds announced its intention of diversifying its product line to include a growing portfolio of non-cigarette products.

In addition to Reynolds American, Inc., other major manufacturers have a presence in the City. The City is the headquarters for Hanesbrands, Inc., which includes such well-known brands as Hanes, Champion, Playtex, Bali, and Maidenform. The third quarter of 2015 was Hanesbrands’ seventh consecutive quarter of record year-over-year results for net sales, adjusted operating profit and adjusted earnings per share. In 2011 heavy-equipment manufacturer Caterpillar Inc. opened a $426 million 850,000-square-foot manufacturing facility in the City and began production of massive axle assemblies for Caterpillar trucks with the largest such truck capable of carrying a load equal to that of 20 semi-trucks. The incentives provided by the City were contingent upon Caterpillar meeting certain capital investment milestones and employment goals. Herbalife International of America, Inc. purchased the former Dell,

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Inc. plant in the City in 2012, and is a global nutrition company with products that include protein shakes and snacks; nutrition, energy and fitness supplements; and personal care products. Herbalife began production of its first salable products with more than 200 workers at its $100 million manufacturing and distribution hub in May 2014. In July 2015 Herbalife announced in plans to hire another 300 full-time jobs by the end of 2018, boosting its workforce by 60% to 899 jobs. The new jobs will include production and corporate information-technology staff with average annual salaries of more than $54,000.Yet another example of the City repurposing and renovating older buildings, the historic Weeks manufacturing plant, once the world’s largest textile factory, was leased by United Furniture Industries, maker of promotional upholstery and vinyl furniture. This 850,000 square-foot plant once was used by Sara Lee Corporation. In July 2015, less than one year after moving into the building, United Furniture Industries had hired 280 employees and was searching for additional distribution and warehouse space fueled by increased demand for its products.

A $300 million hub for Federal Express at the Piedmont Triad International Airport (“PTIA”), which is between the City, Greensboro and High Point, opened in June 2009 and has an estimated 220 employees. In 2010 a third 9,000-foot runway was constructed to accommodate the Federal Express planes. Federal Express opened a distribution hub in nearby Kernersville in 2011 and added approximately another 83,000 square feet to its existing 400,000 square-foot $110 million facility in spring 2015.

Krispy Kreme Doughnuts Inc. was founded in the City in 1937. The company is a branded specialty retailer and wholesaler of sweet treats and complementary products. Its products can be purchased at 855 locations in 24 countries.

Honda Aircraft Company, Inc. (“HondaJet”), a wholly owned subsidiary of Honda Motor, began construction of its facility at the PTIA in 2006. The HondaJet facility totals more than 130 acres. HondaJet currently has over 2,500 employees and has received orders for its corporate jets. The first jet is expected to come off its production line sometime in early 2016.

Business Parks. The industrial site market in the City and County represents a substantial economic development resource for the area. Over 8,200 acres of property are situated along the County’s strategic development corridors. The City works with local economic development organizations to ensure that there is an inventory of attractive space available in business parks for prospective newcomers.

The Union Cross Business Park (“Union Cross”), a 403-acre public-private partnership established for light industrial uses, is nearly filled and is home to manufacturing, distribution and corporate facilities. Approximately 70 acres of Union Cross will remain natural with sidewalks, ponds, and woods. In recent years, real estate developers have constructed speculative facilities at Union Cross of 500,000 square feet and 100,000 square feet, respectively. Union Cross is home to several companies, including Bekaert Textiles, a Belgian mattress ticking manufacturer; Atlantic Coast Toyotalift; Exhibit Works, a leader in large-scale exhibits and displays; Liberty Hardware, a leader in decorative and effective home hardware products; Clearing House Payments Company, a New York-based financial services data center and operations facility; United Furniture Industries; and United Guaranty.

Another 99.4-acre site adjacent to Caterpillar and Herbalife is well connected with high-capacity utilities and convenient access to a major interstate. The site is certified “ready for immediate development” by the North Carolina Certified Sites program. This site is suitable for advanced manufacturers, data centers or logistics operations. The acreage is large enough to accommodate up to a one million square-foot facility or several smaller facilities.

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Pepsi Bottling Ventures expanded its operations in the City with a $82 million capital investment to upfit a 526,000 square-foot building in Union Cross) that streamlined its operations and vertical integration of production. The facility will eventually house 500 workers. Pepsi-Cola has an employment base of 1,050 employees in Forsyth County. Pepsi Bottling Ventures remains the largest privately-held bottler of Pepsi-Cola products in North America, operating 21 bottling and distribution facilities that serve over eight million consumers in North Carolina, South Carolina, Virginia, Maryland, and Delaware.

The approximately 45-acre Brookwood Business Park (formerly Airport Business Park) is being assembled and developed near Smith Reynolds Airport to provide space for businesses interested in smaller parcels of land. One building has been completed and houses the Winston-Salem Police Department indoor firing range. A second building is under construction and is expected to be completed by mid-2016.

Tourism. There are approximately 5,000 hotel and motel rooms in the area with an estimated 932 rooms within walking distance from the M.C. Benton, Jr. Convention Center and Civic Center (“MC Benton”), which is located in downtown Winston-Salem. MC Benton offers 87,500 square feet of flexible meeting space and is directly connected to 1,400 covered parking spaces, 466 first-class hotel rooms in one major hotel complex, shops, and an additional 40,000 square feet of smaller meeting space. The availability of rooms near MC Benton has contributed greatly to the area’s attractiveness as a site for meetings of all sizes and types.

On June 27, 2014, PMC Property Group acquired the downtown Reynolds Building, the former headquarters for R.J. Reynolds Tobacco Company. The new owners have announced plans to convert the building into a Kimpton Hotel with approximately 175 hotel rooms and 120 apartment units. The renovation is expected to be complete in May 2016 at a cost of approximately $60 million and generate 250 jobs. Kimpton Hotels have 60 boutique hotel locations and nearly 70 restaurants in 17 states.

Graylyn International Conference Center of Wake Forest University has hosted presidents of the United States, as well as Fortune 500 boards and government groups. The 55-acre estate was originally the home of Bowman Gray, a leading southern industrialist who was president and chairman of R.J. Reynolds Tobacco Company from 1924-1935. The family later gave the estate to Wake Forest University for educational purposes.

Each year an estimated 500,000 people visit Old Salem, one of the most authentic historic restorations in the country covering about 100 buildings over 90 acres. The Museum of Early Southern Decorative Arts (“MESDA”) and the Children’s Museum are also a part of Old Salem. Costumed interpreters re-create daily life during the late 18th and early 19th centuries in the former German-speaking trading center and Moravian church town. Old Salem also includes the Single Brothers’ Gardens, the largest garden restoration project in the country.

DOWNTOWN DEVELOPMENT

Downtown Winston-Salem’s living, shopping, food, and entertainment options continue to expand and to grow in number and variety. The City has received national recognition for having one of the best downtowns in the United States based on factors such as entertainment options and green space. Downtown development as well as recruitment of new business to the City as a whole, has largely resulted from the leadership and strategic moves of the City Council and the Winston-Salem Alliance, a non-profit alliance headed by Mayor Allen Joines, with membership that includes some of Winston- Salem’s most influential companies and organizations. With the community focused on specific projects identified in the City’s Downtown Plan, combined with support from the City, interest in downtown

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development continues to remain high. In addition, the City has provided matching financing where needed when development leads to job creation.

Additional residential development has taken place including the former Indera Mills Building (28 units), the Charles Department Store Building (13 units), the Piedmont Leaf Lofts Building (45 units), Holly Village (6 “live/work” units), Trader’s Row (16 units plus 40,000 square feet of office and retail space), the conversion of the former Brown & Williamson Building into 77 condominiums, Goler Manor (70 apartments in an independent living facility), Eight Thirty Six Oak (30 units), One Park Vista (32 units plus retail and office space) and 4th & Broad and the Towns (52 condominiums, 20 townhomes). Hilltop South apartments, the first apartment complex in Winston-Salem built with prefabricated modular units, a technique popular in Europe. The estimated value of the 65-unit apartment building is $6.3 million. The conversion of three historic factories for mixed-use residential development was recently announced: Chatham Mills, on the northwest edge of downtown, will support up to 150 new units; R.J. Reynolds Factory 64, now Plant 64, on the eastern edge of downtown, will support up to 200 new units, and 86 units will be located in the P.F. Hanes Building on the northeast edge of downtown.

The City, the County, the Downtown Winston-Salem Partnership, and Piedmont Federal Savings Bank also have partnered to create a master development plan for a two city-block area, including the Pepper Building, the Mother & Daughter Building, and the old County courthouse. The City took the lead in 2006 to demolish several abandoned buildings within the plan area and a private developer has already completed the first phase with the construction of One Park Vista (32 condominiums). Winston- Salem developer Michael Coe purchased the Pepper Building to develop the building as a joint venture with U.S. Development Co. (“US Development”) based in Columbia, South Carolina. Coe and US Development have announced plans to renovate the building for apartments and a first-floor restaurant.

Mast General Store Inc. (“Mast”) purchased the four-story, 64,000 square-foot property known as Coe Plaza on Trade, Fifth and Cherry Streets in downtown Winston-Salem. Mast operates the building through a joint venture with US Development and opened its tenth Mast General Store on the bottom two floors of the building in spring 2015. The store has approximately 35 employees. US Development is renovating the top two floors to create 45 apartments with monthly rents starting in the $700 to $800 range.

Arts and entertainment continue to play an important part in the continued growth of downtown. In fall 2010 a Downtown Center for the Arts opened with performing arts spaces, public galleries, arts education, a revitalized amphitheater, and landscaped parking areas. Other projects downtown in the last few years include a Winston Cup Racing Museum on the northern edge of downtown and a Children’s Museum on the southern side of downtown. Several live music clubs can be found downtown, featuring jazz, rhythm and blues, and alternative music along with coffeehouses featuring folk, bluegrass, and acoustic music. Free outdoor concerts continue on Thursday, Friday and Saturday nights from May through September.

The Brookstown Project, located on downtown’s west side, is becoming a major new residential, employment and entertainment district in the City. The development includes BB&T Ballpark, a minor league baseball stadium that opened for the 2010 season of the Winston-Salem Dash. An upscale downtown apartment complex, the Link Apartments Brookstown, opened in August 2014 across the street from BB&T Ballpark, consisting of 205 studio and one- to two-bedroom units. It is being called the “first institutional grade, ground-up apartment community in downtown”. The complex has approximately 250 spaces in a parking deck, a pool, a 24-hour clubhouse, a 24-hour fitness center, and an electric car charging station.

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The Southeast Gateway project, strategically located near Salem College and Academy, the University of North Carolina School of the Arts and Winston-Salem State University, began in 2004. The project is home to a 90,000 square-foot YWCA sports and wellness center and the Summit building consisting of 43 residential units and 10,000 square feet of retail space. Another building is occupied by Novant Health (approximately 200 employees) to handle billing, accounts receivable, and other financial functions.

The Noble Investments Group (“Noble”) from Atlanta, Georgia acquired and renovated two downtown hotels, converting one to a 315-room Marriott Hotel and the other to an Embassy Suites Hotel with 146 two-room suites, a $28 million investment in downtown. This project, which was completed in August 2005, houses approximately 70,000 square feet of meeting and banquet space. The City invested $10 million in the Embassy Suites Hotel portion of the project to acquire a condominium interest constituting the public space. As part of the project, Noble assumed management and catering of the City-owned, 200,000 square-foot MC Benton in July 2004, which is attached to the hotel complex by an underground pedestrian tunnel. Noble operates the total meeting and convention space of the hotels and the Convention Center as one complex.

In spring of 2015, Fairfield Inn & Suites by Marriott purchased and invested $3 million in renovations to hotel located at 126 South Main Street. It is an easy walk to City Hall, Wake Forest Innovation Quarter, Old Salem Museum and Gardens, Salem College and the vibrant Arts District in downtown Winston-Salem. Development in the northern district of downtown continues with additional small business and private investment. Several projects including new residential, restaurant, and entertainment construction have stretched the growth to encompass the entire downtown area including the Dr. Martin Luther King, Jr. extension. The City has provided approximately $500,000 of sidewalk and street improvements from 4th Street to Dr. Martin Luther King, Jr. Drive.

OTHER DEVELOPMENT

A 26.5-acre mixed-use development known as Hanestowne Village is in the final stage of completion at the site of a former Hanesbrands plant on S. Stratford Road close to both Wake Forest Baptist Medical Center and Forsyth Medical Center. Businesses currently open in Hanestowne Village include LA Fitness, Walmart Neighborhood Market, Hickory Tavern, Fleet Feet Sports, Bank of North Carolina, PDQ restaurant, PJ Chang’s, Starbuck’s, and Tijuana Flats. Lyndhurst OB/GYN expects to open a three-story, 55,700-square-foot building in the mixed-use development, consolidating its three offices in the City, by the first quarter of 2016. The Crown Companies, LLC is developing the project, which is expected to cost between $45 million and $60 million. Pavilion Development is developing a retail site on a 22-acre tract along Hanes Mall Boulevard.

Reynolds American, Inc.’s iconic former headquarters, which was the inspiration for the Empire State Building in New York, was approved for inclusion on the National Register of Historic Places in late 2014. The PMC Property Group purchased the 22-story building for $7.8 million and planned to spend about $60 million in converting its bottom six floors into a downtown boutique hotel that will be managed by the Kimpton Hotel & Restaurant Group. The Kimpton Cardinal Hotel which is scheduled to open in May 2016, has 174 guest rooms from the second through sixth floors. The seventh through 19th floors will house 117 luxury apartments. The 10th floor terrace will be amenities for residents.

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RESIDENTIAL AND NON-RESIDENTIAL CONSTRUCTION

The following table summarizes the number and value of new building permits issued in the City: Fiscal Year Non- Non- New New Ended Residential Residential Residential Residential Rehabilitation Total June 30 Number Value Number Value Value Value 2011 511 $85,095,015 556 $ 68,980,348 $119,847,220 $273,922,583 2012 518 56,462,821 618 106,965,237 169,113,990 332,542,048 2013 524 71,008,036 482 58,371,102 101,003,715 230,382,853 2014 627 92,977,855 384 27,043,964 133,022,261 253,044,080 2015 476 80,763,767 712 79,821,025 166,079,482 326,664,274 ______Source: Winston-Salem/Forsyth County Building Inspection Division.

TAXABLE SALES

Taxable sales figures are not available for the City. The taxable sales for the County for the fiscal years ended June 30, 2011 through 2015 are shown in the following table:

Fiscal Year Ended Total Increase (Decrease) Over June 30 Taxable Sales Previous Year 2011 $3,920,362,498 5.19% 2012 4,119,672,960 5.08 2013 4,087,882,704 (0.78) 2014 4,185,903,566 2.40 2015 4,389,044,665 4.85 ______Source: North Carolina Department of Revenue, Sales and Use Tax Division.

EMPLOYMENT

Ten Largest Employers in the County As of July 2015

Approximate Number of Employer Type Employees Wake Forest Baptist Health Health Care 12,873 Novant Health Inc. Health Care 8,145 Winston-Salem/Forsyth County Schools Education 6,692 Reynolds American, Inc. Tobacco Products 3,000 Wells Fargo Bank Financial Services 2,800 City of Winston-Salem Government 2,660 Hanesbrands, Inc. Apparel 2,500 Wake Forest University (Reynolda Campus) Education 2,401 Branch Banking & Trust Company Financial Services 2,200 Forsyth County Government 2,029 ______Source: Winston-Salem Chamber

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The Labor & Economic Analysis Division of the North Carolina Department of Commerce has estimated the percentage of unemployment in the City to be as follows:

2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 January 9.8% 9.2% 8.4% 6.3% 5.5% July 10.1% 9.4% 8.0% 6.5% 6.0% February 9.6 8.8 7.9 6.0 5.3 August 10.0 9.2 7.4 6.3 5.8 March 9.2 8.4 7.6 6.1 5.1 September 9.4 8.4 6.6 5.4 5.1 April 9.1 8.3 7.2 5.7 4.9 October 9.1 7.9 6.6 5.2 5.2 May 9.6 8.7 7.6 6.4 5.6 November 8.9 8.1 6.3 5.1 5.1 June 10.3 9.3 8.1 6.4 5.8 December 8.9 8.3 5.9 4.8 n/a

GOVERNMENT STRUCTURE

The City operates under a council-manager form of government. The City Council is composed of eight members who are elected by voters of eight districts. The Mayor is elected at-large, presides over all City Council meetings, and votes only in the event of a tie. The City Council enacts resolutions, ordinances, sets general policies, and appoints a professional city manager who directs daily operations of the City through appointed department heads.

Consolidated programs of the City and County, administered by the City, include purchasing, community planning and zoning, inspections, emergency management, water and sewer utilities, and solid-waste management. Consolidated programs of the City and County, administered by the County, include elections and tax collections.

EDUCATION

Winston-Salem/Forsyth County Schools (“WS/FCS”), the fifth largest school system in the State, serves approximately 54,528 students enrolled in 81 schools. Elementary and middle school parents may choose the neighborhood school or other schools within their residential assignment zone. Each of the WS/FCS’s elementary and middle schools has a special theme and resources to enhance its educational program. The WS/FCS Career Center offers about 30 Advanced Placement (college-level) courses to high school students. All schools in the system have guidance counselors, curriculum coordinators, programs for academically gifted students, as well as art, music, foreign language, and physical education teachers.

The WS/FCS is operated and administered by an elected Board of Education, which appoints a school superintendent. State law provides a basic minimum educational program for each school administrative unit or district, which is supplemented by the County and federal governments. The minimum program provides funds for operational costs only, but the building of public school facilities has also been a joint state/county effort. The County provides local financial support for capital and additional operating expenses. The City has no responsibility to finance operating expenses or capital needs of the WS/FCS.

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The following table shows WS/FCS average daily membership (“ADM”) for the last five school years:

School Year 2010-11 2011-12 2012-13 2013-14 2014-15 ADM 52,586 53,139 53,964 54,064 54,528 ______Source: North Carolina Department of Public Instruction. Average daily membership or “ADM” (determined by actual records at the schools) is computed by the North Carolina Department of Public Instruction on a uniform basis for all public school units in the State. ADM figures are used for both teacher allotments and per capita distribution of local funds if there is more than one school administrative unit within a county.

Forsyth Technical Community College or FTCC is one of the largest community colleges in North Carolina. It services more than 37,000 students with over 200 programs that lead to college transfer, associate’s degrees, certificates or diplomas in such fields as health care, engineering technologies, criminal justice, automotive technology, logistics management, nanotechnology, and biotechnology. Students in the 20 college transfer degree programs can begin their first two years of a four-year college or university program at FTCC. FTCC has the largest Health Technology and Biotechnology degree programs in the State as well as the largest race car technology program, the Richard Childress Race Car Technology Program and is one of the first four colleges in the country to pilot the National Association of Manufactures (NAM) Endorsed Skill Certification System. Forsyth Tech is the only community college in the southeast offering a degree in Nanotechnology.

Through FTCC’s Corporate & Continuing Education Division, the Community and Economic Development Team provides customized training in a variety of areas for local businesses and industries. FTCC works with local industry to assess its training needs in order to make appropriate training available. It also provides outplacement counseling for those who are laid off or are looking for a different career. Some of the credit programs offered at the College include web technologies, race car technology, electronics engineering technology, business administration, early childhood education, architectural technology, interior design, nursing, biotechnology, nanotechnology, dental assisting, basic law enforcement, e-commerce, and global logistics technology. The addition of the new Transportation Center in 2011 and the renovated Career Center in 2013 gives the school a total of over 1,000,000 square feet of space. The 139,000-square foot facility houses classes for Richard Childress Race Car Technology, Automotive Systems and Heavy Equipment and Transport.

FTCC’s Early College of Forsyth for high school students was named one of the best high schools in the nation by Newsweek in 2015. The Early College of Forsyth and Stokes Early College allow students to earn a high school diploma and an associate’s degree at the same time at no cost. Early College provides 9th grade students with the opportunity to earn their high school diploma and get college credit at the same time, and with one more year after high school, to receive a two-year degree tuition-free. Middle College allows juniors and seniors in high school an opportunity to continue their studies on the main campus of FTCC while also earning college credit. Dual enrollment classes allow students to earn college credits tuition free on their own high school campus.

Wake Forest University is a private liberal arts university with a nationwide reputation for challenging academics, individualized teaching, small classes, and state-of-the-art resources. Since 1996, U.S. News & World Report’s has ranked Wake Forest University in the top 30 of its annual “America’s Best Colleges”. The university ranked 27th in overall rankings in the 2015 report. The magazine cites its small classes, low student/faculty ratio, freshman retention rate, strong alumni giving, and financial resources. The graduate School of Business ranked 34th in the nation.

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The University’s Reynolda Campus is home of the College of Arts and Sciences, the School of Law, the Calloway School of Business and Accountancy, the Graduate School of Arts and Sciences, the Babcock Graduate School of Management, and the Divinity School. Wake Forest is the parent organization of Wake Forest University Health Sciences, which conducts activities at the University’s Bowman Gray Campus, WFIQ, and various other locations. Wake Forest University Health Sciences operates the Wake Forest School of Medicine, principally on the Bowman Gray Campus, which is associated with WFBH.

Winston-Salem State University (“WSSU”), one of the 17 constituent institutions of The University of North Carolina, is a leading regional institution providing learning opportunities for a diverse student population. Attentive to emerging requirements of a global market, WSSU offers degrees in areas of high job demand such as nursing, computer science, biotechnology, education, and information management. Utilizing state-of-the-art facilities and technologies, including wireless access and networking, the university offers educational opportunities in numerous formats: evening-weekend, summer, distance learning, continuing education, and online. Students may participate in an honors curriculum, co-op and internship opportunities, and study abroad programs. WSSU offers over 40 undergraduate degree programs, 11 graduate degree programs, and two doctoral programs. WSSU partners in biomedical research taking place in WFIQ and in numerous other organizational and philanthropic endeavors including health care and safety studies. The University consistently ranks among the top public universities in the south with award-winning programs like its Motorsports Management major, the first of its kind in the nation. WSSU is the third largest producer of nurses in North Carolina and now offers a Doctorate of Nursing program.

The University of North Carolina School of the Arts (“UNCSA”), also one of the 17 constituent institutions of The University of North Carolina, an arts conservatory of international renown, trains talented students for professional careers in the arts. The first state-supported residential school of its kind in the nation, UNCSA opened in 1965 on 67 acres in the City and became part of the University of North Carolina System in 1972. High school and college students are enrolled annually in its five professional schools: Dance, Design & Production (including a Visual Arts Program), Drama, Filmmaking, and Music. The school is accredited by the Southern Association of Colleges and Schools and awards the high school diploma, the College Arts Diploma, the Professional Artist Certificate, and bachelor and master’s degrees. The State of North Carolina pays the full cost of attending UNCSA (tuition, fees, and room and board) for all in-state students who are accepted into the high school program. The campus currently includes 11 performance and screening spaces comparable to the best in the industry. Students must audition/interview for admission and study with master teachers who have had successful careers in the arts, as well as with guest artists such as filmmaker Spike Lee and actor Mandy Patinkin. UNCSA alumni have performed in or behind the scenes of Broadway shows, film television and regional theatre, and are members of the world’s finest symphony orchestras and opera and dance companies.

UNCSA’s School of Filmmaking trains talented students for professional careers in the film and television industries. Seniors’ films are screened in the City and Los Angeles each year. The joint efforts of the film school and the area’s Film Commission have made the City an attractive site for location shooting of feature films and television movies. UNCSA’s School of Filmmaking ranked 12th on The Hollywood Reporter’s 2013 list of the 25 best film schools in the world. UNCSA marked its 21st year with a new Animation/Production Design and Gaming building which resembles a miniature studio lot.

Founded in 1772, Salem College is the nation’s 13th oldest institution of higher education and the oldest women’s college according to the American Council on Education. Money magazine has named Salem one of the top 10 “Best Buys” among women’s colleges eight years in a row. Salem was also

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ranked in the top 150 “Best Buys” for all colleges and universities in the U.S and one of the top 25 “Best Buys” among liberal arts colleges in the Southeast. Salem College was listed 442nd on Forbes magazine’s list of “America’s 650 Best Colleges” and 102 on its list of “Best Colleges in the South”. It is also a 2015-2016 member of the Colleges of Distinction, which ranks national schools based on engaged students, great teaching, a vibrant community, and successful outcomes.

Committed to the liberal arts curriculum with four undergraduate degrees and two graduate degrees, teacher licensure (Elementary Education K-6, General Curriculum Special Education K-12, Middle/Secondary Content Area 6-12, Second Language - French and Spanish - K-12 and Art Education K-12; add-on licensure is available in Academically and Intellectually Gifted (AIG), Birth-Kindergarten, Reading, and English as a Second Language); and quality professional preparation. Salem was the first college in North Carolina to add a master’s degree program in which students can earn licensure to teach children from birth to kindergarten. Salem’s Women in Science program is designed to provide academic and career support for students interested in pursuing careers in science or mathematics. The College shares a 57-acre campus with Salem Academy, a college preparatory boarding school for girls in grades 9 through 12. Salem Academy and College are located in the Old Salem historical district. The physical campus also expanded with the new LEED-certified Student Center and new McHugh Sisters Flats, the first new student residence on campus in 50 years.

ARTS AND CULTURE

The City has a rich diversity of arts and culture available for its residents’ enjoyment. The community is known for its support of the arts and for many years has had one of the highest per capita contributions to the arts of any city in the United States. The arts are a major driver of the local economy with an approximate $136 million economic impact in Forsyth County annually, resulting in more than 4,700 full-time jobs.

The Arts Council of Winston-Salem and Forsyth County established in 1949 was the first Arts Council in the country. Today, the Arts Council supports a broad range of arts and cultural organizations through the process of grant funding through its grants of Operational Support, Arts In Education, Project Assistance, and Regional Artists grants. The grants support organizations such as The Sawtooth Center for Visual Arts, Associated Artists of Winston-Salem, Facilities for the Arts on Spruce, Coffee Park Downtown, The Winston-Salem Symphony, The North Carolina Black Repertory Company, The Little Symphony, Winston-Salem Delta Fine Arts, Piedmont Craftsmen, Piedmont Opera Theater, Associated Artists, The Children’s Theatre, The Little Theatre of Winston-Salem, The Southeastern Center for Contemporary Art, and Kernersville Little Theatre. The Arts Council Community Support Program assists with the planning and organizing of many community projects including festivals, concerts, workshops, and educational programs.

The Downtown Arts District, which consists of working studios, galleries, locally-owned retail shops, restaurants, residences, and businesses. The Arts District is located along Trade and Liberty Streets and features many restored historic buildings that characterize Winston-Salem’s past. The Downtown Arts District Association (DADA) celebrated its 30th anniversary in 2015 and is the neighborhood organization that transformed the district into the vibrant area it is today. The organization continues to promote art and the arts district through events such as First Friday Gallery Hops, held the first Friday of each month.

In 2015, the Arts District welcomed a new public park, ARTivity on the Green, located in the heart of the district on Liberty Street between Sixth and Seventh Streets. The half-acre urban park features towering faux smokestacks that release clouds of water vapor to pay tribute to the City’s

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industrial past. It also features plenty of green space with areas for sitting and picnicking, a mural wall, and a performance shelter.

The Arts for Art’s Sake (AFAS), a non-profit volunteer organization sponsors the Arts on Sunday, a series of afternoon arts and crafts festivals held outdoors on Trade Street every Sunday afternoon in May and October.

The Milton Rhodes Center for the Arts is comprised of two new galleries, multi-purpose performing arts spaces, meeting and event spaces, a café and terrace, the new Hanesbrands Theatre and Sawtooth School for Visual Art. The new Hanesbrands Theatre anchors the Center and is a 300-seat black-box theatre, affording a variety of stage and seating configurations for dance, theatre, music and film productions.

UNCSA presents more than 400 public performances and screenings annually, including dance and symphony orchestra concerts, plays, musicals, operas, and film screenings. They are presented in the school’s facilities on its South Main Street campus, in the Stevens Center downtown, in other major U.S. cities and overseas. Local favorites include the holiday classic “The Nutcracker” ballet, with The Winston-Salem Symphony, and Films on Fourth, with the Winston-Salem Cinema Society. In 2005, UNCSA brought the annual RiverRun International Film Festival to the City. The RiverRun International Film Festival is a regional event based in the City and is one of the premier film festivals in the southeastern United States. More than 16,000 people were accounted for at the 2015 RiverRun International Film Festival, representing an increase of 11% from the 2014 festival. The 17th annual RiverRun will be held April 7-17, 2016.

The National Black Theatre Festival (“NBTF), held every other year, is the nation’s largest and most celebrated exposition of Black theatre groups. Since its inception in 1989 by Producer and Artistic Director Larry Leon Hamlin, the festival has been hosted in the City by the North Carolina Black Repertory Company, which is celebrating 35 Marvtastic Years (1979-2014). The six-day event in August 2015 marked the 26th year of the City’s largest festival which attracts more than 65,000 patrons to performances by black theatre groups from across the country. Reynolda House, open to the public since 1967 as a museum, is home to a widely praised art collection and is one of a small number of early- twentieth-century American country houses still standing in its original form. Reynolda House features outstanding paintings and prints dating from the colonial period to the present, while retaining the architectural features, home furnishings, and memorabilia of the family of R. J. Reynolds, founder of the Reynolds Tobacco Company. Originally the home of R.J. and Katharine Smith Reynolds, the home was completed in 1917 and has been named to the National Register of Historic Places.

The Southeastern Center for Contemporary Art is a series of cascading galleries housed in the 1929 English-style home of the late industrialist James G. Hanes. The original structure has been enhanced with 20,000 square feet of exhibit space where exhibits change several times a year and represent the finest contemporary art both regionally and nationally. Educational programming, which accompanies each exhibition, includes gallery walks, artist lectures, family community days, hands on workshops, film series, and many more activities designed to engage and entertain restless minds with contemporary art.

As mentioned under “Tourism” above, the City is home to Old Salem, one of the most authentic historic restorations in the country.

MESDA, located on the southern edge of Old Salem, is the nation’s only museum dedicated to researching and exhibiting the regional decorative arts of the early south. MESDA has 24 period rooms and seven galleries to display the furniture, paintings, textiles, ceramics, and metal wares made and used

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regionally through 1820. Adjacent to MESDA is a changing-exhibits space (the Gallery at Old Salem) and The Children’s Museum (for ages 4-9).

SciWorks, the Science Center and Environmental Park of Forsyth County, has exhibits in physics, natural/biological science, astronomy, natural history, and the health sciences. Its unique environmental park has a habitat-based nature trail exhibiting the flora and fauna indigenous to the State.

The Diggs Gallery, a major cultural center at Winston-Salem State University, is one of the nation’s best regional, contemporary African-American art galleries. The gallery also houses an impressive collection of works on paper by well-known European and American artists such as Jean Francois Millet, Joan Miro and Robert Rauchenberg. Exhibitions and programs address a broad range of artistic expression, with special concentration on African-American and regional art.

The Piedmont Opera is the second largest opera company in the State. Celebrating its 38th year in the City, the Piedmont Opera annually presents two full-scale, lavish operas such as Madame Butterfly. Piedmont Opera produces the highest quality opera productions possible by using international, national, regional and local professional singers and technicians. Piedmont Opera currently attracts patrons from 16 states and communities throughout the Piedmont, Upstate, and Virginia. In addition to two regularly scheduled productions each year, the Piedmont Opera also conducts a wide variety of educational and outreach programs as well as presentations at UNCSA, Wake Forest University, and WSSU.

The Winston-Salem Symphony was founded in 1946 and calls the Stevens Center its home. With a roster of approximately 75 musicians and an annual budget of more than $1 million, the full orchestra puts on more than 20 concerts. The symphony also has a 96-voice volunteer chorale and an inspiring music education program including in-school ensemble programs, young people’s concerts and a youth orchestras program consisting of three youth orchestras. Education programs produce over 28,000 student encounters annually. The symphony also supports musical development through Youth Symphony, Repertory Orchestras, and the Youth Talent Search scholarships for needy young musicians. The symphony actively supports the community through ticketing collaborations with the Winston Lake YMCA, Big Brothers/Big Sisters of Forsyth County, The Enrichment Center, Youth Opportunity Homes, and other United Way agencies.

SPORTS AND RECREATION

The Winston-Salem Recreation and Parks Department has 76 public parks, 17 recreation centers, which are tied into WinstonNet (a high-speed computer network that was created to ensure that all citizens have access to the opportunities that computers provide), 34 soccer fields, 36 softball/baseball fields, eight outdoor pools, 51 picnic shelters, a football field, over 23 miles of greenway, 45 playgrounds, 23 fitness trails, 112 tennis courts, six volleyball courts, 25 basketball courts, two public golf courses (Reynolds Park and Winston Lake), and a hobby park for remote-controlled cars and planes and soapbox derby cars.

The most attended professional sport in the City is stock car racing. Thousands of fans come to Bowman Gray Stadium for NASCAR racing on spring and summer nights. Bowman Gray Stadium is also used for WSSU football as well as high school athletic events and the annual Carolina Drum Classic Marching Band Competition. In May 2013, the City approved a resolution expressing its intent to sell Bowman Gray Stadium to the State and WSSU. The University is waiting to get approval from the State to move ahead with the purchase. One provision of the sale is that WSSU would honor the stadium’s contract with Winston-Salem Speedway, Inc. to continue the lease for NASCAR races through 2031.

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The City is home to the Winston-Salem Dash, a Class A minor league professional baseball team affiliated with the Chicago White Sox. The Dash play over 70 home games each season. In 2010 the Dash started their first season in the 5,500-seat BB&T Ballpark in downtown Winston-Salem off Business 40 and Peters Creek Parkway. The Wake Forest University Demon Deacons participate in Division I of the NCAA, including intercollegiate teams in football, basketball, baseball, cross-country, tennis, soccer, volleyball, field hockey, and golf. WSSU students participate in Division II of the NCAA and may participate in football, basketball, track and field, cross-country, tennis, softball, and volleyball.

Now in its fifth year, the Winston-Salem Open Tennis Tournament was held in the tennis stadium next to BB&T Field and for the first time turned a profit.. The 3,800-seat tennis stadium includes 13 courts, making it eligible to host future NCAA tournament events. An ATP World Tour 250 event, the Winston-Salem Open is the final men’s tournament on the Emirates Airline US Open Series prior to the US Open, and it drew an international field of competition. This year’s tournament had an attendance of 40,000 and had as much as $4.5 million in economic impact.

The Dixie Classic Fair (“Fair”), held annually for 10 days each October at the Fairgrounds, is second in size to the North Carolina State Fair (approximately 325,000 visitors each year). The Fair brings national as well as state entertainers to the City. Its carnival atmosphere, rides, games, tempting foods and exhibits ranging from flowers to livestock, draw crowds from a wide area.

TRANSPORTATION

Ground, air, and water transportation routes are readily accessible to local commerce and industry. People and products move smoothly throughout the Triad, in part due to an efficient transportation network and the nation’s largest State-maintained highway system that conveniently links to major east coast interstates. Interstate 40 (Business) passes through the approximate center of the County and connects with Interstate 85 to the east and Interstate 77 to the west. Interstate 40 (Bypass) encircles the southern section of the City, connecting with I-40 (Business) east of Clemmons to the west and east of Kernersville in the western part of Guilford County. Proposed Interstate 74 will run north to south along the eastern leg of the proposed Northern Beltway. It will have interchanges with Business 40, Interstate 40, and join with US 311.

General aviation, air cargo, and commuter services are provided by the Smith Reynolds Airport located five minutes north of downtown Winston-Salem. The Airport Commission of Forsyth County operates the airport. Major air carrier service is provided at PTIA located just off Interstate 40 approximately 20 miles east of downtown Winston-Salem. Scheduled passenger service is provided by seven major airlines and 16 commuter airlines with over 84 daily scheduled commercial flights.

The Piedmont Authority for Regional Transportation (“PART”) provides shuttle service in a ten- county area. Its operations are primarily funded by a five-percent tax levied on the short-term rental of private vehicles in Forsyth and Guilford Counties. PART provides 30-minute service, five days a week, between the City, Greensboro, and High Point during peak travel periods with hourly service at other times of the day. Shuttle services are also available to the PTIA and to any other destination within a range of three to four miles of the Regional Terminal. AMTRAK Connector Service, which provides two daily round trips between the City and the High Point Rail Station, has developed into a valued service for passengers traveling on the Piedmont and Carolinian passenger trains.

Rail systems include Norfolk Southern Corporation, Yadkin Valley Railroad, and the intrastate Winston-Salem Southbound Railway.

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International ports are approximately 250 miles to the east, in Wilmington and Morehead City, North Carolina.

TAX INFORMATION

Assessed Valuation. Fiscal Years Ended (dollars in thousands)

June 30, June 30, June 30, June 30, June 30, 2011 2012 2013 2014 2015 Assessed Valuation: Assessment Ratio(1) 100% 100% 100% 100% 100% Real Property(2) $17,439,250 $17,474,701 $17,673,641 $15,874,483 $16,069,241 Personal Property 3,575,183 3,451,579 3,691,096 3,605,449 3,581,619 Public Service 321,064 339,454 348,733 331,307 343,078 Companies(3) Total Assessed Valuation $21,335,497 $21,265,734 $21,713,470 $19,811,239 $19,993,938 Per Capita Assessed Value 92.62 91.61 93.10 84.11 84.04 Rate per $100 0.4750 0.4750 0.4910 0.5300 0.5400 Levy $ 101,503 $ 101,116 $ 106,640 $ 108,084 $ 108,648 ______(1) Percentage of appraised value has been established by statute. (2) Property values are typically reassessed every four years. The most recent revaluation took effect for the fiscal year ended June 30, 2014. (3) Valuation of railroads, telephone companies, and other utilities as determined by the North Carolina Property Tax Commission.

Ten Largest Taxpayers for the Fiscal Year Ended June 30, 2015.

Percentage of Total Assessed Assessed Company Types of Enterprise Valuation Valuation Tax Levy

Caterpillar Financial Services Corp. Financial Services $ 356,316,115 1.78% $1,924,107 Reynolds American, Inc. Manufacturer 269,628,489 1.35 1,455,994 JG Winston-Salem LLC Real Estate Mgmt. 203,477,000 1.02 1,098,776 Duke Energy Corporation Utility 190,629,026 0.95 1,029,397 Wells Fargo Bank, N.A. Financial Services 151,288,883 0.76 816,960 Lowes Data Center Retail 130,821,769 0.65 706,438 Wexford Building 90 Mt LLC Real Estate Mgmt. 121,426,000 0.61 655,700 Wake Forest Baptist Health Care at Health Care 120,455,587 0.60 650,460 Home LLC 391 Technology Way LLC Real Estate Mgmt. 66,775,100 0.33 360,586 S1 Winston Salem LLC Real Estate Mgmt. 65,775,600 0.33 355,188 Total $1,676,593,569 8.38% $9,053,606 ______Source: Forsyth County Tax Department.

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BUDGET OUTLOOK

The City Council adopted a $414.8 million budget for the fiscal year ending June 30, 2016 that includes $335.8 million for operations and debt service, and $79 million for capital. The budget included a 2.5¢ tax increase to 56.5¢ of assessed property value for debt payments on the voter approved general obligation bonds. The adopted budget included a dedicated tax rate of 9¢ for Downtown Winston-Salem Business Improvement District that was created by Mayor and City Council in November 2013 to provide an enhanced level of service and programs to the downtown area. An increase of 1.5% in real property values, a 8% sales tax collection increase, and an 11.8% increase in utilities franchise fee has given the City the opportunity to maintain its current services levels and address previous years of deferred maintenance on vehicles, facilities, and equipment. As of December 31, 2015, the City expects to increase general fund balance by $2.1 million for the fiscal year ending June 30, 2016. Revenues from sales tax and license and permits are greater than expected and expenditures are forecasted to be under budget due to lower than expected fuel and energy costs.

In April 2016 the City expects to issue approximately $67,925,000 of general obligation bonds on or about April 5, 2016. During fiscal year 2016 the City also expects to enter into a lease payable to North Carolina Municipal Leasing in the principal amount of $20 million in order to finance the acquisition of equipment.

PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS

General. For a discussion of the defined benefit pension plans in which the City participates, see Note 3.B in the City’s audited financial statements attached as Appendix C hereto.

Winston-Salem Police Officers’ Retirement System. The System was established in 1977 by the City for sworn police officers. In 2008, the City entered into a trust agreement with U.S. Bank National Association to establish an irrevocable trust for post-employment benefits including assets of the City’s Police Officers’ Retirement System.

In 2012 the City hired an independent financial advisory firm to review the Winston-Salem Police Officers’ Retirement System, prepare a comprehensive analysis of the funding requirements of the System and develop a long-term financial plan and policy that would fully fund the System. The review was completed in March 2013. Although the City had an existing practice of fully funding the Annual Required Contributions, based on the findings and recommendations of the advisory firm, the City adopted a formal policy to that effect in May 2013. In July 2013, the City used the proceeds of an installment financing contract to help stabilize the Winston-Salem Police Officers’ Retirement fund and increase the funding status to 85%. The City closed the System to police officers hired after December 31, 2013. Results of the January 1, 2015 actuarial study report the funding status was 87%.

For additional information, see Note 3.B in the City’s audited financial statements included as Appendix C hereto.

LITIGATION

The City is not a party to any litigation, the outcome of which, in the opinion of the City Attorney, would materially adversely affect the City’s ability to meet its financial obligations.

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APPENDIX B

FINANCIAL STATEMENTS OF THE CITY

The City has not requested nor obtained the consent of its auditor to the inclusion of these financial statements in this Official Statement.

NO RECOURSE MAY BE HAD AGAINST ANY FUNDS OR ACCOUNTS DISCLOSED IN THESE FINANCIAL STATEMENTS, EXCEPT THE WATER AND SEWER UTILITY FUND FOR THE PAYMENT OF THE 2016 BONDS.

[THIS PAGE INTENTIONALLY LEFT BLANK] Management’s Discussion & Analysis

Our discussion of the City of Winston-Salem’s financial performance is intended as an overview of the City’s financial performance for the fiscal year ended June 30, 2015. The financial statements and notes included in this report present the financial position and operations of the governmental and business activities and fiduciary responsibilities of the City. During the fiscal year, the City continued its sound current and long-range policies for financial management. These policies are intended to: • expand and diversify sources of revenue other than property taxes; • maintain relatively low-property tax rates; • facilitate capital improvements by maintaining adequate resources and reasonable financing capacity; • augment resources by astute cash management; • enhance management techniques to improve productivity and efficiency; • provide self-sufficient public services that are similar in operation to private enterprises; and • continue City-funded affordable housing initiatives to supplement federal housing programs. City policies encourage the use of local revenue to provide basic services instead of depending upon uncertain federal and state sources. We encourage readers to consider the information presented here in conjunction with additional information furnished in our letter of transmittal.

Financial Highlights Highlights of the City’s fiscal year ended June 30, 2015, include: • City of Winston-Salem total net position decreased approximately $1 million from $900 million to $899 million. The City implemented GASB 68 in fiscal year 2015; therefore, included in net position is a net pension liability of $33.5 million and a net pension asset of $10.7 million. • At June 30, 2015, total net position of $899 million included $271 million (unrestricted net position), which in large part, have been reserved for specific purposes or needed for working capital to meet the City’s ongoing obligations to citizens and creditors. The unrestricted net position should not be used to fund ongoing operations other than working capital because major financial stress would be likely as the assets are depleted. • At June 30, 2015, the City’s governmental funds reported combined fund balances of $191.8 million. Approximately 13.74% of this amount is unassigned and is available for spending at the government’s discretion. • Unassigned fund balance of the general fund (approximately $29.7 million) continues to meet working capital requirements and a policy of reserving at least 12.5% of the succeeding fiscal year budget. Legal provisions and financial policies of the City restrict fund balances in other funds to the purposes of those funds. • The City’s total long-term liabilities increased by $47 million to $792 million. Several key factors contributed to this increase: the issuance of limited obligation bonds of $77.9 million, refunding of $7 million and the retirement of $21.4 million, the issuance of $48.7 million in revenue bonds, the refunding of $52.7 million and the retirement of $19.8 million, the retirement of special obligation bonds of $3.2 million and general obligation bonds of $5.8 million. Also, the City implemented GASB Statement 68 this year. With the new reporting change, the City has a net pension liability of $33.5 million. • Property taxes supported 51.68% of governmental services to citizens and the community, and 42.47% to be used for mass transportation in 2015. The City increased the tax rate to $0.54 for fiscal year 2015 from $0.53 in fiscal year 2014. • City of Winston-Salem maintained its AAA bond rating from all three major rating agencies.

36 2015 Annual Financial Report

B-1 Overview of Financial Statements

Required Components of Annual Financial Report Figure 1

Management’s Discussion Basic Financial and Analysis Statements

Government-wide Fund Financial Notes to the Financial Statements Statements Financial Statements

Summary Detail Basic Financial Statements This discussion and analysis serves as an introduction to the City of Winston-Salem’s basic financial statements, which consist of three components: 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the financial statements as shown above. The basic financial statements present two different views of the City through the use of government-wide and fund financial statements. In addition to the basic financial statements, this report contains other supplemental information that will enhance the reader’s understanding of the financial condition of the City. This report includes all funds and account groups of the City of Winston-Salem as well as its component units, which are described below. Note 1A in the financial report includes further discussion of the reporting entity and descriptions of funds.

Government-wide Financial Statements The first two statements (Exhibits 1 and 2) in the basic financial statements are the Government-wide Financial Statements. These financial statements provide a broad overview of the City’s financial position and operations, in a manner similar to a private-sector business. These statements also include two component units, Risk Acceptance Management Corporation and North Carolina Municipal Leasing Corporation. Although legally separate, financial information for these non-profit corporations is blended in the financial statements because under federal tax regulations they may provide services only to the City. The statement of net position presents the City’s assets and deferred outflows of resources and total liabilities and deferred inflows of resources, with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the City is improving. The statement of activities presents information on how the City’s net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Therefore, revenues and expenses are reported in this statement, which result in cash flows in future fiscal periods, such as uncollected taxes and earned but unused vacation leave. Government-wide statements are divided into governmental and business-type activities. The governmental activities include most of the City’s basic services such as public safety, parks and recreation, environmental health, transportation, community and economic development, and general government. Property taxes, intergovernmental revenues, and other local taxes finance about 80% of the costs of these activities. Business-type activities include water and sewer utility, solid waste disposal, stormwater management, public assembly facilities, parking, and Winston-Salem Transit Authority services. These activities are primarily paid from charges to customers.

B-2 Fund Financial Statements The fund financial statements (Exhibits 3 through 10) provide a more detailed look at the City’s most significant activities. A fund is used to maintain control over resources that have been segregated for specific activities or objectives. Fund accounting ensures and reflects compliance, or non-compliance, with related legal requirements, such as General Statutes, grantor provisions, or the City’s budget ordinances. The funds of the City are divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental Funds. Governmental funds are used to account for most basic services and are reported as governmental activities in the government-wide financial statements. Governmental funds are reported using an accounting method called modified accrual accounting, which provides a short-term spending focus. The relationship between government activities (reported in the Statement of Net Position and the Statement of Activities) and governmental funds is described in a reconciliation that is a part of the fund financial statements. The City adopts an annual budget for its general fund, certain special revenue funds, debt service fund and capital projects funds as required by General Statutes. A budgetary comparison statement demonstrating compliance with the budget ordinance is provided for the general fund in the basic financial statements. Proprietary Funds. The City has two different kinds of proprietary funds. Enterprise Funds report business-type activities that are included in the government-wide financial statements. Enterprise funds are used to account for water and sewer utilities, solid waste disposal, stormwater management, parking, public transportation, and public assembly facilities activities. Rate structures of enterprise operations, other than public transportation and public assembly facilities, are set, insofar as practicable, to recover full operating costs plus depreciation and interest expense and to provide reasonable working capital and other reserves. Internal Service Funds are an accounting device used to accumulate and allocate costs internally among the City’s various functions. The City uses internal service funds to account for its central warehouse, fleet services, information services, workers’ compensation, health benefits, dental and flexible benefits and employee benefits funds. These funds predominantly benefit governmental functions and have been included with the respective governmental activities in the government-wide financial statements. Risk Acceptance Management Corporation, a blended component unit, predominantly benefits business-type activities. It has been included within the business-type activities in the government-wide financial statements. Proprietary fund financial statements provide more detailed information than that presented in the government-wide financial statements and separate information for the water and sewer utility and solid waste disposal operations, which are major funds of the City. Fiduciary Funds. Fiduciary funds are used to account for resources held by the government in a trustee capacity for others. Because the resources of fiduciary funds cannot be used to support the government’s own programs, such funds are specifically excluded from the government-wide statements. The City uses fiduciary funds to account for the assets of post-employment benefits, which include the Winston-Salem Police Officers’ Retirement and Police Officers’ Separation Allowance plans, and retired life and health programs. Other Information. In addition to the basic financial statements and accompanying notes, this report includes certain required supplementary information in Exhibits 11 and 12 concerning the City’s progress in funding its obligation to provide postemployment benefits through the Winston-Salem Police Officers’ Retirement, Police Officers’ Separation Allowance and other Post-employment Benefits plans. The purpose of Exhibits 13 through 20 is to provide the information needed for financial reporting and accounting of the Winston-Salem Police Officer’s Retirement plan, Police Officers’ Separation Allowance plan, and the Local Government Employee’s Retirement System plan.

Notes to the Financial Statements The next section of the basic financial statements is the notes to the financial statements, which adds detailed explanations of some of the data contained in the statements. The notes may provide a better understanding of the information presented in the government-wide and fund financial statements.

38 2015 Annual Financial Report

B-3 Government-wide Financial Analysis The following is a summary of net position for the City of Winston-Salem at June 30, 2015 (as shown in Exhibit 1) with comparative data for June 30, 2014.

Net Position Figure 2

(dollars in thousands) Governmental Activities Business-type Activities Total 2015 2014 2015 2014 2015 2014 Current and other assets $ 240,090 $ 200,959 $ 251,432 $ 250,942 $ 491,522 $ 451,901 Capital assets 359,948 339,250 918,066 926,930 1,278,014 1,266,180 Total assets 600,038 540,209 1,169,498 1,177,872 1,769,536 1,718,081 Deferred outﬂows of resources 16,268 3,728 25,053 23,151 41,321 26,879 Long-term liabilities 260,613 181,816 530,949 562,386 791,562 744,202 Other liabilities 38,434 46,857 53,817 52,415 92,251 99,272 Total liabilities 299,047 228,673 584,766 614,801 883,813 843,474 Deferred inﬂows of resources 23,585 299 4,791 894 28,376 1,193 Net position: Net investment in capital assets 131,696 147,404 419,642 424,727 551,338 572,131 Restricted 76,644 49,067 - 2,443 76,644 51,510 Unrestricted 85,334 118,494 185,352 158,158 270,686 276,652 Total net position $ 293,674 $ 314,965 $ 604,994 $ 585,328 $ 898,668 $ 900,293

As indicated above, assets and deferred outflows of resources of the City exceeded liabilities and deferred inflows of resources by $899 million at June 30, 2015. Analysis of the business-type activities indicates that the capital assets decreased $9.6 million in fiscal year 2015 and net position increased $21.5 million. A large portion of the City’s net position (61.4%) at June 30, 2015, are net investment in capital assets, which are used to provide services to citizens. Net investment in capital assets is reported net of the outstanding related debt; however, resources to repay that debt must be provided in future years from current revenues. Restricted net position, 8.5% of the City’s net position, represents resources that are subject to external restrictions, such as the perpetual care fund. At June 30, 2015, the City is able to report positive balances in all three categories of net position.

Governmental Activities Net position of governmental activities decreased by $21 million. Key elements of this decrease are as follows: • Property tax revenues are recorded in governmental and business-type activities. During the fiscal year property tax revenue increased .2%. The 2015 property tax rate was $0.54. Current real and personal property tax collections during fiscal year 2015 were 98.9% of the current year levy. • General revenues, other than property taxes, increased $5.2 million. Sales tax increased $4.7 million, investment income decreased $938 thousand, and local tax reimbursements decreased $930 thousand. • Program revenues provided 28.8% of the support for governmental services. • Total governmental expenses decreased $10.6 million during fiscal year 2015. Major decreases were in culture and recreation due to the $8 million loss on the sale of the Lawrence Joel Veteran’s Memorial Coliseum in fiscal year 2014 and a decrease of $2.9 million in community and economic development projects. • Federal and state grants are an important source of supplementary funding for public facilities and programs. During fiscal year 2015, the City received nearly $23.9 million in grant revenue for restricted programs or specific projects and $15.6 million related to general governmental activities.

B-4 Business-type Activities Net position of business-type activities increased by $21.5 million primarily attributable to charges for services and the relocation of the mass transit tax fund in the business type activities. Rate structures of enterprise operations, other than the Transit Authority and public assembly facilities management, are set, insofar as practicable, to recover full operating costs plus depreciation and interest expense and to provide a reasonable working capital and reserve. The parking and public assembly facilities funds are provided an operating subsidy through a transfer from the general fund. The Transit Authority is provided operating support from the mass transit tax fund established to collect property taxes to be used for mass transportation.

Business-type Activities Figure 3 June 30, 2015 (dollars in thousands) Increase Operating Nonoperating (Decrease) Operating Expenses Before Depreciation Revenues Capital Transfers Net Revenues Depreciation Expense (Expenses) Contributions In (Out) Position Water and sewer utility $ 93,222 $ 37,400 $ 24,607 $ (16,011) $ 2,563 $ (846) $ 16,921 Solid waste disposal 9,383 6,476 3,544 1,018 - 351 732 Stormwater management 10,539 5,133 430 474 21 (1,744) 3,727 Parking 1,178 930 590 91 - 645 394 Transit Authority 2,670 13,992 2,230 12,136 525 (14) (905) Public assembly facilities 9,765 4,952 1,910 (535) 67 1,327 3,762 management Risk Acceptance 115 1,085 - (1,656) - - (2,626) Management Corp. Total $ 126,872 $ 69,968 $ 33,311 $ (4,483) $ 3,176 $ (281) $ 22,005

Financial Analysis of the City’s Funds As noted earlier, fund accounting enables the City to ensure and demonstrate compliance with finance-related legal requirements. Governmental Funds. The focus of the City’s governmental funds is to provide information on near-term inflows, outflows, and balances of usable resources. Such information is useful in assessing the City’s financing requirements. The general fund is the chief operating fund of the City. At the end of the current fiscal year, total fund balance of the general fund was approximately $51 million of which $29.7 million was unassigned. As a measure of the general fund’s liquidity, it may be useful to compare both the total and unassigned fund balance. Unassigned fund balance represents 16.27% of the fiscal year 2015 budgeted expenditures, while total fund balance represents approximately 28.02%. The fund balance of the general fund increased by $2.3 million during the fiscal year.

40 2015 Annual Financial Report

B-5 Figure 4 presents the changes in net position of the City of Winston-Salem.

Changes In Net Position Figure 4

(dollars in thousands) Governmental Activities Business-type Activities Total 2015 2014 2015 2014 2015 2014 Revenues: Program revenues: Charges for services $ 37,827 $ 40,385 $ 126,872 $ 121,496 $ 164,699 $ 161,881 Operating grants and contributions 15,608 13,436 8,262 8,228 23,870 21,664 Capital grants and contributions 3,266 6,859 3,177 5,449 6,443 12,308 General revenues: Property taxes 101,672 108,353 6,889 - 108,561 108,353 Sales taxes 35,397 30,668 - - 35,397 30,668 Other local taxes 1,012 841 - - 1,012 841 Telecommunications sales tax 2,435 2,588 - - 2,435 2,588 Utilities sales tax 11,628 8,501 - - 11,628 8,501 Piped natural gas sales tax 874 1,240 - - 874 1,240 Video franchise fee 2,300 2,301 - - 2,300 2,301 Local tax reimbursements 1,123 2,053 - - 1,123 2,053 Investment income 714 1,652 4,682 17,211 5,396 18,863 Other 1,287 1,762 - - 1,287 1,762 Total revenues 215,143 220,639 149,882 152,384 365,025 373,023 Expenses: General government 28,112 30,214 - - 28,112 30,214 Public protection 91,609 91,571 - - 91,609 91,571 Environmental health 16,271 17,082 - - 16,271 17,082 Transportation 21,006 19,891 - - 21,006 19,891 Culture and recreation 10,835 18,849 - - 10,835 18,849 Community and economic development 19,105 20,426 - - 19,105 20,426 Interest and ﬁscal charges 9,808 9,357 - - 9,808 9,357 Water and sewer utility - - 81,924 81,005 81,924 81,005 Solid waste disposal - - 10,288 10,460 10,288 10,460 Cemeteries - - - 532 - 532 Stormwater management - - 5,542 5,235 5,542 5,235 Parking - - 1,864 1,989 1,864 1,989 Transit Authority - - 16,222 15,709 16,222 15,709 Public assembly facilities management - - 7,406 13,426 7,406 13,426 Risk Acceptance Management Corp. - - 4,350 2,900 4,350 2,900 Total expenses 196,746 207,390 127,596 131,256 324,342 338,646 Increase in net position before transfers 18,397 13,249 22,286 21,128 40,683 34,377 Transfers Government-wide 281 2,192 (281) (2,192) - - Increase (decrease) in net position 18,678 15,441 22,005 18,936 40,683 34,377 Net position - 314,965 - 585,328 - 900,293 - beginning, as previously stated Restatement (39,969) (1,841) (2,339) 1,841 (42,308) - Total net position - beginning, as restated 274,996 301,365 582,989 564,551 857,985 865,916 Net position - ending $ 293,674 $ 314,965 $ 604,994 $ 585,328 $ 898,668 $ 900,293

The debt service fund has a fund balance of $16.7 million at June 30, 2015, an increase of $2.9 million, all of which is reserved for payment of debt service.

B-6 The fund balance of the capital projects fund increased by $19.4 million, to $69.2 million at June 30, 2015, all of which is appropriated for capital projects. The City reclassified certain funds presented in the fund financial statement by fund type between governmental and business-type activities. Beginning net position has been adjusted to reflect this reclassification. See Note 6. General Fund Budgetary Highlights. Differences between the original budget and the final amended budget resulted in appropriations increasing $3.1 million during fiscal year 2015. Expenditure budgets were increased $2.6 million for carry over encumbrances. Major budget amendments included an additional $920 thousand to the debt service fund to cover debt service payments on economic development projects. General fund revenues recognized positive budget variances during 2014-2015 with actual results coming in at $5.4 million above final budget. The increase is primarily due to sales tax and utilities sales tax revenues. The City’s general fund budget had a favorable expenditure variance of $4 million. Departmental operating expenditure savings, capital expenditure deferrals and personnel savings resulted in the addition to general fund balance of $2.3 million. Proprietary Funds. The City’s proprietary fund financial statements provide the same type of information as that provided in the government-wide financial statements, but in more detail. The major enterprise funds are the water and sewer and solid waste disposal funds. Net position of the water and sewer and solid waste disposal funds were $409 million and $43 million at June 30, 2015, respectively. The net position of the water and sewer fund increased $17 million primarily due to charges for services and capital contributions. The water and sewer fund adopted volumetric rate increases of 4.5% for water service and 6.7% for sewer service, as well as increases to base charges for water and sewer availability for a total increase of approximately 7% in October 2014.

Capital Asset and Debt Administration Capital Assets. The City’s investment in capital assets for its governmental and business-type activities as of June 30, 2015, totals $1.3 billion (net of accumulated depreciation). These assets include land, buildings, improvements other than buildings (infrastructure assets, such as streets, sidewalks, water and sewer lines), machinery and equipment, and construction-in-progress.

Capital Assets (net of depreciation) Figure 5 June 30, 2015 with Comparative Data for June 30, 2014

(dollars in thousands) Governmental Business-type Activities Activities Total 2015 Restated 2014 2015 Restated 2014 2015 Restated 2014 Land $ 73,369 $ 73,381 $ 43,390 $ 40,680 $ 116,759 $ 114,061 Buildings 73,589 59,962 199,824 221,716 273,413 281,678 Improvements other than buildings 139,122 136,100 550,402 548,441 689,524 684,541 Machinery and equipment 24,433 21,659 19,454 20,835 43,887 42,494 Construction-in-progress 49,435 48,148 104,996 95,258 154,431 143,406 Total $ 359,948 $ 339,250 $ 918,066 $ 926,930 $ 1,278,014 $ 1,266,180

Major capital asset transactions during the year include the following: • Construction in progress for governmental activities was $49.4 million, which reflects construction of street widening and resurfacing projects, improvements to recreation centers and parks, improvements to fire stations, and other economic development projects. • Business-type capital assets decreased $8.9 million as a result of the sale of the Bryce A. Stuart Building from Risk Acceptance Management Corporation to the City. Risk Acceptance Management Corporation is included as an internal service fund. The building was added as an asset in governmental activities. Increases included major improvements to the extension of water and sewer lines, Muddy Creek clarifier upgrade, South Fork critical improvements, Reedy Creek pump station, Salem Creek crossing, and $2 million in stormwater capital projects.

42 2015 Annual Financial Report

B-7 Additional information on the City’s capital assets is included in Note 3D of the Basic Financial Statements. Long-term Debt. The City utilizes various techniques to fund capital improvements and other long-term needs. A debt management model is maintained which identifies resources available for current and future payments of principal and interest on outstanding debt. Resources are identified and designated for payment of both principal and interest before issuance of additional debt. The debt management model clearly identifies the City’s capacity for future debt service and the adequacy of designated resources. In accordance with the Capital Improvement Program, funding for projects may include: current revenues or financing by non-voted general obligation bonds; general obligation bonds authorized by referendum; leasing through North Carolina Municipal Leasing Corporation; installment financing contracts; special obligation bonds; and revenue bonds for water and sewer utilities and stormwater management. At June 30, 2015, the City had total bonded debt outstanding of $556.4 million, of which, $74.6 million is backed by the City’s full faith and credit and taxing power of the City and $481.9 million in bonds secured solely by specified revenue sources. Revenues of the water and sewer utility system and stormwater management system are pledged as security for revenue bonds and special obligation bonds are secured by the City’s sales tax revenue.

Bonded Debt and Contractual Obligations Outstanding Figure 6 June 30, 2015 with Comparative Data for June 30, 2014

(dollars in thousands) Governmental Business-type Activities Activities Total 2015 2014 2015 2014 2015 2014 Bonds General obligation $ 74,555 $ 80,395 $ - $ - $ 74,555 $ 80,395 Revenue - - 449,320 473,930 449,320 473,930 Special obligation 9,242 9,772 23,324 25,756 32,566 35,528 Contractual Obligation: NCMLC 119,926 81,438 22,666 10,937 142,592 92,375 Other 16,310 17,631 818 15,581 17,128 33,212 Total $ 220,033 $ 189,236 $ 496,128 $ 526,204 $ 716,161 $ 715,440

The City has $142.6 million in contractual lease obligations to the North Carolina Municipal Leasing Corporation (“NCMLC”) for certificates of participation and limited obligation bonds issued by the corporation for property and equipment acquired by the City under lease agreements. Capital leases have funded equipment and certain real property acquired under the City’s leasing program for many years. NCMLC, a non-profit organization, issues limited obligation bonds from time to time for acquisition of real property and equipment expected to be acquired over approximately 24 months. Issues for equipment requisitions have been level at $18 million every other year since 1996. General obligation bonded debt service is funded substantially by dedicated sources such as a portion of local property and sales taxes, one-third of the City’s profits from alcoholic beverage sales, and interest on designated governmental fund investments. The City has capacity for additional future debt because of the allocation of specific resources and the relatively short schedule of maturing debt. About 79.69% of outstanding general obligation bonds will be repaid within 10 years as shown in the following schedule.

B-8 General Obligation Bond Debt Service Figure 7

(dollars in thousands) Maturities Principal Percent of Total Interest and Principal 2016-2020 $ 29,760 39.92% $ 43,424 2021-2025 29,650 39.76 37,002 2026-2030 12,985 17.42 14,943 2031-2032 2,160 2.90 2,316 $ 74,555 100.00% $ 97,685

The City maintained triple “A” bond ratings from Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. The bond ratings are a clear indication of the sound ﬁnancial condition of the City of Winston-Salem, which is one of a few cities in the country that maintains the highest ﬁnancial rating from all three of the major rating agencies. North Carolina general statutes limit the amount of general obligation debt that a unit of government can issue to 8% of the total assessed value of taxable property located within that government’s boundaries. The legal debt margin for the City is $1,536,805,019. Additional information regarding the City’s long-term debt can be found in Note 3G.

Budget Highlights for the Fiscal Year Ending June 30, 2016 Governmental Activities. While the City still faces the challenges of a slowly recovering economy, these challenges are eased by a 1.5% increase in real property values, an 8% sales tax collection increase and an 11.8% increase in the utilities franchise fee. In years past, balancing the budget required considerable effort and fiscal discipline to allocate scarce resources while trying to maintain the current level of service to which citizens are accustomed. While this effort is still necessary, the City has the opportunity to maintain its current service levels by addressing years of deferred maintenance on vehicles, facilities, and equipment. In the fiscal year 2014-2015 budget the City addressed the challenge of maintaining competitive employee compensation. The City conducted a market pay study that found 80% of City employees’ salaries were below average actual market rates. For some position classifications, voluntary turnover rates exceeded 10%. The fiscal year 2015-2016 budget continues to address this need for the City to remain competitive. The budget is balanced with a proposed tax rate of 56.5 cents, which represents a 2.5 cent increase from the current rate of 54 cents for debt payments on the voter approved bonds. The proposed budget provides a modest market pay adjustment to move employees closer to market rates and provides for increased replacement of vehicles and equipment. For general fund, which accounts for municipal services that are covered primarily by property and sales taxes, the adopted budget is $182.4 million, an increase of 1.7% compared to fiscal year 2014-2015. Business-type Activities. The City/County Utility Commission approved a 5% increase in the sewer volumetric rate and a $1.85 increase in the bi-monthly base rate for water and sewer. Water rates for most customers will remain unchanged; however, the commission approved a 9% increase in the water rate for large, high-volume customers. These increases will generate sufficient revenues to provide funding for all operating expenses and to meet debt coverage requirements.

Requests for Information This report is designed to provide an overview of the City of Winston-Salem’s ﬁnances for those with an interest in this area. Questions concerning any of the information found in this report or requests for additional information should be directed to the Chief Financial Ofﬁcer, City of Winston-Salem, P. O. Box 2511, Winston-Salem, North Carolina 27102, or by visiting our website at www.cityofws.org.

44 2015 Annual Financial Report

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B-10 Basic Financial Statements

B-11 City of Winston-Salem, North Carolina Statement of Net Position Exhibit 1 June 30, 2015 Page 1 of 2 Governmental Business-type Activities Activities Total Assets Current Assets Cash and cash equivalents/investments $ 170,816,966 $ 150,478,372 $ 321,295,338 Receivables Taxes, net 1,415,328 92,669 1,507,997 Accounts, net 3,075,579 13,785,254 16,860,833 Leases 11,622,962 - 11,622,962 Assessments, net 250,821 332,994 583,815 Loans, net 27,800,283 - 27,800,283 Total receivables 44,164,973 14,210,917 58,375,890 Due from other governments 13,649,007 4,151,650 17,800,657 Inventories 2,336,406 2,912,693 5,249,099 Prepaid items 45,644 17,890 63,534 Total current assets 231,012,996 171,771,522 402,784,518 Noncurrent Assets Restricted Assets Cash and cash equivalents - 77,580,962 77,580,962 Net pension asset 9,076,708 1,579,548 10,656,256 Capital Assets Land 73,368,873 43,390,262 116,759,135 Construction in progress 49,435,036 104,996,141 154,431,177 Other capital assets, net of accumulated depreciation 237,144,511 769,679,965 1,006,824,476 Accounts receivables - 500,000 500,000 Total noncurrent assets 369,025,128 997,726,878 1,366,752,006 Total assets 600,038,124 1,169,498,400 1,769,536,524

Deferred Outflows of Resources Pension deferrals Difference between expected and actual experience 2,810,030 - 2,810,030 Changes of assumptions 3,896,444 - 3,896,444 Employer contributions to pension plan in current fiscal year 6,198,026 1,078,593 7,276,619 Charge on refunding 3,363,046 2,298,314 5,661,360 Derivative instrument - 21,676,041 21,676,041 Total deferred outflows of resources 16,267,546 25,052,948 41,320,494

The accompanying notes are an integral part of the ﬁnancial statements.

46 2015 Annual Financial Report

B-12 City of Winston-Salem, North Carolina Statement of Net Position Exhibit 1 June 30, 2015 Page 2 of 2 Governmental Business-type Activities Activities Total Liabilities Current Liabilities Accounts payable $ 12,259,823 $ 22,570,331 $ 34,830,154 Accrued payroll 2,385,891 570,031 2,955,922 Accrued vacation 3,382,764 661,669 4,044,433 Accrued interest payable 912,218 1,266,652 2,178,870 Loan escrow 28,899 - 28,899 Unearned revenue 441,409 1,633,171 2,074,580 Landﬁll closure and postclosure costs - 216,000 216,000 Current maturities Claims payable 4,688,708 - 4,688,708 Contracts payable 7,847,213 3,162,435 11,009,648 Bonds payable 6,486,900 23,736,793 30,223,693 Total current liabilities 38,433,825 53,817,082 92,250,907 Noncurrent Liabilities Contracts payable from restricted assets - 5,385,544 5,385,544 Accrued vacation 6,373,386 898,310 7,271,696 Net pension liability 33,539,650 - 33,539,650 Landﬁll closure and postclosure costs - 15,907,637 15,907,637 Claims payable 1,346,738 299,436 1,646,174 Contracts payable 137,173,342 25,628,615 162,801,957 Bonds payable 82,179,827 461,153,497 543,333,324 Derivative instrument - 21,676,041 21,676,041 Total noncurrent liabilities 260,612,943 530,949,080 791,562,023 Total liabilities 299,046,768 584,766,162 883,812,930

Deferred Inﬂows of Resources Advances from other governments 693,286 - 693,286 Pension deferrals Difference between expected and actual experience 991,787 172,593 1,164,380 Changes of assumptions 21,900,209 3,811,122 25,711,331 Charge on refunding - 807,407 807,407 Total deferred inﬂows of resources 23,585,282 4,791,122 28,376,404 Net Position Net investment in capital assets 131,696,233 419,642,228 551,338,461 Restricted for: Stabilization by state statute 54,075,405 - 54,075,405 Debt service 15,218,991 - 15,218,991 General government 152,036 - 152,036 Public protection 2,357,119 - 2,357,119 Transportation 629,126 - 629,126 Culture and recreation 689,425 - 689,425 Community and economic development 121,370 - 121,370 Perpetual care Nonexpendable 3,400,056 - 3,400,056 Unrestricted 85,333,859 185,351,836 270,685,695 Total net position $ 293,673,620 $ 604,994,064 $ 898,667,684

B-13 City of Winston-Salem, North Carolina Statement of Activities For the Fiscal Year Ended June 30, 2015 Program Revenues Operating Capital Charges for Grants and Grants and Expenses Services Contributions Contributions Activities: Governmental: General government $ 28,112,510 $ 20,515,345 $ 1,041,216 $ - Public protection 91,609,111 3,808,576 971,654 - Environmental health 16,270,988 2,425,703 470,605 - Transportation 21,006,107 3,325,676 8,228,690 3,218,175 Culture and recreation 10,835,392 1,458,330 - - Community and economic development 19,105,095 6,293,171 4,895,518 47,766 Interest and ﬁscal charges 9,807,798 - - - Total governmental activities 196,747,001 37,826,801 15,607,683 3,265,941 Business-type: Water and sewer utility 81,924,268 93,221,504 1,631,486 2,563,540 Solid waste disposal 10,288,446 9,382,726 902,213 - Stormwater management 5,541,532 10,539,003 56,076 21,300 Parking 1,863,836 1,178,191 426,641 - Transit Authority 16,222,267 2,670,064 5,245,183 525,072 Public assembly facilities management 7,405,950 9,765,453 - 67,371 Risk Acceptance Management Corporation 4,350,212 115,235 - - Total business-type activities 127,596,511 126,872,176 8,261,599 3,177,283 Total City of Winston-Salem $ 324,343,512 $ 164,698,977 $ 23,869,282 $ 6,443,224

General revenues: Taxes: Property taxes Sales taxes Gross receipts taxes Occupancy taxes Beer and wine excise-state Telecommunications sales tax Utilities sales tax Piped natural gas sales tax Video franchise fee Payment in lieu of taxes ABC store allocations Investment income Transfers Government-wide Total general revenues and transfers Change in net position Net position - beginning, as previously stated Restatement Net position - beginning, as restated Net position - ending

The accompanying notes are an integral part of the ﬁnancial statements.

48 2015 Annual Financial Report

B-14 Exhibit 2 Net (Expense) Revenue and Changes in Net Position

Governmental Business-Type Activities Activities Total

(6,555,949) - (6,555,949) (86,828,881) - (86,828,881) (13,374,680) - (13,374,680) (6,233,566) - (6,233,566) (9,377,062) - (9,377,062) (7,868,640) - (7,868,640) (9,807,798) - (9,807,798) (140,046,576) - (140,046,576)

- 15,492,262 15,492,262 - (3,507) (3,507) - 5,074,847 5,074,847 - (259,004) (259,004) - (7,781,948) (7,781,948) - 2,426,874 2,426,874 - (4,234,977) (4,234,977) - 10,714,547 10,714,547 (140,046,576) 10,714,547 (129,332,029)

101,672,305 6,889,480 108,561,785 35,396,961 - 35,396,961 336,466 - 336,466 676,361 - 676,361 1,123,316 - 1,123,316 2,434,801 - 2,434,801 11,628,161 - 11,628,161 874,111 - 874,111 2,299,732 - 2,299,732 215,901 - 215,901 1,071,106 - 1,071,106 713,752 4,681,987 5,395,739

280,537 (280,537) - 158,723,510 11,290,930 170,014,440 18,676,934 22,005,477 40,682,411 314,965,348 585,327,301 900,292,649 (39,968,662) (2,338,714) (42,307,376) 274,996,686 582,988,587 857,985,273 $ 293,673,620 $ 604,994,064 $ 898,667,684

B-15 City of Winston-Salem, North Carolina Balance Sheet Governmental Funds June 30, 2015 Exhibit 3 Other Total Debt Service Capital Governmental Governmental Assets General Fund Fund Projects Fund Funds Funds Cash and cash equivalents/investments $ 41,991,820 $ 15,236,667 $ 73,465,403 $ 26,073,331 $ 156,767,221 Receivables Taxes, net 1,280,957 131,397 - 2,974 1,415,328 Accounts, net 2,994,909 - 45,194 11,767 3,051,870 Leases - 12,000,000 2,788,254 - 14,788,254 Assessments, net 248,712 - 2,109 - 250,821 Loans 930,361 - - 28,735,489 29,665,850 Total receivables 5,454,939 12,131,397 2,835,557 28,750,230 49,172,123 Due from other governments 10,953,840 1,480,511 55,200 1,159,456 13,649,007 Due from other funds 606,120 - - - 606,120 Inventories 220,500 - - 801,451 1,021,951 Prepaid items 30,144 - - 15,500 45,644 Total assets 59,257,363 28,848,575 76,356,160 56,799,968 221,262,066 Liabilities Accounts payable 4,575,903 2,382 4,368,318 1,239,724 10,186,327 Accrued payroll 2,260,980 - - 1,111 2,262,091 Due to other funds - - - 38,668 38,668 Loan escrow 2,592 - - 26,307 28,899 Unearned revenue 34,790 - - - 34,790 Total liabilities 6,874,265 2,382 4,368,318 1,305,810 12,550,775 Deferred Inflows of Resources Taxes 1,280,957 131,397 - 2,974 1,415,328 Leases - 12,000,000 2,788,254 - 14,788,254 Assessments - - 2,109 - 2,109 Advances from other governments - - - 693,286 693,286 Total deferred inflows of resources 1,280,957 12,131,397 2,790,363 696,260 16,898,977 Fund Balances Nonspendable Loans 930,361 - - 28,735,489 29,665,850 Inventories 220,500 - - 801,451 1,021,951 Prepaids 30,144 - - 15,500 45,644 Perpetual care - - - 3,400,056 3,400,056 Restricted Stabilization by state statute 17,368,209 1,495,805 27,053,818 8,157,573 54,075,405 Debt service - 15,218,991 - - 15,218,991 Capital improvements - - 2,072,049 - 2,072,049 General government - - - 152,036 152,036 Public protection - - - 2,357,119 2,357,119 Transportation - - - 629,126 629,126 Culture and recreation - - - 689,425 689,425 Community & economic development - - - 121,370 121,370 Committed Capital improvements - - 40,071,612 - 40,071,612 Community & economic development - - - 13,055,075 13,055,075 Assigned Subsequent year budget 2,879,210 - - - 2,879,210 Unassigned 29,673,717 - - (3,316,322) 26,357,395 Total fund balances 51,102,141 16,714,796 69,197,479 54,797,898 191,812,314 Total liabilities, deferred inflows of resources, and fund balances $ 59,257,363 $ 28,848,575 $ 76,356,160 $ 56,799,968 $ 221,262,066

The accompanying notes are an integral part of the ﬁnancial statements.

50 2015 Annual Financial Report

B-16 City of Winston-Salem, North Carolina Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Position June 30, 2015 Exhibit 3.1

Total fund balances for governmental funds (Exhibit 3) $ 191,812,314 Total net position reported for governmental activities in the statement of net position is different because: Capital assets (net of accumulated depreciation) used in governmental activities are not financial resources and therefore are not reported in the funds. Gross capital assets at historical cost 577,398,890 Accumulated depreciation (217,450,470) Net pension asset 9,076,708 Contributions to the pension plan in the current fiscal year are deferred outflows of resources on the Statement of Net Position. 12,904,500 Other assets not available to pay for current period expenditures, and therefore are inflows of resources in fund statements. 14,580,865 Internal service funds are used by management to charge the costs of warehouse, fleet services, information services, workers’ compensation, health benefits, dental and flex benefits and employee benefits. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net position. 6,138,109 Net pension liability (33,539,650) Pension related deferrals (22,891,996) Long-term liabilities are not due and payable in the current period and accordingly are not reported as fund liabilities: Accrued vacation (9,756,150) Accrued interest (912,218) Contracts payable (145,020,555) Bonds payable (88,666,727) Net position of governmental activities (Exhibit 1) $ 293,673,620

B-17 City of Winston-Salem, North Carolina Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds For the Fiscal Year Ended June 30, 2015 Exhibit 4 Capital Other Total Debt Projects Governmental Governmental General Fund Service Fund Funds Funds Revenues Taxes $ 122,255,030 $ 14,989,392 $ - $ 1,207,217 $ 138,451,639 Licenses and permits 8,140,839 - - 489,714 8,630,553 Intergovernmental 19,739,838 1,041,489 3,265,941 14,473,757 38,521,025 Investment income - 323,277 115,953 173,026 612,256 Charges for services 18,792,591 - - - 18,792,591 Capital lease charges - 600,000 1,097,420 286,521 1,983,941 Other 4,235,254 1,633,714 1,764,406 876,697 8,510,071 Total revenues 173,163,552 18,587,872 6,243,720 17,506,932 215,502,076 Expenditures Current General government 28,139,352 - - 3,539 28,142,891 Public protection 87,163,960 - - 1,405,292 88,569,252 Environmental health 15,482,856 - - 458,041 15,940,897 Transportation 12,217,160 - - 1,857,880 14,075,040 Culture and recreation 9,304,398 - - 243,249 9,547,647 Community and economic development 12,066,010 - - 6,582,897 18,648,907 Capital outlay - - 37,326,971 - 37,326,971 Debt service Capital lease charges 6,077,613 2,366,333 - - 8,443,946 Principal retirement Bond - 6,370,000 - - 6,370,000 Other - 988,306 16,855,536 333,000 18,176,842 Interest and ﬁscal charges Bond - 3,707,737 - - 3,707,737 Other - 3,914,518 2,977,927 168,051 7,060,496 Total expenditures 170,451,349 17,346,894 57,160,434 11,051,949 256,010,626 Excess of revenues over (under) expenditures 2,712,203 1,240,978 (50,916,714) 6,454,983 (40,508,550) Other Financing Sources (Uses) Premium on limited obligation bonds - - 5,613,000 - 5,613,000 Issuance of limited obligation bonds - - 45,170,000 - 45,170,000 Issuance of refunding LOBS - - 6,018,464 - 6,018,464 Payment to refunded LOBS escrow agent - - (6,259,644) - (6,259,644) Capital leases - - 18,937,813 - 18,937,813 Transfers in 7,557,764 1,688,040 5,421,937 5,254,620 19,922,361 Transfers out (7,932,261) (2,898) (4,575,678) (7,744,817) (20,255,654) Total other ﬁnancing sources (uses), net (374,497) 1,685,142 70,325,892 (2,490,197) 69,146,340 Net change in fund balances 2,337,706 2,926,120 19,409,178 3,964,786 28,637,790

Fund balances July 1, as previously stated 47,829,207 13,788,676 49,788,301 22,347,794 133,753,978 Restatement 935,228 - - 28,485,318 29,420,546 Fund balances July 1, as restated 48,764,435 13,788,676 49,788,301 50,833,112 163,174,524

Fund balances – ending $ 51,102,141 $ 16,714,796 $ 69,197,479 $ 54,797,898 $ 191,812,314

The accompanying notes are an integral part of the ﬁnancial statements.

52 2015 Annual Financial Report

B-18 City of Winston-Salem, North Carolina Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities For the Fiscal Year Ended June 30, 2015 Exhibit 4.1

Amounts reported for governmental activities in the statement of activities (Exhibit 2) are different because: Net change in fund balances - total governmental funds (Exhibit 4) $ 28,637,790 Governmental funds report capital outlays as expenditures. However in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation expense in the current period. Capital outlay expenditures which were capitalized 37,109,036 Depreciation expense for governmental assets (12,309,497) The net effect of various miscellaneous transactions involving capital assets (i.e., sales, trade-ins, and donations) is to decrease net assets. (1,159,179) Contributions to the pension plan in the current fiscal year are not included on the Statement of Activities 5,884,222 Revenues in the statement of activities that do not provide current financial resources are not reported as revenue in the funds. (460,174) Internal service funds are used by management to charge the costs of warehouse, fleet services, information services, workers’ compensation, health benefits, dental and flex benefits and employee benefits. The net revenue (expenses) of certain activities of internal service funds is reported with governmental activities. 1,427,154 The issuance of long-term debt are reported as financing sources in governmental funds and thus contribute to the change in fund balance. In the statement of net position, however, issuing debt increases long-term liabilities and does not affect the statement of activities. Similarly, repayment of principal is an expenditure in the governmental funds but reduces the liability in the statement of net position. Also governmental funds report the effect of issuance costs, premiums and discounts, and similar items as expenses when debt is first issued, whereas these amounts are deferred and amortized in the statement of activities. Debt issued: Premium on limited obligation bonds (5,613,000) Issuance of limited obligation bonds (45,170,000) Issuance of refunding limited obligation bonds (6,018,464) Payment to refunded LOBS escrow agent 6,259,644 Capital leases (18,937,813) Decrease in contracts payable 4,368,240 Repayments: Bonds 6,370,000 Certificates of participation/limited obligation bonds 16,855,536 Installment financing contract 988,307 HUD Section 108 loan 333,000 Under the modified accrual basis of accounting used in the governmental funds, expenditures are not recognized for transactions that are not normally paid with expendable available financial resources. In the statement of activities, liabilities are reported regardless of when financial resources are available. In addition, interest on long-term debt is not recognized under the modified accrual basis of accounting until due, rather than as it accrues. Pension expense (660,760) Accrued vacation (187,543) Amortization of financing costs 1,474,493 Accrued interest on bonds 15,849 Accrued interest on limited obligation bonds (532,617) Accrued interest on installment financing contract 2,710 Change in net position of governmental activities (Exhibit 2) $ 18,676,934

B-19 City of Winston-Salem, North Carolina Statement of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual General Fund Exhibit 5 For the Fiscal Year Ended June 30, 2015 Page 1 of 5 Variance with Final Budget Original Final Positive Budget Budget Actual (Negative) Revenues Taxes Property taxes Current levy $ 89,101,390 $ 89,101,390 $ 90,493,040 $ 1,391,650 Prior years levies 1,700,000 1,700,000 858,811 (841,189) Penalty and interest on taxes 350,000 350,000 467,225 117,225 Total property taxes 91,151,390 91,151,390 91,819,076 667,686 Other local taxes Local option sales taxes 28,066,560 28,066,560 30,099,488 2,032,928 Gross receipts taxes 230,000 230,000 336,466 106,466 Total other local taxes 28,296,560 28,296,560 30,435,954 2,139,394 Total taxes 119,447,950 119,447,950 122,255,030 2,807,080 Licenses and permits Building permits 958,350 958,350 1,319,578 361,228 Electrical permits 699,200 699,200 733,885 34,685 Plumbing permits 357,250 357,250 473,420 116,170 Heating permits 601,300 601,300 745,414 144,114 Zoning board ordinances 19,500 19,500 18,040 (1,460) Other construction related permits 40,000 40,000 67,667 27,667 Site inspection permits 11,500 11,500 6,052 (5,448) Zoning permits 233,770 233,770 252,800 19,030 Refrigeration permits 7,000 7,000 11,690 4,690 Privilege licenses and penalties 2,312,180 2,312,180 2,456,852 144,672 Motor vehicle licenses 1,740,330 1,740,330 1,862,910 122,580 Other licenses and permits 168,750 168,750 192,531 23,781 Total licenses and permits 7,149,130 7,149,130 8,140,839 991,709 Intergovernmental revenues Beer and wine excise tax - state 975,120 975,120 1,123,316 148,196 Telecommunications sales tax 2,570,970 2,570,970 2,434,801 (136,169) Utilities sales tax 8,533,770 8,533,770 11,628,161 3,094,391 Piped natural gas sales tax 1,113,930 1,113,930 874,111 (239,819) Video franchise fee 2,194,750 2,194,750 2,299,732 104,982 Payments in lieu of taxes 157,810 157,810 215,901 58,091 Emergency management 40,000 40,000 80,000 40,000 Other state grants - 15,200 12,710 (2,490) ABC store allocations 776,460 776,460 1,071,106 294,646 Total intergovernmental revenues 16,362,810 16,378,010 19,739,838 3,361,828

The accompanying notes are an integral part of the ﬁnancial statements.

54 2015 Annual Financial Report

B-20 City of Winston-Salem, North Carolina Statement of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual General Fund Exhibit 5 For the Fiscal Year Ended June 30, 2015 Page 2 of 5 Variance with Final Budget Original Final Positive Budget Budget Actual (Negative) Revenues (continued) Charges for sales and services Governmental services and sales Public safety services $ 135,800 $ 135,800 $ 159,925 $ 24,125 Transportation 197,500 197,500 226,990 29,490 Public works services 3,281,170 3,281,170 2,895,160 (386,010) Governmental services 863,680 863,680 806,238 (57,442) Miscellaneous sales and services 231,800 231,800 205,233 (26,567) Total governmental services and sales 4,709,950 4,709,950 4,293,546 (416,404) Charges to State of North Carolina Highway maintenance/special projects 80,000 80,000 80,000 - Traffic control devices 375,000 375,000 317,196 (57,804) Computerized traffic system 97,000 97,000 97,583 583 Total charges to state 552,000 552,000 494,779 (57,221) Charges to Other Governments Forsyth County Planning board support 1,472,790 1,472,790 1,353,141 (119,649) Emergency management 355,590 366,870 328,262 (38,608) Inspections 218,430 218,430 (157,079) (375,509) Purchasing 108,970 108,970 108,839 (131) Winston-Salem/Forsyth County School Board 125,000 125,000 125,000 - (Super Kids) Police 246,000 246,000 226,131 (19,869) Other 31,940 31,940 24,975 (6,965) Total charges to county 2,558,720 2,570,000 2,009,269 (560,731) Interfund charges for services Engineering 1,550,000 1,550,000 1,653,570 103,570 Financial management services 2,731,070 2,731,070 2,731,080 10 Streets 150,000 150,000 469,411 319,411 Planning 20,000 20,000 26,776 6,776 Property management 1,081,930 1,278,700 973,710 (304,990) Sanitation 37,000 37,000 41,180 4,180 Police 270,540 322,110 426,020 103,910 Real estate 10,000 10,000 50,970 40,970 Street cuts 350,000 350,000 513,680 163,680 Indirect cost allocation 4,469,700 4,469,700 4,504,341 34,641 Traffic engineering 450,000 450,000 541,297 91,297 Recreation 41,240 41,240 29,789 (11,451) Vegetation management services 40,000 40,000 16,463 (23,537) Human relations - - 5,000 5,000 Telecommunications 14,160 14,160 11,710 (2,450) Total interfund charges for services 11,215,640 11,463,980 11,994,997 531,017 Total charges for sales and services 19,036,310 19,295,930 18,792,591 (503,339)

B-21 City of Winston-Salem, North Carolina Statement of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual General Fund Exhibit 5 For the Fiscal Year Ended June 30, 2015 Page 3 of 5 Variance with Final Budget Original Final Positive Budget Budget Actual (Negative) Revenues (continued) Other revenues Rentals $ 396,610 $ 461,120 $ 423,626 $ (37,494) Sales of property 180,000 180,000 128,834 (51,166) Parking meters 75,000 80,250 100,826 20,576 Parking tickets 275,000 275,000 273,858 (1,142) Fines and forfeitures 823,300 823,300 511,568 (311,732) Miscellaneous revenue 2,902,986 2,913,408 2,796,542 (116,866) Total other revenues 4,652,896 4,733,078 4,235,254 (497,824) Total revenues 166,649,096 167,004,098 173,163,552 6,159,454

Expenditures (by function) General government Legislative 1,233,480 1,221,780 1,185,115 36,665 Executive 2,771,280 2,817,980 2,856,104 (38,124) Staff services 5,975,990 5,977,632 5,738,556 239,076 Financial management 8,225,020 8,309,029 7,912,323 396,706 Intergovernmental services 10,452,330 9,931,547 8,672,198 1,259,349 Employee safety and health 860,440 869,063 859,036 10,027 Human relations 356,540 368,840 350,929 17,911 Contingency budget 29,000 14,000 - 14,000 Property tax collections 475,290 475,290 565,091 (89,801) Total general government 30,379,370 29,985,161 28,139,352 1,845,809

Public protection Police 61,324,790 61,656,275 61,044,913 611,362 Fire 24,792,670 25,115,139 25,565,269 (450,130) Emergency management 559,320 633,985 553,778 80,207 Total public protection 86,676,780 87,405,399 87,163,960 241,439

Environmental health Sanitation administration 830,440 830,440 804,398 26,042 Organic and solid waste collection 8,448,320 8,506,860 8,140,324 366,536 Solid waste disposal 1,751,920 1,860,405 1,599,920 260,485 Yard waste collections 1,102,430 1,119,907 877,923 241,984 Curbside collection 4,540,290 4,520,630 4,060,291 460,339 Total environmental health 16,673,400 16,838,242 15,482,856 1,355,386

The accompanying notes are an integral part of the ﬁnancial statements.

56 2015 Annual Financial Report

B-22 City of Winston-Salem, North Carolina Statement of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual General Fund Exhibit 5 For the Fiscal Year Ended June 30, 2015 Page 4 of 5 Variance with Final Budget Original Final Positive Budget Budget Actual (Negative) Expenditures (by function continued) Transportation Technical support $ 1,741,210 $ 1,741,210 $ 1,593,542 $ 147,668 Signal system operations 215,430 215,430 178,118 37,312 Trafﬁc system maintenance 6,202,690 6,279,611 5,808,718 470,893 Street parking 197,370 229,730 215,228 14,502 Streets and sidewalks 4,879,090 5,348,811 4,421,554 927,257 Total transportation 13,235,790 13,814,792 12,217,160 1,597,632

Culture and recreation Recreation administration 999,260 978,363 936,161 42,202 Participant recreation 8,601,220 8,786,399 8,368,237 418,162 Total culture and recreation 9,600,480 9,764,762 9,304,398 460,364

Community and economic development Zoning and construction control 3,780,720 3,780,720 3,618,176 162,544 Real estate management 453,280 453,280 384,621 68,659 Planning board 2,616,920 2,571,510 2,477,006 94,504 Housing services 3,560,090 3,639,500 3,695,717 (56,217) Housing and neighborhood development 711,340 711,340 690,612 20,728 Economic development 615,150 597,286 395,810 201,476 Community agencies 1,086,800 1,152,398 804,068 348,330 Total community and economic development 12,824,300 12,906,034 12,066,010 840,024

Other Capital lease charges 6,670,140 6,725,840 6,077,613 648,227 Appropriated expenditure reductions (3,006,520) (3,006,520) - (3,006,520) Total other 3,663,620 3,719,320 6,077,613 (2,358,293) Total expenditures 173,053,740 174,433,710 170,451,349 3,982,361 Excess of expenditures over revenues (6,404,644) (7,429,612) 2,712,203 10,141,815

B-23 City of Winston-Salem, North Carolina Statement of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual General Fund Exhibit 5 For the Fiscal Year Ended June 30, 2015 Page 5 of 5 Variance with Final Budget Original Final Positive Budget Budget Actual (Negative) Other Financing Sources (Uses) Transfers in Community development fund $ 883,730 $ 883,730 $ 782,650 $ (101,080) Gasoline tax fund 5,307,310 5,323,270 4,806,297 (516,973) Cemetery perpetual care fund 143,154 143,154 143,154 - Water and sewer utility fund 77,540 77,540 62,101 (15,439) Stormwater fund 1,749,330 1,749,330 1,627,392 (121,938) Workers’ compensation fund 136,170 136,170 136,170 - Total transfers in 8,297,234 8,313,194 7,557,764 (755,430)

Transfers out Grants fund (185,390) (537,390) (496,765) 40,625 Economic and housing development fund (1,722,990) (1,722,990) (1,722,990) - Debt service fund (767,810) (1,688,040) (1,688,040) - Capital projects fund (1,472,540) (1,772,540) (1,772,535) 5 Cemetery perpetual care fund (104,720) (104,720) (104,720) - Parking fund (645,150) (645,150) (645,150) - Public assembly facilities management fund (568,990) (708,990) (752,061) (43,071) Information services fund (750,000) (750,000) (750,000) - Total transfers out (6,217,590) (7,929,820) (7,932,261) (2,441) Total other ﬁnancing sources, net 2,079,644 383,374 (374,497) (757,871)

Excess of revenues and other ﬁnancing sources over (under) expenditures and other uses (4,325,000) (7,046,238) 2,337,706 9,383,944 Fund balance - July 1, as previously stated 47,829,207 47,829,207 47,829,207 - Restatement 935,228 935,228 935,228 - Fund balance July 1, as restated 48,764,435 48,764,435 48,764,435 - Fund balance June 30 $ 44,439,435 $ 41,718,197 $ 51,102,141 $ 9,383,944

The accompanying notes are an integral part of the ﬁnancial statements.

58 2015 Annual Financial Report

B-24 City of Winston-Salem, North Carolina Statement of Net Position – Proprietary Funds June 30, 2015 Exhibit 6 Enterprise Funds Internal Water and Solid Waste Non-Major Service Assets Sewer Utility Disposal Funds Total Funds Current Assets Cash and cash equivalents/investments $ 71,088,406 $ 16,243,005 $ 27,959,464 $ 115,290,875 $ 49,237,242 Receivables for uncollectibles Taxes, net - - 92,669 92,669 - Accounts, net 12,530,439 222,559 1,032,256 13,785,254 10 Assessments, net 332,994 - - 332,994 - Total receivables 12,863,433 222,559 1,124,925 14,210,917 10 Due from other governments - 48,193 4,103,457 4,151,650 Inventories 2,722,509 - 190,184 2,912,693 1,314,455 Prepaid expenses - - 17,890 17,890 - Total current assets 86,674,348 16,513,757 33,395,920 136,584,025 50,551,707 Noncurrent Assets Restricted assets Cash and cash equivalents/investments 61,390,200 16,123,637 67,125 77,580,962 - Net pension asset 1,197,030 124,812 257,706 1,579,548 459,552 Capital assets Land 16,012,007 11,616,288 15,761,967 43,390,262 801,682 Construction in progress 75,950,920 1,117,352 27,927,869 104,996,141 172,628 Other capital assets, net of accumulated depreciation 652,823,492 28,040,037 88,816,436 769,679,965 4,151,926 Accounts receivables - - 500,000 500,000 - Total noncurrent assets 807,373,649 57,022,126 133,331,103 997,726,878 5,585,788 Total assets 894,047,997 73,535,883 166,727,023 1,134,310,903 56,137,495 Deferred Outflows of Resources Contributions to pension plan in current fiscal year 817,392 85,227 175,974 1,078,593 313,804 Charge on refunding 2,226,351 34,488 37,475 2,298,314 - Accumulated increase in fair value of hedging derivatives 21,676,041 - - 21,676,041 - Total deferred outflows of resources 24,719,784 119,715 213,449 25,052,948 313,804 Liabilities Current Liabilities Accounts payable 20,291,861 722,605 1,538,279 22,552,745 2,091,082 Accrued payroll 310,965 33,215 225,851 570,031 123,800 Accrued vacation 240,228 34,438 387,003 661,669 232,221 Accrued interest payable 1,197,463 12,683 56,506 1,266,652 - Due to other funds - - - - 567,452 Unearned revenue 2,600 - 1,630,571 1,633,171 425,907 Landfill closure and postclosure costs - 216,000 - 216,000 - Current maturities Claims payable - - - - 4,688,708 Contracts payable 492,377 483,216 2,186,842 3,162,435 715,935 Bonds payable 20,470,000 2,193,100 1,073,693 23,736,793 - Total current liabilities 43,005,494 3,695,257 7,098,745 53,799,496 8,845,105 Noncurrent Liabilities Contracts payable from restricted assets 5,385,544 - - 5,385,544 - Accrued vacation 678,038 74,852 145,420 898,310 113,258 Landfill closure and postclosure costs - 15,907,637 - 15,907,637 - Claims payable - - - - 1,646,174 Contracts payable 6,275,046 574,614 18,778,955 25,628,615 1,326,292 Bonds payable 428,492,565 10,054,476 22,606,456 461,153,497 - Derivative instrument 21,676,041 - - 21,676,041 - Total noncurrent liabilities 462,507,234 26,611,579 41,530,831 530,649,644 3,085,724 Total liabilities 505,512,728 30,306,836 48,629,576 584,449,140 11,930,829 Deferred Inflows of Resources Pension deferrals 3,018,981 314,782 649,952 3,983,715 1,159,016 Charge on refunding 798,789 8,618 - 807,407 - Total deferred inflows of resources 3,817,770 323,400 649,952 4,791,122 1,159,016 Net Position Net investment in capital assets 304,250,286 27,494,141 87,897,801 419,642,228 3,084,009 Unrestricted 105,186,997 15,531,221 29,763,143 150,481,361 40,277,445 Total net position $ 409,437,283 $ 43,025,362 $ 117,660,944 570,123,589 $ 43,361,454 Adjustment to reflect the consolidation of internal service fund activities related to enterprise funds 34,870,475 Net position of business-type activities $ 604,994,064

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60 2015 Annual Financial Report

B-26 City of Winston-Salem, North Carolina Statement of Revenues, Expenses, and Changes in Net Position Proprietary Funds For the Fiscal Year Ended June 30, 2015 Exhibit 7

Enterprise Funds Internal Water and Solid Waste Non-Major Service Sewer Utility Disposal Funds Total Funds Operating Revenues Sales $ 89,538,826 $ - $ - $ 89,538,826 $ - Charges for services 3,726,735 9,367,880 17,434,856 30,529,471 62,328,087 Rebates - - - - (1,628,859) Other (44,057) 14,846 6,717,855 6,688,644 789,854 Total operating revenues 93,221,504 9,382,726 24,152,711 126,756,941 61,489,082 Operating Expenses Personal services 15,410,089 1,604,032 12,963,972 29,978,093 5,940,999 Maintenance and operations 21,989,861 4,871,981 12,043,984 38,905,826 55,070,560 Total operating expenses before depreciation 37,399,950 6,476,013 25,007,956 68,883,919 61,011,559 Depreciation 24,606,962 3,543,728 5,160,123 33,310,813 630,462 Total operating expenses 62,006,912 10,019,741 30,168,079 102,194,732 61,642,021 Operating income (loss) 31,214,592 (637,015) (6,015,368) 24,562,209 (152,939) Nonoperating Revenues (Expenses) Intergovernmental revenue 1,602,170 891,000 5,710,256 8,203,426 - Property taxes - - 6,889,480 6,889,480 - Investment income (loss) 2,274,525 384,704 413,653 3,072,882 1,710,601 Gain (loss) on disposal of assets 3,382 11,213 - 14,595 (2,951,892) Damage settlements 25,934 - 17,644 43,578 - Interest and ﬁscal expense (20,208,610) (346,918) (933,998) (21,489,526) (418,318) Amortization of ﬁnancing costs 291,254 78,213 68,492 437,959 - Total nonoperating revenues (expenses), net (16,011,345) 1,018,212 12,165,527 (2,827,606) (1,659,609) Income (loss) before capital contributions and transfers 15,203,247 381,197 6,150,159 21,734,603 (1,812,548) Capital Contributions 2,563,540 - 613,743 3,177,283 - Transfers In - 350,740 1,975,109 2,325,849 750,000 Transfers Out (845,611) - (1,760,775) (2,606,386) (136,170) Total transfers (845,611) 350,740 214,334 (280,537) 613,830 Change in net position 16,921,176 731,937 6,978,236 24,631,349 (1,198,718) Total net position - beginning, as previously stated 394,288,456 42,478,224 111,064,274 45,240,594 Restatement (1,772,349) (184,799) (381,566) (680,422) Total net position - beginning, as restated 392,516,107 42,293,425 110,682,708 44,560,172 Total net position - ending $ 409,437,283 $ 43,025,362 $ 117,660,944 $ 43,361,454

Adjustment to reﬂect the consolidation of internal service fund activities related to enterprise funds (2,625,872) Change in net position of business-type activities $ 22,005,477

The accompanying notes are an integral part of the ﬁnancial statements.

B-27 City of Winston-Salem, North Carolina Statement of Cash Flows Proprietary Funds Exhibit 8 For the Fiscal Year Ended June 30, 2015 Page 1 of 2

Enterprise Funds Internal Water and Solid Waste Non-Major Service Sewer Utility Disposal Funds Total Funds Cash Flows from Operating Activities Cash received from sales $ 92,534,028 $ 9,734,667 $ 20,743,347 $ 123,012,042 $ 63,133,202 Cash payments to suppliers for goods and services (18,384,573) (4,191,573) (11,869,536) (34,445,682) (55,695,604) Cash payments to employees for services (16,147,138) (1,672,021) (13,035,611) (30,854,770) (6,591,566) Cash rebates - - - - (1,628,859) Net cash provided (used) by operating activities 58,002,317 3,871,073 (4,161,800) (57,711,590) (782,827)

Cash Flows from Noncapital Financing Activities Intergovernmental revenue 1,602,170 914,597 5,608,733 8,125,500 - Property taxes - - 6,794,525 6,794,525 - Borrowings from other funds - - - - 492,552 Repayments to other funds - - (626,998) (626,998) (28,382) Transfers in - 350,740 1,625,109 1,975,849 - Transfers out (295,928) - (1,760,775) (2,056,703) (136,170) Net cash provided (used) by noncapital financing activities 1,306,242 1,265,337 11,640,594 14,212,173 328,000 Cash Flows from Capital and Related Financing Activities Proceeds from issuance of bonds 53,166,872 251,975 - 53,418,847 - Proceeds from issuance of state loans 5,271,434 - - 5,271,434 - Increase in contracts payable - - 13,890,586 13,890,586 - Intergovernmental revenue 100,394 - 612,199 712,593 - Property taxes - - 94,955 94,955 - Capital contributions - - 88,671 88,671 - Transfers in - - 350,000 350,000 750,000 Transfers out (549,683) - - (549,683) - Acquisition of property and equipment (30,111,983) (364,326) (15,825,384) (46,301,693) (261,650) Retirement of bonds (19,800,000) (2,135,044) (1,013,802) (22,948,846) - Retirement of refunded bonds (52,715,000) - - (52,715,000) - Retirement of contracts payable (523,667) (544,500) (2,220,111) (3,288,278) (15,744,167) Retirement of refunded contracts - - (633,990) (633,990) - Interest and fiscal expense paid on bonds (20,458,979) (290,305) (506,223) (21,255,507) - Interest and fiscal expense paid on contracts payable (98,309) (74,402) (697,970) (870,681) (418,318) Debt issuance costs (1,432,808) - (98,293) (1,531,101) - Proceeds from sale of assets 3,382 11,213 - 14,595 14,716,932 Damage settlements 25,934 - 17,644 43,578 - Net cash provided (used) by capital financing activities (67,122,413) (3,145,389) (5,941,718) (76,209,520) (957,203) Cash Flows from Investing Activities Investment income (loss) 2,303,024 384,704 413,653 3,101,381 1,710,601 Net increase (decrease) in cash (5,510,830) 2,375,725 1,950,729 (1,184,376) 298,571 Cash and cash equivalents/investments July 1 137,989,436 29,990,917 26,075,860 194,056,213 48,938,671 Cash and cash equivalents /investments June 30 $ 132,478,606 $ 32,366,642 $ 28,026,589 $ 192,871,837 $ 49,237,242

62 2015 Annual Financial Report

B-28 City of Winston-Salem, North Carolina Statement of Cash Flows Proprietary Funds Exhibit 8 For the Fiscal Year Ended June 30, 2015 Page 2 of 2

Enterprise Funds Internal Water and Solid Waste Non-Major Service Sewer Utility Disposal Funds Total Funds Reconciliation of Cash and Cash Equivalents/Investments Cash and investments - current $ 71,088,406 $ 16,243,005 $ 27,959,464 $ 115,290,875 $ 49,237,242 Cash and investments - restricted 61,390,200 16,123,637 67,125 77,580,962 - Cash and cash equivalents/investments June 30 $ 132,478,606 $ 32,366,642 $ 28,026,589 $ 192,871,837 $ 49,237,242

Reconciliation of Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities Operating income (loss) $ 31,214,592 $ (637,015) $ (6,015,368) $ 24,562,209 $ (152,939) Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities Depreciation expense 24,606,962 3,543,728 5,160,123 33,310,813 630,462 Pension expense 49,602 5,171 10,680 65,453 19,042 Change in assets and liabilities (Increase) decrease in receivables (684,047) 351,941 816,216 484,110 1,175 (Increase) decrease in inventories 304,695 - 69,636 374,331 (396,463) (Increase) decrease in prepaid expenses - - 13,112 13,112 96,335 Increase (decrease) in accounts payable 3,300,593 52,316 91,700 3,444,609 (178,283) Increase (decrease) in accrued payroll 39,678 7,431 92,396 139,505 (363,906) Increase (decrease) in unearned revenue (3,429) - (4,225,580) (4,229,009) 14,086 Increase (decrease) in accrued vacation (8,937) 4,636 1,259 (3,042) 8,101 Increase in landﬁll closure & postclosure costs - 628,092 - 628,092 - Increase (decrease) in claims payable - - - - (221,129) Increase (decrease) in contracts payable - - - - 74,496 (Increase) decrease in deferred outﬂows of resources for pensions (817,392) (85,227) (175,974) (1,078,593) (313,804) Total adjustments 26,787,725 4,508,088 1,853,568 33,149,381 (629,888) Net cash provided (used) by operating activities $ 58,002,317 $ 3,871,073 $ (4,161,800) $ 57,711,590 $ (782,827)

Noncash Investing, Capital, and Financing Activities The City entered into leases for new property and equipment and incurred capital lease obligations of $2,722,780 and $3,320,377 during the years ended June 30, 2015, and 2014, respectively. The City received contributed land amounting to $2,463,146 and $639,963 during the years ended June 30, 2015, and 2014, respectively, from various developers. Capitalized interest included in asset acquisitions of $2,070,717. The City accrued intergovernmental revenues of ($9,201).

The accompanying notes are an integral part of the ﬁnancial statements.

B-29 City of Winston-Salem, North Carolina Statement of Fiduciary Net Position Fiduciary Funds June 30, 2015 Exhibit 9

Beneﬁts Trust Fund Assets Cash and cash equivalents/investments $ 3,239,140 Investments, at fair value Common stock 157,879,871 United States government treasuries 20,214,408 United States government agencies 4,139,600 Corporate Bonds 17,421,958 Net pension asset 8,660 Total assets 202,903,637

Deferred Outﬂows of Resources Contributions to pension plan in current ﬁscal year 5,913

Liabilities Accounts payable 100,647 Accrued payroll 2,415 Accrued vacation 5,508 Accrued interest payable 111,217 Unearned revenue 170,450 Claims payable 902,507 Contracts payable 28,850,000 Total liabilities 30,142,744

Deferred Inﬂows of Resources Pension deferrals 21,841 Net position restricted for pensions $ 172,744,965

The accompanying notes are an integral part of the ﬁnancial statements.

64 2015 Annual Financial Report

B-30 City of Winston-Salem, North Carolina Statement of Changes in Fiduciary Net Position Fiduciary Funds For the Fiscal Year Ended June 30, 2015 Exhibit 10

Beneﬁts Trust Fund Additions Contributions Employer $ 14,759,916 Plan members 3,355,651 Total contributions 18,115,567 Investment income (loss) Net appreciation in fair value 4,324,403 Interest and dividends 4,000,438 Total investment income (loss) 8,324,841 Less investment expense 744,420 Net investment income (loss) 7,580,421 Total additions 25,695,988

Deductions Beneﬁts 19,876,856 Refund of contributions 112,132 Administrative expense 229,066 Interest and ﬁscal expense 1,364,073 Total deductions 21,582,127 Net increase in net position 4,113,861 Net position restricted for pensions Total net position – beginning, as previously stated 168,643,926 Restatement (12,822) Total net position – beginning, as restated 168,631,104 End of year $ 172,744,965

B-31 Notes to the Financial Statements June 30, 2015

1. Summary of Significant Accounting Policies Accounting policies conform to generally accepted principles applicable to governmental units. The following paragraphs summarize significant policies: A. The Reporting Entity The City of Winston-Salem, North Carolina, a municipal corporation, is governed by an elected mayor and an eight member City Council. This report presents the financial position and results of operations of the City and two legally separate component units that have significant financial relationships because they provide services only to the City. Other criteria used to determine component units under generally accepted accounting principles include appointment of a voting majority of the governing board and/or imposition of will or financial benefit/burden, fiscal dependency, or other significant operational and financial relationships. The financial statements of the non-profit corporations are included in this report as blended component units. Risk Acceptance Management Corporation administers auto liability, general liability, and certain tort claims made against the City. The financial statements of the corporation are included as an internal service fund in the City’s financial statements. North Carolina Municipal Leasing Corporation assists the City by financing certain real and personal property under contractual lease agreements. The assets and related long-term lease obligations are reported in the related governmental and business-type funds. Financial statements for each of the component units are available through Financial Management Services, City of Winston- Salem, P. O. Box 2511, Winston-Salem, North Carolina 27102. B. Government-wide and Fund Financial Statements Government-wide Financial Statements, the statement of net position and the statement of activities, report information on all of the non-fiduciary activities of the primary government and its component units. Interfund activity has been eliminated from these statements; however, interfund services provided and used are not eliminated in the process of consolidation. Governmental activities, taxes and intergovernmental revenues are reported separately for business-type activities, which are normally supported by user charges and fees. The statement of activities presents a comparison between direct expenses and program revenues for governmental and business types of the City’s activities. Direct expenses are those that are clearly identifiable with a specific governmental function or business segment. Program revenues include 1) fees or charges for services paid by customers or recipients of goods or services and 2) grants and contributions that are restricted to meet the operational or capital requirements of a particular function or segment. Taxes and other revenues not included among program revenues are reported as general revenues. Fund Financial Statements are presented for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Emphasis in these statements is placed on major governmental and enterprise funds with each major individual fund displayed in a separate column. All remaining governmental and enterprise funds are aggregated and shown as non-major funds. Proprietary Funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. Operating expenses for enterprise funds and internal service funds include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenue and expenses not meeting this definition are reported as non-operating revenues and expenses. The City reports the following major governmental funds: The General Fund is the primary operating fund of the City and accounts for the provision of governmental services. The general fund summarizes the financial transactions of governmental services, except for those more appropriately recorded in other funds.

66 2015 Annual Financial Report

B-32 The Debt Service Fund accumulates resources to pay maturing principal and interest on long-term general obligations and capital lease charges for governmental capital projects. General, revenue, and special obligations issued for water and sewer utilities, solid waste disposal, stormwater, parking facilities, and public assembly facilities plus related debt service, are recorded in the respective enterprise funds. The Capital Projects Fund accounts for resources to acquire or construct major capital improvements, other than those financed by proprietary funds. Principal resources include intergovernmental revenues, proceeds of general obligation bonds, capital leases, and transfers from other funds. The City reports the following major proprietary funds: The Water and Sewer Utility Fund accounts for water and sewer services in the City and certain areas of the county. The system is under the administrative direction of the Winston-Salem/Forsyth County Utility Commission. The Solid Waste Disposal Fund accounts for recycling and disposal services of solid waste in Winston-Salem and Forsyth County. The system is under the administrative direction of the Winston-Salem/Forsyth County Utility Commission. Additionally the City reports the following fund types: Internal Service Funds account for central warehouse, fleet services, information services, workers’ compensation, health benefits, dental and flexible benefits, employee benefits, and Risk Acceptance Management Corporation that is a component unit blended in the City fund financial statements. Fiduciary Funds account for post-employment benefits, and pension trust funds, including Winston-Salem Police Officers’ Retirement System and Winston-Salem Police Officers’ Separation Allowance. C. Measurement Focus and Basis of Accounting Government-wide, Proprietary Fund, and Fiduciary Fund Financial Statements are reported using the flow of economic resources measurement focus and accrual basis of accounting. Revenues are recognized in the period earned, and expenses are recognized in the period incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Revenue from grants and similar items is recognized when all eligibility requirements have been met. With this measurement focus, all assets and all liabilities associated with the operation of these funds are included on the statement of net position. Governmental Fund Financial Statements are reported using a current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized in the period received and are accrued if considered to be both measurable and available to pay current liabilities. Expenditures are generally recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures for compensated absences and claims and judgments, are recorded only when payment is due. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. Proceeds of general long-term debt and proceeds from capital leases are reported as other financial sources. General capital asset acquisitions are reported as expenditures. The City considers all revenues available if they are collected within 90 days after year-end, except for property taxes. Ad valorem taxes received are not accrued as revenue because the amount is not susceptible to accrual. At June 30, taxes receivable for property other than motor vehicles are materially past due and are not considered to be an available resource to finance the operations of the current year. Also, as of September 1, 2013, State law altered the procedures for the assessment and collection of property taxes on registered motor vehicles in North Carolina. Effective with this change in the law, the State of North Carolina is responsible for billing and collecting the property taxes on registered motor vehicles on behalf of all municipalities and special tax districts. Property taxes are due when vehicles are registered. The billed taxes are applicable to the fiscal year in which they are received. Uncollected taxes that were billed in periods prior to September 1, 2013 and for limited registration plates are shown as a receivable in these financial statements and are offset by deferred inflows of resources. Sales taxes and certain intergovernmental revenues, such as the utilities franchise tax, collected and held by the State at year- end on behalf of the City are recognized as revenue. Intergovernmental revenues and sales and services are not susceptible to accrual because generally they are not measurable until received in cash. Grant revenues which are unearned at year-end are recorded as unearned revenues. Under the terms of grant agreements, the City funds certain programs by a combination of specific cost-reimbursement grants, categorical block grants, and general revenues. Thus, when program expenses are incurred, there are both restricted and unrestricted net position available to finance the program. It is the City’s policy to first apply cost-reimbursement grant resources to such programs, followed by categorical block grants, and then by general revenues.

B-33 D. Budgetary Accounting Budgetary accounting is used for management control of all funds of the City. Annual budget ordinances are adopted on the modified accrual basis at the fund level and amended as required for the operations of the general, debt service, certain special revenue, and proprietary funds. Project or program budgets spanning more than one fiscal year are adopted, and amended as required, for certain special revenue, capital projects, and proprietary capital improvements. Special revenue fund budgets adopted under project ordinances, including community development, grants, economic and housing development, cable franchise fee, and emergency telephone fund, as well as the capital projects fund budgets, are reported by program authorizations. The City’s internal service funds operate under a financial plan that was adopted by the governing board at the time the City’s budget ordinance was approved. Administrative control is exercised through the establishment of detailed line item budgets. Budget amendments to total expenditures of any fund or between functions, which are the legal level of budgetary control, require approval by the City Council. Budgets are reported as originally adopted and amended by executive or council action. During the year, amendments to the original budget were made, when appropriate, the effects of which were not material. The budget ordinance must be adopted by July 1 of the fiscal year or the City Council must adopt an interim budget that covers that time until the annual ordinance can be adopted. All unencumbered budget appropriations, except project or program budgets, lapse at year-end. E. Assets, Liabilities, Deferred Outflows/Inflows of Resources, and Net Position or Fund Balance 1. Deposits and Investments The City’s cash and investments under the “pooled cash concept” is composed of fixed income and equity investments and demand deposit accounts and is used by all funds as allowed by their investment authority. For arbitrage purposes, the City maintains separate investments of proceeds of bond issues and other tax-exempt financings. Each fund’s portion of cash and investments is included as “Cash and Cash Equivalents/Investments” on the statement of net position. Investments are governed by state statutes and written policies. Governmental monies may be deposited in FDIC-insured or collateralized demand accounts and certificates of deposit. Other investments may be made in obligations of the United States Treasury and federal agencies, commercial paper rated A-1 by Standard & Poor’s Corporation or P-1 by Moody’s Commercial Paper Record, bankers’ acceptances, and master repurchase agreements. Equity investments of the pension trust funds, other employee benefit reserves, and designated capital reserves are permitted by North Carolina State Statutes and governed by City policies. The City utilizes Capital Management of the Carolinas which facilitates electronic transfers between the state and units of local government and provides immediate short-term investment of temporarily idle funds, principally bond proceeds. Investments are stated at fair value and securities traded on national exchanges are valued at the last reported sales price. 2. Receivables and Payables Lending/borrowing arrangements between funds outstanding at the end of the fiscal year are referred to as either “due to/ from other funds” (for the current portion of interfund loans) or “advances to/from other funds” (for the non-current portion of interfund loans.) All receivables are shown net of an allowance for uncollectibles which is estimated by analyzing the historical collection experience of the fund. 3. Ad Valorem Taxes Receivable The City property tax is based on the assessed valuation of property located in the City as of the preceding January first. The value of personal property is established annually, and by state law, real property must be appraised at least once every eight years. The last revaluation of real property became effective with the 2013 tax levy. The City’s fiscal year 2015 tax rate was .54 mils, allocated as follows: .4529 mils for general purposes, .0509 mils for general debt service, and .0362 mils for mass transit. Taxes are due on September first and payable without penalty or interest until the fifth of January. On and after January sixth, taxes become delinquent, a lien attaches to the property, and a penalty of 2 percent is assessed. On February first, interest accrues at the rate of .75 percent per month until paid. Property tax receivables are recorded net of allowance for estimated uncollectible amounts and offset as deferred inflows of resources since the amount due is not considered to be currently available.

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B-34 4. RestrictedRestricted Assets Assets Certain funds of the Winston-Salem/Forsyth County Utility System are restricted by revenue bond covenants and other intergovernmental agreements. These funds include unexpended bond proceeds, which are restricted to be used solely for the purpose for which the bonds were originally issued, funds restricted to be used for system maintenance and replacement, future expansion, and economic development purposes. Capital reserve funds for closure and postclosure costs are reserved in the solid waste disposal fund. The City also holds a capital reserve account in the public assembly facilities fund to be used for repair or to make capital improvements to the Bowman Gray Field House. Restricted Cash June 30, 2015 Business-type activities Water and sewer utility Unexpended bond proceeds $ 13,766,293 Equipment and replacement reserves 44,623,907 Economic development 3,000,000 Solid waste disposal Landﬁll closure and postclosure costs 16,123,637 Public assembly facilities management Capital reserve 67,125 Total business-type activities 77,580,962 Total restricted cash $ 77,580,962

5. Inventories Inventories are recognized under the consumption method of accounting, which recognizes expenditures or expenses of operating materials and supplies as goods are used. Inventories are stated at average cost for warehouse, fleet services, Transit Authority and water and sewer funds. All other inventories are stated at lower of cost (first in, first out) or market. 6. Capital Assets Capital assets, which include property, plant, equipment, and infrastructure assets (i.e. roads, bridges, sidewalks, and similar items) are reported in the applicable governmental or business-type activities columns in the government-wide statements. Equipment purchases are considered capital assets when the individual cost is equal to or greater than $5,000 and useful life is in excess of two years. Capital assets are recorded at cost or at fair market value on the date acquired. General infrastructure that was acquired prior to July 1, 2001, consists of road network and water and sewer system assets. These assets are reported at historical cost. The cost of maintenance and repair is recorded as an expenditure or expense, whereas a significant betterment is capitalized. Major outlays are capitalized as projects are constructed. Net interest on debt issued to finance capital assets of business-type activities is capitalized during the construction phase. Property, plant, and equipment of the City and component units is depreciated using the straight line method over the following estimated useful lives: Buildings 10-40 years Improvements other than buildings 10-40 years Machinery and equipment 3-12 years Computer software 5-8 years 7. Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period and so will not be recognized as an expense or expenditure until then. The City has three items that qualifies for reporting in this category. Contributions made to the pension plan in the 2015 fiscal year. Deferred charge on refunding and derivative instrument in the government-wide statement of net position. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. The derivative instrument is a change in fair value associated with an effective hedge.

B-35 In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources until that time. The City has three items that qualifies for reporting in this category. Deferrals of pension expense that result from the implementation of GASB Statement 68 and GASB Statement 71. Deferred charge on refunding, and advances from other governments in the government-wide statement of net position. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. The advances from other governments are grants received in advance of meeting the GASB 33 timing requirements in governmental funds. The governmental funds also report unavailable revenues from taxes, leases, and assessments. 8. Accumulated Vacation and Sick Leave Benefits Earned vacation may be accumulated to a maximum of 30 days at the end of each calendar year. Accumulated vacation is due when leave time is taken by the employee or at the time of termination, retirement, or death. Accrued vacation leave is recorded as a liability when incurred in the government-wide, proprietary, and fiduciary fund financial statements. Employees terminating service before retirement forfeit accumulated sick leave; therefore, sick leave is charged as an expenditure or expense when paid. Sick leave may be accumulated without limit until retirement, at which time limited credit for this leave is given in the computation of retirement benefits. Since the City has no obligation for the accumulated sick leave until it is actually taken, no accrual for sick leave has been made. 9. Long-Term Obligations In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net position. Bond premiums and discounts are deferred and amortized over the life of the related debt. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs, except for prepaid insurance costs, are expensed in the reporting period in which they are incurred. Prepaid insurance costs are expensed over the life of the debt. In fund financial statements, governmental fund types recognize bond premiums and discounts, as well as issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums and discounts received on debt issuance are reported as other financing sources. Issuance costs, whether or not withheld from the actual debt proceeds, are reported as debt service expenditures. 10. Net Position/Fund Balances Net position in government-wide and proprietary fund financial statements are classified as net investment in capital assets, restricted, and unrestricted. Restricted net position are either constrained externally by creditors, grantors, contributors, or laws or regulations of other governments or imposed by law through state statute. Restricted Net Position June 30, 2015 Stabilization by state statute $ 54,075,405 Debt service 15,218,991 Other purposes Nonmajor governmental 7,349,132 Total $ 76,643,528 In the governmental fund financial statements, fund balance is composed of five classifications designed to disclose the hierarchy of constraints placed on how fund balance can be spent. The governmental fund types classify fund balances as follows: Nonspendable Fund Balance – This classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. Loans – portion of fund balance that is not an available resource because it represents the year-end balance of loans, which are not spendable resources.

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B-36 Inventories – portion of fund balance that is not an available resource because it represents the year-end balance of ending inventories, which are not spendable resources. Prepaids – portion of fund balance that is not an available resource because it represents the year-end balance of ending prepaids, which are not spendable resources. Perpetual care – Cemetery resources that are required to be retained in perpetuity for the maintenance of the Woodlawn and Evergreen Cemeteries. Restricted Fund Balance – This classification includes amounts that are restricted to specific purposes externally imposed by creditors or imposed by law. Restricted for Stabilization by State Statute – portion of fund balance that is restricted by State Statute [G.S. 159-8(a)]. Restricted for Debt Service – portion of fund balance restricted by revenue source for debt service. Restricted for capital improvements – portion of fund balance restricted by bond proceeds for capital improvements. Restricted for general governmental – portion of fund balance restricted by revenue source for certain public access, education and governmental cable expenditures. Restricted for public protection – portion of fund balance restricted by revenue source for certain emergency telephone system expenditures. Restricted for transportation – portion of fund balance restricted by revenue source for transportation expenditures. Restricted for culture and recreation – portion of fund balance restricted by revenue source for cultural and recreational expenditures. Restricted for community and economic development - portion of fund balance restricted by revenue source for community and economic development expenditures. Committed Fund Balance – portion of fund balance that can only be used for specific purposes imposed by majority vote by quorum of the City of Winston-Salem’s City Council. Any changes or removal of specific purpose requires majority action by City Council. Committed for capital improvements – portion of fund balance committed by City Council for capital improvements. Committed for community and economic development – portion of fund balance committed by City Council for community and economic development. Assigned Fund Balance – portion of fund balance that the City Council has assigned for specific management purposes. The City Council may delegate to the City Manager or Chief Financial Officer the authority to assign a portion of fund balance to promote sound financial operations of the City or to meet a future obligation. Subsequent year’s budget – portion of fund balance that is appropriated in the adopted 2015-2016 Budget Ordinance and as approved by City Council on June 15, 2015 that is not already classified in restricted or committed. Unassigned fund balance – portion of fund balance that has not been restricted, committed, or assigned to specific purposes or other funds. The City of Winston-Salem will use resources in the following hierarchy: bond proceeds, federal funds, state funds, local non-city funds, city funds. For purposes of fund balance classification expenditures are to be spent from restricted fund balance first, followed in-order by committed fund balance, assigned fund balance and lastly unassigned fund balance. The City of Winston-Salem has adopted a minimum fund balance policy for general fund which requires the unassigned fund balance to be at least 12.5% of budgeted General Fund expenditures.

B-37 Fund Balance June 30, 2015 Nonspendable Loans $ 29,665,850 Inventories 1,021,951 Prepaids 45,644 Perpetual care 3,400,056 Restricted Stabilization by state statute 54,075,405 Debt service 15,218,991 Capital improvements 2,072,049 General government 152,036 Public protection 2,357,119 Transportation 629,126 Culture and recreation 689,425 Community and economic development 121,370 Committed Capital improvements Community and economic development 40,071,612 Assigned 13,055,075 Subsequent year budget 2,879,210 Unassigned 26,357,395 Total $ 191,812,314

11. Pensions For purposes of measuring the net pension asset, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Local Governmental Employees’ Retirement System (LGERS) and additions to/deductions from LGERS’ fiduciary net position have been determined on the same basis as they are reported by LGERS. For this purpose, plan member contributions are recognized in the period in which the contributions are due. The City of Winston-Salem’s employer contributions are recognized when due and the City of Winston-Salem has a legal requirement to provide the contributions. Benefits and refunds are recognized when due and payable in accordance with the terms of LGERS. Investments are reported at fair value.

2. Stewardship, Compliance and Accountability A. Excess of Expenditures over Appropriations For the ﬁscal year ended June 30, 2015, debt service expenditures in the debt service fund were under estimated; however, fund balance was available to cover the expenditures.

3. Detailed Notes on All Funds A. Deposits and Investments 1. Deposits All of City’s deposits are entirely insured or collateralized. The City requires collateral for demand deposits and certificates of deposit to be held by an independent custodian in the City’s name or through a collateral pool held by the State Treasurer’s agent in the name of the State Treasurer. Since the State Treasurer is acting in a fiduciary capacity for the City; these deposits are considered to be held by the City’s agents in its name. The amount of the pledged collateral is based on an approved averaging method for non-interest bearing deposits and the actual current balance for interest-bearing deposits. Depositories using the Pooling Method report to the State Treasurer the adequacy of their pooled collateral covering uninsured deposits. The State Treasurer does not confirm this information with the City or with the escrow agent.

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B-38 Because of the inability to measure exact amount of collateral pledged for the City under the Pooling Method, the potential exists for under-collateralization, and this risk may increase in periods of high cash flows. However, the State Treasurer of North Carolina enforces strict standards of financial stability for each depository that collateralizes public deposits under the Pooling Method. The City does not have a policy regarding custodial credit risk for deposits. At June 30, 2015, the City’s deposits had a carrying value of $145,694,762 and bank balance of $146,810,367. Of the bank balance $1,666,502 was covered by federal depository insurance and the remainder was covered by collateral held under the Pooling Method. At June 30, 2015, the City maintained various petty cash funds totaling $55,751. 2. Investments The City’s investment policy was adopted by the City Council in July 1999, (revised on April 15, 2013) and is designed to provide liquidity for disbursement needs and to maximize investment income. Since individual funds may deposit and withdraw funds at any time, the cash and investment types, short-term and longer-term fixed income investments and equity investments are essentially managed on demand deposit accounts. For the statement of cash flows, all proprietary fund types pooled cash is considered cash and cash equivalents. Restricted cash and cash equivalents are restricted by bond covenants and other financing intergovernmental agreements. As of June 30, 2015, the City had the following investments and maturities:

Market Less Than 6 - 12 Over 1 Investment Type Value 6 Months Months Year Domestic Common Stock $ 131,401,298 $ 131,401,298 $ - $ - US Gov't Treasuries 59,442,103 19,031 223,711 59,199,361 US Gov't Agencies 59,705,431 1,969,248 8,167,986 49,568,197 Corporate Bonds 38,700,272 225,630 491,033 37,983,609 Certiﬁcate of Deposits (CDARS) 31,204,583 31,204,583 - - Commercial Paper 2,993,080 999,690 1,993,390 - Mutual Funds 108,240,737 108,240,737 - - Money Market Funds 22,408,470 22,408,470 - - NC Capital Management Trust – Cash Portfolio 1,924,790 1,924,790 - - Total $ 456,020,764 $ 298,393,477 $ 10,876,120 $ 146,751,167

Interest Rate Risk. As a means of limiting its exposure to fair value losses arising from rising interest rates, the City’s investment policy limits direct investment of operating funds to securities maturing no more than five years from the date of purchase. Also, the City’s investment policy requires purchases of securities to be laddered with staggered maturity dates to meet the operating requirements of each individual fund and cash flow requirements of the City’s overall operations. Reserve funds invested by external asset managers are not required to meet liquidity needs within the short-term and may have maturities generally consistent with benchmark indices established to monitor performance of the assets managers. City investment policy requires that proceeds of General Obligation, Special Obligation, Revenue and Limited Obligation Bonds shall be invested in cash and short-term fixed income securities since these funds are required to be expended within 3 years. Credit Risk. The City’s investment policy requires that all investments subject to NCGS 159-30 in bonds or notes, including commercial paper, bear the highest ratings of at least one nationally recognized rating service and do not bear a rating below the highest by any nationally recognized rating service which rates the particular obligation. The City’s investment policy requires that investments in corporate bonds under its statutorily expanded investment authority for investments not subject to NCGS 159-30 must be investment grade (BBB or higher). The City’s investments in the NC Capital Management Trust Cash Portfolio carried a credit rating of AAAm by Standard & Poor’s as of June 30, 2015. The City’s investments in US Agencies are rated AA+ by Standard & Poor’s and Aaa by Moody’s Investors Service. All commercial paper of the City is rated A1 by Standard & Poor’s and P1 by Moody’s.

B-39 The ratings of the municipal and corporate bonds are presented in the following table:

Type of Bonds S&P Moody’s Market Value Corporate AAA AAA $ 944,859 AAA N/R 5,969 AA+ AAA 615,804 AA+ AA1 298,449 AA+ A1 285,094 AA AA1 162,387 AA AA2 406,240 AA AA3 323,294 AA N/A 622,084 AA- AA1 346,598 AA- AA3 768,313 AA- A1 589,068 A+ AAA 336,943 A+ A1 144,626 A+ A2 353,162 A+ A3 449,772 A AA3 100,740 A A1 1,871,438 A A2 3,476,024 A A3 1,671,516 A BAA1 395,356 A BAA2 266,577 A N/A 406,224 A- A2 767,209 A- A1 4,130,266 A- BAA1 1,965,527 A- BAA2 345,866 A- N/A 441,823 BBB+ BAA1 4,338,254 BBB+ BAA2 338,320 BBB+ BAA3 333,064 BBB+ N/A 392,886 BBB BAA1 806,917 BBB BAA2 2,128,354 BBB BAA3 352,255 BBB N/A 300,003 BBB- BAA2 493,596 BBB- BAA3 3,720,614 BBB- BA1 225,630 BBB- N/A 130,989 N/A AAA 1,482,299 N/A AA1 34,982 N/A AA3 223,898 N/A A1 109,249 N/A BAA3 301,500 N/A N/A 496,234 $ 38,700,272

The City has special authority to invest retirement, other employee beneﬁts, risk reserve, cemetery perpetual care funds, and capital reserves designated by the City Council in “Securities and other investments authorized by State Law for the State Treasurer” in N.C.G.S. §147-69.1 and N.C.G.S. §147-69.2. These investments have similar interest rate and credit risk characteristics, include common stocks, municipal bonds and corporate bonds, and other instruments similar to those used by the North Carolina State Treasurer for long-term ﬁnancial assets.

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B-40 B. Receivables-Allowance for Uncollectible Accounts The receivable amounts shown in the Balance Sheet and the Statement of Net Position are net of the following allowances for uncollectible accounts: Allowances for Uncollectible Accounts at June 30, 2015 General fund Taxes receivable $ 2,123,518 Other receivables 2,422,683 Special revenue funds Nonmajor 991 Debt service fund 206,503 Enterprise funds Water and sewer utility 1,297,935 Solid waste disposal 75,735 Nonmajor 295,047 Total $ 6,422,412

C. Interfund Receivables, Payables, and Transfers The composition of interfund receivables and payables at June 30, 2015, is as follows: Interfund Receivables and Payables at June 30, 2015 Interfund Payables Interfund Receivables General fund $ - $ 606,120 Special revenue funds Nonmajor 38,668 - Internal service funds 567,452 - Total $ 606,120 $ 606,120

All balances are from time lags between the dates that 1) interfund goods and services are provided or reimbursable expenditures occur, 2) transactions are recorded in the accounting system, and 3) payments between funds are made. The City uses transfers to 1) move revenues from a fund that state statute or budget requires to collect them to a fund that statute or budget requires to expend them, 2) move receipts restricted to debt service from the funds collecting the receipts, to the debt service fund as debt service payments become due, and 3) use unrestricted revenues collected in various funds to ﬁnance various programs accounted for in other funds in accordance with budgetary authorizations. Major transfers made in the year ended June 30, 2015, include: a transfer of $1,627,392 from the stormwater management fund to the general fund for the seasonal leaf collection and rodent control; a community development fund transfer to the general fund for $782,650 to cover housing rehabilitation expenditures; a gasoline tax fund transfer to the general fund for $4,806,297 and $1,085,838 to the capital projects fund for non-state street construction and maintenance; a general fund transfer to the parking fund for $645,150 to cover the City’s share of the operating loss of $1,188,534 for the Church and Fourth Street Parking Deck and other parking fund losses; a transfer from general fund to economic and housing development fund of $1,722,990 to fund economic development projects; a general fund transfer to the public assembly facilities management fund for $752,061 to cover operating expenses of the M.C. Benton, Jr. Convention Center; a transfer from general fund to debt service fund of $1,688,040 to cover debt service payments on economic development projects; a transfer from general fund to information services fund of $750,000 to fund the work order management system upgrade.

B-41 Transfers for Fiscal Year Ended June 30, 2015 Transfers In Transfers Out General fund $ 7,557,764 $ 7,932,261 Special revenue funds Nonmajor 5,254,620 7,744,817 Debt service fund 1,688,040 2,898 Capital projects fund 5,421,937 4,575,678 Enterprise funds Water and sewer utility - 845,611 Solid waste disposal 350,740 - Nonmajor 1,975,109 1,760,775 Internal service funds 750,000 136,170 Total $ 22,998,210 $ 22,998,210

D. Capital Assets The following tables summarize the changes in the components of capital assets for the year ended June 30, 2015: Governmental Activities Balance as restated Balance as restated June 30, 2014 Increase Decrease June 30, 2015 Capital assets, not being depreciated: Land $ 73,380,625 $ 1,133,787 $ (1,145,539) $ 73,368,873 Construction in progress 48,147,711 1,287,325 - 49,435,036 Total capital assets, not being depreciated 121,528,336 2,421,112 (1,145,539) 122,803,909 Capital assets, being depreciated: Buildings 89,126,583 15,951,707 - 105,078,290 Improvements other than buildings 231,275,319 8,908,036 - 240,183,355 Machinery and equipment 104,775,128 7,516,751 (2,958,543) 109,333,336 Total capital assets, being depreciated 425,177,030 32,376,494 (2,958,543) 454,594,981 Less accumulated depreciation for: Buildings 29,164,412 2,324,783 - 31,489,195 Improvements other than buildings 95,175,522 5,886,251 - 101,061,773 Machinery and equipment 83,115,479 4,728,925 (2,944,902) 84,899,502 Total accumulated depreciation 207,455,413 $ 12,939,959 $ (2,944,902) 217,450,470 Total capital assets, being depreciated, net 217,721,617 237,144,511 Governmental activities capital assets, net $ 339,249,953 $ 359,948,420

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B-42 Business-type Activities Balance as restated Balance as restated June 30, 2014 Increase Decrease June 30, 2015 Capital assets, not being depreciated: Land $ 40,680,592 $ 2,709,670 $ - $ 43,390,262 Construction in progress 95,257,528 9,738,613 - 104,996,141 Total capital assets, not being depreciated 135,938,120 12,448,283 - 148,386,403 Capital assets, being depreciated: Buildings 342,863,892 3,602,252 (22,238,313) 324,227,831 Improvements other than buildings 866,004,079 23,961,925 - 889,966,004 Machinery and equipment 65,627,999 2,136,617 (1,826,814) 65,937,802 Total capital assets, being depreciated 1,274,495,970 29,700,794 (24,065,127) 1,280,131,637 Less accumulated depreciation for: Buildings 121,147,690 7,825,842 (4,569,849) 124,403,683 Improvements other than buildings 317,562,781 22,001,687 - 339,564,468 Machinery and equipment 44,793,959 3,483,284 (1,793,722) 46,483,521 Total accumulated depreciation 483,504,430 $ 33,310,813 $ (6,363,571) 510,451,672 Total capital assets, being depreciated, net 790,991,540 769,679,965 Business-type activities capital assets, net $ 926,929,660 $ 918,066,368

During fiscal year June 30, 2015 the cemeteries fund was reclassified to the general fund. This fund had previously been recorded as an enterprise fund. As a result of this change $779,098 in capital assets were moved from business-type activities to governmental activities. The City has outstanding project authorizations for general governmental projects in the amount of $225,531,282 with $28,533,601 in unexpended commitments and outstanding authorizations for capital projects in enterprise funds amounting to $253,279,730 with $86,626,052 in unexpended commitments. Funding for these commitments has been identified in capital project ordinances and should not require future financing. During the fiscal year ended June 30, 2015, the total interest and fiscal charges in the enterprise funds were $23,560,243 of which $2,070,717 net of interest income was capitalized to construction projects. Depreciation expense was charged to functions/programs as follows: Governmental Activities Depreciation Expense For Year Ended June 30, 2015 General government $ 1,323,126 Public protection 3,715,377 Environmental health 924,120 Transportation 4,553,171 Culture and recreation 1,495,010 Community and economic development 929,155 Total $ 12,939,959

B-43 Business-type Activities Depreciation Expense For Year Ended June 30, 2015 Water and sewer utility $ 24,606,962 Solid waste disposal 3,543,728 Stormwater management 430,114 Parking 590,199 Transit Authority 2,229,626 Public assembly facilities management 1,910,184 Total $ 33,310,813 E. Operating Leases The City leases land, building space, and certain operating equipment under non-cancelable operating leases terminating during fiscal years 2015 through 2023. Renewal options of one to five years are available to the City under certain of these agreements. Total expense on operating leases was $1,130,087 during fiscal year 2015. Future Minimum Commitments for Operating Leases 2016 $ 487,341 2017 312,208 2018 217,596 2019 217,596 2020 217,596 2021-2023 489,591 Total $ 1,941,928 F. Net Investment in Direct Financing Leases The City leases the condominium space of the Embassy Suites Hotel/West Tower and Grand Pavilion Ballroom to Noble – Interstate Management Group, LLC. The lease will expire June 30, 2036, with the option to purchase for $2 million plus the unamortized balance of the related debt.

Total lease payments receivable $ 14,000,000 Less unearned income (5,165,292) Net investment in direct ﬁnancing lease $ 8,834,708

Minimum Lease Payments 2016 $ 600,000 2017 600,000 2018 600,000 2019 600,000 2020 600,000 Thereafter 11,000,000 Total $ 14,000,000 G. Long-term Liabilities

General Obligation Bonds The City issues general obligation bonds to provide funds for general government capital improvement projects. The bonds are direct obligations and pledge the full faith and credit, and taxing power of the City. In November 2014, City residents approved a $139,200,000 bond referendum that authorized bonds to be issued for road improvements, economic development, housing development, parks & recreation improvements, and public safety center renovations. As of June 30, 2015, $139,200,000 of these bonds were unissued.

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B-44 Provisions of the state constitution and the Local Government Bond Act, as amended, permit the City statutory capacity for additional general obligation bonds in the amount of $1.5 billion. General Obligation Bonds Debt Service Requirements to Maturity are: Governmental Activities Fiscal Year Principal Interest 2016 $ 5,950,000 $ 3,126,593 2017 6,060,000 2,945,952 2018 5,640,000 2,744,240 2019 5,965,000 2,545,583 2020 6,145,000 2,301,620 2021-2025 29,650,000 7,351,912 2026-2030 12,985,000 1,957,748 2031-2032 2,160,000 156,131 Total $ 74,555,000 $ 23,129,779

Special Obligation Bonds The City issued special obligation bonds in fiscal years 1996, 2003, and 2011 to fund solid waste disposal capital projects. The City issued special obligation bonds in fiscal year 2006 to advance refund the Winston-Salem Special Obligation Bonds Series 1995 and to fund improvements to the Alliance Science and Technology Business Park municipal service district, now known as Wake Forest Innovation Quarter. The City issued special obligation bonds in fiscal year 2010 to finance the City’s purchase of the land and construction cost of a downtown ballpark. The City issued special obligation bonds in fiscal year 2013 to refund the Special Obligation Bonds Series 2002, to partially refund the Special Obligation Bonds Series 2005, and to make infrastructure capital improvements to the Wake Forest Innovation Quarter. The bonds are payable exclusively from pledged revenues.

Special Obligation Bonds Debt Service Requirements to Maturity are: Governmental Activities Business-type Activities Fiscal Year Principal Interest Principal Interest 2016 $ 536,900 $ 355,183 $ 2,791,793 $ 760,592 2017 555,000 333,775 2,383,694 658,828 2018 575,000 311,575 2,448,693 574,745 2019 590,000 288,575 1,313,693 488,162 2020 615,000 264,975 1,338,693 448,054 2021-2025 3,490,000 927,825 7,028,467 1,598,611 2026-2030 1,710,000 376,275 6,019,188 488,280 2031-2033 1,170,000 84,637 - - Total $ 9,241,900 $ 2,942,820 $ 23,324,221 $ 5,017,272

Stormwater Fee Revenue Bonds In fiscal year 2013, the City issued stormwater fee revenue bonds to finance and reimburse the City for improvements to the City’s stormwater facilities. The revenues, net of operating expenses, of the stormwater management system are pledged as security for these bonds. Stormwater fee revenue bonds outstanding at June 30, 2015 were $11,575,000 with interest rates ranging from 3.0% to 5.0%, which are payable over the next 18 years. A trust agreement dated April 1, 2013, between the City and US Bank, as trustee, authorizes and secures all outstanding stormwater fee revenue bonds. Certain financial covenants are contained in the trust agreement including a requirement that the City maintain a long-term debt service coverage ratio on all stormwater fee revenue debt of not less than 1.2. The City was in compliance with all covenants for the fiscal year ended June 30, 2015, and the ratio was 3.3. The principal and interest remaining to be paid on the bonds is $15,382,382. Principal and interest paid in the fiscal years ended June 30, 2015 and 2014 were $856,244 and $853,368, respectively.

B-45 Stormwater Fee Revenue Bonds Debt Service Requirements to Maturity are: Business-type Activities Fiscal Year Principal Interest 2016 $ 475,000 $ 377,294 2017 490,000 363,044 2018 505,000 348,343 2019 520,000 333,194 2020 545,000 307,194 2021-2025 3,050,000 1,226,569 2026-2030 3,575,000 700,219 2031-2033 2,415,000 151,525 Total $ 11,575,000 $ 3,807,382

State Revolving Loan During FY 2015, the City’s Water and Sewer Utility enterprise received $5,271,434 in proceeds from the Clean Water State Revolving Fund. This loan carries a ﬁxed interest rate of 2% and is payable over 20 years. The total loan amount is approximately $70.5 million. For FY 2015, there were no principal and interest payments made as the loan is still in the draw process. Final amounts for this loan will be determined when the project is completed. Repayment will begin six months after project completion which is estimated to be May 31, 2017.

Water and Sewer Revenue Bonds The City issues revenue bonds to fund capital improvement projects for the Winston-Salem/Forsyth County Water and Sewer System. The revenues, net of operating expenses, of the water and sewer system are pledged as security for the revenue bonds which were issued in 2002, 2005, 2007, 2009, 2010, and 2011. The trust agreement dated October 1, 1988, between the City and the Bank of New York, as trustee, authorizes and secures all outstanding revenue bonds. Certain financial covenants are contained in the trust agreement including a requirement that the City maintain a long-term debt service coverage ratio on all utility revenue debt of not less than 1.1. The City was in compliance with all covenants for the fiscal year ended June 30, 2015, and the ratio was 1.4. The total principal and interest remaining to be paid on the bonds is $681,201,276. Principal and interest paid in the fiscal years ended June 30, 2015 and 2014 were $39,627,486 and $40,454,890, respectively. In November 2014, the City issued $48,370,000 of water and sewer revenue refunding bonds. The total amount of $48,370,000 has a net interest cost of 3.316%. The net proceeds were used to advance refund the Water and Sewer Revenue Bonds, Series 2005. The refunding issues will save the City $7,789,679 in future debt service over the remaining life of the bonds and results in an economic gain (net present value of the savings) of $6,316,542. The difference between the redemption price of $48,370,000 and the carrying value of the old debt $52,715,000 resulted in a deferred amount of $4,345,000, which is recognized as a reduction of the new debt and will be amortized over the life of the old debt. Water and Sewer revenue bonds outstanding at June 30, 2015, were $437,745,000 with interest rates between .55% and 5.694% which are payable over the next 25 years.

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B-46 Water & Sewer Revenue Bonds Debt Service Requirements to Maturity are: Business-type Activities Fiscal Year Principal Interest 2016 $ 20,470,000 $ 18,776,123 2017 21,075,000 18,156,891 2018 22,025,000 17,513,595 2019 23,380,000 16,821,150 2020 15,920,000 15,887,036 2021-2025 88,395,000 69,766,048 2026-2030 107,175,000 50,001,285 2031-2035 77,120,000 27,807,717 2034-2040 62,185,000 8,726,431 Total $ 437,745,000 $ 243,456,276

Interest Rate Swap Water and Sewer System Revenue Bonds, Series 2002B The City entered into an interest rate swap agreement (the “swap agreement”) with Citigroup, Inc. on November 12, 2002, which became effective on December 4, 2002, with the issuance of $37,090,000 City of Winston-Salem Water and Sewer System Revenue Bonds, Series 2002B (the “Series B Bonds”). The synthetic fixed interest rate swap effectively changes the Series B Bonds from a variable rate demand obligation to a fixed interest rate of 3.69%. The Bond Buyer published a comparative revenue bond fixed interest rate index of 5.24% on December 4, 2002. The synthetic fixed interest rate swap agreement initially lowered the fixed interest rate on the Series B Bonds by at least 155 basis points. The synthetic fixed interest rate on the Series B Bonds is subject to adjustment in future periods as described in following paragraphs. Under the swap agreement, beginning on the first Wednesday in January 2003, and continuing on a monthly basis, the City pays Citigroup, Inc. interest at the fixed rate of 3.69% on the notional amount of the Series B Bonds. Citigroup, Inc., on the same date and continuing on a monthly basis, pays the City a floating interest rate on the notional amount based on the monthly average actual variable interest rate (Bond Rate) on the Series B Bonds. On or after December 5, 2003, Citigroup, Inc. pays the City an alternative floating rate from and including the date on which the average of the Bond Rate of the Series B Bonds has exceeded 69% of the average USD-LIBOR-BBA (with a designated maturity of one month) for a period of more than the next preceding 180 days. The alternative floating rate will be 69% of the monthly average USD-LIBOR-BBA if this rate is lower than the Bond Rate. The notional amount of the swap reduces annually; the reductions begin on June 6, 2019, and end on the termination date of June 30, 2030. Based upon the terms of the swap agreement, the City may be exposed to basis risk and a subsequent payment on and after June 2, 2004, if its actual variable interest rate on the Series B Bonds has exceeded 69% of the average monthly USD-LIBOR-BBA for a period of more than the next preceding 180 days. Basis risk also could occur with an event of taxability of the Series B Bonds that causes the Bond Rate to be consistently above 69% of LIBOR. If the relationship of the City’s Series B Bonds trade to a percentage of LIBOR is greater than 69%, the City will experience an increase in debt service above the synthetic fixed rate of the swap. As of June 30, 2015, rates were as follows: Series 2002B Terms Rates Fixed payment to Citigroup, Inc. Fixed 3.690% Variable payment from Citigroup, Inc. provided the Bond Rate has not exceeded 69% of the average monthly USD-LIBOR-BBA for a period of more than the next preceding 180 days. Bond Rate -0.048% Variable payment from Citigroup, Inc. provided the Bond Rate limited to 69% of the average monthly Limited to 69% of USD-LIBOR-BBA provided the Bond Rate has exceeded the LIBOR percentage for a period of more than Average Monthly the next preceding 180 days. LIBOR N/A Net interest rate swap payment 3.642% Actual variable Bond Rate Bond Rate 0.050% Synthetic fixed interest rate on Series B Bonds 3.692% The Bond Buyer Revenue Bond Index on 12/4/2002 5.240%

B-47 As of June 30, 2015, the agreement had a negative fair value of $7,594,990. The fair value was developed by Citigroup, Inc. using the zero coupon method. This method calculates the future net settlement payments required by the agreement assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. As of June 30, 2015, the City was not exposed to credit risk because the swap had a negative fair value. The City is exposed to credit risk in the amount of the derivative’s positive fair value. Citigroup Global Markets Holdings, Inc. has executed and delivered a Guarantor Agreement to the City, which “absolutely” and “unconditionally” guarantees the payment to the City of any obligation of its wholly owned subsidiary, Citigroup, Inc. At June 30, 2015, Citigroup Global Markets Holdings, Inc. was rated “Baa1” by Moody’s Investors Service, “A-” by Standard & Poor’s Ratings Services, and “A” by Fitch Ratings. The derivative contract uses the International Swap Dealers Association Master Agreement, which includes standard termination events, such as failure to pay and bankruptcy. Termination could result in the City being required to make or being entitled to receive an unanticipated termination payment based upon the market value on the date of termination. As rates vary, variable rate bond interest payments and net swap payments will vary. As indicated in a preceding paragraph, the initial synthetic ﬁxed interest rate on the Series B Bonds lowered the City’s interest cost by about 30% compared with The Bond Buyer Revenue Bond Index on the date of issuance of the bonds and before any adjustment on the swap. Using rates as of June 30, 2015, debt service requirements of the variable rate debt and net swap payments, assuming current interest rates remain the same for the term of the Series B Bonds are as follows:

Series 2002B Business-type Activities Net Interest Fiscal Year Rate Swap Ending June 30 Principal Variable Rate Interest Payments* Total 2016 $ - $ 18,545 $ 1,350,818 $ 1,369,363 2017 - 18,545 1,350,818 1,369,363 2018 - 18,545 1,350,818 1,369,363 2019 1,700,000 18,545 1,350,818 3,069,363 2020 1,760,000 17,695 1,288,904 3,066,599 2021-2025 9,915,000 74,541 5,429,494 15,419,035 2026-2030 23,715,000 44,854 3,267,058 27,026,912 Total $ 37,090,000 $ 211,270 $ 15,388,728 $ 52,689,998 * Computed using the 3.692% net interest rate swap payment to the City times $37,090,000, less accumulated annual reductions, if any.

Series 2002B Changes in Fair Value Change from Actual for Fiscal Year Ended Fair Value Prior Year Synthetic Rate June 30, 2003 $ (2,376,527) $ - 3.690% June 30, 2004 657,162 3,033,689 3.735 June 30, 2005 (2,793,390) (3,450,552) 4.955 June 30, 2006 1,200,727 3,994,117 3.702 June 30, 2007 1,111,189 (89,538) 3.670 June 30, 2008 (1,643,812) (2,755,001) 3.680 June 30, 2009 (4,423,303) (2,779,491) 4.320 June 30, 2010 (6,467,828) (2,044,525) 3.739 June 30, 2011 (5,218,734) 1,249,094 3.736 June 30, 2012 (10,605,721) (5,386,987) 3.693 June 30, 2013 (7,036,751) 3,568,970 3.689 June 30, 2014 (7,146,533) (109,782) 3.688 June 30, 2015 (7,594,990) (448,457) 3.692 The Series 2002B interest rate swap was an effective hedge under the Dollar-offset Method in Fiscal Year 2014-2015 with an average variance of -1.9% and was an effective hedge inception to-date with an average variance of 3.25% so the

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B-48 swap is recorded at fair value on the Statement of Net Position as a deferred outflow and a noncurrent liability. No investment gains or losses are recorded for mark-to-market changes for this effective hedge. City of Winston-Salem Water and Sewer System Revenue Bonds, Series 2002C The City entered into an interest rate swap agreement (the “swap agreement”) with Citigroup, Inc. on November 12, 2002, which became effective on December 4, 2002, with the issuance of $71,305,000 City of Winston-Salem Water and Sewer System Revenue Refunding Bonds, Series 2002C (the “Series C Bonds”). The synthetic fixed interest rate swap was executed in order to complete an advance refunding of prior water and sewer system revenue bonds and effectively changes the Series C Bonds from a variable rate demand obligation to a fixed interest rate of 3.00%. The Bond Buyer published a comparative revenue bond fixed interest rate index of 5.24% on December 4, 2002. The synthetic fixed interest rate swap agreement initially lowered the fixed interest rate on the Series C Bonds by at least 224 basis points and is subject to adjustment in future periods as described in following paragraphs. Under the swap agreement, beginning on the first Wednesday in January 2003, and continuing on a monthly basis, the City pays Citigroup, Inc. interest at the fixed rate of 3.00% on the notional amount of the Series C Bonds. Citigroup, Inc., on the same date and continuing on a monthly basis, pays the City a floating interest rate on the notional amount based on the monthly average actual variable interest rate (Bond Rate) on the Series C Bonds. On or after December 5, 2003, Citigroup, Inc. pays the City an alternative floating rate from and including the date on which the average of the Bond Rate of the Series C Bonds has exceeded 69% of the average USD-LIBOR-BBA (with a designated maturity of one month) for a period of more than the next preceding 180 days. The alternative floating rate is 69% of the monthly average USD- LIBOR-BBA if this rate is lower than the Bond Rate. The notional amount of the swap reduces annually; the reductions began on June 4, 2003, and end on the termination date of June 3, 2027. Based upon the terms of the swap agreement, the City may be exposed to basis risk and a subsequent payment after June 2, 2004, if its actual variable interest rate on the Series C Bonds has exceeded 69% of the average monthly USD- LIBOR-BBA for a period of more than the next preceding 180 days. Basis risk also could occur with an event of taxability of the Series C Bonds that causes the Bond Rate to be consistently above 69% of LIBOR. If the relationship of the City’s Bonds trade to a percentage of LIBOR is greater than 69%, the City will experience an increase in debt service above the synthetic fixed rate of the swap.

As of June 30, 2015, rates were as follows: Terms Series 2002C Rates Fixed payment to Citigroup, Inc. Fixed 3.000% Variable payment from Citigroup, Inc. provided the Bond Rate has not exceeded 69% of the average monthly USD-LIBOR-BBA for a period of more than the next preceding 180 days. Bond Rate -0.048% Variable payment from Citigroup, Inc. provided the Bond Rate limited to 69% of the average monthly USD-LIBOR-BBA provided the Bond Rate has exceeded the LIBOR percentage for a period Limited to 69% of of more than the next preceding 180 days. Average Monthly LIBOR N/A Net interest rate swap payment 2.952% Actual variable Bond Rate Bond Rate 0.049% Synthetic ﬁxed interest rate on Series C Bonds 3.001% The Bond Buyer Revenue Bond Index on 12/4/2002 5.240%

As of June 30, 2015, the agreement had a negative fair value of $6,595,168. The fair value was developed by Citigroup, Inc. using the zero coupon method. This method calculates the future net settlement payments required by the agreement assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. The swap agreement is cancelable at par at the option of Citigroup, Inc. on any date on or after July 1, 2012, upon 30-days irrevocable notice delivered to the City. The cancellation option resulted in the reduction of the swap rate by approximately 69 basis points. Should Citigroup, Inc. exercise its option to cancel the swap, the City would pay a weekly variable interest rate or could change the interest rate method as provided in Series Indenture, Number 9. As of June 30, 2015, the City was not exposed to credit risk because the swap had a negative fair value. However, should interest rates change and the fair value of the swap becomes positive, the City would be exposed to credit risk in the amount of the derivative’s positive fair value. Citigroup Global Markets Holdings, Inc. has executed and delivered a Guarantor Agreement to the City, which “absolutely” and “unconditionally” guarantees the payment to the City of any obligation of its wholly owned

B-49 subsidiary, Citigroup, Inc. At June 30, 2015, Citigroup Global Markets Holdings, Inc. was rated “Baa1” by Moody’s Investors Service, “A-” by Standard & Poor’s Ratings Services, and “A” by Fitch Ratings. The derivative contract uses the International Swap Dealers Association Master Agreement, which includes standard termination events, such as failure to pay and bankruptcy. Termination could result in the City being required to make or being entitled to receive an unanticipated termination payment based upon the market value on the date of termination. As rates vary, variable rate bond interest payments and net swap payments will vary. As indicated in a preceding paragraph, the initial synthetic ﬁxed interest rate lowers the City’s interest cost by about 43% compared with The Bond Buyer Revenue Bond Index on the date of issuance of the bonds and before any adjustment on the swap. Using rates as of June 30, 2015, debt service requirements of the variable rate debt and net swap payments, assuming current interest rates remain the same for the term of the Series C Bonds are as follows:

Business-type Activities Series 2002C Net Interest Fiscal Year Ending Rate Swap June 30 Principal Variable Rate Interest Payments* Total 2016 $ 2,280,000 $ 26,688 $ 1,607,807 $ 3,914,495 2017 2,340,000 26,741 1,541,671 3,908,412 2018 2,380,000 25,416 1,472,416 3,877,832 2019 4,095,000 24,623 1,402,532 5,522,155 2020 4,230,000 21,957 1,280,987 5,532,944 2021-2025 23,285,000 79,331 4,451,686 27,816,017 2026-2028 15,855,000 16,998 947,410 16,819,408 Total $ 54,465,000 $ 221,754 $ 12,704,509 $ 67,391,263 *Computed using the 3.001% net interest rate swap payment to the City times $54,465,000 less accumulated annual reductions. Series 2002C Changes in Fair Value for Change from Actual Fiscal Year Ended Fair Value Prior Year Synthetic Rate June 30, 2003 $ (4,442,015) $ - 3.000% June 30, 2004 (28,751) 4,413,264 3.045 June 30, 2005 (2,746,795) (2,718,044) 4.275 June 30, 2006 1,623,377 4,370,172 3.026 June 30, 2007 1,039,468 (583,909) 3.016 June 30, 2008 (2,759,347) (3,798,815) 2.990 June 30, 2009 (6,695,879) (3,936,532) 3.588 June 30, 2010 (8,238,126) (1,542,247) 3.049 June 30, 2011 (7,311,475) 926,651 3.046 June 30, 2012 (11,007,752) (3,696,277) 3.003 June 30, 2013 (7,665,865) 3,341,887 3.005 June 30, 2014 (6,917,180) 748,685 2.998 June 30, 2015 (6,595,168) 322,012 3.001 The Series 2002C interest rate swap was an effective hedge under the Dollar-offset Method in Fiscal Year 2014-2015 with an average variance of -2.3% and was an effective hedge inception to-date with an average variance of 3.25%, so the swap is recorded at fair value on the Statement of Net Position as a deferred outflow and a noncurrent liability. No investment gains or losses are recorded for mark-to-market changes for this effective hedge. City of Winston-Salem Water and Sewer System Revenue Bonds, Series 2007B The City entered into a forward starting floating-to-fixed interest rate swap agreement (the “swap agreement”) with Citigroup, Inc. on January 18, 2006, to become effective on April 19, 2007, with the issuance of $40,000,000 City of Winston-Salem Water and Sewer System Revenue bonds. The forward starting floating-to-fixed interest rate swap was executed in order to lock-in a historically low 4.083% synthetically fixed rate of interest on revenue bonds the City issued on April 19, 2007, in order to meet on-going expansion needs of the Water and Sewer System.

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B-50 The City issued variable rate bonds and then on a semi-annual basis each June 1 and December 1, commencing on December 1, 2007, the City pays Citigroup, Inc. 4.083% of the notional amount of the revenue bonds and Citigroup, Inc. pays the City the Securities Industry and Financial Markets Association (SIFMA, previously known as BMA) index variable rate. The notional amount of the swap reduces annually in conjunction with the amortization schedule of the variable rate revenue bonds issued. As of June 30, 2015, the agreement had a negative fair value of $7,485,883. The fair value was developed by Citigroup, Inc. using the zero coupon method. This method calculates the future net settlement payments required by the agreement assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. The City may terminate the swap with 30 days written notice to Citigroup, Inc. Should the City exercise its option to cancel the swap, the City would pay a weekly variable interest rate. As of June 30, 2015, the City was not exposed to credit risk because the swap had a negative fair value. Citigroup Global Markets Holdings, Inc. has executed and delivered a Guarantor Agreement to the City, which “absolutely” and “unconditionally” guarantees the payment to the City of any obligation of its wholly owned subsidiary, Citigroup, Inc. At June 30, 2015, Citigroup Global Markets Holdings, Inc. was rated “Baa1” by Moody’s Investors Service, “A-” by Standard & Poor’s Rating Services, and “A” by Fitch Ratings. The derivative contract uses the International Swap Dealers Association Master Agreement, which includes standard termination events, such as failure to pay and bankruptcy. Termination could result in the City being required to make or being entitled to receive an unanticipated termination payment based upon the market value on the date of termination.

Business-type Activities Series 2007B Fiscal Year Ending June 30 Principal Synthetic Variable Rate Interest Total 2016 $ 965,000 $ 1,403,993 $ 2,368,993 2017 1,005,000 1,360,751 2,365,751 2018 1,050,000 1,319,712 2,369,712 2019 1,095,000 1,276,836 2,371,836 2020 1,140,000 1,235,498 2,375,498 2021-2025 6,485,000 5,423,513 11,908,513 2026-2030 8,025,000 3,978,540 12,003,540 2031-2035 9,930,000 2,190,432 12,120,432 2036-2037 4,600,000 283,769 4,883,769 Total $ 34,295,000 $ 18,473,044 $ 52,768,044

Series 2007B Changes in Fair Value Change from Actual for Fiscal Year Ended Fair Value Prior Year Synthetic Rate June 30, 2006 $ 1,441,740 $ - 4.083% June 30, 2007 426,361 (1,015,379) 4.102 June 30, 2008 (1,542,494) (1,968,855) 4.055 June 30, 2009 (2,908,554) (1,366,060) 3.958 June 30, 2010 (4,938,874) (2,030,320) 4.014 June 30, 2011 (4,415,515) 523,359 4.070 June 30, 2012 (9,927,417) (5,511,902) 4.430 June 30, 2013 (6,207,166) 3,720,251 4.078 June 30, 2014 (6,204,846) 2,320 4.085 June 30, 2015 (7,485,883) (1,281,037) 4.084 The Series 2007B interest rate swap was an effective hedge under the Dollar-offset Method in Fiscal Year 2014-2015 with an average variance of -0.028% and was an effective hedge inception to-date with an average variance of .335%, so the swap is recorded at fair value on the Statement of Net Position as a deferred outﬂow and a noncurrent liability. No investment gains or losses are recorded for mark-to-market changes for this effective hedge.

B-51 Long-term Liabilities at June 30, 2015 Bonds Payable General obligation bonds, issues dated 2006 to 2014 with stated interest rates of 2.0% to 6.1% General government $ 74,555,000 Discounts/premiums 4,869,827 Revenue bonds, water and sewer system Series 2002, principal due annually through 2030 with stated and synthetic fixed interest rates of 3.0% to 3.69% 91,555,000 Series 2007A, principal due annually through 2037 with stated interest rates of 3.7% to 5.0% 47,590,000 Series 2007B, principal due annually through 2037 with synthetic fixed interest rate of 4.083% 34,295,000 Series 2009, principal due annually through 2039 with stated interest rates of 2.5% to 5.0% 99,725,000 Series 2010A, principal due annually through 2023 with stated interest rates of 2.5% to 5.0% 23,525,000 Series 2010B, principal due annually through 2034 with stated interest rates of 5.144% to 5.294% 42,895,000 Series 2010C, principal due annually through 2040 with stated interest rate of 5.694% 37,000,000 Series 2010D, principal due annually through 2021 with stated interest rates of 2.5% to 3.0% 7,860,000 Series 2011A, principal due annually through 2017 with stated interest rate of 4.0% 5,080,000 Series 2014A, principal due annually through 2033 with stated interest rates of 4.0% to 5.0% 33,085,000 Series 2014B, principal due annually through 2018 with stated interest rates of .55% to 1.75% 15,135,000 Discounts/premiums 11,217,565 Revenue bonds, stormwater management Series 2013, principal due annually through 2033 with stated interest rates of 2.0% to 5.0% 11,575,000 Discounts/premiums 680,088 Special obligation bonds, general governmental Series 2013, principal due annually through 2033 with stated interest rates of 3.0% to 5.0% 5,455,000 Series 2013, principal due annually through 2025 with stated interest rates of 3.0% to 5.0% 3,786,900 Special obligation bonds, solid waste management Series 2011A, principal due annually through 2026 with variable interest rate of 68% of 30-day LIBOR plus .85%, .962% at year end 8,096,060 Series 2013, principal due annually through 2018 with stated interest rates of 3.0% to 5.0% 3,330,000 Series 2013, principal due annually through 2016 with stated interest rates of 3.0% to 5.0% 473,100 Discounts/premiums 348,416 Special obligation bonds, public assembly facilities management Series 2009, principal due monthly through September 1, 2016, with variable interest rate of 30-day LIBOR plus 1.0%, .901% at year end 11,425,061 Contracts Payable Certificates of participation issued by North Carolina Municipal Leasing Corporation Series 2004C, principal due annually through June 1, 2034, with variable interest rate on one month LIBOR rate plus 0.5% as determined by bondholder, 0.65100% at year end 3,635,000 Series 2006A, principal due annually through June 1, 2031, with stated interest rates of 4.0% to 5.0% 12,850,000 Series 2006B, principal due annually through June 1, 2021, with stated interest rates of 4.125% to 5.0% 5,555,000 Series 2006D, principal due annually through June 1, 2026, with stated interest rate of 4.81% 2,580,000 Limited obligation bonds issued by North Carolina Municipal Leasing Corporation Series 2010A, principal due annually through June 1, 2024, with stated interest rates of 3.0% to 5.0% 12,855,000 Series 2012A, principal due 2015 and 2017: interest payable semi-annually with stated interest rates ranging from 2% to 5%. 15,175,000 Series 2013A, principal due annually through June 1, 2038, with stated interest rate of 4.626% 28,850,000 Series 2013B, principal due annually through June 1, 2035, with stated interest rates of 4.0% to 5.0% 13,540,000 Series 2014A, principal due monthly through September 1, 2029; with variable interest rate, payable monthly on one month LIBOR rate plus 0.74% as determined by bondholder, at June 30, 2015 was .9240% 12,940,000 Series 2014B, principal due annually through June 1, 2034, with stated interest rates of .4% to 4.4% 8,815,000 Series 2014C, principal due annually through June 1, 2034, with stated interest rates of 2% to 5% 41,860,000 Series 2014D, principal due October 1, 2015, 2017, 2018 and 2019; with variable interest rate, payable monthly with 70% of the one month LIBOR rate plus .45% as determined by bondholder, at June 30, 2015 was .5788% 12,786,819 Discounts/premiums 8,820,647 United States for construction of W. Kerr Scott reservoir by the Corps of Engineers, principal due annually through 2016 with fixed interest rate of 2.699% 30,756 HUD Section 108 loan, principal due annually through August 1, 2022, with stated interest rates of 1.75% to 6.67% 2,461,000 Installment financing contract, principal due annually through June 1, 2028, with stated interest rate of 3.29% 14,635,949 Clean water state revolving fund loan, payable over 20 years with stated interest rate of 2% 5,271,434 Other Net pension liability – WSPORS 25,275,622 Net pension liability – separation allowance 8,264,028 Accrued vacation leave 11,321,637 Accrued interest payable 2,290,087 Landfill closure and postclosure costs 16,123,637 Claims payable – employment and post-retirement benefits 6,937,953 Claims payable – Risk Acceptance Management Corporation 299,436 Total current and long-term liabilities $ 846,731,022

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B-52 Changes in Long-term Liabilities during Fiscal Year 2015 Principal Retirement Principal Outstanding and Outstanding June 30, 2014 Additions Deferrals June 30, 2015 Due Within Year Governmental activities General obligation bonds $ 80,395,000 $ - $ 5,840,000 $ 74,555,000 $ 5,950,000 Discount/premium 5,341,974 - 472,147 4,869,827 - Special obligation bonds 9,771,900 - 530,000 9,241,900 536,900 Contracts payable North Carolina Municipal Leasing Corporation 81,437,611 71,092,262 32,603,943 119,925,930 6,525,907 Discount/premium 4,482,567 5,613,000 1,310,822 8,784,745 - HUD Section 108 loan 2,794,000 1,610,000 1,943,000 2,461,000 333,000 Installment financing contract 14,837,187 - 988,307 13,848,880 988,306 Net pension liability (LGERS) 19,477,347 - 19,477,347 - - Net pension liability (WSPORS) 19,204,627 6,070,995 - 25,275,622 - Net pension liability (Separation Allowance) 7,324,864 939,164 - 8,264,028 - Accrued vacation 9,553,978 8,936,987 8,734,815 9,756,150 3,382,764 Accrued interest payable 398,160 514,058 - 912,218 912,218 Claims payable-employment benefits 6,219,039 - 183,593 6,035,446 4,688,708 Total governmental activities debt 261,238,254 94,776,466 72,083,974 283,930,746 23,317,803 Business-type activities Revenue Bonds 473,930,000 48,370,000 72,980,000 449,320,000 20,945,000 Discount/premium 8,037,285 6,061,142 2,200,774 11,897,653 - Special obligation bonds 25,756,092 251,975 2,683,846 23,324,221 2,791,793 Discount/premium 458,163 - 109,747 348,416 - Contracts payable North Carolina Municipal Leasing Corporation 10,937,389 15,643,330 3,914,830 22,665,889 3,091,093 Discount/premium 29,465 60,416 53,979 35,902 - Installment financing contract 843,237 - 56,168 787,069 56,168 Risk Acceptance Management Corporation 14,692,210 - 14,692,210 - - US Corps of Engineers 45,532 - 14,776 30,756 15,174 Clean water state revolving loan fund - 5,271,434 - 5,271,434 - Net pension liability (LGERS) 3,389,491 - 3,389,491 - - Accrued vacation 1,569,551 1,451,956 1,461,528 1,559,979 661,669 Accrued interest payable 1,363,699 - 97,047 1,266,652 1,266,652 Landfill closure and postclosure costs 15,495,545 836,310 208,218 16,123,637 216,000 Claims payable 336,972 - 37,536 299,436 - Total business-type activities debt 556,884,631 77,946,563 101,900,150 532,931,044 29,043,549 Fiduciary funds Contracts payable North Carolina Municipal Leasing Corporation 29,545,000 - 695,000 28,850,000 - Net pension liability (LGERS) 18,583 - 18,583 - - Accrued vacation 1,546 12,380 8,418 5,508 - Accrued interest payable 113,896 - 2,679 111,217 - Claims payable-post employment benefits - 902,507 - 902,507 - Total fiduciary fund debt 29,679,025 914,887 724,680 29,869,232 - Total $ 847,801,910 $ 173,637,916 $ 174,708,804 $ 846,731,022 $ 52,361,352

Compensated absences for governmental funds typically have been liquidated in the general fund. The June 30, 2014 balance has been restated to include a net pension liability from the implementation of GASB Statement No. 68. The zero ending balance is due to an actuarially reported net pension asset as of June 30, 2015.

B-53 Contracts Payable Contracts Payable Debt Service Requirements to Maturity are:

Governmental Activities Business-type Activities Fiduciary Activities Fiscal Year Principal Interest Principal Interest Principal Interest 2016 $ 7,847,213 $ 5,393,620 $ 3,162,435 $ 727,335 $ 730,000 $ 1,334,601 2017 20,814,299 5,245,866 2,560,757 575,039 765,000 1,300,831 2018 10,484,688 4,315,972 2,229,786 468,525 800,000 1,265,442 2019 10,315,873 4,026,171 1,760,420 385,255 835,000 1,228,434 2020 7,002,872 3,705,341 1,266,602 323,505 875,000 1,189,807 2021-2025 35,666,314 14,546,492 3,147,058 1,150,393 5,010,000 5,303,940 2026-2030 33,143,091 7,083,986 2,228,116 836,049 6,290,000 4,032,483 2031-2035 10,961,460 1,963,622 7,128,540 - 7,885,000 2,436,746 2036-2038 - - - - 5,660,000 531,760 Total $ 136,235,810 $ 46,281,070 $ 23,483,714 $ 4,466,101 $ 28,850,000 $ 18,624,044

The City has contracts payable to North Carolina Municipal Leasing Corporation (the “NCMLC”) obligating the City to make periodic payments that include interest and principal components. The interest component was calculated using the average interest rate for the previous twelve months for the variable rate debt plus 2%. At June 30, 2015, the City had assets acquired with NCMLC totaling $110,117,296 with related accumulated depreciation in the amount of $73,898,953. The NCMLC had available funds of $594,806 at June 30, 2015. The North Carolina Municipal Leasing Corporation issued $13.25 million of taxable Limited Obligation Bonds Series 2014A on September 15, 2014 to finance the acquisition of additional improvements to the BB&T Ballpark. The North Carolina Municipal Leasing Corporation issued $51.825 million taxable and tax exempt Limited Obligation Bonds on October 1, 2014, Series 2014B & C to (1) refinance a portion of the principal portion of Installment Payments due under the contract related to the 2004 Project and (2) to finance (a) the acquisition of condominium interests in the Bryce A. Stuart Building not currently owned by the City, (b) and certain additional improvements to the Benton Convention Center, (c) certain improvements to Union Station, and (d) Business 40 corridor improvements (collectively the 2014 Project). The North Carolina Municipal Leasing Corporation issued $18 million of Limited Obligation Bonds on October 8, 2014 to finance budgeted equipment for fiscal year 2015 and estimated acquisitions for fiscal year 2016. The terms of the lease includes a variable interest rate of 70% of LIBOR plus 45 basis points (.045%). Assets have been pledged as collateral for the following contracts payable: Certificates of Participation executed and delivered by North Carolina Municipal Leasing Corporation Series 2004C Convention Center Facility, Bryce A. Stuart Building Series 2006A City Hall, Public Safety Center, Lowery street, BB&T Ballpark Series 2006B Convention Center Facility, Bryce A. Stuart Building Series 2006D City Hall, Public Safety Center, Lowery street, BB&T Ballpark Installment Financing Contract 2011 Alexander Beaty Public Safety Training and Support Center, Firearms Training Facility Limited Obligation Bonds executed and delivered by North Carolina Municipal Leasing Corporation Series 2010A City Hall, Public Safety Center, Lowery street, BB&T Ballpark Series 2013A & B City Hall, Public Safety Center, Lowery street, BB&T Ballpark Series 2014A City Hall, Public Safety Center, Lowery street, BB&T Ballpark Series 2014B & C Convention Center Facility, Bryce A. Stuart Building

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B-54 H. Net Investment in Capital Assets Net investment in capital assets at June 30, 2015 Governmental Business-type Capital assets $ 359,948,420 $ 918,066,368 less: long-term debt (219,353,169) (486,782,112) less: short-term debt (14,334,113) (26,899,228) add: unexpended debt proceeds 2,072,049 13,766,293 add: charge on refunding, net 3,363,046 1,490,907 Net investment in capital assets $ 131,696,233 $ 419,642,228

I. Fund Balance The following schedule provides management and citizens with information on the portion of general fund fund balance that is available for appropriation at June 30, 2015.

Total fund balance - general fund $ 51,102,141 Less: Loans 930,361 Inventories 220,500 Prepaids 30,144 Stabilization by state statute 17,368,209 Subsequent year budget 2,879,210 Fund balance policy 22,794,940 Remaining fund balance 6,878,777

The City of Winston-Salem has adopted a minimum fund balance policy for general fund which requires the unassigned fund balance to be at least 12.5% of budgeted general fund expenditures. The outstanding encumbrances are amounts needed to pay any commitments related to purchase orders and contracts that remain unperformed at year-end. Encumbrances Outstanding June 30, 2015 General fund $ 2,564,628 Special revenue funds Nonmajor 6,986,350 Debt service fund 15,294 Capital projects fund 26,953,424 Enterprise funds Water & sewer utility fund 84,755,780 Solid waste disposal fund 881,630 Nonmajor 3,341,894 Internal service funds 1,580,177 Fiduciary funds 9,560 Total $ 127,088,737

B-55 4. Other Information A. Pension Plan 1. The City participates in three defined benefit pension plans:

a. North Carolina Local Government Employees’ Retirement System Plan Description. The City of Winston-Salem is a participating employer in the statewide Local Governmental Employees’ Retirement System (LGERS), a cost-sharing, multiple-employer defined benefit pension plan administered by the State of North Carolina. LGERS membership is comprised of general employees and local law enforcement officers (LEOs) of participating local governmental entities. Article 3 of G.S. Chapter 128 assigns the authority to establish and amend benefit provisions to the North Carolina General Assembly. Management of the plan is vested in the LGERS Board of Trustees, which consists of 13 members - nine appointed by the Governor, one appointed by the State Senate, one appointed by the State House of Representatives, and the State Treasurer and State Superintendent, who serves as ex- officio members. The Local Governmental Employees’ Retirement System is included in the Comprehensive Annual Financial Report (CAFR) for the State of North Carolina. The State’s CAFR includes financial statements and required supplementary information for LGERS. That report may be obtained by writing to the Office of the State Controller, 1410 Mail Service Center, Raleigh, North Carolina 27699-1410, by calling (919) 981-5454, or at www.osc.nc.gov. Benefits Provided. LGERS provides retirement and survivor benefits. Retirement benefits are determined as 1.85% of the member’s average final compensation times the member’s years of creditable service. A member’s average final compensation is calculated as the average of a member’s four highest consecutive years of compensation. Plan members are eligible to retire with full retirement benefits at age 65 with five years of creditable service, at age 60 with 25 years of creditable service, or at any age with 30 years of creditable service. Plan members are eligible to retire with partial retirement benefits at age 50 with 20 years of creditable service or at age 60 with five years of creditable service. Survivor benefits are available to eligible beneficiaries of members who die while in active service or within 180 days of their last day of service and who have either completed 20 years of creditable service regardless of age or have completed five years of service and have reached age 60. Eligible beneficiaries may elect to receive a monthly Survivor’s Alternate Benefit for life or a return of the member’s contributions. The plan does not provide for automatic post-retirement benefit increases. Increases are contingent upon actuarial gains of the plan. LGERS plan members who are LEOs are eligible to retire with full retirement benefits at age 55 with five years of creditable service as an officer, or at any age with 30 years of creditable service. LEO plan members are eligible to retire with partial retirement benefits at age 50 with 15 years of creditable service as an officer. Survivor benefits are available to eligible beneficiaries of LEO members who die while in active service or within 180 days of their last day of service and who also have either completed 20 years of creditable service regardless of age, or have completed 15 years of service as a LEO and have reached age 50, or have completed five years of creditable service as a LEO and have reached age 55, or have completed 15 years of creditable service as a LEO if killed in the line of duty. Eligible beneficiaries may elect to receive a monthly Survivor’s Alternate Benefit for life or a return of the member’s contributions. Contributions. Contribution provisions are established by General Statute 128-30 and may be amended only by the North Carolina General Assembly. City of Winston-Salem employees are required to contribute 6% of their compensation. Employer contributions are actuarially determined and set annually by the LGERS Board of Trustees. The City of Winston- Salem’s contractually required contribution rate for the year ended June 30, 2015, was 7.41% of compensation for law enforcement officers and 7.07% for general employees, actuarially determined as an amount that, when combined with employee contributions, is expected to finance the costs of benefits earned by employees during the year. Contributions to the pension plan from the City of Winston-Salem were $7,282,532 for the year ended June 30, 2015. Refunds of Contributions. City employees who have terminated service as a contributing member of LGERS, may file an application for a refund of their contributions. By state law, refunds to members with at least five years of service include 4% interest. State law requires a 60 day waiting period after service termination before the refund may be paid. The acceptance of a refund payment cancels the individual’s right to employer contributions or any other benefit provided by LGERS.

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B-56 Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At June 30, 2015, the City reported an asset of $10,664,916 for its proportionate share of the net pension asset. The net pension asset was measured as of June 30, 2014. The total pension liability used to calculate the net pension asset was determined by an actuarial valuation as of December 31, 2013. The total pension liability was then rolled forward to the measurement date of June 30, 2014 utilizing update procedures incorporating the actuarial assumptions. The City’s proportion of the net pension asset was based on a projection of the City’s long-term share of future payroll covered by the pension plan, relative to the projected future payroll covered by the pension plan of all participating LGERS employers, actuarially determined. At June 30, 2014, the City’s proportion was 1.81%, which was a decrease of .09% from its proportion measured as of June 30, 2013. For the year ended June 30, 2015, the City recognized pension expense of $441,929. At June 30, 2015, the City reported deferred outﬂows of resources and deferred inﬂows of resources related to pensions from the following sources:

Deferred Outﬂows Deferred Inﬂows of Resources of Resources Differences between expected and actual experience $ - $ 1,165,326 Changes of assumptions -- Net difference between projected and actual earnings on pension plan investments - 24,827,676 Changes in proportion and differences between City contributions and proportionate share of contributions - 904,550 City contributions subsequent to the measurement date 7,282,532 - Total $ 7,282,532 $ 26,897,552

$7,282,532 reported as deferred outﬂows of resources related to pensions resulting from City contributions subsequent to the measurement date will be recognized as an increase of the net pension asset in the year ended June 30, 2016. Other amounts reported as deferred inﬂows of resources related to pensions will be recognized in pension expense as follows:

Year Ended June 30 2016 $ (6,725,685) 2017 (6,725,685) 2018 (6,725,685) 2019 (6,720,497) 2020 - Thereafter -

Actuarial Assumptions. The total pension liability in the December 31, 2013 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 3.0% Salary increases 4.25 to 8.55 %, including inflation and productivity factor Investment rate of return 7.25%, net of pension plan investment expense, including inflation The plan currently uses mortality tables that vary by age, gender, employee group (i.e. general, law enforcement officer) and health status (i.e. disabled and healthy). The current mortality rates are based on published tables and based on studies that cover significant portions of the U.S. population. The healthy mortality rates also contain a provision to reflect future mortality improvements. The actuarial assumptions used in the December 31, 2013 valuation were based on the results of an actuarial experience study for the period January 1, 2005 through December 31, 2009.

B-57 Future ad hoc COLA amounts are not considered to be substantively automatic and are therefore not included in the measurement. The projected long-term investment returns and inflation assumptions are developed through review of current and historical capital markets data, sell-side investment research, consultant whitepapers, and historical performance of investment strategies. Fixed income return projections reflect current yields across the U.S. Treasury yield curve and market expectations of forward yields projected and interpolated for multiple tenors and over multiple year horizons. Global public equity return projections are established through analysis of the equity risk premium and the fixed income return projections. Other asset categories and strategies’ return projections reflect the foregoing and historical data analysis. These projections are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class as of June 30, 2014 are summarized in the following table:

Long-Term Expected Asset Class Target Allocation Real Rate of Return Fixed Income 36.0% 2.5% Global Equity 40.5 6.1 Real Estate 8.0 5.7 Alternatives 6.5 10.5 Credit 4.5 3.8 Inﬂation Protection 4.5 3.7 Total 100.0%

The information above is based on 30 year expectations developed with the consulting actuary for the 2013 asset liability and investment policy study for the North Carolina Retirement Systems, including LGERS. The long-term nominal rates of return underlying the real rates of return are arithmetic annualized figures. The real rates of return are calculated from nominal rates by multiplicatively subtracting a long-term inflation assumption of 3.19%. All rates of return and inflation are annualized. A new asset allocation policy was finalized during the fiscal year ended June 30, 2014 to be effective July 1, 2014. The new asset allocation policy utilizes different asset classes, changes in the structure of certain asset classes, and adopts new benchmarks. Using the asset class categories in the preceding table, the new long-term expected arithmetic real rates of return are: Fixed Income 2.2%, Global Equity 5.8%, Real Estate 5.2%, Alternatives 9.8%, Credit 6.8% and Inflation Protection 3.4%. Discount rate. The discount rate used to measure the total pension liability was 7.25%. The projection of cash flows used to determine the discount rate assumed that contributions from plan members will be made at the current contribution rate and that contributions from employers will be made at statutorily required rates, actuarially determined. Based on these assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefit payments of the current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the City’s proportionate share of the net pension asset to changes in the discount rate. The following presents the City’s proportionate share of the net pension asset calculated using the discount rate of 7.25 percent, as well as what the City’s proportionate share of the net pension asset or net pension liability would be if it were calculated using a discount rate that is one percentage point lower (6.25 percent) or one percentage point higher (8.25 percent) than the current rate:

1% Current 1% Decrease Discount Rate Increase (6.25%) (7.25%) (8.25%) City’s proportionate share of the net pension liability (asset) $ 36,201,324 $ (10,664,916) $ (50,124,768)

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B-58 Pension plan fiduciary net position. Detailed information about the pension plan’s fiduciary net position is available in the separately issued Comprehensive Annual Financial Report (CAFR) for the State of North Carolina. b. Winston-Salem Police Officers’ Retirement System Summary of Significant Accounting Policies Basis of Accounting. Pension trust fund financial statements are prepared using the accrual basis of accounting. The defined benefit plan does not issue a stand-alone financial report, and it is not included in the financial report of another entity. Member and employer contributions are recognized in the period in which the contributions are due. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan. Method Used to Value Investments. Investments are reported at fair market value. Short-term investments are reported at cost, which approximates fair market value. Securities traded on a national exchange are valued at the last reported sales price.

Plan Description Plan Administration. Winston-Salem Police Officer’s Retirement System (WSPORS) is a single-employer, defined benefit plan with required membership for police officers hired prior to January 1, 2014. It was established by the City in 1977. The City established WSPORS, which is similar to the North Carolina Local Governmental Employees’ Retirement System for Law Enforcement Officers, and authorizes benefit provisions and amendments, including post- retirement benefit increases. The Commission is composed of a member of the City Council, two sworn officers elected by members of WSPORS, one retired officer, and an unaffiliated citizen of Winston-Salem who serves as Chairperson of the Commission. Two additional elected sworn officers serve as Alternate Members. The Chief Financial Officer of the City serves as WSPORS Administrator and oversees both benefits administration and investments. Plan Membership. At June 30, 2015, the Winston-Salem Police Officers’ Retirement System membership consisted of:

Inactive plan members or beneficiaries currently receiving benefits 333 Inactive plan members entitled to but not receiving benefits 35 Active plan members 508 Total 876 As of December 31, 2013, the plan is closed to new entrants. Benefits Provided. Members may retire with unreduced benefits after completing 30 years of creditable service or at age 55 with 5 years of creditable service. Officers retiring with unreduced benefits are entitled to annual benefits equal to 1.85% of average highest earnings for four consecutive years times the number of years of creditable service. Contributions. Under the Code of the City of Winston-Salem, contribution requirements of plan members and the City are established and may be amended. Members are required to contribute 6 percent of their salary and contributions by the City are based upon annual actuarial studies. The City is responsible for the payment of administrative expenses of the plan as additional contributions. In 2008, the City entered into a trust agreement with U.S. Bank National Association to establish an irrevocable trust for post-employment benefits including the Winston-Salem Police Officers’ Retirement System.

Annual Pension Cost and Net Pension Obligation The annual required contribution for the current year was determined as part of the January 1, 2014, actuarial valuation using the projected unit credit method. Significant actuarial assumptions include (a) projected salary increases of 2% in 2014, 2015 and 2016, 2.5% in 2017, 3% in 2018, and 5% thereafter, compounded annually, (b) no post-retirement benefit increases, and (c) an average rate of return on investment of present and future assets of 7.25%. Assets of the plan for actuarial valuation are reported at fair market value. At January 1, 2015, the plan had an actuarially determined unfunded accrued liability of $20,175,218, which reflects a change in asset valuation to the Entry Age Normal Actuarial Cost Method. The contribution equals the Normal Cost plus the amount needed to amortize the Unfunded Actuarial Accrued Liability over 23 years (25 years closed period beginning January 1, 2013). The plan at June 30, 2015, does not have a net pension obligation.

B-59 Actuarially Determined % of Actuarial Contribution Year Employer Contribution Amount of Actual Contribution Contributed by Employer 2006 $ 3,012,374 $ 3,012,374 100% 2007 3,455,026 3,455,026 100% 2008 4,167,474 4,167,474 100% 2009 4,299,153 4,299,153 100% 2010 4,832,238 4,832,238 100% 2011 5,324,788 5,324,788 100% 2012 4,324,629 4,324,629 100% 2013 5,093,595 5,093,595 100% 2014 6,216,781 34,382,951 100% 2015 3,326,051 4,205,640 100%

During ﬁscal year 2014, NCMLC issued $30,255,000 of Limited Obligation Bonds. The proceeds were used to increase the funding level from 65% to 86.66%.

Funding Status and Funding Progress At January 1, 2015, the most recent actuarial valuation date, the plan was 87.40% funded. The actuarial accrued liability for benefits was $160,080,639, and the actuarial value of assets was $139,905,421, resulting in an unfunded actuarial accrued liability (UAAL) of $20,175,218. The covered payroll of the plan was $25,206,604 and the ratio of the UAAL to the covered payroll was 80.04%. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets are increasing or decreasing over time relative to the actuarial accrued liability of benefits.

Investments Investment Policy. City Council has adopted an Investment Policy for all City funds inclusive of the investment of the retirement fund. The City Manager, with recommendation from the Chief Financial Officer and City Treasurer, has the authority, with the assistance of financial consultants, to select and employ asset managers to direct investment activities of WSPORS in accordance with the Investment Policy. The City has eight equity managers, four fixed income managers, and three index funds, whose performance is measured against appropriate market indices. Financial consultants are approved by City Council to assist the City in the selection and oversight of asset managers. Deutsche Bank Alex. Brown serves as the financial consultant that helps select and monitor the performance of WSPORS equity asset managers. Stephens, Inc. serves as the financial consultant that helps select and monitors performance of WSPORS fixed income asset managers. Asset allocation is a strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio. Based on the principle that asset types perform differently in different market and economic conditions, asset allocation is an important factor in determining returns for an investment portfolio. Target asset allocations are set by ranges by the Chief Financial Officer and City Treasurer with the assistance of financial consultants and adjusted within those ranges from time to time to adjust for market conditions. Concentrations. The pension plan does not hold 5 percent or more of the pension plan’s fiduciary net position (other than those issued or explicitly guaranteed by the U.S. government) in any one organization. Rate of Return. For the year ended June 30, 2015, the annual money-weighted rate of return on pension plan investments, net of pension plan investment expense was 3.85 percent. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested.

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B-60 Net Pension Liability The components of the net pension liability of the City as of June 30, 2015 are as follows:

Total pension liability $ 162,578,722 Plan ﬁduciary assets (137,303,100) Net pension liability $ 25,275,622 Plan ﬁduciary assets as a percentage of total pension liability 84.50%

Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At June 30, 2015, the City reported a net pension liability of $25,275,622. The net pension liability was measured as of June 30, 2015. The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of January 1, 2015. The total pension liability was then rolled forward to the measurement date of June 30, 2015. For the year ended June 30, 2015, the City recognized pension expense of $4,445,819. At June 30, 2015, the City reported deferred outﬂows of resources and deferred inﬂows of resources related to pensions from the following sources:

Deferred Outﬂows of Deferred Inﬂows Resources of Resources Differences between expected and actual experience $ 2,161,897 $ - Changes of assumptions 145,961 - Net difference between projected and actual earnings on pension plan investments 3,522,958 - City contributions subsequent to the measurement date - - Total $ 5,830,816 $ -

Other amounts reported as deferred inﬂows of resources related to pensions will be recognized in pension expense as follows:

Year Ended June 30 2016 $ 1,342,310 2017 1,342,310 2018 1,342,310 2019 1,342,312 2020 461,574 Thereafter -

Actuarial Assumptions. The total pension liability was determined by an actuarial valuation as of January 1, 2015, using the following actuarial assumptions, applied to all periods included in the measurement:

Inﬂation 3.00% Salary increases 2.00% until 2016, increasing to ultimate rate of 5.0% Investment return 7.25%, net of investment expense and including inﬂation Mortality rates were based on the IRS-2015 Combined Healthy Annuitant Mortality Tables for small plans. The actuarial assumptions used in the January 1, 2015 valuation were based on the results of actuarial experience analysis during the 2000 to 2010 time period. All assumptions were reviewed in 2013. Changes in Actuarial Assumptions. The following assumption changes were made since the prior valuation: 1. Update of mortality table from 2014 Table to 2015 version. The actuarial method was entry age.

B-61 The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimates of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. This is then modified through a Monte-Carlo simulation process, by which a (downward) risk adjustment is applied to the baseline expected return. Best estimates of arithmetic real rates of return for each major asset class included in the pension plan’s target asset allocation as of June 30, 2015, and the final investment return assumption, are summarized in the following table:

Long-Term Expected Asset Class Target Allocation Real Rate of Return Equity Funds 75% 5.90% Fixed Income Funds 20 2.70 Cash 5 0.80 Total Weighted Average Real Return 100% 4.89% Plus inflation 3.00 Total return w/o adjustment 7.89 Risk adjustment (0.64) Total Expected Return 7.25% Discount Rate. The discount rate used to measure the total pension liability was 7.25%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that City contributions will be made at rates equal to the difference between actuarially determined contribution rates and the member rate. Based on those assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefits payments of current plan members. Therefore, the long-term expected rates of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the Net Pension Liability to Changes in the Discount Rate. The following presents the net pension liability of the City, calculated using the discount rate of 7.25%, as well as what the City’s net pension liability would be if it were calculated using a discount rate that is 1.00% lower or 1.00% higher than the current rate:

1% Current 1% Decrease Discount Rate Increase 6.25% 7.25% 8.25% Total pension liability $ 180,307,653 $ 162,578,722 $ 146,402,513 Plan assets (137,303,100) (137,303,100) (137,303,100) Net pension liability $ 43,004,553 $ 25,275,622 $ 9,099,413 Ratio of plan assets to total pension liability 76.1% 84.5% 93.8%

c. Winston-Salem Police Officers’ Separation Allowance

Summary of Significant Accounting Policies Basis of Accounting. Pension trust fund financial statements are prepared using the accrual basis of accounting. The defined benefit plan does not issue a stand-alone financial report, and it is not included in the financial report of another entity. Employer contributions are recognized in the period in which the contributions are due. Benefits are recognized when due and payable in accordance with the terms of the plan. Method Used to Value Investments. Investments are reported at fair market value. Short-term investments are reported at cost, which approximates fair market value. Securities traded on a national exchange are valued at the last reported sales price.

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B-62 Plan Description Plan Administration. Winston-Salem Police Officers’ Separation Allowance is a single-employer, defined benefit plan established by the State of North Carolina in 1987 for all local law enforcement officers. Article 12D of G.S. Chapter 143 assigns the authority to establish and amend benefit provisions to the North Carolina General Assembly. Plan Membership. At June 30, 2015, the Winston-Salem Police Officers’ Separation Allowance membership consisted of:

Inactive plan members or beneficiaries currently receiving benefits 91 Inactive plan members entitled to but not receiving benefits - Active plan members 559 Total 650

Benefits Provided. The monthly benefit is paid by the City to officers retired under the Winston-Salem Police Officers’ Retirement System or the North Carolina Local Governmental Employees’ Retirement System until age 62. The benefit is 0.85% of the annual equivalent of the most recent base rate of compensation times the years of creditable service. Contributions. Benefit provisions are established and may be amended by the State of North Carolina. City contributions are based upon annual actuarial studies. Administrative expenses are funded by additional City contributions. In 2008, the City entered into a trust agreement with U.S. Bank National Association to establish an irrevocable trust for post-employment benefits including the Winston-Salem Police Officers’ Separation Allowance.

Annual Pension Cost and Net Pension Obligation The annual required contribution for the current year was determined as part of the January 1, 2014, actuarial valuation using the projected unit credit method. Significant actuarial assumptions include (a) projected salary increases of 2% in 2014, 2015 and 2016, 2.5% in 2017, 3% in 2018, and 5% thereafter, compounded annually, (b) no post-retirement benefit increases, and (c) an average rate of return on investment of present and future assets of 7.25%. Assets of the plan for actuarial valuation are reported at fair market value. At January 1, 2014, the plan had an actuarially determined unfunded accrued liability of $8,996,416, which reflects a change in asset valuation to the Entry Age Normal Actuarial Cost Method. The contribution equals the Normal Cost plus the amount needed to amortize the Unfunded Actuarial Accrued Liability over 23 years (25 years closed period beginning January 1, 2013). The plan at June 30, 2015, does not have a net pension obligation.

Actuarially Determined % of Actuarial Contribution Year Employer Contribution Amount of Actual Contribution Contributed by Employer 2006 $ 850,280 $ 850,280 100% 2007 895,343 895,343 100% 2008 555,382 555,382 100% 2009 570,086 570,086 100% 2010 731,690 731,690 100% 2011 737,414 737,414 100% 2012 904,263 904,263 100% 2013 976,576 976,576 100% 2014 1,000,073 1,000,073 100% 2015 1,035,697 1,035,697 100%

B-63 Funding Status and Funding Progress At January 1, 2015, the most recent actuarial valuation date, the plan was 48.27% funded. The actuarial accrued liability for benefits was $17,391,249, and the actuarial value of assets was $8,394,833, resulting in an unfunded actuarial accrued liability (UAAL) of $8,996,416. The covered payroll of the plan was $26,095,009 and the ratio of the UAAL to the covered payroll was 34.48%. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets are increasing or decreasing over time relative to the actuarial accrued liability of benefits.

Investments Investment Policy. City Council has adopted an Investment Policy for all City funds inclusive of the investment of the retirement fund. The City Manager, with recommendation from the Chief Financial Officer and City Treasurer, has the authority, with the assistance of financial consultants, to select and employ asset managers to direct investment activities of Separation Allowance in accordance with the Investment Policy. The City has eight equity managers, four fixed income managers, and three index funds, whose performance is measured against appropriate market indices. Financial consultants are approved by City Council to assist the City in the selection and oversight of asset managers. Deutsche Bank Alex. Brown serves as the financial consultant that helps select and monitor the performance of the equity asset managers. Stephens, Inc. serves as the financial consultant that helps select and monitors performance of the fixed income asset managers. Asset allocation is a strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio. Based on the principle that asset types perform differently in different market and economic conditions, asset allocation is an important factor in determining returns for an investment portfolio. Target asset allocations are set by ranges by the Chief Financial Officer and City Treasurer with the assistance of financial consultants and adjusted within those ranges from time to time to adjust for market conditions. Concentrations. The pension plan does not hold 5 percent or more of the pension plan’s fiduciary net position (other than those issued or explicitly guaranteed by the U.S. government) in any one organization. Rate of Return. For the year ended June 30, 2015, the annual money-weighted rate of return on pension plan investments, net of pension plan investment expense was 4.12 percent. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested.

Net Pension Liability The components of the net pension liability of the City as of June 30, 2015 are as follows:

Total pension liability $ 17,436,599 Plan ﬁduciary assets (9,172,571) Net pension liability $ 8,264,028 Plan ﬁduciary assets as a percentage of total pension liability 52.6%

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B-64 For the year ended June 30, 2015, the City recognized pension expense of $1,099,203. At June 30, 2015, the City reported deferred outﬂows of resources and deferred inﬂows of resources related to pensions from the following sources:

Deferred Outﬂows of Deferred Inﬂows Resources of Resources Differences between expected and actual experience $ 648,133 $ - Changes of assumptions 3,595 - Net difference between projected and actual earnings on pension plan investments 223,930 - City contributions subsequent to the measurement date - - Total $ 875,658 $ -

Other amounts reported as deferred inﬂows of resources related to pensions will be recognized in pension expense as follows:

Year Ended June 30 2016 $ 128,398 2017 128,398 2018 128,398 2019 128,396 2020 72,415 Thereafter 289,653

Inflation 3.00% Salary increases 2.00% until 2016, increasing to ultimate rate of 5.0%. Investment return 7.25%, net of investment expense and including inflation Mortality rates were based on the IRS-2015 Combined Healthy Annuitant Mortality Tables for small plans. The actuarial assumptions used in the January 1, 2015 valuation were based on the results of actuarial experience analysis during the 2000 to 2010 time period. All assumptions were reviewed in 2013. Changes in Actuarial Assumptions. The following assumption changes were made since the prior valuation: 1. Update of mortality table from 2014 Table to 2015 version. The actuarial method was entry age. The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimates of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. This is then modified through a Monte-Carlo simulation process, by which a (downward) risk adjustment is applied to the baseline expected return.

B-65 Best estimates of arithmetic real rates of return for each major asset class included in the pension plan’s target asset allocation as of June 30, 2015, and the ﬁnal investment return assumption, are summarized in the following table:

Discount Rate. The discount rate used to measure the total pension liability was 7.25%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that City contributions will be made at rates equal to the difference between actuarially determined contribution rates and the member rate. Based on those assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rates of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the Net Pension Liability to Changes in the Discount Rate. The following presents the net pension liability of the City, calculated using the discount rate of 7.25%, as well as what the City’s net pension liability would be if it were calculated using a discount rate that is 1.00% lower or 1.00% higher than the current rate:

1% Current 1% Decrease Discount Rate Increase 6.25% 7.25% 8.25% Total pension liability $ 19,371,012 $ 17,436,599 $ 15,672,294 Plan assets (9,172,571) (9,172,571) (9,172,571) Net pension liability $ 10,198,441 $ 8,264,028 $ 6,499,723

Ratio of assets to total pension liability 47.4% 52.6% 58.5%

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B-66 The following are financial statements for the Winston-Salem Police Officers’ Retirement System and the Winston-Salem Police Officers’ Separation Allowance Funds included in Exhibits 9 and 10 at June 30, 2015.

Statement of Fiduciary Net Position June 30, 2015 Winston-Salem Police Ofﬁcers’ Retirement System Separation Allowance Assets Cash and cash equivalents/investments $ 137,303,100 $ 9,172,571 Total assets 137,303,100 9,172,571 Liabilities Accounts payable 109 - Accrued interest payable 111,217 - Contracts payable 28,850,000 - Total liabilities 28,961,326 - Net position restricted for pensions $ 108,341,774 $ 9,172,571

Statement of Changes in Fiduciary Net Position For Year Ended June 30, 2015 Winston-Salem Police Officers’ Retirement System Separation Allowance Additions Contributions Employer $ 6,267,392 $ 1,035,697 Plan members 1,543,565 - Total contributions 7,810,957 1,035,697 Investment income Net appreciation in fair value 3,118,346 230,758 Interest and dividends 2,724,427 178,819 Total investment income 5,842,773 409,577 Less investment expense 511,976 34,524 Net investment income 5,330,797 375,053 Total additions 13,141,754 1,410,750 Deductions Benefits 9,317,619 1,535,057 Refund of contributions 112,132 - Administrative expense 111,694 460 Interest and fiscal expense 1,364,073 - Total deductions 10,905,518 1,535,517 Net increase in net position 2,236,236 (124,767) Net position restricted for pensions Beginning of year 106,105,538 9,297,338 End of year $ 108,341,774 $ 9,172,571

B-67 2. The City participates in two defined contribution plans:

a. Winston-Salem Police Officers’ Defined Contribution Plan Plan Description. Winston-Salem Police Officers’ Defined Contribution Plan is a defined contribution plan effective January 1, 2014. Sworn police officers employed after December 31, 2013 may voluntarily participate in the Winston- Salem Police Officers’ Defined Contribution Retirement Plan, which shall consist of the Winston-Salem Police Officers’ Defined Contribution Retirement Plan for employee contributions (the “457(b) plan”), to which employees may defer compensation, and the Winston-Salem Police Officers’ Defined Contribution Retirement Plan for employer contributions (the “401(a) plan”), under which the City will match employees’ deferrals to the 457(b) plan. The maximum amount of a participant’s deferrals under the 457(b) plan and all other plans under section 457(b) of the Internal Revenue Code for any calendar year shall not exceed the lessor of (1) the amount established under section 457(e) (15) of the Internal Revenue Code, as adjusted annually for cost-of-living changes to the extent provided under section 415(d) of the Internal Revenue Code, or (2) the participant’s includible compensation for the calendar year. For this purpose, annual deferrals do not include any rollover amounts. Funding Policy. The City shall contribute 4 percent of each participant’s compensation to the 401(a) plan for each payroll period during which such participant contributes 4 percent under the 457(b) plan. Contributions for the year ended June 30, 2015 were $66,160, which consisted of $33,080 from the City and $33,080 from the law enforcement officers. Trust agreements have been adopted to hold the assets of the 457(b) plan for employee contributions and 401(a) plan for the employer contributions.

b. Supplemental Retirement Income Plan for Law Enforcement Officers Plan Description. The City contributes to the Supplemental Retirement Income Plan, a defined contribution pension plan administered by the Department of State Treasurer and a Board of Trustees. The Plan provides retirement benefits to law enforcement officers employed by the City. Article 5 of G.S. Chapter 135 assigns the authority to establish and amend benefit provisions to the North Carolina General Assembly. The Supplemental Retirement Income Plan for Law Enforcement Officers is included in the Comprehensive Annual Financial Report (CAFR) for the State of North Carolina. The State’s CAFR includes the pension trust fund financial statements for the Internal Revenue Code Section 401(k) plan that includes the Supplemental Retirement Income Plan for Law Enforcement Officers. That report may be obtained by writing to the Office of the State Controller, 1410 Mail Service Center, Raleigh, North Carolina 27699-1410, or by calling (919) 981-5454. Funding Policy. Article 12E of G.S. Chapter 143 requires the City to contribute each month an amount equal to 5 percent of each officer’s salary, and all amounts contributed are vested immediately. Also, the law enforcement officers may make voluntary contributions to the plan. City contributions for the year ended June 30, 2015 were $1,329,183. B. Other Post-employment Benefits (OPEB)

Healthcare and Death Benefits Plan Description. Under a City Council resolution dated September 9, 1991, the City of Winston-Salem provides healthcare and death benefits as a single-employer defined benefit plan to cover retirees of the City who have at least fifteen years creditable service and retire from the City of Winston-Salem. The City pays a $2,000 death benefit and contributes a maximum of $2,400 annually towards the retiree’s healthcare premium. Retirees participate in the City’s healthcare program until age 65, when they are eligible to participate in the City’s medicare supplemental plan. The healthcare premium for active employees and retirees under age 65 is a blended rate reflecting costs for both active and retired employees. Dependents of retirees may participate in the City’s group health plan by paying premiums that vary depending upon their type of coverage. The City Council may amend the benefit provisions. A separate report was not issued for the plan. At January 1, 2014, the plan had 2,848 participants, consisting of 1,824 active and vested terminated employees and 1,024 retirees.

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B-68 Funding Policy. The City Council establishes the contribution requirements of plan members. Employees hired after June 30, 2010 are not eligible for the Retiree healthcare beneﬁt. The current annual required contribution was 7.22% of estimated annual covered payroll. For the current year, the City contributed $7,456,827 or 7.22% of annual covered payroll. The City of Winston-Salem is self-insured. Contributions were made by employees of $1,812,086 through healthcare premiums. The City’s obligation to provide healthcare and death beneﬁts may be amended by City Council. Annual OPEB Cost and Net OPEB Obligation. The annual required contribution for the current year was determined as part of the January 1, 2014 actuarial valuation. The annual required contribution represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a period not to exceed thirty years. The City’s annual OPEB cost, the percentage of annual OPEB cost contributed, and the net OPEB obligation is:

For Year Ended Percentage of Annual June 30 Annual OPEB Cost OPEB Cost Contributed Net OPEB Obligation 2015 $ 6,483,194 100% $ - 2014 7,480,680 100 - 2013 6,749,465 100 - Summary of Significant Accounting Policies. Post-employment trust fund financial statements are prepared using the accrual basis of accounting. Member and employer contributions are recognized in the period in which the contributions are due. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value asset, consistent with the long-term perspective of the calculations. Investments are reported at fair market value. Short-term investments are reported at cost, which approximates fair market value. Securities traded on a national exchange are valued at the last reported sales price. Administration costs are financed through investment earnings. In 2008, the City entered into a trust agreement with U.S. Bank National Association to establish an irrevocable trust for post-employment benefits including the other post-employment benefits. Funded Status and Funding Progress. As of January 1, 2014, the most recent actuarial valuation date, the plan was 49.25% funded. The actuarial accrued liability for benefits was $97,801,873 and the actuarial value of assets was $48,168,884, resulting in an unfunded actuarial liability (UAAL) of $49,632,989. The covered payroll (annual payroll of active employees covered by the plan) was $104,119,336 and the ratio of UAAL to the covered payroll was 47.67%. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumption about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents information about the actuarial value of plan assets and the actuarial accrued liabilities for benefits. Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term prospective of the calculations. In January 1, 2014, actuarial valuation, the projected unit credit method was used. The actuarial assumptions included a 7.5% rate of return (net of administrative expenses), which is the expected long-term investment returns on plan assets calculated based on the funded level of the plan at the valuation date. The medical cost trend rate varied between 7.75% and 4%. Both rates included a 3% inflation assumption. The actuarial value of assets was determined using the market value of investments. The UAAL is being amortized as a level dollar amount on an open basis over thirty years.

B-69 The following are financial statements for the Post-employment Benefits Trust Funds included as Fiduciary Funds in Exhibits 9 and 10 at June 30, 2015. Statement of Fiduciary Net Position June 30, 2015 Post-employment Benefits Trust Funds Assets Cash and cash equivalents $ 56,419,306 Net pension asset 8,660 Total assets 56,427,966 Deferred Outflows of Resources Contributions to pension plan in current fiscal year 5,913 Total deferred outflows of resources 5,913 Liabilities Accounts payable 100,538 Accrued payroll 2,415 Accrued vacation 5,508 Unearned revenue 170,450 Claims payable 902,507 Total liabilities 1,181,418 Deferred Inflows of Resources Pension deferrals 21,841 Total deferred inflows of resources 21,841 Net position restricted for pensions $ 55,230,620

Statement of Changes in Fiduciary Net Position For Year Ended June 30, 2015 Post-employment Beneﬁts Trust Funds Additions Contributions Employer $ 7,456,827 Plan members 1,812,086 Total contributions 9,268,913 Investment income Net appreciation in fair value 975,299 Interest and dividends 1,097,192 Total investment income 2,072,491 Less investment expense 197,920 Net investment income 1,874,571 Total additions 11,143,484 Deductions Beneﬁts 9,024,180 Administrative expense 116,912 Total deductions 9,141,092 Net increase in net position 2,002,392 Net position restricted for pensions Total net position - beginning, as previously stated 53,241,050 Restatement (12,822) Total net position - beginning, as previously restated 53,228,228 Total net position - ending $ 55,230,620

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B-70 C. Deferred Compensation The City offers a deferred compensation plan pursuant to Section 457 of the Internal Revenue Code. All City employees are eligible to participate and may defer until future years up to 25% of their gross income with a maximum of $18,000 per year. The compensation deferred is not available to employees until termination, retirement, death, or an unforeseeable emergency. During 1998, the plan assets were placed in trust for the exclusive benefit of participants and beneficiaries as required by Section 457 of the Internal Revenue Code and therefore are no longer included in the City’s financial statements. D. Joint Ventures and Jointly Governed Organizations Joint Ventures. The City of Winston-Salem, Village of Clemmons, Town of Kernersville, Town of Lewisville, Town of Oak Ridge, Town of Bermuda Run, and Town of Yadkinville jointly appoint the nine member Triad Municipal Alcoholic Beverage Control Board, which operates 14 liquor stores in Forsyth County, Davie County, Guilford County, and Yadkin County. North Carolina General Statute 18B-805 requires the Triad Municipal Alcoholic Beverage Control Board to distribute it’s net income to the seven municipalities who appoint the Board and Forsyth County. During fiscal year 2015, the City received $1,606,659 in distributed net income. The participating governments do not have equity interest in the joint venture. The City does not have financial responsibility for the Triad Board and is not held responsible for its debts. Audited financial statements for the Triad Municipal Alcoholic Beverage Control Board are available through their administrative offices at 3127 Starlight Drive, Winston-Salem, North Carolina 27107-4141. The governing boards of the cities of Winston-Salem, Burlington, Greensboro, and High Point established the Piedmont Authority for Regional Transportation (PART) under the Regional Public Transportation Authority Act, North Carolina General Statutes Chapter 160A, Article 27. The purpose of the authority is to promote the development of sound transportation systems that provide transportation choices for citizens in its territorial jurisdiction. The participating governments do not have an equity interest in the joint venture. The City of Winston-Salem does not have financial responsibility for the authority and is not responsible for its debts. Audited financial statements for PART are available through the PART Administrative Office, 107 Arrow Road, Greensboro, NC 27409. Jointly Governed Organizations. The Piedmont Triad Regional Council (PTRC) was formed on July 1, 2011 by consolidating the Northwest Piedmont Council of Governments, and the Piedmont Triad Council of Governments. The PTRC was designated by the State of NC to serve as the lead regional organization for the Piedmont Triad region. PTRC serves 72 member governments in a 12 county area. Each participating government appoints one member to the council’s governing board. The City paid membership fees of $48,979 to the council during the fiscal year ended June 30, 2015. E. Closure and Postclosure Care Costs State and federal laws and regulations require that the City place a final cover on the Hanes Mill Road Sanitary Landfill and the Old Salisbury Road Construction and Demolition Landfill as each unit is closed and perform certain maintenance and monitoring functions at the site for 30 years after closure. In addition to operating expenses related to current activities of the landfill, an expense provision and related liability are being recognized based on future closure and postclosure care costs that will be incurred during operation and will continue after the date the landfill no longer accepts waste. The City is required by state and federal laws and regulations to demonstrate financial assurance for closure and postclosure care. The City is in compliance with the requirement and has established a capital reserve fund for these purposes. The capital reserve fund of $16,123,637 at June 30, 2015, is reported as restricted assets on the balance sheet of the solid waste disposal fund. Recognition of these reserves for landfill closure and postclosure costs is based on 100% usage of the Hanes Mill Road Sanitary Landfill for the unlined section of the landfill which closed in June 1997. Cell one, two, and three of the lined section was closed in July 2005. Phase one and part of Phase two of the expansion area is currently under construction/filling and recognition of reserves is based on the engineer’s estimate of cost projected through closure of the landfill. The estimated total current cost for Hanes Mill Road Landfill, $40,561,933 and Old Salisbury Road, $9,973,230, of the landfill closure and postclosure care is based on the amount that would be paid if all equipment, facilities, and services required to close, monitor, and maintain the landfill were acquired as of June 30, 2015. However, the actual cost may be higher due to inflation, changes in technology, or changes in landfill laws and regulations. Old Salisbury Road Landfill is currently under construction/filling and recognition of reserves is based on the engineer’s estimate of cost projected through closure of the landfill.

B-71 F. Risk Management The City has employment benefit funds for health benefits and workers’ compensation, and post-employment benefit trust funds for retired employees’ life and health insurance. Reserves are established for reported claims and claims incurred but not reported for each fiscal year. In addition, the City contracts with a not-for-profit corporation, Risk Acceptance Management Corporation (RAMCO), for services related to settlement of general and automotive liability, and certain tort claims and reserve funding for claims. Under the contract, the City made an annual basic payment in 2015 of $1,140,930 to RAMCO for normal claim payments. RAMCO is responsible for the administration of all claims for damages against the City, which are not covered by commercial insurance, subject to a $1 million limit per occurrence. In July 1994, the City transferred the balance of its self-funded excess liability fund to RAMCO for investment and together with any investment earnings thereon, to pay claims in excess of $1 million but less than $3 million. Should there be a claim or claims in excess of $1 million for which payment has to be made, the payment will be made by RAMCO from these funds. Traditional insurance contracts cover property damage, loss of money, and situational risks. The City carries flood insurance through the National Flood Insurance Plan (NFIP). This insurance provides $1,000,000 per incident and annual aggregate coverage for Flood Zones prefixed as “B”; $25,000,000 annual aggregate coverage for all other Flood Zones, except that we do not have coverage for Flood Zones designated as “A” and “V”. In accordance with G.S. 159-29, the City’s employees that have access to $100 or more at any given time of the City’s funds are performance bonded through a commercial surety bond. The finance officer, two assistant finance officers, investment analyst, and City revenue collector are individually bonded for $500,000. The remaining employees that have access to funds are bonded under a blanket bond for $500,000. Claims payable recorded in the general purpose financial statements are composed of the self-insurance claims for health benefits, workers’ compensation, and retired health insurance, and RAMCO claims for damages. Changes in Claims Payable 2015 2014 Claims payable July 1 $ 6,556,011 $ 6,565,609 Claims paid (12,094,704) (10,800,776) New claims and changes in claim estimates 12,776,082 10,791,178 Claims payable June 30 $ 7,237,389 $ 6,556,011 Employment benefits funds $ 6,035,446 $ 6,219,039 Post-employment benefits trust fund 902,507 - Risk Acceptance Management Corporation 299,436 336,972 $ 7,237,389 $ 6,556,011 Due within year $ 4,688,708 $ 4,773,618

Contingent Liabilities and Commitments 1. Claims and Legal Action Various claims and legal actions are pending against the City, and it is not possible at this time to predict their outcome. However, in the opinion of management and the City attorney, ultimate resolutions will not have a material, adverse impact on financial position. The City has federal and state grants for specific purposes that are subject to annual audit and other periodic review by grantor agencies. Such reviews could result in request for reimbursements to the grantor agencies for costs which may be disallowed as appropriate expenditures under grant terms. City management believes disallowances, if any, will be insignificant.

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B-72 5. Subsequent Event The City has evaluated subsequent events through October 26, 2015, in connection with the preparation of these financial statements, which is the date the financial statements were available to be issued. On August 19, 2015, the City of Winston-Salem issued Water and Sewer Refunding Bonds Series 2015 A, B and C, which refunded the Water and Sewer Revenue Bonds, Series 2002 B & C and Series 2007 B. The Water and Sewer Revenue Bonds, Series 2002 B & C and Series 2007 B were variable rate demand bonds that were hedged by interest rate swaps and were supported by a remarketing agent and Standby Bond Purchase Agreement that were nearing expiration. By replacing the variable rate demand bonds with a fixed rate bank loan, consolidating the swaps and modifyiing the basis of the 2007B swap provides stability and structural simplicity.

6. Reclassiﬁcations and Changes in Accounting Principle Restatements

A. Reclassifications During fiscal year 2015, the City has reclassified certain funds presented in the fund financial statements by fund type. The reorganization includes: transferring the enterprise cemeteries fund to the general fund, transferring the sales tax special revenue fund to the general fund and transferring the mass transit tax special revenue fund to the Transit Authority enterprise fund.

B. Changes in Accounting Principles restatements Having become aware that there is diversity of accounting principles generally accepted for the accounting treatment and reporting of long-term loans receivable in governmental funds, the City has adopted new accounting principles, effective July 1, 2014, that it believes are preferable to its previous principles. The City not uses expenditure and revenue contra accounts to eliminate the effect of expenditures and revenues reported for budgetary purposes in conjunction with the issuance of long-term loans receivable in governmental funds and expends loans which are not expected to be collected. Deferred inflows reported under the City’s previous accounting principles have been reclassified to an appropriate component of fund balance or expended, as appropriate. The City’s previous accounting principles included elimination of the deferred inflows related to loans receivable when converting the governmental funds to full accrual for reporting in the statement of net position. Therefore, no adjustments to beginning net position of the governmental activities for the effect of deferred inflows in the governmental funds is required. The City implemented Governmental Accounting Standards Board (GASB) Statement 68, Accounting and Financial Reporting for Pensions (an amendment of GASB Statement No. 27) and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date – an amendment of GASB Statement No. 68. The cumulative effect of adoption of the standard is presented as an adjustment to beginning fiscal year 2015 net position since information is not available to determine the impact on expense and net position in fiscal year 2014.

B-73 The reclassiﬁcations and restatements are detailed in the table below:

Government Wide - Governmental Funds - Net Position Fund Balance Net Position

Proprietary Funds Fiduciary Governmental Business-Type Debt Service Post- Net Position Net Position General Fund Fund Nonmajor Water & Sewer Solid Waste Nonmajor employment June 30, 2014 - Ending balances $ 316,805,618 $ 583,487,031 $ 45,966,223 $ 12,572,581 $ 27,976,205 $ 394,288,456 $ 42,478,224 $ 109,224,004 $ 168,643,926 Reclassiﬁcations: Cemeteries fund closed into General fund - - 593,185 - - - - (593,185) - Sales tax fund closed to General and Debt Service Funds 709,062 - 1,269,799 1,216,095 (3,194,956) - - - - Mass transit tax fund closed to Transit Authority fund - - - - (2,433,455) - - 2,433,455 - Total of all fund balances moved (2,549,332) 1,840,270 ------June 30, 2015 - Beginning balances 314,965,348 585,327,301 47,829,207 13,788,676 22,347,794 394,288,456 42,478,224 111,064,274 168,643,926

Changes in Accounting Principles Restatements Restatement of deferred inﬂows to fund balance - - 935,228 - 28,485,318 - - - - Pension restatement (39,968,662) (2,338,714) - - - (1,772,349) (184,799) (381,566) (12,822) June 30, 2015 - Restated balances $ 274,996,686 $ 582,988,587 $ 48,764,435 $ 13,788,676 $ 50,833,112 $ 392,516,107 $ 42,293,425 $ 110,682,708 $ 168,631,104

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B-74

APPENDIX C

THE NORTH CAROLINA LOCAL GOVERNMENT COMMISSION

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APPENDIX C

THE NORTH CAROLINA LOCAL GOVERNMENT COMMISSION

The Local Government Commission (the “Commission”) is composed of nine members: the State Treasurer, the Secretary of State, the State Auditor, the Secretary of Revenue and five others by appointment (three by the Governor, one by the General Assembly upon recommendation of the President Pro Tempore of the Senate and one by the General Assembly upon recommendation of the Speaker of the House of Representatives). The State Treasurer serves as Chairman and selects the Secretary of the Commission, who heads the administrative staff serving the Commission.

A major function of the Commission is the approval, sale and delivery of substantially all North Carolina local government bonds and notes. A second key function is monitoring certain fiscal and accounting standards prescribed for units of local government by The Local Government Budget and Fiscal Control Act. In addition, the Commission furnishes, upon request, on-site assistance to units of local government concerning existing financial and accounting systems as well as aid in establishing new systems. Further, educational programs and materials are provided for local officials concerning finance and cash management.

Before any unit of local government can incur bonded indebtedness, the proposed bond issue must be approved by the Commission. In determining whether to give such approval the Commission may consider, among other things, the unit's debt management procedures and policies, its compliance with The Local Government Budget and Fiscal Control Act and its ability to service the proposed debt. The Commission maintains records for all units of local government of principal and interest payments coming due on bonded indebtedness in the current and future years and monitors the payment by the units of local government of debt service through a system of monthly reports.

As a part of its role in assisting and monitoring the fiscal programs of units of local government, the Commission attempts to ensure that the units of local government follow generally accepted accounting principles, systems and practices. The Commission's staff also counsels the units of local government in treasury and cash management, budget preparation and investment policies and procedures. Educational programs, in the form of seminars or classes, are also provided by the Commission in order to accomplish these tasks. The monitoring of the financial systems of units of local government is accomplished through the examination and analysis of the annual audited financial statements and other required reports. The Local Government Budget and Fiscal Control Act requires each unit of local government to have its accounts audited annually by a certified public accountant or by an accountant certified by the Commission as qualified to audit local government accounts. A written contract must be submitted to the Secretary of the Commission for his approval prior to the commencement of the audit.

The Commission has the statutory authority to impound the books and records of any unit of local government and assume full control of all its financial affairs (a) when the unit defaults on any debt service payment or, in the opinion of the Commission, will default on a future debt service payment if the financial policies and practices of the unit are not improved or (b) when the unit persists, after notice and warning from the Commission, in willfully or negligently failing or refusing to comply with the provisions of The Local Government Finance Act. When the Commission takes action under this authority, the Commission is vested with all of the powers of the governing board of the unit of local government as to the levy of taxes, expenditure of money, adoption of budgets and all other financial powers conferred upon such governing board by law.

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In addition, if a unit of local government fails to pay any installment of principal or interest on its outstanding debt on or before its due date and remains in default for 90 days, the Commission may take such action as it deems advisable to investigate the unit's fiscal affairs, consult with its governing board and negotiate with its creditors in order to assist the unit in working out a plan for refinancing, adjusting or compromising such debt. When a plan is developed that the Commission finds to be fair and equitable and reasonably within the ability of the unit of local government to meet, the Commission will enter an order finding that the plan is fair, equitable and within the ability of the unit to meet and will advise the unit to take the necessary steps to implement such plan. If the governing board of the unit declines or refuses to do so within 90 days after receiving the Commission's advice, the Commission may enter an order directing the unit to implement such plan and may apply for a court order to enforce such order. When a refinancing plan has been put into effect, the Commission has the authority (a) to require any periodic financial reports on the unit's financial affairs that the Secretary deems necessary and (b) to approve reject the unit's annual budget ordinance. The governing board of the unit of local government must also obtain the approval of the Secretary of the Commission before adopting any annual budget ordinance. The power and authority granted to the Commission as described in this paragraph will continue with respect to a defaulting unit of local government until the Commission is satisfied that the unit has performed or will perform the duties required of it in the refinancing plan and until agreements made with the unit's creditors have been performed in accordance with such plan.

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APPENDIX D

PROPOSED FORM OF BOND COUNSEL OPINION

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APPENDIX D

PROPOSED FORM OF BOND COUNSEL OPINION

April __, 2016

City of Winston-Salem, North Carolina Winston-Salem, North Carolina

The Bank of New York Mellon Trust Company, N.A. Jacksonville, Florida

City of Winston-Salem, North Carolina $______Water and Sewer System Revenue Refunding Bonds, Series 2016A $______Taxable Water and Sewer System Revenue Refunding Bonds, Series 2016B

Ladies and Gentlemen:

We have acted as bond counsel (“Bond Counsel”) in connection with the issuance and delivery by the City of Winston-Salem, North Carolina (the “City”) of $______aggregate principal amount of its Water and Sewer System Revenue Refunding Bonds, Series 2016A (the “2016A Bonds”) and $______aggregate principal amount of its Taxable Water and Sewer System Revenue Refunding Bonds, Series 2016B (the “2016B Bonds” and collectively with the 2016A Bonds, the “2016 Bonds”). The City is a municipal corporation of the State of North Carolina (the “State”) and is empowered to issue the 2016 Bonds pursuant to the State and Local Government Revenue Bond Act, General Statutes of North Carolina Section 159-80 et seq., as amended (the “Act”), subject to the approval of the Local Government Commission of North Carolina.

The 2016 Bonds are issuable only as fully registered bonds and will be numbered, will bear interest payable at the rates and at the times, and will be subject to redemption, all as provided in the General Trust Indenture dated as of October 1, 1988, as amended (the “General Indenture”), between the City and NCNB National Bank of North Carolina, the successor to which is The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) and Series Indenture, Number 16 dated as of April 1, 2016 (the “Sixteenth Series Indenture” and collectively with the General Indenture, the “Indenture”) between the City and the Trustee.

The 2016 Bonds are being issued to (a) refund in advance of their maturities certain of the City’s Water and Sewer System Revenue and Revenue Refunding Bonds, Series 2007A, Water and Sewer System Revenue Bonds, Series 2009 and Water and Sewer System Revenue Bonds, Series 2010A and (b) pay the costs of certain expenses incurred in connection with the execution and delivery of the 2016 Bonds. We have examined the following: (a) the Act; (b) executed copies of the General Indenture and the Sixteenth Series Indenture; and (c) such other laws, documents, instruments, proceedings and opinions as we have deemed relevant in rendering this opinion. We have also examined a specimen of each Series of the 2016 Bonds.

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City of Winston-Salem, North Carolina The Bank of New York Mellon Trust Company, N.A. April __, 2016 Page 2

From such examination, we are of the opinion, under existing law, that:

The City is a municipal corporation of the State. Pursuant to the Act, the City is empowered to issue the 2016 Bonds for the purposes set forth in the Indenture and to execute, deliver and perform its obligations under the Indenture.

The General Indenture and the Sixteenth Series Indenture have been duly authorized, executed and delivered by the City, and, assuming due authorization and execution by the Trustee, are valid, binding and enforceable obligations, respectively, of the City. All right, title and interest of the City in and to the Trust Estate (as defined in the General Indenture) have been validly pledged and assigned to the Trustee and the General Indenture creates a valid security interest in the Trust Estate.

The 2016 Bonds have been duly authorized, executed and issued in accordance with the General Indenture and applicable law, including the Act, and represent valid, binding and enforceable special obligations of the City. The 2016 Bonds are entitled to the benefits and security of the Indenture for the payment thereof in accordance with the terms of the Indenture.

The principal of and interest on the 2016 Bonds are special obligations payable by the City solely from the sources described in the Indenture. The principal of, premium, if any, and interest on the 2016 Bonds are not payable from the general funds of the City, nor do they constitute a legal or equitable pledge, charge, lien or encumbrance upon any of its property or upon any of its income, receipts or revenues, except the funds which are pledged under the Indenture. Neither the credit nor the taxing power of the State or the City are pledged for the payment of the principal of, premium, if any, or interest on the 2016 Bonds, and no owner of the 2016 Bonds has the right to compel the exercise of the taxing power by the State or the City or the forfeiture of any of its property in connection with any default thereon.

Interest on the 2016A Bonds is excludable from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, such interest is taken into account in determining adjusted current earnings for the purpose of computing the federal alternative minimum tax imposed on certain corporations. The opinion set forth in the preceding sentence is subject to the condition that the City comply with all requirements of the Internal Revenue Code of 1986, as amended, that must be satisfied subsequent to the issuance of the 2016A Bonds in order that the interest on the 2016A Bonds be, or continue to be, excludable from gross income for federal income tax purposes. The City has covenanted to comply with all such requirements. Failure to comply with certain of such requirements may cause the interest on the 2016A Bonds to be included in gross income for federal income tax purposes retroactively to the date of the issuance of the 2016A Bonds. We express no opinion regarding other federal tax consequences arising with respect to the 2016A Bonds.

Interest on the 2016B Bonds will be treated as ordinary income for federal income tax purposes under the Internal Revenue Code of 1986, as amended.

Interest on the 2016 Bonds is exempt from all State of North Carolina income taxation.

It is to be understood that the rights of the owners of the 2016 Bonds and the enforceability of the 2016 Bonds and the Indenture may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights generally or by equitable principles, whether considered at law or in equity.

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City of Winston-Salem, North Carolina The Bank of New York Mellon Trust Company, N.A. April __, 2016 Page 3

Our services as Bond Counsel in connection with the issuance of the 2016 Bonds have been limited to rendering the opinions expressed above based on our review of such proceedings and documents as we deem necessary to approve the validity of the 2016 Bonds and the tax-exempt status of interest thereon. In rendering the foregoing opinions, we have assumed the accuracy and truthfulness of all public records and of all certifications, documents and other proceedings examined by us that have been executed or certified by public officials acting within the scope of their official capacities and have not verified the accuracy or truthfulness thereof. We have also assumed the genuineness of the signatures appearing on such public records and certifications, documents and other proceedings.

We have not been engaged or undertaken to review the accuracy, completeness or sufficiency of the Preliminary Official Statement or the Official Statement (collectively, the “Official Statement”), or any other offering material relating to the 2016 Bonds (except to the extent, if any, stated in the Official Statement) and we express no opinion herein relating thereto (excepting only the matters set forth as our opinion in the Official Statement and the section entitled “TAX TREATMENT”) or as to the financial resources of the City, or the ability of the City to make the payments required under the Indenture, that may have been relied on by anyone in making the decision to purchase 2016 Bonds.

Respectfully submitted,

PARKER POE ADAMS & BERNSTEIN LLP

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APPENDIX E

SUMMARY OF THE INDENTURE

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APPENDIX E

SUMMARY OF THE INDENTURE

In addition to the terms otherwise defined in this Official Statement, the following are certain definitions in the General Indenture and the Series Indenture related to the 2016 Bonds. This summary does not purport to be complete and is qualified in its entirety by express reference to the General Indenture and the Series Indenture.

“Account” or “Fund” means one of the special funds or accounts created and established pursuant to the General Indenture or the Series Indenture.

“Accountant” means a nationally recognized firm of independent certified public accountants as may be selected by the City.

“Accreted Value” means (1) on a Compounding Date with respect to any Capital Appreciation Bond, an amount equal to the principal amount of such Capital Appreciation Bond at the date of delivery to the original purchasers thereof plus the interest accrued on such Capital Appreciation Bond from such date to that Compounding Date as shown in the Series Indenture under which it is issued, or (2) as of any date of computation with respect to any Capital Appreciation Bond, an amount equal to the principal amount of such Capital Appreciation Bond at the date of delivery to the original purchasers thereof plus the interest accrued on such Capital Appreciation Bond from such date to the date of computation, calculated based on the assumption that Accreted Value as shown in the Series Indenture under which it is issued accrues during any period in equal daily amounts on the basis of a year of 360 days consisting of twelve months of thirty days each.

“Act” means The State and Local Government Revenue Bond Act, General Statutes of North Carolina Section 159-80 et seq., and as the same may hereafter be amended.

“Additional Bonds” means any additional Bonds (including, without limitation, bonds, notes or other obligations) issued by the City under the General Indenture.

“Authenticating Agent” means the entity designated as such pursuant to the General Indenture and any successor thereto, initially The Bank of New York Mellon Trust Company, N.A.

“Authorized Denomination” means $5,000 and any integral multiple thereof.

“Authorized Officer” means the Mayor, City Manager and Director of Finance and, in the case of any act to be performed or duty to be discharged, any other member, officer or employee of the City then authorized to perform such act or discharge such duty.

“Beneficial Owner” means the Person in whose name a Bond is recorded as beneficial owner of such Bond by the Securities Depository or a Participant or an Indirect Participant on the records of such Securities Depository, Participant or Indirect Participant, as the case may be, or such Person’s subrogee.

“Bond” means one of the obligations delivered pursuant to the General Indenture, including all Series of Bonds issued pursuant to a Series Indenture.

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“Bond Counsel” means an attorney or firm of attorneys of nationally recognized standing in the field of law relating to municipal, state and public agency financing, selected by the City and satisfactory to the Trustee.

“Book Entry Form” or “Book Entry System” means a form or system, as applicable, under which physical Bond certificates in fully registered form are registered only in the name of the Securities Depository or its nominee, with the physical Bond certificates “immobilized” in the custody of the Securities Depository.

“Business Day” means any day other than (1) a Saturday, a Sunday or any other day on which banks located in the cities in which the Trustee, the Paying Agent, the Registrar or the Authenticating Agent have their respective principal offices are authorized or required to remain closed or (2) a day on which the New York Stock Exchange is closed.

“Capital Appreciation Bonds” means any Bonds, however denominated in the related Series Indenture, as to which interest is compounded periodically on each Compounding Date and which are payable in an amount equal to the then-current Accreted Value only at maturity, earlier redemption or other payment date therefor.

“Certificate” means (i) a signed document either attesting to or acknowledging the circumstances, representations or other matters therein stated or set forth or setting forth matters to be determined pursuant to the General Indenture or (ii) the report of an accountant as to audit or other procedures called for by the General Indenture.

“City” means the City of Winston-Salem, North Carolina.

“Code” means the Internal Revenue Code of 1986, as amended. Each reference to a section of the Code in the General Indenture will be deemed to include the United States Treasury Regulations proposed or in effect with respect thereto and applicable to the Bonds or the use of proceeds thereof. “Compounding Date” means, with respect to any Capital Appreciation Bond, the dates set forth in the Series Indenture under which it is issued.

“Construction Fund” means the Fund so designated and established under the General Indenture.

“Consultant” means a firm of engineers, accountants or water and sewer consultants with recognized expertise for advising municipalities with respect to the setting of rates and charges for the use of water and sewer systems selected by the City.

“Costs of Construction” means the costs reasonably incurred in connection with the System or any portion thereof, including but not limited to the costs of (1) acquisition of all property, real or personal and all interests in connection therewith including all rights-of-way and easements therefor, (2) physical construction, installation and testing, including the costs of labor, services, materials, supplies and utility services used in connection therewith, (3) architectural, engineering, legal, and other professional services, (4) premiums for insurance policies taken out and maintained during construction, to the extent not paid for by a contractor for construction and installation, (5) any taxes, assessments or other charges which become due during construction, (6) expenses incurred by the City or on its behalf with its approval in seeking to enforce any remedy against any contractor or sub-contractor in respect of any default under a contract relating to construction, (7) principal of and interest on any indebtedness of the City, other than the Bonds, incurred for Costs of Construction, (8) any capitalized interest, (9) miscellaneous expenses incidental thereto.

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“Costs of Issuance” means all items of expense, directly or indirectly payable by or reimbursable to the City, related to the authorization, sale and issuance of Bonds.

“Debt Service” means, with respect to any particular Fiscal Year, an amount equal to the sum of (i) all interest payable on the Bonds during such Fiscal Year, excluding any capitalized interest payable from the proceeds of a Series of the Bonds, plus (ii) any Principal Installments of the Bonds during such Fiscal Year.

(a) For purposes of computing “Debt Service,” the rate of interest used to determine (i) above will be a rate per annum equal to (1) with respect to Bonds which bear interest at a fixed rate, the rate of interest borne or to be borne by such Bonds, and (2) with respect to Bonds which bear interest at a variable or periodically determined rate of interest, the rate is equal to the greater of (A) the average of all the interest rates in effect on the Bonds (or which would have been in effect on the Bonds had such Bonds been Outstanding) during the immediately preceding twelve-month period or (B) the average of all interest rates in effect on the Bonds (or which would have been in effect on the Bonds had such Bonds been Outstanding) during the immediately preceding one month period.

If the City has entered into a Derivative Agreement under which it will receive payments calculated on a notional amount equal to all or a portion of the aggregate principal amount of a Series of the Bonds and will make payments calculated on the same notional amount, the interest used to calculate (1) above will be the amount to be paid by the City, and the amount to be received will be deducted; payments on a variable or periodic basis under such an agreement will be calculated in accordance with clause (2) above.

(b) For purposes of computing “Debt Service,” the Principal Installments used to compute (ii) above will be: (1) with respect to Bonds or other obligations with a term in excess of one year, the amount equal to (A-B) ÷ C, where A is the outstanding principal amount of such Bonds or other obligations, B is the amount of unencumbered cash or other assets of the System on hand and available for the payment of such Bonds or other obligations, and C is the number of full years in the remaining term of such Bonds or other obligations; and (2) with respect to notes or other obligations with a term of less than one year which are issued in anticipation of the issuance of Bonds or other obligations described in (1) above (the “Take Out Obligations”), the amount equal to (X - Y) ÷ Z, where X is the outstanding principal amount of such notes or other obligations, Y is the amount of unencumbered cash or other assets of the System on hand and available for the payment of such notes or other obligations, and Z is the number of full years expected to be in the term of the Take Out Obligation as certified to the Trustee by the Director of Finance.

“Debt Service Fund” means the Fund so designated and established by the General Indenture.

“Debt Service for General Obligation Indebtedness” means, with respect to any particular Fiscal Year, an amount equal to the sum of (1) all interest payable on the General Obligation Indebtedness during such Fiscal Year excluding any capitalized interest payable from the proceeds of such General Obligation Indebtedness, plus (2) any principal of the General Obligation Indebtedness during such Fiscal Year. Principal and interest for purposes of this definition will be computed in the manner in which the principal of and interest on the Bonds is calculated under the definition of “Debt Service.”

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“Debt Service for Other Indebtedness” means, with respect to any particular Fiscal Year, an amount equal to the sum of all payment obligations with respect to Other Indebtedness during such Fiscal Year excluding any capitalized interest payable from the proceeds of such Other Indebtedness. If the payment obligation under any Other Indebtedness is stated in terms of principal and interest, such principal and interest will be computed for purposes of this definition in the manner in which the principal of and interest on the Bonds is calculated under the definition of “Debt Service.”

“Debt Service for Subordinate Indebtedness” means, with respect to any particular Fiscal Year, an amount equal to the sum of (1) all interest payable on Subordinate Indebtedness during such Fiscal Year excluding any capitalized interest from the proceeds of such Subordinate Indebtedness, plus (2) any principal of Subordinate Indebtedness during such Fiscal Year. Principal and interest for purposes of this definition will be computed in the manner in which the principal of and interest on the Bonds is calculated under the definition of “Debt Service.”

“Derivative Agreement” means an interest rate swap, cap, collar, floor, forward, option, put, call or other similar agreement however denominated, relating to the Bonds.

“Director of Finance” means the Chief Financial Officer of the City or her designee.

“Electronic Means” shall mean the following communications methods: e-mail, facsimile transmission, secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys, or another method or system specified by the Trustee as available for use in connection with its services hereunder.

“Event of Default” means any of the events specified in the General Indenture and a Series Indenture.

“Extension and Replacement Fund” means the Fund so designated and established by the General Indenture.

“Favorable Opinion of Bond Counsel” means an opinion of Bond Counsel, addressed to the City and the Trustee, to the effect that the action proposed to be taken is authorized or permitted by the laws of the State and this Indenture and will not adversely affect any exclusion from gross income for federal income tax purposes, or any exemption from State income taxes, of interest on the applicable series of the Bonds.

“Federal Securities” means (a) direct obligations of the United States of America for the payment of which the full faith and credit of the United States of America is pledged; (b) obligations issued by any agency controlled or supervised by an acting as an instrumentality of the United States of America, the payment of the principal of and interest on which is fully guaranteed as full faith and credit obligations of the United States of America (including any securities described in (a) or (b) issued or held in the name of the Trustee in book entry form on the books of the Department of Treasury of the United States of America), which obligations, in either case, are held in the name of the Trustee and are not subject to redemption or purchase prior to maturity at the option of anyone other than the Owner; (c) any bonds or other obligations of any state or territory of the United States of America or of any agency, instrumentality or local governmental unit of any such state or territory which are (i) not callable prior to maturity or (ii) as to which irrevocable instructions have been given to the trustee or escrow agent of such bonds or other obligations by the obligor to give due notice or redemption and to call such bonds for redemption on the date or dates specified, and which are rated by Moody’s and S&P within its highest rating category and which are secured as to principal, redemption premium, if any, and interest by a fund consisting only of cash or bonds or other obligations of the character described in clause (a) hereof which

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fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate; or (d) direct evidences of ownership of proportionate interests in future interest and principal payments on specified obligations described in (a) held by a bank or trust company as custodian, under which the owner of the investment is the real party in interest and has the right to proceed directly and individually against the obligor on the underlying obligations described in clause (a), and which underlying obligations are not available to satisfy any claim of the custodian or any person claiming through the custodian or to whom the custodian may be obligated.

“Fiscal Year” means a twelve-month period commencing on the first day of July of any year, or such other twelve-month period adopted as the Fiscal Year of the City.

“Fitch” means Fitch, Inc., its successors and assigns, and, if such corporation for any reason no longer performs the functions of a securities rating agency, “Fitch” will be deemed to refer to any other nationally recognized rating agency designated by the Director of Finance by notice to the Trustee.

“General Indenture” means the General Trust Indenture dated as of October 1, 1988 between the City and the Trustee, and any amendments and supplements thereto.

“General Obligation Indebtedness” means (1) general obligation indebtedness incurred by the City which is payable from Net Revenues and the proceeds of which were or are to be used to provide for capital costs of the System and (2) general obligation indebtedness of another governmental unit, the payment on which is assumed by the City in connection with acquisition of assets for the System.

“Interest” means (1) the amount designated as interest on any Bonds and (2) payments due from the City under a Derivative Agreement other than for the termination thereof.

“Interest Payment Date” means each June 1 and December 1, beginning December 1, 2016.

“Interest Subsidy Account” means the account by that name created in the Series Indenture.

“Investment Securities” means (i) Federal Securities; (ii) obligations of the Federal Land Bank; (iii) obligations of the Federal Home Loan Bank; (iv) obligations of the Federal Intermediate Credit Bank; (v) obligations of the Central Bank for Cooperatives; (vi) certificates of deposit of national or state banks located within the State which have deposits insured by the Federal Deposit Insurance Corporation and certificates of deposit of Federal savings and loan associations and state building and loan associations located within the State which have deposits insured by the Federal Savings and Loan Insurance Corporation (including the certificates of deposit of any bank, savings and loan association and state building and loan association acting as a depository, custodian or trustee for any proceeds of the Bonds); provided, however, that the portions of such certificates of deposit in excess of the amount insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, if any, shall be secured by deposit with the Federal Reserve Bank of Charlotte, North Carolina, or with any national or state bank located within the State, of any of the obligations included in (i), (ii), (iii), (iv) or (v) above; (vii) any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of such state which are rated “A” or better by Moody’s, if the Bonds are rated by Moody’s, and S&P, if the Bonds are rated by S&P; (viii) shares of a tax exempt Money Market Fund which is restricted by its terms to investment in obligations which carry the highest short-term rating of Moody’s, if the Bonds are rated by Moody’s, and S&P, if the Bonds are rated by S&P; and (ix) any other investments permitted by the law of the state for the investment of

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public funds which meet the requirements for the highest rating category of Moody’s, if the Bonds are rated by Moody’s, and S&P, if the Bonds are rated by S&P.

“Local Government Commission” or “LGC” means the Local Government Commission of North Carolina, a division of the Department of State Treasurer, and any successor or successors thereto, or its designated representative.

“Mail” means first-class United States mail, postage prepaid.

“Moody’s” means Moody’s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation for any reason no longer performs the functions of a securities rating agency, “Moody’s” will be deemed to refer to any other nationally recognized rating agency designated by the Director of Finance by notice to the Trustee.

“Net Revenues” means the Revenues less the Operating Expenses.

“Operating Budget” means the annual budget described in the General Indenture adopted by the City concerning the operation of the System for the succeeding Fiscal Year.

“Operating and Maintenance Fund” means the Fund so designated and established by the General Indenture.

“Operating Expenses” means the current expenses, paid or accrued, of operation, maintenance and current repair of the System, as calculated in accordance with sound accounting practice, and includes, without limiting the generality of the foregoing: insurance premiums; any Rebate Deposit; administrative expenses of the City relating solely to the System; labor; executive compensation; the cost of materials and supplies used for current operations; and charges for the accumulation of appropriate reserves for current expenses not annually recurrent, but which are such as may reasonably be expected to be incurred in accordance with sound accounting practices. “Operating Expenses” will not include any allowance for depreciation or replacements of capital assets of the System or contractual obligations relating to the System with a term greater than one year.

“Other Indebtedness” means capital leases, installment financing agreements or other contracts used to provide capital improvements to the System, the payments under which are payable from Net Revenues after payment of the principal of and interest on the Bonds.

“Outstanding” or “Bonds Outstanding” means all Bonds which have been authenticated and delivered by the Trustee under the General Indenture, except:

(a) Bonds canceled after purchase by the City in the open market or because of payment (it being understood that a payment to an Owner of the purchase price of a Bond, as prescribed in the Series Indenture, is not payment of a Bond) at or redemption prior to maturity or on acceleration;

(b) Bonds deemed paid under the General Indenture;

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(d) Bonds in lieu of which other Bonds have been authenticated under the General Indenture; and

(e) Undelivered Bonds, if funds in the amount of the purchase price of such Undelivered Bonds are available for payment to the Owner thereof on the date and at the time specified in the Series Indenture.

“Owner” means a registered owner of a Bond.

“Parity Account” means the account in the Reserve Fund securing all Series of the Bonds designated as secured thereby.

“Paying Agent” means The Bank of New York Mellon Trust Company, N.A., and any successor paying agent or agents appointed in accordance with the General Indenture. If two or more paying agents have been appointed and are acting in such capacity, each shall be considered to be a co-paying agent.

“Person” means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof.

“Principal Installment” means, as of any date of calculation, (1) the aggregate principal amount of Outstanding Bonds (including as to Capital Appreciation Bonds, the Accreted Value thereof, except with respect to the order of priority of payment of Bonds after an event of default under the General Indenture, in which case, “Principal Installment” means the principal amount of such Capital Appreciation Bonds on their date of delivery and the balance of the Accreted Value is “Interest”) due on a certain future date, reduced by the aggregate principal amount of such Bonds which would be retired by reason of the payment when due and application in accordance with the General Indenture of Sinking Fund Payments payable before such future date, plus (2) any Sinking Fund Payments due on such certain future date, together with the aggregate amount of the premiums, if any, applicable on such Sinking Fund Payments.

“Principal Office” means the office identified in the Series Indenture, except for any Person who has identified a different office as its principal office in writing to the Trustee.

“Principal Payment Date” means any date upon which a Principal Installment is due and payable.

“Qualified Reserve Fund Substitute” means (i) an irrevocable letter of credit, naming the Trustee as beneficiary, issued by any domestic or foreign bank, or any branch or agency thereof, whose long-term debt obligations are rated in one of the two highest rating categories by Moody’s and S&P or (ii) a policy of reserve fund insurance issued by an insurance company whose claims-paying ability is rated in one of the two highest rating categories by Moody’s and S&P.

“Rate Covenant” means the covenant as to rates, fees and charges of the System in the General Indenture.

“Rating Agency” means each of Fitch when the Bonds are rated by Fitch, Moody’s when the Bonds are rated by Moody’s, and S&P when the Bonds are rated by S&P.

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“Rebate Deposit” means the amount required to be deposited into the Rebate Fund as a result of the computation made pursuant to the General Indenture.

“Rebate Fund” means the Fund so designated and established pursuant to the General Indenture.

“Rebate Interest Account” means the trust account by that name established in the Rebate Fund.

“Rebate Principal Account” means the trust account by that name established in the Rebate Fund.

“Record Date” means the 15th day of the month next preceding the Interest Payment Date.

“Recovery Act” means the American Recovery and Reinvestment Act of 2009.

“Redemption Date” means the date on which 2016A Bonds have been called for redemption or are to be called for redemption or are to be redeemed pursuant to the Series Indenture.

“Redemption Price” means, with respect to any 2016A Bond, the principal amount thereof plus the applicable premium, if any, payable on redemption thereof plus accrued interest to the Redemption Date.

“Registrar” means The Bank of New York Mellon Trust Company, N.A., and any successor registrar appointed in accordance with the General Indenture.

“Reserve Fund” means the Fund so designated and established pursuant to the General Indenture.

“Reserve Requirement” means (a) with respect to all Bonds Outstanding as of May 1, 2001, as of any date of calculation an amount equal to the lesser of (1) the maximum Debt Service on all Bonds Outstanding as of May 1, 2001 becoming due in any Fiscal Year, (2) 125% of the average annual Debt Service on all Bonds Outstanding as of May 1, 2001 or (3) 10% of the gross proceeds of the Bonds Outstanding as of May 1, 2001 and (b) with respect to all Additional Bonds issued after May 1, 2001, as of any date of calculation, the collective amount required to be on deposit in the Reserve Fund as determined by the Series Indentures under which all Additional Bonds issued after May 1, 2001 secured by an account in the Reserve Fund are issued.

“Revenue Fund” means the Fund so designated and established under the General Indenture.

“Revenues” means all rates, fees, rentals or other charges or other income received by the City in connection with the ownership, management and operation of the System, and all parts thereof, including any amounts contributed by the City, all as calculated in accordance with generally accepted accounting principles except as otherwise provided in the General Indenture, but excluding (1) amounts received from the investment of moneys in any Fund or Account, (2) assessments restricted by their terms to capital improvements, (3) net proceeds of insurance or condemnation awards or other extraordinary items, (4) any amounts collected by the City representing sales or use taxes which may be required by law or agreement to be paid to the State or a governmental unit thereof or (5) refundable deposits made by customers of the System.

“S&P” means Standard & Poor’s, a Division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and their assigns, and, if such corporation for any reason no longer performs the functions of a securities rating

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agency, “S&P” will be deemed to refer to any other nationally recognized securities rating agency designated by the Director of Finance by notice to the Trustee.

“Securities Depository” means DTC or, if applicable, any successor securities depository appointed pursuant to the Series Indenture.

“Series of Bonds” or “Series” means any series of Bonds issued under the General Indenture pursuant to a series indenture.

“Series Indenture” means, with respect to the 2016 Bonds, Series Indenture, Number 16 dated as of April 1, 2016, between the City and the Trustee, and any amendments or supplements adopted in accordance with the terms thereof, and when used with respect to any other Series of Bonds, any indenture or other document supplementing the General Indenture, executed by the City and effective in accordance with the General Indenture, providing for the issuance of a Series of Bonds.

“Sinking Fund Payment” means, as of any particular date of calculation, the amount required to be paid by the City on a certain future date for the retirement of Outstanding Bonds which mature after said future date, but does not include any amount payable by the City by reason of the maturity of a Bond or by call for redemption at the election of the City.

“Sinking Fund Requirement” means the principal amount of the 204 Bonds to be retired by mandatory redemption under the Series Indenture. If during any 12-month period ended June 30 the total principal amount of the 2016 Bonds retired by purchase or redemption under the provisions of this Indenture is greater than the applicable amount of the Sinking Fund Requirement for the 2016 Bonds, the next succeeding Sinking Fund Requirements for the 2016 Bonds will be reduced in such applicable amount aggregating the amount of such excess.

“State” means the State of North Carolina.

“Subordinate Indebtedness” means debt, other than General Obligation Indebtedness, the payment of the principal and interest on which is secured by Net Revenues after payment of the principal of and interest on the Bonds.

“Supplemental Indenture” means any indenture supplemental to the General Indenture delivered pursuant to the General Indenture amending or supplementing the General Indenture.

“System” means the complete water and sewer system of the City, now operated by the Utility Commission or hereafter constructed and acquired either from the proceeds of the Bonds authorized by the General Indenture or from any other sources and includes (a) all wells, pumping stations, purification plants and other sources of supply of water and all pipes, mains and other parts of the facilities for the distribution of water and all equipment and property used in connection therewith, (b) all sanitary sewers, all waste water disposal and purification plants, and all equipment used in connection therewith, all facilities for the collection, treatment and disposal of sewage and waste matter, including industrial wastes, and (c) all other facilities of any nature or description, real or personal, now or hereafter owned or used by the Utility Commission in the supply, distribution, treatment and sale of water or sewage by its municipally owned water and sewer system.

“Trustee” means The Bank of New York Mellon Trust Company, N.A., as successor in interest to NCNB National Bank of North Carolina, and any successor trustee appointed in accordance with the General Indenture.

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“Trust Estate” means all property and rights conveyed by the City under the Granting Clauses of the General Indenture.

“Underwriters” means Robert W. Baird & Co., J.P. Morgan Securities LLC, Raymond James & Associates, Inc. and Rice Financial Products Company, as underwriters of the 2016 Bonds.

“Utility Commission” means the Winston-Salem/Forsyth County Utility Commission, or any successor thereto.

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INDENTURE SUMMARY

COVENANTS

Operating Budget. The City has covenanted that it will adopt and file with the Trustee an Operating Budget covering the fiscal operations of the Utility Commission for the Fiscal Year not later than the first day of such Fiscal Year. Such budget need not necessarily be the budget prepared by the City for City budgeting purposes. The Operating Budget will set forth for such Fiscal Year the estimated Revenues, the Principal Installments of and interest on the Bonds due and payable or estimated to become due and payable during such Fiscal Year, and estimated Operating Expenses in quarterly allotments. The City may at any time adopt and file with the Trustee an amended Operating Budget in the manner provided in the General Indenture for the adoption of the Operating Budget. Copies of the Operating Budget as then amended and in effect will be made available by the Trustee at normal business hours in the Trustee’s principal corporate trust office for inspection by any Owner of Bonds. If the City does not adopt an Operating Budget for a Fiscal Year on or before the first day of such Fiscal Year, the Operating Budget for the preceding Fiscal Year will be deemed to have been adopted and will be in effect for such Fiscal Year until the Operating Budget for such Fiscal Year is adopted as described above. The City may not expend funds for Operating Expenses in any Fiscal Year in excess of the reasonable or necessary amount thereof.

Maintenance of System. The City has covenanted to complete or cause the completion of the additions, extensions, and improvements of the System provided for in the General Indenture in an economical and efficient manner with all practicable dispatch and thereafter to maintain or cause to be maintained the System in good condition and to continuously operate or cause to be operated the same in an efficient manner and at a reasonable cost as a municipal revenue producing enterprise.

Insurance; Condemnation. The City has covenanted to provide for self-insurance or carry or cause to be carried such other insurance with a reputable insurance carrier or carriers as is maintained or carried by utilities similar to the System, and such insurance must at all times be in an amount sufficient to indemnify for loss of the System and of the Revenues and other payments derived therefrom, to the extent that such insurance is obtainable.

The City will deliver the proceeds of any insurance or condemnation with respect to the System in excess of $100,000 in any given Fiscal Year to the Trustee with a certificate directing that such funds be used either: (1) to rebuild or replace the System or portion thereof giving rise to the referenced proceeds or (2) to redeem or pay Bonds pursuant to a Series Indenture.

Adding to or Removing from the System. The System may be sold, mortgaged, leased or otherwise disposed of, in whole or in part, to another political subdivision, public agency, public authority or other public instrumentality in the State authorized by law to own and operate such systems only (1) if there is filed with the Trustee (a) a report prepared by a Consultant satisfactory to the Trustee showing that there is no material adverse effect on the ability of the System to produce Revenues to satisfy the Rate Covenant as described under the caption “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS--The Rate Covenant” in this Official Statement, (b) written evidence from any rating agency then rating the Bonds that such sale will not adversely affect its rating then in effect on the Bonds (without regard to gradation within category), (c) an opinion of counsel to the City that such disposition has been properly authorized and (d) an opinion of Bond Counsel that such disposition will not adversely affect the federal or state income tax treatment of Interest on the Bonds, and (2) for a disposition in whole, if such political subdivision, public agency, public authority or other public instrumentality assumes all of the obligations of the City related to such enterprise under the Indenture.

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Any part of the System constructed on behalf of or with funds provided by another governmental unit may be sold, leased or otherwise disposed of to that governmental unit, if the Trustee receives a certificate from the Consultant that states that the projected Revenues of the System as it will exist after the proposed disposition for each of the two Fiscal Years subsequent to the year in which the disposition is expected to be completed, plus 12% of the Liquid Assets as shown in the most recent audited financial statements, are equal to the sum of the Operating Expenses projected for such period plus 120% of (1.20 times) the Debt Service on the Bonds for such Fiscal Year plus 100% of (1.00 times) the maximum Debt Service for Subordinate Indebtedness plus 100% (1.00 times) the maximum Debt Service for General Obligation Indebtedness plus 100% of (1.00 times) the maximum Debt Service for Other Indebtedness due in any Fiscal Year.

Any part of the System may be sold, mortgaged, leased or otherwise disposed of, in whole or in part, to a nongovernmental entity only if (1) the net proceeds to be realized will be sufficient, together with other moneys available therefor, to discharge the lien of the Indenture as described under “- DEFEASANCE” below as to all Series of Bonds or the portion thereof related thereto and such net proceeds are deposited in a separate segregated account for such purpose and (2) the Trustee has received (a) an opinion of counsel to the City that such disposition has been properly authorized and is permitted by the law of the State, (b) an opinion of Bond Counsel to the effect that such disposition will not adversely affect the federal and state income tax treatment of the Interest on the Bonds, (c) written evidence from any rating agency then rating the Bonds that such sale will not adversely affect its rating then in effect on the Bonds (without regard to gradation within category) and (d) a certificate from the Chief Financial Officer that the disposition will not materially adversely affect the ability of the City to meet its financial obligations under the Indenture, including the ability of the City to meet its Rate Covenant.

The City has reserved the right to sell, lease or otherwise dispose of any of the property comprising a part of the System determined in the manner provided in the Indenture as described below to be no longer necessary, useful or profitable in the operation thereof. Before any such sale, lease or other disposition of such property, a City Representative will make a finding in writing determining that such property comprising a part of the System is no longer necessary, useful or profitable in the operation thereof and the Chief Financial Officer will make a finding in writing that the disposition of such property will not materially adversely affect the ability of the City to meet its financial obligations under the Indenture, including the ability of the City to meet its Rate Covenant. If the amount to be received therefor is in excess of .50% of Net Property and Equipment of the System as shown in the most recent audited financial statements, such findings will be approved by resolution of the City and the Trustee has received written evidence from any rating agency then rating the Bonds that such sale will not adversely affect its rating then in effect on the Bonds (without regard to gradation within category). All proceeds derived from the sale, lease or other disposition of any property comprising a part of the System as provided above, will be deposited in the Revenue Fund.

Liens or Charges. The City may create or permit to be created a lien on the System in order to secure the issuance of Other Indebtedness as long as the Chief Financial Officer certifies at the time of the creation of the lien that (1) loss of the property subject to the lien will not materially adversely affect the ability of the City to meet its financial obligations under the Indenture, including the ability of the City to meet its Rate Covenant described above under the caption “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS--The Rate Covenant” in this Official Statement and (2) the current value of all parts of the System subject to liens securing Other Indebtedness, including property that may be added to the System as a result of issuance of the proposed Other Indebtedness, does not exceed 20% of the current value of the Net Property and Equipment of the System as shown in the most recent audited financial statements. The City covenants to not otherwise create or permit to be created

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any lien or charge on the System. The City covenants to pay or cause to be discharged or make provisions to satisfy and discharge, within 60 days after the same accrues, all claims and demands for labor, materials, supplies or other items that, if unpaid, might by law become a lien on the System or the Revenues on a parity with the lien of the Bonds, except for the liens permitted by the Indenture as described in this paragraph. The City need not pay or cause to be discharged or make provision for any lien or charge as long as the validity thereof is being contested in good faith by appropriate legal proceedings.

Issuance of Subordinate Indebtedness. The City may issue Subordinate Indebtedness if:

EITHER

(1) the Net Revenues, adjusted in the manner described in paragraph (e) under the caption “SECURITY AND SOURCES OF PAYMENT FOR THE 2016 BONDS--Additional Bonds” in this Official Statement, plus 12% of the Liquid Assets, each as shown in the most recent audited financial statements, were at least equal to (a) 120% of (1.20 times) the maximum Debt Service on the Bonds, (b) 100% of (1.00 times) the Debt Service for Subordinate Indebtedness in that Fiscal Year, including the Subordinate Indebtedness to be issued,(c) 100% of (1.00 times) the Debt Service for General Obligation Indebtedness in that Fiscal Year and (d) 100% of (1.00 times) the Debt Service for Other Indebtedness in that Fiscal Year;

(2) (a) the Net Revenues, plus 12% of the Liquid Assets, each as shown in the most recent audited financial statements, were at least equal to (i) 120% of (1.20 times) the Debt Service on the Bonds for such Fiscal Year, (ii) 100% of (1.00 times) the Debt Service for Subordinate Indebtedness in such Fiscal Year, excluding the Subordinate Indebtedness to be issued, (iii) 100% of (1.00 times) the Debt Service for General Obligation Indebtedness in such Fiscal Year and (iv) 100% of (1.00 times) the Debt Service for Other Indebtedness in such Fiscal Year; and

(b) the Net Revenues, as projected by a report of a Consultant filed with the Trustee, for the first two Fiscal Years following (i) the date capitalized interest, if any, provided from the proceeds of the proposed Subordinate Indebtedness is expended in the case of the acquisition of assets for or construction of improvements to the System or (ii) the date the proposed Subordinate Indebtedness is incurred in any other case, plus 12% of the Liquid Assets as shown in the most recent audited financial statements, are at least equal to (a) 120% of (1.20 times) the Debt Service on the Bonds for such Fiscal Years, (b) 100% of (1.00 times) the Debt Service for Subordinate Indebtedness, including the Subordinate Indebtedness to be issued, to become due in such Fiscal Years, (c) 100% of (1.00 times) the Debt Service for General Obligation Indebtedness to become due in such Fiscal Years and (d) 100% of (1.00 times) the Debt Service for Other Indebtedness to become due in such Fiscal Years;

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AND

(3) no Event of Default under the Indenture or under the agreement securing the Subordinate Indebtedness has occurred and is continuing.

FUNDS AND ACCOUNTS

Pursuant to the General Indenture, the City established the following funds:

(1) Construction Fund;

(2) Revenue Fund;

(3) Debt Service Fund;

(4) Operating and Maintenance Fund;

(5) Extension and Replacement Fund;

(6) Rebate Fund; and

(7) Reserve Fund.

The Trustee or the City may also create other Funds or Accounts necessary or desirable in the administration of the Indenture. The Construction Fund, the Debt Service Fund, the Reserve Fund, and the Rebate Fund will be held by the Trustee. The Revenue Fund, the Operating and Maintenance Fund, and the Extension and Replacement Fund will be held by the City.

There will be deposited into each Fund created under the Indenture all amounts required to be deposited therein pursuant to the Indenture and any other amounts available therefor and determined by the City to be deposited therein.

Construction Fund. The Construction Fund will be applied for any of the following purposes:

(1) the payment of costs of issuance of the Bonds;

(2) the payment of all costs of construction in the manner and subject to the restrictions described in the Indenture;

(3) the transfer to the Debt Service Fund to make up any deficiency therein in the order of priority described under “ -- Debt Service Fund” below; and

(4) the payment of principal of, premium, if any, and interest on the Bonds upon direction from an authorized officer of the City.

Revenue Fund. In addition to other amounts to be deposited in the Revenue Fund pursuant to the General Indenture, the City must cause all Revenues to be deposited in the Revenue Fund. Except for amounts collected by the City as State sales taxes, State user fees and refundable deposits made by customers of the System that have been deposited in the Revenue Fund, which may be paid out of the Revenue Fund in the amounts and at the times determined by the Chief Financial Officer of the City, the City will cause disbursements to be made from the Revenue Fund in the following order of priority:

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FIRST: On the first day of each month, to the Operating and Maintenance Fund an amount such that the amounts deposited therein during the current Fiscal Year do not exceed the amount shown for Operating Expenses in the Operating Budget for the current Fiscal Year or any quarterly allotment, plus any additional amount required to be transferred to the Debt Service Fund to make up any deficiency therein;

SECOND: On or before the 10th day before each Interest Payment Date, to the Trustee for deposit in the Debt Service Fund, an amount such that (after taking into consideration amounts then on deposit in the Debt Service Fund allocated to pay interest due with respect to the Bonds), there will be in the Debt Service Fund an amount equal to the Interest due on the next Interest Payment Date;

THIRD: On or before the 10th day before a Principal Payment Date, and subject to modification with respect to any Series of Bonds by the Series Indenture relating thereto, to the Trustee for deposit in the Debt Service Fund, an amount such that (after taking into consideration amounts then on deposit in the Debt Service Fund allocated to pay the Principal Installment due with respect to the Bonds), there will be in the Debt Service Fund an amount equal to the Principal Installment due on the next succeeding Principal Payment Date;

FOURTH: At any time as may be required, to the paying agent or directly to the registered owners of General Obligation Indebtedness in an amount necessary to pay when due the principal of, premium, if any, and interest on the General Obligation Indebtedness;

FIFTH: At any time as may be required, to the provider of any Qualified Reserve Fund Substitute in satisfaction of the then current obligations of the City incurred in connection therewith;

SIXTH: On each June 1 or December 1, to the Trustee for deposit in the Reserve Fund (1) the amount necessary for the balance therein to equal the Reserve Requirement, but if the Revenues are insufficient therefor, to each Account of the Reserve Fund pro rata on the basis of the Reserve Requirement for each Series of Bonds secured by an Account of the Reserve Fund or (2) if the Reserve Fund is less than 90% of the Reserve Requirement as a result of a valuation of investments therein, the amount necessary for the balance therein to equal the Reserve Requirement; but under either clause (1) or (2), the City is not required to transfer in any month more than an amount such that if the same amount were deposited in equal monthly installments over the subsequent 11 months, the Reserve Fund would equal the Reserve Requirement;

SEVENTH: At any time as may be required, to the Persons entitled to payment of any principal, premium, if any, or interest on any Subordinate Indebtedness, an amount equal to the principal, premium or interest then due and owing;

EIGHTH: At any time as may be required, to the Persons entitled to payment with respect to any Other Indebtedness, an amount equal to the payment then due and owing;

NINTH: At any time as may be required, to the Debt Service Fund, the amount necessary to make up any deficiency therein in accordance with the order of priority described under “-- Debt Service Fund” below; and

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TENTH: On the last Business Day of each Fiscal Year, to the Extension and Replacement Fund, any amounts remaining in the Revenue Fund.

Debt Service Fund. The Trustee will disburse amounts deposited in the Debt Service Fund as follows:

(1) on each Interest Payment Date, (i) if the Trustee is also the Paying Agent with respect to any Series of Bonds, to the Owners of such Bonds, interest due on such date, and (ii) if the Paying Agent for any Series of Bonds is not the Trustee, to such Paying Agent for payment to the Owners of such Bonds, interest due on such date.

(2) subject to the provisions of the General Indenture requiring the application thereof to the payment or redemption of any particular Bond, on each Principal Payment Date, (i) if the Trustee is also the Paying Agent with respect to any Series of Bonds, to the Owners of such Bonds, the amounts required for the payment of the Principal Installments due on such date, and (ii) if the Paying Agent for any Series of Bonds is not the Trustee, to such Paying Agent for payment to the Owners of such Bonds, interest due on such date.

(3) on each Redemption Date, (i) if the Trustee is also the Paying Agent with respect to any Series of Bonds, to the Owners of such Bonds, the amount required for redemption of Bonds called for redemption, and (ii) if the Paying Agent for any Series of Bonds is not the Trustee, to such Paying Agent for payment to the Owners of such Bonds, the amount required for redemption of Bonds called for redemption.

In the event that on any Interest Payment Date or Principal Payment Date there is a deficiency in the Debt Service Fund, the amount of such deficiency will be made up from the following Funds and in the following order of priority:

(1) Revenue Fund;

(2) Extension and Replacement Fund;

(3) Construction Fund;

(4) Reserve Fund; and

(5) Operating and Maintenance Fund.

Operating and Maintenance Fund. Amounts in the Operating and Maintenance Fund will be (1) at the times and in the amounts provided in the General Indenture, transferred to the Rebate Principal Account of the Rebate Fund to the extent necessary to make any required Rebate Deposit; (2) applied to the payment of Operating Expenses consistent with the Operating Budget, and (3) transferred to the Debt Service Fund to make up any deficiency therein in the order of priority described under “-- Debt Service Fund” above. In no event may the aggregate disbursements from the Operating and Maintenance Fund in each Fiscal Year, excluding any amounts transferred to the Debt Service Fund to make up any deficiency therein, exceed the amount provided therefor in the Operating Budget.

Rebate Fund. The Trustee will pay, as directed by the City, from the Rebate Fund investment income required to be paid to the United States at the times and in the amounts required by the General Indenture and the Code.

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Extension and Replacement Fund. The Extension and Replacement Fund will be applied for the following purposes:

(1) paying the cost of extensions, additions, and capital improvements to, or the renewal and replacement of capital assets of, or purchasing and installing new equipment for, the System, or paying any extraordinary maintenance and repair, or any expenses that are not Operating Expenses in the manner and subject to the restrictions described in the General Indenture;

(2) the repayment of debt incurred in connection with capital improvements to the System or any portions thereof in the manner and subject to the restrictions described in the General Indenture; and

(3) transfer to the Debt Service Fund to make up any deficiency therein in the order of priority described under “-- Debt Service Fund” above.

Reserve Fund. The 2016 Bonds are not secured by the Reserve Fund.

Investments. The Trustee will invest moneys held in the Debt Service Fund, the Construction Fund, and the Rebate Fund, at the direction of the City, in Investment Securities. The City will invest all Funds and Accounts held by it pursuant hereto in such Investment Securities as it determines in its sole discretion. The proceeds of any remarketing of the Bonds will be held uninvested or will be invested in Federal Securities maturing not later than the earlier of 30 days or the date needed for payment.

All earnings from the investment of moneys held in any Fund and Account under the General Indenture except the Construction Fund and the Rebate Fund will be deposited in the Revenue Fund. Earnings from the investment of moneys in the Construction Fund and the Rebate Fund will be retained in the respective fund.

Valuation. In computing the amount in any Fund or Account, obligations purchased as an investment of moneys therein will be valued at amortized value. “Amortized value” means par, if the obligation was purchased at par, or, when used with respect to an obligation purchased at a premium above or a discount below par, means the value as of any given time obtained by dividing the total premium or discount at which such obligation was purchased by the number of interest payments remaining on such obligation after such purchase and deducting the amount thus calculated for each interest payment date after such purchase from the purchase price in the case of an obligation purchased at a premium or adding the amount thus calculated for each interest payment date after such purchase to the purchase price in the case of an obligation purchased at a discount.

Bonds Not Delivered for Payment. If any Bond is not presented for payment when the principal thereof becomes due, either at maturity, or at the date fixed for redemption thereof, or otherwise, or if any interest check is not cashed, and if funds sufficient to pay such Bond have been made available by the City to the Trustee or any Paying Agent for the benefit of the Owner of such Bond, all liability of the City to such Owner for the payment of such Bond will forthwith cease, terminate, and be completely discharged. It will then be the duty of the Trustee and any Paying Agent to hold such funds in trust, uninvested and without liability for interest thereon, for the benefit of the Owner of such Bond, who will thereafter be restricted exclusively to such funds for any claim of whatever nature on his part under the Indenture or on, or with respect to, such Bond. Any money that is so set aside or transferred and that remains unclaimed by the Owners thereof for a period of five and one-half years after such payment has become due and payable will be treated as abandoned property under N.C.G.S. §116B-53, and the Trustee or Paying Agent will report and remit such property to the Escheat Fund according to the requirements of

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Article 4 of N.C.G.S. §116B. Thereafter, the Owners may look only to the Escheat Fund for payment and then only to the extent of the amounts so received without any interest thereon, and the City and the Trustee or Paying Agent will have no responsibility with respect to such money.

DEFAULTS AND REMEDIES

Events of Default. Any of the following events will be deemed an “Event of Default” under the General Indenture:

(1) a failure to pay the principal of or premium, if any, on any Bond when the same becomes due and payable, whether at the stated maturity thereof or upon proceedings for redemption;

(2) a failure to pay any installment of interest on any Bond when the same becomes due and payable; and

(3) a failure by the City to observe and perform any covenant, condition, agreement, or provisions (other than as described in subparagraphs (a) and (b) above) contained in the Bonds or in the General Indenture on the part of the City to be observed or performed, which failure continues for a period of 90 days after written notice, specifying such failure and requesting that it be remedied, has been given to the City by the Trustee. The Trustee may give such notice in its discretion, and must give such notice at the written request of Owners of not less than 25% of principal amount of the Bonds, unless the Trustee, or the Trustee and the Owners of a principal amount of Bonds not less than the principal amount of Bonds the Owners of which requested such notice, as the case may be, agrees in writing to an extension of such period prior to its expiration; except that the Trustee, or the Trustee and the Owners of such principal amount of Bonds, as the case may be, will be deemed to have agreed to an extension of such period if corrective action is initiated by the City within such period and is being diligently pursued.

Remedies on Default. Upon the occurrence and continuance of an Event of Default, the Trustee may, or if required by a majority of the registered Owners of the Bonds, must, declare the Bonds to be immediately due and payable, whereupon they will, without further action, become due and payable, anything in the Indenture or in the Bonds to the contrary notwithstanding.

The provisions described in the preceding paragraph are subject to the condition that if, after the principal of any of the Bonds has been so declared to be due and payable, but before any judgment or decree for the payment of the moneys due is obtained or entered as hereinafter described, the City causes to be deposited with the Trustee a sum sufficient to pay all matured installments of principal of and interest on all Bonds that are due otherwise than by reason of such declaration (with interest upon such overdue installments of interest, at the rate per annum borne by the Bonds) and such amount as is sufficient to cover reasonable compensation and reimbursement of expenses payable to the Trustee, and all Events of Default under the General Indenture other than nonpayment of the principal of the Bonds that have become due by said declaration have been remedied, then, in every such case, such Event of Default will be deemed waived and such declaration and its consequences rescinded and annulled. The Trustee will promptly give written notice of such waiver, rescission, or annulment to the City and the Local Government Commission of North Carolina and will give notice thereof as provided by the General Indenture to all Owners of Bonds, but no such waiver, rescission and annulment will extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon.

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Upon the occurrence and continuance of any Event of Default, the Trustee in its discretion may, and upon the written direction of registered Owners of not less than a majority in principal amount of the Bonds and receipt of indemnity to its satisfaction, must, in its own name and as the trustee of an express trust:

(1) by mandamus, or other suit, action, or proceeding at law or in equity, enforce all rights of the Owners of the Bonds, and require the City to carry out any agreements with or for the benefit of the Owners of the Bonds and to perform its duties under the Indenture;

(2) take whatever action at law or in equity may appear necessary or desirable to enforce its rights against the City.

No right or remedy set forth in the General Indenture is exclusive of any other rights or remedies, but each and every such right or remedy is cumulative and in addition to any other remedy given thereunder or now or hereafter existing at law or in equity or by statute. If any Event of Default occurs and if requested by the Owners of a majority in aggregate principal amount of Bonds and indemnified as provided by the General Indenture, the Trustee is obligated to exercise such one or more of the rights and powers conferred by the General Indenture as the Trustee, being advised by counsel, deems most expedient in the interests of the Owners of the Bonds.

Owners’ Right to Direct Proceedings. Anything in the General Indenture to the contrary notwithstanding, the Owners of a majority in aggregate principal amount of the Bonds have the right, at any time, to the extent permitted by law, by instruments in writing executed and delivered to the Trustee, to direct the time, method, and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the General Indenture, or for the appointment of a receiver, and any other proceedings thereunder, except that such direction may not be otherwise than in accordance with the provisions of the General Indenture. The Trustee will not be required to act on any direction given to it as described in this paragraph until the indemnity provided in the General Indenture is furnished to it by such Owners of Bonds.

Limitation on Rights of Owners. No Owner of Bonds has any right to institute any suit, action, mandamus or other proceeding in equity or at law under the Indenture for the protection or enforcement of any right under thereunder unless such Owner gives the Trustee written notice of the Event of Default or breach of duty on account of which such suit, action, or proceeding is to be taken, and unless the Owners of not less than twenty-five percent (25%) in principal amount of the Bonds make written request of the Trustee after the right to exercise such powers or right of action, as the case may be, accrues, and afford the Trustee a reasonable opportunity either to proceed to exercise the powers granted in the Indenture or granted under the law or to institute such action, suit, or proceeding in its name and unless, also, the Trustee is offered reasonable indemnity against the costs, expenses, and liabilities to be incurred therein or thereby, and the Trustee refuses or neglects to comply with such request within a reasonable time. Such notification, request, and offer of indemnity are in every such case, at the option of the Trustee, conditions precedent to the execution of the powers under the Indenture or for any other remedy thereunder or by law. No one or more Owners of Bonds has any right in any manner whatever by his or their action to affect, disturb, or prejudice the security of the General Indenture, or to enforce any right thereunder or under law with respect to the Bonds or the Indenture, except in the manner therein provided, and all proceedings at law or in equity must be instituted, had, and maintained in the manner provided in the General Indenture and for the benefit of all Owners of Bonds. Nothing contained in the General Indenture as described under this subheading affects or impairs the right of any Owner of Bonds

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to enforce the payment of the principal of and interest on its Bonds at the time and place expressed in such Bond.

Each Owner of Bonds, by its acceptance of a Bond, is deemed to have agreed that any court in its discretion may require, in any suit for the enforcement of any right or remedy under the General Indenture or any Series Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the reasonable costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable pre-trial, trial, and appellate attorneys’ fees, against any party litigant in any such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant. The provisions described in this paragraph do not apply to any suit instituted by the Trustee, to any suit instituted by Owners of at least 25% in principal amount of the Bonds, or to any suit instituted by any Owner of Bonds for the enforcement of the payment of any Bond on or after the respective due date thereof expressed in such Bond.

Subordination of Claims for Interest. No claim for interest appertaining to any of the Bonds that in any way at or after maturity has been transferred or pledged separate and apart from the Bond to which it appertains will, unless accompanied by such Bond, be entitled, in case of an Event of Default, to any benefit by or from the General Indenture, except after the prior payment in full of the principal of all of the Bonds then due and of all claims for interest then due not so transferred or pledged.

SUPPLEMENTAL INDENTURES

Supplemental Indentures Effective Upon Filing With the Trustee. At any time or from time to time a Supplemental Indenture may be adopted, which, upon the filing by the City with the Trustee in accordance with the General Indenture, will be fully effective in accordance with its terms, for any one or more of the following purposes:

(1) to close the General Indenture against, or provide limitations and restrictions in addition to the limitations and restrictions contained in the General Indenture on, the delivery of Bonds or the issuance of other evidences of indebtedness;

(2) to add to the covenants and agreements of and the limitations and restrictions on the City in the General Indenture other covenants and agreements or limitations and restrictions to be observed by the City that are not contrary to or inconsistent with the General Indenture as theretofore in effect;

(3) to surrender any right, power, or privilege reserved to or conferred upon the City by the terms of the General Indenture, but only if the surrender of such right, power or privilege is not contrary to or inconsistent with the covenants and agreements of the City contained in the General Indenture;

(4) to confirm, as further assurance, any pledge under, and the subjection to any lien or pledge created or to be created by, the General Indenture of the Trust Estate, including the Revenues or any other revenues or assets;

(5) to modify any of the provisions of the General Indenture in any respect whatsoever, but only if (i) such modification will be, and be expressed to be, effective only after all Bonds outstanding at the date of the adoption of such Supplemental Indenture cease to be outstanding and (ii) such Supplemental Indenture will be specifically referred to in the text of all Bonds delivered after the date of the adoption of

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such Supplemental Indenture and of Bonds issued in exchange therefor or in place thereof;

(6) to provide for the delivery of a Qualified Reserve Fund Substitute; provided that any changes do not, in the opinion of Bond Counsel, adversely affect the interests of the Owners of the Bonds.

Supplemental Indentures Effective Upon Consent of Trustee. At any time or from time to time a Supplemental Indenture may be adopted that, upon (a) the filing by the City with the Trustee of a copy thereof in accordance with the General Indenture, and (b) the filing with the Trustee and the City of an instrument in writing made by the Trustee consenting thereto, will be fully effective in accordance with its terms:

(1) to cure any ambiguity, supply any omission or cure, or correct any defect or inconsistent provision in the General Indenture;

(2) to insert such provisions clarifying matters or questions arising under the General Indenture as are necessary or desirable and are not contrary to or inconsistent with the General Indenture as theretofore in effect; or

(3) to effectuate changes in the General Indenture that will not adversely affect the interests of the Owners of the Bonds.

Any such Supplemental Indenture may also contain one or more of the purposes described under “--Supplemental Indentures Effective Upon Filing With the Trustee” above, and in that event, the consent of the Trustee described in this paragraph will apply only to those provisions of such Supplemental Indenture as contain one or more of the purposes set forth in subparagraphs (1), (2), or (3) of this paragraph.

Supplemental Indentures Effective Upon Consent of Owners. Exclusive of Supplemental Indentures already described herein, the written consent of the Owners of not less than a majority in aggregate principal amount of the Bonds outstanding will be required for the execution by the City and the Trustee of any indenture or indentures supplemental to the General Indenture; except that without the consent of the Owners of all the Bonds outstanding, nothing contained in the General Indenture permits:

(1) a change in the terms of redemption or maturity of the principal amount of or the interest on any outstanding Bond, or a reduction in the principal amount of or premium payable upon any redemption of any outstanding Bond or the rate of interest thereon;

(2) the deprivation of the Owner of any Bond outstanding of the lien created by the General Indenture (other than as originally permitted thereby);

(3) a privilege or priority of any Bond over any other Bond; or

(4) a reduction in the aggregate principal amount of the Bonds required for consent to such Supplemental Indenture.

If at any time the City requests the Trustee to enter into a Supplemental Indenture for which the consent of the Owners of Bonds is required as described above, the Trustee will give notice to such Owners pursuant to the General Indenture. If, within 60 days (or such longer period prescribed by the

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City) following the giving of such notice, the percentage of Owners of Bonds outstanding required by the General Indenture have consented to and approved the execution of such Supplemental Indenture as provided in the General Indenture, no Owner of Bonds will have any right to object to any of the terms and provisions contained therein, or in the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Trustee or the City from executing the same or from taking any action pursuant to the provisions thereof.

General Provisions. As a condition to the effectiveness of any Supplemental Indenture, a Bond Counsel Opinion must be delivered to the Trustee stating that such Supplemental Indenture has been duly and lawfully adopted in accordance with the provisions of the General Indenture, is authorized or permitted by the General Indenture, is valid and binding upon the City, and does not adversely affect the tax status of interest on the Bonds. No Supplemental Indenture may change or modify any of the rights or obligations of the Trustee without its written consent thereto. Nothing contained in the General Indenture as described under the caption “- Supplemental Indentures” herein affects or limits the right of the City to enter into Series Indentures in connection with the issuance of additional Series of Bonds. Any Series Indenture may be amended or supplemented as provided therein.

Amendment of Thirteenth Series Indenture. As long as the 2016 Bonds are Outstanding, the Fourteenth Series Indenture may be modified or amended at the same times, in the same manner and for the same purposes as the General Indenture. If such modification or amendment to the General Indenture affects only the 2016 Bonds, the percentage of Owners required to consent to the modification or amendment will be applied only to Outstanding 2016 Bonds.

Before the City and the Trustee enter into any Supplemental Indenture, there must have been delivered to the Trustee and the City an opinion of Bond Counsel stating that such Supplemental Indenture is authorized or permitted by the Thirteenth Series Indenture, complies with the terms thereof, will, upon the execution and delivery thereof, be valid and binding upon the City in accordance with its terms and will not adversely affect the exclusion from the gross income of the recipients thereof of interest on the Bonds for federal income tax purposes.

DEFEASANCE

If the City pays or causes to be paid to the Owner of any Bond the principal of and interest due and payable, and thereafter to become due and payable, on such Bond, or any portion of such Bond in any integral multiple of the Authorized Denomination thereof, such Bond or portion thereof will cease to be entitled to any lien, benefit, or security under the Indenture. If the City pays or causes to be paid the principal of, premium, if any, and interest due and payable on all outstanding Bonds and pays or causes to be paid all other sums payable by the City, including all fees, expenses, and other amounts payable to the Trustee and any Paying Agent, then the right, title, and interest of the Trustee in and to the Trust Estate will thereupon cease, terminate, and become void.

Any Bond will be deemed to be paid within the meaning and for all purposes of the Indenture when (1) payment of the principal of such Bond plus interest thereon to the due date thereof (whether such due date is by reason of maturity or upon redemption as provided in the General Indenture) either (a) has been made or caused to be made in accordance with the terms thereof, or (b) has been provided for by irrevocably depositing with the Trustee in trust and irrevocably set aside exclusively for such payment, (i) moneys, sufficient to make such payment and/or (ii) non-callable Federal Securities maturing as to principal and interest in such amount and at such time as will insure the availability of sufficient moneys to make such payment, and (2) all necessary and proper fees, compensation, and expenses of the Trustee and any Paying Agent pertaining to the Bonds with respect to which such deposit is made have been paid

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or the payment thereof provided for to the satisfaction of the Trustee. At such times as a Bond is deemed to be paid under the General Indenture, such Bond will no longer be secured by or entitled to the benefits of the General Indenture, except for the purposes of any such payment from such moneys or Federal Securities.

Notwithstanding the preceding paragraph, no deposit as described under clause (1)(b) of such paragraph will be deemed a payment of such Bonds as aforesaid until (1) proper notice of redemption of such Bonds has been given accordance with the Indenture, or (2) the maturity of such Bonds.

AMENDMENTS TO GENERAL INDENTURE

In connection with the execution and delivery of Series Indenture, the City will amend certain provisions of the General Indenture that, once consented to by the Owners of all the Bonds Outstanding, will become effective. Such amendments are as follows:

Definitions. The definitions of the following terms in the General Indenture are replaced with the following definitions:

“Debt Service” means, with respect to any particular Fiscal Year, an amount equal to the sum of (i) all interest payable on the Bonds during such Fiscal Year, excluding (a) any capitalized interest payable from the proceeds of a Series of the Bonds and (b) any interest rate subsidy receivable by the City from the United States Treasury pursuant to Section 54AA, 1400U-2 or 6431 of the Code (as such Sections were added by the Recovery Act, pertaining to “Recovery Zone Economic Development Bonds” or “Build America Bonds”) or any other section of the Code, plus (ii) any Principal Installments of the Bonds during such Fiscal Year.

(a) For purposes of computing “Debt Service,” the rate of interest used to determine (i) above will be a rate per annum, after taking into account the exclusions in (i) above, equal to (1) with respect to Bonds which bear interest at a fixed rate, the rate of interest borne or to be borne by such Bonds, and (2) with respect to Bonds which bear interest at a variable or periodically determined rate of interest, the rate is equal to the greater of (A) the average of all the interest rates in effect on the Bonds (or which would have been in effect on the Bonds had such Bonds been Outstanding) during the immediately preceding twelve-month period or (B) the average of all interest rates in effect on the Bonds (or which would have been in effect on the Bonds had such Bonds been Outstanding) during the immediately preceding one month period.

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Bonds or other obligations; and (2) with respect to notes or other obligations with a term of less than one year which are issued in anticipation of the issuance of Bonds or other obligations described in (1) above (the “Take Out Obligations”), the amount equal to (X - Y) ÷ Z, where X is the outstanding principal amount of such notes or other obligations, Y is the amount of unencumbered cash or other assets of the System on hand and available for the payment of such notes or other obligations, and Z is the number of full years expected to be in the term of the Take Out Obligation as certified to the Trustee by the Director of Finance.

“Revenues” means all rates, fees, rentals or other charges or other income received by the City in connection with the ownership, management and operation of the System, and all parts thereof, including any amounts contributed by the City, all as calculated in accordance with generally accepted accounting principles except as otherwise provided in the General Indenture, but excluding (1) amounts received from the investment of moneys in any Fund or Account, (2) assessments restricted by their terms to capital improvements, (3) net proceeds of insurance or condemnation awards or other extraordinary items, (4) any amounts collected by the City representing sales or use taxes which may be required by law or agreement to be paid to the State or a governmental unit thereof, (5) refundable deposits made by customers of the System or (6) any interest rate subsidy received by the City from the United States Treasury pursuant to Section 54AA, 1400U-2 or 6431 of the Code (as such Sections were added by the Recovery Act, pertaining to “Recovery Zone Economic Development Bonds” or “Build America Bonds”) or any other section of the Code.

Amendments. The following paragraph is to be added to Section 5.5 of the General Indenture:

The City hereby creates and establishes the “Build America Bond Interest Account of the Debt Service Fund”. The City will transfer any interest rate subsidy received from the United States Treasury, pursuant to Section 54AA, 1400U-2 or 6431 of the Code (as such Sections were added by the Recovery Act, pertaining to “Recovery Zone Economic Development Bonds” or “Build America Bonds”) or any other section of the Code, to the Trustee for deposit into the Subsidy Interest Account, and on each Interest Payment Date, the Trustee will apply the money in the Subsidy Interest Account to pay the interest on the Bonds for which the subsidy was received.

The following paragraph is to be added as Section 7.2(c) of the General Indenture:

Notwithstanding anything in the General Indenture to the contrary, (1) any initial purchaser, underwriter or remarketing agent holding any 2016 Bonds or another Series of the Bonds issued after the issuance of the 2016 Bonds may, regardless of its intent to sell or distribute such Bonds in the future, consent as the Owner of such Bonds to any amendment or Supplemental Indenture as required or permitted by this Article, including any amendment or Supplemental Indenture that adversely affects the interests of other Owners, and (2) any such holder providing its consent under this Section is not entitled to receive, nor is the City required to provide, any prior notice or other documentation regarding such amendment or Supplemental Indenture.

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APPENDIX F

BOOK-ENTRY-ONLY SYSTEM [THIS PAGE INTENTIONALLY LEFT BLANK]

APPENDIX F

BOOK-ENTRY ONLY SYSTEM

1. THE FOLLOWING DESCRIPTION OF DTC, OF PROCEDURES AND RECORD KEEPING ON BENEFICIAL OWNERSHIP INTERESTS IN THE 2016 BONDS, PAYMENT OF INTEREST AND OTHER PAYMENTS ON THE 2016 BONDS TO DTC PARTICIPANTS OR TO BENEFICIAL OWNERS, CONFIRMATION AND TRANSFER OF BENEFICIAL OWNERSHIP INTERESTS IN THE 2016 BONDS, AND OR OTHER TRANSACTIONS BY AND BETWEEN DTC, DTC Participants AND BENEFICIAL OWNERS IS BASED ON INFORMATION FURNISHED BY DTC.

The Depository Trust Company a subsidiary of The Depository Trust & Clearing Corporation

2. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the 2016 Bonds. The 2016 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered bond will be issued for the 2016 Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC. SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE 2016 BONDS, AS DTC’S PARTNERSHIP NOMINEE, REFERENCE HEREIN TO THE OWNERS OR REGISTERED OWNERS OF THE 2016 BONDS WILL MEAN CEDE & CO. AND WILL NOT MEAN THE BENEFICIAL OWNERS OF THE 2016 BONDS.

3. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of the 2016 Bonds. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

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4. Purchases of 2016 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2016 Bonds on DTC’s records. The ownership interest of each actual purchaser of the 2016 Bonds (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests with respect to the 2016 Bonds 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 bonds representing their ownership interests in 2016 Bonds, except in the event that use of the book-entry system for the 2016 Bonds is discontinued.

5. To facilitate subsequent transfers, all 2016 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of 2016 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2016 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such 2016 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

6. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of 2016 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2016 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of 2016 Bonds may wish to ascertain that the nominee holding the 2016 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

7. Redemption notices will be sent to DTC. If less than all of the 2016 Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.

8. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to 2016 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts 2016 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

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BECAUSE DTC IS TREATED AS THE OWNER OF THE 2016 BONDS FOR SUBSTANTIALLY ALL PURPOSES UNDER THE INDENTURE, BENEFICIAL OWNERS MAY HAVE A RESTRICTED ABILITY TO INFLUENCE IN A TIMELY FASHION REMEDIAL ACTION OR THE GIVING OR WITHHOLDING OF REQUESTED CONSENTS OR OTHER DIRECTIONS. IN ADDITION, BECAUSE THE IDENTITY OF BENEFICIAL OWNERS IS UNKNOWN TO THE CITY, TO DTC OR TO THE TRUSTEE, IT MAY BE DIFFICULT TO TRANSMIT INFORMATION OF POTENTIAL INTEREST TO BENEFICIAL OWNERS IN AN EFFECTIVE AND TIMELY MANNER. BENEFICIAL OWNERS SHOULD MAKE APPROPRIATE ARRANGEMENTS WITH THEIR BROKER OR DEALER REGARDING DISTRIBUTION OF INFORMATION REGARDING THE 2016 BONDS THAT MAY BE TRANSMITTED BY OR THROUGH DTC.

9. Redemption proceeds, distributions, and dividend payments on the 2016 Bonds 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 the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Trustee, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City, 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. THE CITY AND THE TRUSTEE CANNOT AND DO NOT GIVE ASSURANCE THAT DIRECT AND INDIRECT PARTICIPANTS WILL PROMPTLY TRANSFER PAYMENTS TO BENEFICIAL OWNERS.

10. DTC may discontinue providing its services as depository with respect to the 2016 Bonds at any time by giving reasonable notice to the City and the Trustee. Under such circumstances, in the event that a successor depository is not obtained, 2016 Bond certificates are required to be printed and delivered.

11. The City may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, 2016 Bond certificates will be printed and delivered to DTC.

12. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources the City believes to be reliable, but the City takes no responsibility for the accuracy thereof.

THE CITY AND THE TRUSTEE HAVE NO RESPONSIBILITY OR OBLIGATION TO DTC, THE DIRECT PARTICIPANTS, THE INDIRECT PARTICIPANTS OR THE BENEFICIAL OWNERS WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY PARTICIPANT, OR THE MAINTENANCE OF ANY RECORDS; (2) THE PAYMENT BY DTC OR ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE 2016 BONDS, OR THE SENDING OF ANY TRANSACTION STATEMENTS; (3) THE DELIVERY OR TIMELINESS OF DELIVERY BY DTC OR ANY PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TRUST AGREEMENT TO BE GIVEN TO OWNERS; (4) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENTS UPON ANY PARTIAL

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PREPAYMENT OF THE 2016 BONDS; OR (5) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC OR ITS NOMINEE AS THE REGISTERED OWNER OF THE 2016 BONDS, INCLUDING ANY ACTION TAKEN PURSUANT TO AN OMNIBUS PROXY.

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City of Winston-Salem, North Carolina • Water and Sewer System Revenue Refunding Bonds, Series 2016A and Taxable Water and Sewer System Revenue Refunding Bonds, Series 2016B