CITY of LOS ANGELES, CALIFORNIA Sanitation Equipment Charge Revenue Bonds, Series 2005-A

NEW ISSUE FULL BOOK-ENTRY-ONLY Ratings: (See "Ratings" herein)

In the opinion of Sidley Austin Brown & Wood LLP, Special Tax Counsel, based on existing statutes, regulations, rnlings and judicial decisions, and assuming compliC01ce with certain covenants in the documents pertaining to the Bonds C01d requirements ofthe Internal Revem1e Code of 1986, as cnnended, (the "Code") as described herein, interest on the Bonds is not inchidable in the gross income of the owners of the Bonds for federal income tax purposes. In the farther opinion of Special Tax CoW1sel, interest on the Bonds is not treated as C01 item of tax preference in calculating the federal alternative minimwn taxable income of individuals and corporations. Interest on the Bonds, however, is inchided as an acijustment in the calculation offederal corporate alternative mininmm taxable income C01d may therefore affect a corporation's alternative mininnun tax liability. Special Tax CoW1sel is farther ofthe opinion that the interest on the Bonds is exempt from personal income taxes imposed by the State of California. See "TAXlvlATTERS" herein. $45, 750,000 CITY OF LOS ANGELES, CALIFORNIA Sanitation Equipment Charge Revenue Bonds, Series 2005-A

Dated: Date of Delivery Due: February 1, as shown on inside cover page This cover page contains certain information for quick reference only. It is not intended to be a summary of all factors relating to an investment in the Bonds. Investors should review the entire Official Statement before making C01Y investment decision. The $45,750,000 Sanitation Equipment Charge Revenue Bonds, Series 2005-A (the "Bonds'') are being issued by the City of Los Angeles (the "City'') to finance the acquisition of certain refuse collection containers, equipment and vehicles and the design, planning, improvement and/or construction of certain sanitation facilities (the "Project''), to fund a Reserve Fund for the Bonds and to pay costs of issuance of the Bonds. The Bonds are authorized under the Charter of the City and Ordinance No. 174129 adopted July 24, 2001, and are being issued under a Master Trust Agreement, dated as of September 1, 2001, as amended and supplemented, and a Fifth Supplemental Trust Agreement, dated as of July 1, 2005 (collectively, the "Trust Agreement''), by and behveen the City and U.S. Bank National Association, as successor trustee (the "Trustee''). Interest on the Bonds is payable semiannually on each February 1 and August 1, commencing February 1, 2006 until maturity or prior redemption thereof. The Bonds will be delivered in fully registered form only and, when issued, will be registered in the name of Cede & Co. as nominee of The Depository Trust Company, New York, New York ("DTC''). The Bonds will be in denominations of$5,000 each or any integral multiple thereof. Beneficial owners of Bonds will not receive physical certificates from the City or the Trustee representing the Bonds purchased, but will receive a credit balance on the books of the nominees of such purchasers. Principal of and interest on the Bonds will be paid by the Trustee solely from the Revenues described below to DTC, which in turn is obligated to remit such principal and interest to its participants for subsequent disbursement to the beneficial owners of the Bonds as described herein. See ''THE BONDS-Book Entry-Only System." The Bonds are subject to optional redemption prior to maturity as set forth herein. See ''THE BONDS-Redemption." The Bonds are special, limited obligations of the City and are secured solely by and payable from a pledge of the Revenues which include (i) the Sanitation Equipment Charge received by the Sanitation Equipment Charge Special Revenue Fund (together with any future similar fund serving substantially the same function into which the Sanitation Equipment Charge Special Revenue Fund may be incorporated or merged, the "SEC Fund''), including penalties and delinquencies, if any, after deduction of costs of administering the billing and collection process, (ii) any other legally available income, rates, fees, charges and other moneys which the City may hereafter designate by ordinance or resolution for deposit in the SEC Fund, including the Extra Capacity Fee (defined herein), and (iii) the earnings on and income derived from the investment of the amounts set forth in (i) and (ii) and from amounts on deposit in the Reserve Fund (as defined in the Trust Agreement). The City has previously obligated itself to make base rental payments and installment payments secured by the Revenues on a parity with the Bonds, which base rental payments and instalhnent payments secure certain indebtedness issued by the Municipal Improvement Corporation of Los Angeles (the "Corporation'') on behalf of the City, currently outstanding in an aggregate principal amount of $33,565,000. The City has also obligated itself to pay principal and interest from Revenues on four series of Bonds issued under the Trust Agreement and currently outstanding in the aggregate principal amount of$250,615,000. The City may issue additional debt or incur additional obligations on a parity with the Bonds prior to payment of debt service on the Bonds but only in accordance with the provisions contained in the Trust Agreement. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS." Concurrently with the issuance of the Bonds, Financial Guaranty Insurance Company, doing business in California as FGIC Insurance Company (the "Bond Insurer'') will issue its Municipal Bond New Issue Insurance Policy for the Bonds (the "Policy''). The Policy unconditionally guarantees the payment of that portion of the principal of and interest on the Bonds which has become due for payment, but shall be paid by reason of nonpayment by the City. RIWld.lll

The General Fund of the City is not liable for the payment of the Bonds and neither the full faith and credit nor the taxing power of the City is pledged to pay the Bonds. The pledge of Revenues contained in the Trust Agreement does not create a legal or equitable pledge, charge, lien or encumbrance upon any of the City's property, or upon its income, receipts or revenue, except the Revenues. The Bonds do not constitute a debt of the City within the meaning of any constitutional or statutory debt limitation or restriction. The Bonds are offered when, as and if received by the purchaser, subject to the approval of legality by Fulbright & Jaworski L.L.P., Los Angeles, California, Bond Counsel, and certain other conditions. Certain legal matters will be passed on for the City by Rockard J. Delgadillo, City Attorney, and by Sidley Austin Brown & Wood LLP, Los Angeles, California as Disclosure Counsel and Special Tax Counsel. It is anticipated that the Bonds will be available for delivery to DTC in book-entry form on or about July 7, 2005.

Date of Official Statement: June 22, 2005 Maturities, Principal Amounts, Interest Rates, Yields and CUSI pt Numbers (BaseCUSI pt Number: 54462P)

Maturity (February 1) Principal Amount I nterest Rate Yield CUSI pt Number 2009 $4,000,000 5.000!6 2.780!6 DDl 2010 4,300,000 5.000!6 3.000!6 DE9 2011 2,765,000 5.000!6 3.080!6 DF6 2012 2,905,000 5.000!6 3.230!6 DG4 2013 3,055,000 5.000!6 3.330)6 DH2 2014 3,205,000 5.000!6 3.450)6 DJS 2015 3,365,000 5.000!6 3.540!6 DK5 2016 3,530,000 5.000!6 3.630)6 C DL3 2017 3,710,000 5.000!6 3.700!6 C DMl 2018 8,165,000 5.000!6 3.780!6 C DN9 2019 6,750,000 5.000!6 3.840!6 C DP4

C Priced to first cal I date of February 1, 201 5 at par. t Cop,rright 2005, American Bankers Association. CUSI P data herein is pr0.tided b,r Standard & Poor's CUSIP Service Bureau, a division of the McGraw-Hill Companies, Inc. CITY OF LOSANGELES,CALIFORNIA

Mayor J arres K. Hahna

City Council Ed P. Reyes (District 1) Tony Cardenas (District 6) Cindy MiscikONski (District 1l)b Wendy Greuel (District 2) Alex Padilla (District 7) Greig Snith (District 12) Dennis P. Zine (District 3) Bernard C. Parks (District 8) Eric Garcetti (District 13) Tom LaBonge (District 4) Jan Perry (District 9) Antonio Villaraigosa (District 14)' Jack Weiss (District 5) Martin LudlON (District 10) Janice Hahn (District 15)

City Officials RockardJ. Delgadillo, City Attorney Laura N. Chick, City Controller WilliarnT Fujioka, City Adninistrative Officer J o,ra C. DeFoor, City Treasurer Frank T. Martinez, City Clerk

City Agency I ssuer Office of the City Adninistrative Officer, Debt M anagerrent Group

PROFESSIONAL SERVICES

Bond Counsel Fulbright& Jaworski L.L.P. Los Angeles, California

Special Tax Counsel and Disclosure Counsel Sidley Austin BrONn & Wood LLP Los Angeles, California

Co--F inancial Ad.tisors Fieldman, Rolapp& Associates Irvine, California

Acacia Financial Managerrent Los Angeles, California

Trustee U.S. Bank National Association Los Angeles, California

aTerrn endsJ une 30, 2005. Mayor-elect Antonio Villaraigosa to be sworn in onJ uly 1, 2005. bTerrn endsJ une 30, 2005. Councilrrernber--elect Bill Rosendahl to be sworn in onJ uly 1, 2005. ' Vacant as ofJ uly 1, 2005. No dealer, broker, salesperson, or other person has been authorized by the City to give any information or to make any representations other than those contained herein and, if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Official Statement does not constitute an offer to sel I or the solicitation of an offer to buy nor shal I there be any sale of the Bonds by a person in any jurisdiction in which it is unlawful for such person to make an offer, solicitation or sale.

This Official Statement is not to be construed as a contract with the Purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as a representation of facts.

The information set forth herein has been obtained from sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the City. The information and expressions of opinions herein are suqject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circum;tances, create any implication that there has been no change in the affairs of the City or the Sanitation Equipment Charge Special Revenue Fund since the date hereof. This Official Statement is submitted with respect to the sale of the Bands referred to herei n and may not be reproduced or used, i n whole or i n part, for any other purpose, unless authorized in writing by the City. All summaries of the documents and laws are made suqject to the prc:wisions thereof and do not purport to be complete statements of any or all such prc:wisions.

Certain statements included or incorporated by reference in the fol I cwi ng information constitute "forward-looking statements." Such statements are generally identifiable by the terminology used such as "plan," "expect," "estimate," "budget" or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve kncwn and unkncwn risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. No assurance is given that actual results will meet the City's forecasts in any way, regardless of the level of optinism communicated in the information. Except as set forth in the continuing disclosure certificate (see APPENDIX F-''FORM OF CONTINUING DISCLOSURE CERTIFICATE"), the City does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations, or events, conditions or circum;tances on which such statements are based occur. TABLE OF CONTENTS

INTRODUCTION ...... 1 THE BONDS ...... 3 G eneral Terms ...... 3 Book-Entry-Only System ...... 3 Rederrpti on ...... 3 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS ...... 4 Ra-enue Pledge ...... 4 Prior Parity Debt ...... 5 Maintenance of Sanitation Equipment Charge ...... 6 Proposition 218 ...... 6 Limitations on Parity and Superior Obi igations; Additional Bonds ...... 7 Reserve Fund ...... 8 I nvestment of Funds ...... 9 Limited Liability ...... 9 Debt Service Schedule ...... 10 BOND INSURANCE ...... 12 THE PROJECT ...... 14 Description ...... 14 Substituti on of Project ...... 15 SAN ITA Tl ON EQUIPMENT CHARGE ...... 15 Background ...... 15 Charges ...... 16 Exerrptions From Sanitation Equipment Charge ...... 17 Bi I Ii ng and Collection ...... 17 H istori cal Debt Service CCNerage ...... 20 Pro-F orm1 Statement of Debt Service CCNerage ...... 20 DEPARTMENT OF PUBLIC WORKS, BUREAU OF SANITATION SOLID WASTE OPERATIONS ...... 21 I ntroduction ...... 21 City Residential Solid Waste Col Iecti on ...... 22 Organization and Management ...... 22 Department of Public Works, Bureau of Sanitation Budgeted General Fund Expenditures ...... 23 Recycling Implementation Plan-AB 939 ...... 23 A utom1ted Col I ecti on ...... 24 A utom1ted Container System1ti c Replacement Program ...... 24 Alternative Clean Fuel Program ...... 24 Processing and Disposal ...... 25 G reen Recycling Faci I iti es ...... 25 Landfi 11 Closure Construction Activities ...... 26 Solid Waste Disposal Alternatives ...... 26 Solid Waste Management Plan ...... 26 Future Capital Projects and Borro.vi ng PI ans ...... 28 REGULATION ...... 30 Potential Restrictions on Sol id Waste Disposal ...... 30 PrCNision for City Landfil I Closure and Postclosure Maintenance Costs ...... 30 Federal and State Laws GCNerning Solid Waste Disposal ...... 31 Regulatory Agencies ...... 32 California Integrated Waste Management Act ...... 32 CONTINUING DISCLOSURE ...... 33 TAX MATTE RS ...... 33 CERTAIN LEGAL MATTERS ...... 35 LITIGATION ...... 35 RATINGS ...... 35 UNDERWRITING ...... 36 Fl NA NCIAL ST A TE ME NTS ...... 36 AV Al LAB IL ITY OF DOCUMENTS ...... 36 CO-flNANCIAL ADVISORS ...... 36 TABLE OF CONTENTS (continued)

MISCELLANEOUS ...... 37

APPENDICES A CITYOFLOSANGELES ...... A-1 B EXCERPTS FROM THE CITY'S COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDEDJ UNE 30. 2004AND INDEPENDENT AUDITOR'S REPORT ...... B-1 C SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT ...... C-1 D PROPOSED FORM OF BOND COUNSEL OPINION ...... 0-1 E PROPOSED FORM OF SPECIAL TAX COUNSEL OPINION ...... E-1 F FORM OF CONTINUING DISCLOSURE CERTIFICATE ...... F-1 G BOOK ENTRY-ONLY SYSTEM ...... G-1 H FORM OF MUNICIPAL BOND NEW ISSUE INSURANCE POLICY ...... H-1

$45,750,000 CITY OF LOSANGELES,CALIFORNIA Sanitation Equipment Charge Revenue Bonds, Series 2005-A

I NTR ODUCTI ON

This Official Statement is provided for the purpose of setting forth information concerning the issuance and sale by the City of Los Angeles, California (the "City") of the $45,750,000 Sanitation Equipment Charge Revenue Bonds, Series 2005-A (the "Bonds"). The Bonds are authorized under the Charter of the City and Ordinance No.174129 adopted July 24, 2001, and are being issued under a Master Trust Agreement, dated as of September 1, 2001, as amended and supplemented, and a Fifth Supplemental Trust Agreement, dated as of July 1, 2005 (collectively, the ''Trust Agreement"), by and between the City and U.S. Bank National Association, as successor trustee (the "Trustee''). See APPENDIX C -"SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT" for the definitions of certain capitalized terms and further information regarding the City's obligations under the Trust Agreement.

The Bonds will be secured by a pledge of Revenues (as defined in the Trust Agreement) which shall consist of (i) the Sanitation Equipment Charge (the "SEC") received by the Sanitation Equipment Charge Special Revenue Fund (together with any successor fund held by the City, the "SEC Fund'), i ncl udi ng penal ti es and del i nquenci es, if any, after deduction of admi ni strati on charges by the Department of Water and Paver of the City of Los Angeles ("DWP"), (ii) any other legally available income, rates, fees, charges and other moneys which the City designates by ordinance or resolution for deposit in the SEC Fund, including the Extra Capacity Fee, and (iii) the earnings and income derived from the investment of the amounts set forth in clauses (i) and (ii) and from amounts on deposit in the Reserve Fund (as defined in the Trust Agreement).

The Sanitation Equipment Charge was first established by Ordinance effectiveJ uly 21, 1983 (the "SEC Ordinance'') for the purpose of acquiring and repairing sanitation equipment consisting of vehicles utilized in the collection and disposal of household solid waste. EffectiveJ uly 5, 1990, the City amended the SEC Ordinance to expand the use of the Sanitation Equipment Charge to include the acquisition of solid waste containers. EffectiveJ uly 1, 1994, the City amended the SEC Ordinance to expand the use of the Sanitation Equipment Charge to include the construction of landfill prqjects. Effective February 2, 1997, the City amended the SEC Ordinance to expand the use of the Sanitation Equipment Charge to include the acquisition, leasing and improving of real properties for parking, repairing and maintaining the sanitation equipment. Effective August 22, 2002, the City amended the SEC Ordinance to expand the use of the Sanitation Equipment Charge to include the cost of distribution, repair and maintenance of the solid waste containers. Effective March 11, 2004, the City amended the SEC Ordinance to expand the use of the Sanitation Equipment Charge to include the acquisition, leasing and improving of real properties for use as transfer stations for the transloading of solid waste.

Effective February 19, 1996, the City approved an Extra Capacity Fee (the "Extra Capacity Fee") by Ordinance No. 170868 and began collection of the Extra Capacity Fee, which is a component of Revenues as defined under clause (ii) above, inJ uly 1996. The City may designate hereafter as Revenues any other i ncorre, rates, fees, charges and other legally available moneys as the City chooses and, b,r ordinance, may expand the pernitted uses of the Sanitation Equipment Charge. For additional information on the Sanitation Equipment Charge and the Extra Capacity Fee, see "SANITATION EQUIPMENT CHARGE."

The City has previously obligated itself to make debt service payrrents, base rental payrrents and installrrent payrrents secured b,r the Revenues which payrrents are to be made on a parity with debt service payrrents on the Bands. These payrrents secure certain indebtedness previously issued b,r the Municipal lrrprc:werrent Corporation of Los Angeles (the "Corporation") on behalf of the City (the "Outstanding Parity Bonds") currently outstanding in the aggregate principal amount of $33,565,CXXl. These payrrents also include indebtedness previously issued pursuant to the Trust Agreerrent including the Seri es 2001-A Bands currently outstanding in the aggregate principal amount of $85,440,CXXl, the Series 2003-A Bonds currently outstanding in the aggregate principal amount of $47,825,CXXl, the Seri es 2003--B Bands currently outstanding in the aggregate principal amount of $61, 120,CXXl and the Series 2004-A Bonds currently outstanding in the aggregate principal amount of $56,230,CXXl (the "Series 2001-A Bonds," the "Series 2003-A Bonds," the "Series 2003--B Bonds" and the "Series 2004-A Bonds'' are collectively referred to herein as the "Prior Bonds." The Prior Bonds and the Outstanding Parity Bonds are collectively referred to herein as the "Prior Parity Debt''). See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS-Outstanding Parity Indebtedness" herein.

In addition, the City may issue additional revenue bonds, contracts (whether in the form of installrrent purchase agreerrents, lease or sublease agreerrents, or otherwise) or notes of the City (the "Additional Bonds") secured b,r the Revenues on a parity with the Bonds and the Prior Parity Debt. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS-limitations on Parity and Superior Obligations; Additional Bonds."

Under the Trust Agreerrent, the City may not issue or incur any future obligations payable from Revenues which would create a lien superiortothe lien of the Bonds. The City may issue debt on a parity with the Bonds, and the Prior Parity Debt, but only in accordance with the prc:wisions in the Trust Agreerrent (see "SECURITY AND SOURCES OF PAYMENT FOR THE BOND-Revenue Pledge" and "Limitations on Parity and Superior Obligations; Additional Bonds").

THE BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE CITY PAYABLE SOLELY FROM AND SECURED BY THE REVENUES. THE BONDS DO NOT CONSTITUTE AN OBLIGATION OF THE CITY FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE BONDS DO NOT CONSTITUTE A DEBT OR AN INDEBTEDNESS OF THE CITY, THE COUNTY OF LOS ANGELES, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS IN CONTRAVENTION OF THE CONSTITUTION OR STATUTES OF THE STATE.

This Official Staterrent contains brief descriptions of, among other things, the Bonds, the Trust Agreerrent, the City, the Sanitation Equiprrent Charge Special Revenue Fund and the Prqject. Such descriptions do not purport to be comprehensive or definitive. All references in this Official Staterrent to docurrents are qualified in thei r entirety b,r references to such docurrents and references to the Bands are qualified in thei r enti rety b,r reference to the form of Bond incl uded in the Trust A greerrent.

For a discussion of the collection of the Sanitation Equipment Charge and the City's solid waste collection and disposal system, see "SANITATION EQUIPMENT CHARGE" and "DEPARTMENT OF PUBLIC WORKS, BUREAU OF SANITATION SOLID WASTE OPERATIONS." For certain

2 financial, governmental, dermgraphic and economic information with respect to the City, see APPENDIX A -"CITY OF LOS ANGELES."

THE BONDS

General Terms

The Bonds are being issued and delivered in the aggregate principal amount of $45,750,000 and will be dated as of their date of delivery. The Bonds, when issued, will be initially registered in the name of Cede & Co., as registered cwner and noninee of The Dep:isitory Trust Company, NEW Yark, NEW York ("DTC"). So long as DTC, or its nominee, Cede& Co., is the registered cwner of the Bonds, all payments on the Bonds and any notice with respect to any Bond will be sent directly to DTC, and disbursement of such payments and delivery of such notices to the DTC Participants (as defined in APPENDIX G -"BOOK-ENTRY ONLY SYSTEM") will be the responsibility of DTC. Disbursement of such payments and delivery of such notices to the Beneficial owners of the Bonds will be the responsi bi I ity of the DTC Participants as more fully described herein.

Interest on the Bonds will be payable semiannually on February I and August 1 of each year, commencing February 1, 2006 (each, a "Payment Date") at the rates set forth on the inside cc:wer page hereof and will mature on February 1 in each of the designated years in the principal amounts set forth on the inside cc:wer page hereof. I nterest on the Bands shal I be payable on each Payment Date from the Payment Date preceding the date of execution thereof, unless such date of execution is after the fifteenth day of the month preceding any Payment Date (a "Record Date") and on or before the succeeding Payment Date, in which event interest with respect thereto shall be payable from such succeeding Payment Date or unless such date of execution is on or beforeJ anuary 15, 2006, in which event interest with respect thereto shal I be payable from the date of delivery of the Bands.

Book-£ ntry-Only System

When issued, the B ands wi 11 be issued in book-entry form only and registered i n the name of a nominee of The Dep:isitory Trust Company ("DTC"), which will act as Securities Dep:isitory for the Bonds. Purchases of the Bonds may be made in book-entry form only, through brokers and dealers who are, or who act through, DTC Participants. Payments of principal, prenium, if any, and interest on the Bonds will be made to DTC or its noninee as the registered owner of the Bonds. Disbursement of such payments to DTC Participants is the responsibility of DTC and disbursement of such payments to the Beneficial owners is the responsibility of DTC Participants. See APPENDIX G -"DTC BOOK-ENTRY ONLY SYSTEM."

Redemption

Optional Redemption. The Bonds maturing on or before February 1, 2015 are not suqject to redemption prior to their maturity. The Bonds maturing on or after February 1, 2016 are suqject to redemption prior to maturity at the option of the City, in whole or in part on any date on or after February 1, 2015, from any moneys that may be prc:wided for such purpose, at a redemption price equal to 10036 of the principal amount thereof, without premium, pl us accrued and unpaid interest thereon to the date fixed for redemption.

Notice of Redemption. In the event any of the Bonds are called for redemption, the Trustee shall give notice, in the name of the City, of the redemption of such Bonds, at least 30 days before each redemption, by first-class mail (or with respect to Bonds held by the Dep:isitory by an express delivery service for delivery on the next fol I cwi ng Business Day) to each owner of a Bond to be redeemed; each

3 such notice shal I be sent to the owner's registered address. The notice shal I ( i) specify the Bands to be redeerred, the redemption date, the redemption price and the pl ace or pl aces where amounts due upon such rederll)tion will be payable and, if less than all of the Bonds are to be redeerred, the numbers of the Bonds, and the portions of Bonds, to be redeerred, (ii) state any condition to such rederll)tion and (iii) state that on the redemption date, and upon the satisfaction of any such condition, the Bonds to be redeerred shall cease to bear interest. Such notice may set forth any additional information relating to such redemption.

Effect of Redemption. From and after the date fixed for redemption, if funds available for the payrrent of the rederll)tion price of and interest on the Bonds so called for redemption shall have been duly deposited with the Trustee, such Bands so cal led shal I cease to be entitled to any benefit under the Trust Agreerrent other than the right to receive payrrent of the redemption price and accrued interest to the redemption date, and no interest shal I accrue thereon from and after the redemption date specified in such notice.

SOURCES AND USES OF PROCEEDS

The proceeds of the Bonds are expected to be used generally as set forth in the follcwing table.

Sources of Funds: Principal Annunt of Bonds ...... $45,750,000.00 NetOriginal Issue Premium ...... 4,523,645.50

Total Sources ...... $50,273,645.50

Uses of Funds: DeposittoAcquisition Fund ...... $45,209,500.00 Deposit to Reserve Fund1 11...... 4,575,000.00 Costs of I ssuance121 ...... 440,538.25 Underwriters' Discount ...... 48,607.25

Total Uses ...... $50,273,645.50

'" Depo~t necessary to bring the balance in the Reserve Fund up to the Reserve Requirem,nt for the Bonds and the Prior Parity Debt (2) I nc::ludes rating agencies' fees, bond insurance prerrium Bond Counsel fees and expenses, Disclosure Counsel fees and expense~ Co-Financial Advisor fees and expenses, Trustee fees and expenses, printing c~ and other costs of delivery.

SECURITY AND SOURCES OF PAYMENT FOR THE BONDS

Revenue Pledge

The Bonds are special, linited obligations of the City and are secured solely by and payable from a pledge of the Revenues which includes (i) the Sanitation Equiprrent Charge received by the SEC Fund, including penalties and delinquencies, if any, after deduction of administration charges by DWP; (ii) any other legally available incorre, rates, fees, charges and other moneys which the City designates by ordinance or resolution for deposit in the SEC Fund; and (iii) the earnings on and income derived from the investrrent of the amounts in the SEC Fund and from the amounts on deposit in the Reserve Fund. The term "SEC Fund" includes any successor fund as may be established from tirre to tirre by the City

4 serving substantially the same function. The City approved an Extra Capacity Fee by Ordinance No. 170868 and began collection of the Extra Capacity Fee in July 1996. The Extra Capacity Fee is a conµ:inent of Revenues as defined under clause (ii) alx:we.

All Revenues and all amounts on deposit in the SEC Fund are irrevocably pledged to the payment of the Bonds as provided in the Trust Agreement and to the payment of any Outstanding Parity Bonds and any Additional Bonds. The Revenues shall not be used during any month of any Fiscal Year for any other purpose if any of the monthly transfers required by the Trust Agreement (and the documents under which the Outstanding Parity Bonds were issued (the "Parity Documents")) to be made from the SEC Fund (i) to the debt service funds for the Bonds, the Prior Parity Debt and any Additional Bonds, (ii) to the Reserve Fund and the reserve funds for any Prior Parity Debt, and (iii) to the debt service funds for any subordinate obligations, is delinquent. Follcwing such monthly transfers out of the SEC Fund each month, the City may use remaining Revenues in the SEC Fund for any lawful purpose. This pledge constitutes a first and exclusive lien on the Revenues, suqject to application of amounts on deposit therein as provided in the Trust Agreement and the Parity Documents for the payment of debt service on the Bonds, the Prior Parity Debt and any Additional Bonds in accordance with the terms of the Trust Agreement and the Parity Documents.

If the Outstanding Parity Bonds have been fully paid or defeased in accordance with their terms, the City has the option under the Trust Agreement to transfer moneys from the SEC Fund to the Debt Service Fund for debt service payments on the Bonds and any Additional Bonds on a seniannual rather than a monthly basis in the manner set out in the Trust Agreement. See APPENDIX C - "SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT-Alternate Receipt and Deposit of Revenues; Withdrawals."

Moneys in the SEC Fund shall be used and applied by the City as provided in the Trust Agreement. The City will maintain all Revenues in the SEC Fund separate and apart frorn other funds of the City so long as the Bonds, the Prior Parity Debt or Additional Bonds remain unpaid. All moneys in the SEC Fund shall be used and applied to pay Debt Service as defined in the Trust Agreement, including principal of and interest on the Bonds, the Prior Parity Debt and any Additional Bonds, and to replenish all reserve funds established for the Bonds, the Prior Parity Debt and any Additional Bonds, including the Reserve Fund, or for other purposes of the City permitted by law. See APPENDIX C -"SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT -Receipt and Deposit of Revenues; Withdrawals."

Prior Parity Debt

The City has previously obligated itself to rnake debt service payments, base rental payments and installment payments secured by the Revenues which payments are to be rnade on a parity with debt service payments on the Bands. These payments secure certain indebtedness previously issued by the Municipal Improvement Corporation of Los Angeles (the "Corporation") on behalf of the City (the "Outstanding Parity Bonds") currently outstanding in the aggregate principal amount of $33,565,CXXl. These payments also include indebtedness previously issued pursuant to the Trust Agreement including the Seri es 2001-A Bands currently outstanding in the aggregate principal amount of $85,440,CXXl, the Series 2003-A Bonds currently outstanding in the aggregate principal amount of $47,825,CXXl, the Seri es 2003--B Bands currently outstanding in the aggregate principal amount of $61, 120,CXXl and the Series 2004-A Bonds currently outstanding in the aggregate principal amount of $56,230,CXXl (the "Series 2001-A Bonds," the "Series 2003-A Bonds," the "Series 2003--B Bonds" and the "Series 2004-A Bonds'' are collectively referred to herein as the "Prior Bonds." The Prior Bonds and the Outstanding Parity Bonds are collectively referred to herein as the "Prior Parity Debt").

5 The Outstanding Parity Bonds consist of the Corporation's $15,585,CXXl Sanitation Equiprrent Charge Revenue Bonds, Series 1997-A, currently outstanding in the amount of $9,795,CXXl (the "Series 1997-A Bonds"), its $42,060,CXXlSanitation EquiprrentCharge Revenue Bonds, Series 1997--B, currently outstanding in the amount of $13,565,CXXl (the "Series 1997--B Bonds") and its $22,255,CXXl Sanitation Equiprrent Charge Revenue Bonds, Series 1999-A, currently outstanding in the amount of $10,205,CXXl (the "Series 1999-A Bonds").

Maintenance of Sanitation Equipment Charge

The City has covenanted in the Trust Agreerrent that if at any ti rre during the Fiscal Year the City deternines that the Sanitation Equiprrent Charge is not being maintained at a level sufficient to provide for payrrent of all Debt Service within the Fiscal Year, together with any amount required to replenish the Reserve Fund follcwing a withdr.M'al therefrom and to pay all costs, fees and expenses to be paid by the City under the Trust Agreerrent, the City will take action at that tirre to maintain the Sanitation Equiprrent Charge at a level sufficient to provide for payrrent of all Debt Service within the Fiscal Year, together with any amount required to replenish the Reserve Fund follcwing a withdr.M'al therefrom and to pay all costs, fees and expenses required to be paid by the City under the Trust Agreerrent; provided, hcwever, that to the extent the City designates other legally available funds for such payrrent, it need not increase the Sanitation Equiprrent Charge. Under Proposition 218, approved by California voters in November 1996, any increase in the Sanitation Equiprrent Charge may require a public hearing, preceded by mailed notice, and be suqject to a majority written protest. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS-Proposition 218'' belcw.

Proposition 218

On November 5, 1996, the voters of the State approved Proposition 218, kncwn as the "Right to Vote on Taxes Act." Proposition 218 added Articles XI IIC and XIIID to the California Constitution and contains a number of interrelated provisions affecting the ability of the City to levy and collect both existing and future taxes, assessrrents and property related fees and charges.

ArticleXIIID contains several provisions affecting property related "fees'' and "charges," which are defined for purposes of ArticleX 111 D to rrean "any levy otherthan an advaloremtax, a special tax, or an assessrrent, imposed by a local governrrental entity upon a parcel or upon a person as an incident of property cwnership, including user fees or charges for a property related service." The Sanitation Equiprrent Charge and the Extra Capacity Fee (as defined belcw under "SANITATION EQUIPMENT CHARGE-Charges") may be considered to be "fees" or "charges" for a property related service within the rreaning of Proposition 218.

ArticleX 111 D requires that any local governrrent imposing or increasing any property related fee or charge must provide written notice thereof to the record cwner of each identified parcel upon which such property related fee or charge is proposed to be imposed, and must conduct a public hearing with respect thereto. The proposed property related fee or charge may not be imposed or increased if a majority of cwners of the identified parcels file written protests against it. As a result, if the Sanitation Equiprrent Charge or the Extra Capacity Fee is determined to be a "fee'' or "charge" for a property related service as defined in Proposition 218, any increase in the Sanitation Equiprrent Charge or the Extra Capacity Fee would require a public hearing, preceded by mailed notice, and would be suqject to a majority written protest.

In addition, ArticleXIIID provides that, except for fees or charges for sewer, water and solid waste collection services, no property related fee or charge may be imposed or increased unless such fee or charge is submitted and approved by a majority vote of the property cwners of the property suqject to

6 the fee or charge, or at the option of the local governmental entity, b,r a two-thirds vote of the electorate residing in the affected area. The City believes that, in the eventthe Sanitation Equipment Charge and the Extra Capacity Fee are determined to be a property related fees or charges for purposes of ArticleX 111 D, they would be deemed to be fees and charges for "solid waste collection services" and not suqject to this election requi rement, al though there can be no assurance that a court would not determine otherwise.

Article X 111 D al so includes the fol I cwi ng Ii ni tati ans appl i cable to property related fees or charges: (i) revenues derived from the fee or charge may not exceed the funds required to provide the property related service; (ii) revenues derived from the fee or charge may not be used for any purpose other than that for which the fee or charge was imposed; (iii) the amount of a fee or charge imposed upon any parcel or person as an incident of property cwnership may not exceed the proportional cost of the service attributable to the parcel; and (iv) no fee or charge may be imposed for a service unless that service is actually used b,r, or immediately available to, the cwner of the property in question. The City believes that the Sanitation Equipment Charge and the Extra Capacity Fee satisfy these requirements, although there can be no assurance that a court would not deternine otherwise.

ArticleXIIIC rermves linitations on the initiative pcwer in the matters of local taxes, assessments, fees and charges. Consequently, the voters of the City could, b,r future initiative, seek to repeal, reduce or prohibit the future imposition or increase of any local tax, assessment, fee or charge. "Assessment," "fee'' and "charge'' are not defined in ArticleXIIIC and it is unclear whether the definitions of such terms contained in ArticleXIIID (which are generally property related as described aoove) are so limited under ArticleXIIIC. No assurance can be given that the voters of the City will not, in the future, approve an initiative which reduces or repeals local taxes, assessments, fees or charges, including a reduction of all or any portion of the Sanitation Equipment Charge or the Extra Capacity Fee securing the Bonds. The use of the initiative pcwer is arguably linited in the case of levies directly pledged to bonded indebtedness, such as the Sanitation Equipment Charge and the Extra Capacity Fee securing the Bonds. Hcwever, there can be no assurance that the voters of the City will not approve an initiative which attempts to reduce the Sanitation Equipment Charge or the Extra Capacity Fee or to curtai I any future increases i n such charge or fee.

The ability of the City to comply with the covenants in the Trust Agreement, including the rate covenant described under "Maintenance of Sanitation Equipment Charge'' aoove, could be ad.tersely affected b,r actions taken (or not taken) b,r voters, property cwners or other persons obligated to pay the Sanitation Equipment Charge or Extra Capacity Fee. The opinion to be delivered b,r Fulbright& Jaworski L.L.P., Bond Counsel, concurrently with the issuance of the Bonds to the effect that the Trust Agreement constitutes a legal, valid and binding obligation of the City will be suqject to various linitations, including any limitation on the imposition and collection of Sanitation Equipment Charges or Extra Capacity Fees as a result of the application of the provisions of Proposition 218. See APPENDIX D-"PROPOSED FORM OF BOND COUNSEL OPINION."

For further discussion regarding the potential impact of Proposition 218 on the City's General Fund, see APPENDIX A -"CITY OF LOS ANGELES - Limitations on Taxes and Appropriations."

Limitations on Parity and Superior Obligations; Additional Bonds

No Obligations Superior to Debt Service Payments on the Bonds. The City has covenanted in the Trust Agreement and in the financing documents with respect to the Outstanding Parity Bonds that it will not, so long as any bonds are Outstanding under the Trust Agreement or Outstanding Parity Bonds are outstanding, issue or incur any obligations secured b,r a pledge of Revenues superior to the pledge securing the payment of pri nci pal of and interest on the Bands.

7 Obligations on a Parity IMth the Bonds; Additional Bonds. The City may at any time issue Addi ti anal Bands, provided:

(1) The Revenues for the most recent Fiscal Year for which the City has unaudited financial statements certified by a City Representative preceding the date of adoption by the City Council of the City of the resolution authorizing the issuance of such Additional Bonds, as evidenced by a calculation prepared by the City Representative on file with the Trustee, shall have produced a sum equal to at least 11036 of the Debt Service for such Fiscal Year; and

(2) The Revenues for the most recent Fiscal Year preceding the date of adoption by the City Council of the City of the resolution authorizing the issuance of such Additional Bonds, including aqjustments to give effect as of the first day of such Fiscal Year to increases or decreases in the Sanitation Equipment Charge or other rates and charges described in clause (2) of the definition of Revenues approved and in effect as of the date of calculation, as evidenced by a calculation prepared by the City Representative and on file with the Trustee, shall have produced a sum equal to at least 11036 of the Debt Service for such Fiscal Year plus the Debt Service which would have accrued had such Additional Bonds been issued at the beginning of such Fi seal Y ear; and

(3) The estimated Revenues for the then current Fiscal Year and for the first Fiscal Year thereafter, as evidenced by a certificate of the City Representative on file with the Trustee, plus an allcwance for estimated Revenues for each of such Fiscal Years arising from any increase or decrease in the Sanitation Equipment Charge or other rates and charges described in clause (2) of the definition of Revenues estimated to be fixed and prescribed to the extent such increases or decreases shall take effect during such period, as evidenced by a certificate of the City Representative on file with the Trustee, shall produce a sum equal to at least 11036 of the estimated maximum annual Debt Service for each of such Fiscal Years, after giving effect to the issuance of such Addi ti anal Bands.

In addition, the documents relating to each series of Additional Bonds shall provide that, prior to or simultaneous with the issuance of such series of Additional Bonds, there shall be deposited into the Reserve Fund an amount equal to the difference between the Reserve Requirement for the Outstanding Parity Bonds, the Bonds and the previously Outstanding Additional Bonds and the amount on deposit therein on the date of issuance of the Additional Bonds. Notwithstanding the foregoing, such deposits may be in the form of a credit facility as provided belcw under" Reserve Fund."

Reserve Fund

The Reserve Fund was established in connection with the Outstanding Parity Bonds and the Prior Bonds and as ofJune 10, 2005 was funded in the amount of $32,172,741.96. Upon initial delivery of the Bonds, an additional $4,575,CXXlwill be deposited in the Reserve Fund from proceeds of the Bonds. This amount, plus the $32,172,741.96 on deposit in the Reserve Fund, will be sufficient to meet the Reserve Requirement for the Bonds and the Prior Parity Debt of $36,505,781. "Reserve Requirement'' means, with respect to each series of Additional Bonds and the Bonds as of the date of calculation, the least of (a) the maximum annual Debt Service with respect to the Bonds or such series of Additional Bonds, (b) 125% of the average annual aggregate Debt Service with respect to the Bonds or such series of Additional Bonds, and (c) 1036 of the proceeds of the Bonds or such series of Additional Bonds; provided, hcwever, the Reserve Requirement with respect to the Prior Parity Debt, all series of Additional Bonds and the Bonds combined shall not exceed the maximum annual Debt Service with respect to the Prior Parity Debt, all series of Additional Bonds and the Bonds combined. The Reserve Fund will be held as a separate and distinct fund for the pro--rata benefit of the Prior Parity Debt, the Bonds and all

8 Additional Bonds. The Trustee will deposit in the Reserve Fund the armunts required to be deposited therein pursuant to the Trust Agreement and apply moneys in the Reserve Fund in accordance with the Trust Agreement.

If four business days prior to any interest or principal payment date with respect to the Prior Parity Debt, the Bonds or any series of Additional Bonds, the moneys available are insufficient to make the payments required with respect to the Prior Parity Debt, the Bonds or such series of Additional Bonds on such payment date, the Trustee will transfer from the Reserve Fund to the applicable fund the armunt of such i nsuffi ci ency.

In the event that the Trustee has transferred moneys from the Reserve Fund in accordance with the Trust Agreement, upon receipt of the moneys from the City to increase the balance in the Reserve Fund to the Reserve Requirement, the Trustee will deposit such moneys in the Reserve Fund.

At the option of the City, a credit facility in the armunt of all or a portion of the Reserve Requirement may be substituted for the funds held b,r the Trustee in the Reserve Fund as pro.tided in the Trust Agreement. See APPENDIX C -"SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT -Reserve Fund."

Investment of Funds

Moneys on deposit in the SEC Fund are currently held and invested b,r the Treasurer of the City in the Treasurer's general pooled investment fund (the "Pool"). See APPENDIX A - "CITY OF LOS ANGELES -- FINANCIAL OPERATIONS-Investment Practices" for information on the City's investment practices.

Certain proceeds of the Bands and other moneys required to be deposited b,r the City to the funds and accounts established under the Trust Agreement will be held and invested b,r the Trustee, at the direction of the City, in Permitted Investments, as defined in the Trust Agreement. See APPENDIX C - "SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT-MASTER TRUST AGREEMENT." The City anticipates that the proceeds of the Bonds deposited to the Acquisition Fund will be held b,r the Treasurer of the City and invested in Pernined Investments.

Limited Liability

Notwithstanding anything contained in the Trust Agreement, the City shall not be required to ad.lance any moneys derived from any source of income other than the Revenues, the SEC Fund and the other funds pro.tided in the Trust Agreement forthe payment of principal and interest on the Bonds. The City may, hcwever, ad.lance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and which may be legally used b,r the City for such purpose.

THE OBLIGATION OF THE CITY TO PAY THE PRINCIPAL OF AND INTEREST ON THE BONDS IS A SPECIAL, LIMITED OBLIGATION OF THE CITY, PAYABLE FROM AND SECURED BY REVENUES. THE BONDS DO NOT CONSTITUTE AN OBLIGATION OF THE CITY FOR WHICH THE CITY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE CITY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. THE OBLIGATION OF THE CITY TO PAY THE PRINCIPAL OF AND INTEREST ON THE BONDS DOES NOT CONSTITUTE A DEBT OR INDEBTEDNESS OF THE CITY, THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION.

9 The Bands are not secured b,r, and the owners have no security interest in or mortgage on, the Prqject, or the solid waste collection and disp:isal system of the City or any other property of the City (other than the SEC Fund). Default b,r the City on the payment of the Bonds will not result in loss of the Prqject. Should the City default, the Trustee may take whatever actions are available legally to enforce performance and observance of any obligation, agreement or co.tenant of the City under the Trust Agreement. Neither the Trustee nor the owners are pernitted to accelerate the payment b,r the City of the principal of and interest on the Bonds under any circumstances. See APPENDIX C -"SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT."

Debt Service Schedule

The follcwing table sets forth the amounts required in each fiscal year for the payment of principal and interest on the Bonds, the Prior Bonds and the Outstanding Parity Bonds. The debt service payments, base rental payments and installment payments on the Prior Bonds and the Outstanding Parity Bonds are secured b,r the Revenues on parity with the Bonds. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS-Prior Parity Debt."

[remainder of page intentionally left blank]

10 TABLE NO. l DEBT SERVICE SCHEDULE

Perioo Sen es 2005-A Bonds Prior Bmds Outstanding Parity Bonds Total Debt Ending Prirupal Interest: Principal Interest: Principal Interest Service 00;01 ;2005 $ $ $ $ 5.970.693 $ $ 775.159 $ 6.745.851 02;01 ;2006 l.296250 4.600000 5.970.693 19.035.000 775.159 31.677.101 00;01 ;2006 l.143.750 5.858,693 341.683 7.344.125 02;01 ;2007 l.143.750 18,755.000 5.858,693 5.760.000 341.683 31.859.125 00;01 ;2007 l.143.750 5.463.593 193.983 6.801.325 02;01 ;2000 l.143.750 19,215.000 5.463.593 6.055.000 193.983 32.07].325 00;01 ;2000 l.143.750 4.983.218 55.658 6.182.625 02;01 ;2009 $4.000.000 l.143.750 14.575.000 4.983.218 2.715.000 55.658 27.472.625 00;01 ;2009 l.043.750 4.657.986 5.701.736 02;01 ;2010 4.300.000 l.043.750 17.850.000 4.657.986 27.851.736 00;01 ;2010 936.250 4.236.705 5.172.955 02;01 ;201 l 2.765.000 936.250 15.730,000 4.236,705 23.667.955 00;01 ;201 l 867.125 3.868,325 4.735.450 02;01 ;2012 2.905.000 867.125 16.465.000 3.868,325 24.105.450 00;01 ;2012 794.500 3.498,075 4.292.575 02;01 ;2013 3.055.000 794.500 17.205.000 3.498,075 24.552.575 00;01 ;2013 718,125 3.085.019 3.803.144 02;01 ;2014 3.205.000 718,125 18,030,000 3.085.019 25.038, 144 00;01 ;2014 638,000 2.651.469 3.289.469 02;01 ;2015 3.365.000 638,000 18, 90Cl, 000 2.651.469 25.554.469 00;01 ;2015 553.875 2.196.869 2.750.744 02;01 ;2016 3.530.000 553.875 19.810,000 2.196869 26.090.744 00;01 ;2016 465.625 l.736.975 2.202.600 02;01 ;2017 3.710.000 465.625 20.730,000 l.736,975 26.642.600 00;01 ;2017 372.875 l.229.394 l.602.269 02;01 ;2018 8, 165.000 372.875 17.475.000 l.229,394 27.242.269 00;01 ;2018 168,750 795.988 964.738 02;01 ;2019 6,750.000 168,750 10.000,000 795.988 17.714.738 00;01 ;2019 539.113 539.113 02;01 ;2020 10,515.000 539.113 ll.054.113 00;01 ;2020 269.000 269.000 02;01 ;2021 975.000 269.000 l.244.000 00;01 ;2021 244.625 244.625 02;01 ;2022 l.025.000 244.625 l.269.625 00;01 ;2022 219.000 219.000 02;01 ;2023 l.075.000 219.000 l.294.000 00;01 ;2023 192.125 192.125 02;01 ;2024 l.130,000 192.125 ].322.125 00;01 ;2024 163.875 163.875 02;01 ;2025 l.185.000 163.875 ].348,875 00;01 ;2025 134.250 134.250 02;01 ;2026 l.245.000 134.250 ].379.250 00;01 ;2026 103.125 103.125 02;01 ;2027 ].310,000 103.125 l.413.125 00;01 ;2027 70.375 70.375 02;01 ;2028 ].375.000 70.375 l.445.375 00;01 ;2028 36.000 36.000 02;01 ;2029 l.440,000 36.000 l.476.000 TOTAL 111 $45.750.000 $21.276.500 $250.615.000 $104.408,973 $33.565.000 $2.732.962 $458,348,435

In Totals tllay' mt add dLe to in::l~n:lent roun:litl'J.

11 BOND INSURANCE

The Bond Insurer has supplied the follONing information for inclusion in this Official Statement. No representation is made by the City or the Underwiter as to the accuracy or corrpleteness of this information.

Payments Under the Policy

Concurrently with the issuance of the Bonds, Financial Guaranty Insurance Company, doing business in California as FGIC Insurance Company (the "Bond Insurer") will issue its Municipal Bond Nav Issue Insurance Policy for the Bonds (the "Policy"). The Policy unconditionally guarantees the payment of that portion of the principal or accreted value (if applicable) of and interest on the Bonds which has become due for payment, but shall be unpaid by reason of nonpayment by the City. The Bond Insurer will make such payments to U.S. Bank Trust National Association, or its successor as its agent ( the " Fi seal A gent''), on the I ater of the date on which such pri nci pal, accreted val ue or interest ( as applicable) is due or on the business day next follcwing the day on which the Bond Insurer shall have received notice (in accordance with the terms of the Policy) from an cwner of Bonds or the trustee or paying agent (if any) of the nonpayment of such amount by the City. The Fiscal Agent will disburse such amount due on any Bond to its cwner upon receipt by the Fiscal Agent of evidence satisfactory to the Fiscal Agent of the cwner's right to receive payment of the principal, accreted value or interest (as applicable) due for payment and evidence, including any appropriate instruments of assignment, that all of such cwner's rights to payment of such principal, accreted value or interest (as applicable) shall be vested in the Bond Insurer. The term "nonpayment" in respect of a Bond includes any payment of principal, accreted value or interest (as applicable) made to an cwner of a Bond which has been recovered from such cwner pursuanttothe United States Bankruptcy Code by a trustee in bankruptcy in accordance with a final, nonappealable order of a court having competentjurisdiction.

Once issued, the Policy is non--cancellable by the Bond Insurer. The Policy covers failure to pay pri nci pal ( or accreted value, if applicable) of the Bands on their stated maturity dates and thei r mandatory sinking fund redemption dates, and not on any other date on which the Bonds may have been otherwise called for redemption, accelerated or advanced in maturity. The Policy also covers the failure to pay interest on the stated date for its payment. In the event that payment of the Bonds is accelerated, the Bond Insurer will only be obligated to pay principal (or accreted value, if applicable) and interest in the originally scheduled amounts on the originally scheduled payment dates. Upon such payment, the Bond I nsurer wi 11 become the cwner of the Band, appurtenant coupon or right to payment of principal or interest on such Bond and will be fully subrogated to all of the Bondholder's rights thereunder.

The Policy does not insure any risk other than Nonpayment by the City, as defined in the Policy. Specifically, the Policy does not cover: (i) payment on acceleration, as a result of a call for redemption (other than mandatory sinking fund redemption) or as a result of any other advancement of maturity; (ii) payment of any redemption, prepayment or acceleration premium; or (iii) nonpayment of principal (or accreted value, if applicable) or interest caused by the insolvency or negligence or any other act or onission of the trustee or paying agent, if any.

As a condition of its comnitmentto insure Bonds, the Bond Insurer may be granted certain rights underthe Bond documentation. The specific rights, if any, granted to the Bond Insurer in connection with its insurance of the Bonds may be set forth in the description of the principal legal documents appearing elsewhere in this Official Statement, and reference should be made thereto.

The Policy is not covered by the Property~asualty Insurance Security Fund specified in Article 76 of the NavY ark Insurance Law.

12 The Policy is not covered by the California Insurance Guaranty Association (California Insurance Ccx:le, Article 14.2).

Financial Guaranty Insurance Company

The Bond Insurer, a New Yark stock insurance corporation, is a direct, wholly--cwned subsidiary of FGIC Corporation, a Delaware corporation, and provides financial guaranty insurance for public finance and structured finance obligations. The Bond Insurer is licensed to engage in financial guaranty insurance in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico and, through a branch, in the United Kingdom

On December 18, 2003, an investor group consisting of The PMI Group, Inc. ("PMI"), affiliates of The Blackstone Group L.P. ("Blackstone''), affiliates of The Cypress Group L.L.C. ("Cypress") and affiliates of CIVC Partners L.P. ("CIVC") acquired FGIC Corporation (the "FGIC Acquisition") from a subsidiary of General Electric Capital Corporation ("GE Capital"). PMI, Blackstone, Cypress and CIVC acquired approximately 42%, 23%, 23% and 7%, respectively, of FGIC Corporation's common stock. FGIC Corporation paid GE Capital approximately $284.3 million in pre-closing dividends from the proceeds of dividends it, in turn, had received from the Bond Insurer, and GE Capital retained approximately $234.6 nillion in liquidation preference of FGIC Corporation's convertible participating preferred stock and approximately 5% of FGI C Corporation's common stock. Neither FGIC Corporation nor any of its shareholders is obi i gated to pay any debts of the Band I nsurer or any cl ai ms under any insurance policy, including the Policy, issued by the Bond Insurer.

The Bond Insurer is suqject to the insurance laws and regulations of the State of Nav Yark, where it is cloniciled, including Article 69 of the New York Insurance Law ("Article 69''), a comprehensive financial guaranty insurance statute. The Bond Insurer is also suqject to the insurance laws and regulations of all other jurisdictions in which it is licensed to transact insurance business. The insurance laws and regulations, as well as the level of supervisory authority that may be exercised by the various insurance regulators, vary by jurisdiction, but generally require insurance companies to maintain minimum standards of business conduct and solvency, to meet certain financial tests, to comply with requirements concerning pernitted investments and the use of policy forms and premium rates and to file quarterly and annual financial statements on the basis of statutory accounting principles ("SAP") and other reports. In addition, Article 69, among other things, Ii nits the business of each financial guaranty insurer, including the Bond Insurer, to financial guaranty insurance and certain related lines.

For the three months ended March 31, 2005, and the years ended December 31, 2004, and December 31, 2003, the Bond Insurer had written directly or assumed through reinsurance, guaranties of approximately $14.8 billion, $59.5 billion and $42.4 billion par value of securities, respectively (of which approximately 71%, 56% and 7936, respectively, constituted guaranties of municipal bonds), for which it had collected gross premiums of approximately $84.4 nillion, $323.6 nillion and $260.3 nillion, respectively. For the three months ended March 31, 2005, the Bond Insurer had reinsured, through facultative and excess of loss arrangements, approximately 0.5% of the risks it had written.

As of March 31, 2005, the Bond Insurer had net adnitted assets of approximately $3.215 billion, total liabilities of approximately $2.040 billion, and total capital and policyholders' surplus of approximately $1.175 bi 11 ion, deterni ned in accordance with statutory accounting practices prescribed or perni tted by i nsurance regulatory authorities.

The unaudited financial statements of the Bond Insurer as of March 31, 2005, the audited financial statements of the B and I nsurer as of December 31 , 2004, and the audited financial statements of the Bond Insurer as of December 31, 2003, which have been filed with the Nationally Recognized

13 Municipal Securities Information Repositories ("NRMSIRs"), are hereb,r included b,r specific reference in this Official Statement. Any statement contained herein underthe heading" BOND INSURANCE," or in any documents included b,r specific reference herein, shall be mcx:lified or superseded to the extent required b,r any statement in any document subsequently filed b,r the Bond Insurer with such NRMSI Rs, and shall not be deemed, except as so mcx:lified or superseded, to constitute a part of this Official Statement. All financial statements of the Bond Insurer (if any) included in documents filed b,r the Bond Insurer with the NRMSI Rs subsequent to the date of this Official Statement and prior to the termination of the offeri ng of the Bands shal I be deemed to be i ncl uded b,r specific reference i nto this Official Statement and to be a part hereof from the respective dates of fi Ii ng of such documents.

The Bond Insurer also prepares quarterly and annual financial statements on the basis of generally accepted accounting principles. Copies of the Bond Insurer's most recent GAAP and SAP financial statements are available upon request to: Financial Guaranty Insurance Company, 125 Park Avenue, Nav York, NY 10017, Attention: Corporate Communications Department. the Bond Insurer's telephone number is (212) 312-3CXXl.

Financial Guaranty's Credit Ratings

The financial strength of the Bond Insurer is rated "AAA" b,r Standard & Poor's, a Division of The McGriM'--Hill Companies, Inc., "Aaa'' b,r Moody's Investors Service, and "AAA" b,r Fitch Ratings. Each rating of the Bond Insurer should be evaluated independently. The ratings reflect the respective ratings agencies' current assessments of the i nsurance financial strength of the Band I nsurer. Any further explanation of any rating may be obtained only from the applicable rating agency. These ratings are not recommendations to buy, sell or hold the Bonds, and are suqject to revision or withdrawal at any time b,r the rating agencies. Any dcwnward revision or withdrawal of any of the alx:we ratings may have an ad.terse effect on the market price of the Bands. The Bond Insurer does not guarantee the market price or investment value of the Bonds nor does it guarantee that the ratings on the Bonds will not be revised or withdrawn.

Neither the Bond Insurer nor any of its affiliates accepts any responsibility for the accuracy or completeness of the Official Statement or any information or disclosure that is provided to potential purchasers of the Bonds, or omitted from such disclosure, other than with respect to the accuracy of information with respect to the Bond Insurer or the Policy under the heading "BOND INSURANCE." In addition, the Bond Insurer makes no representation regarding the Bonds orthe ad.tisability of investing in the Bonds.

THE PROJECT

Description

The capital prqject to be financed with the proceeds of the Bonds is the acquisition of refuse collection containers, equipment and vehicles and the design, planning, improvement and/or construction of certain sanitation facilities (the "Prqject").

The follcwing items are expected to be financed with the proceeds of the Bonds:

14 Estimated Item Costs Sanitation Truck~ OtherVehiclesand Related Equipment $22,309,300 Automited Recycling Containers 19,427,200 Storm Water Clarifiers 200,CXXl Toym Landfill Closure 1,600,CXXl Refurbishment and Repair of Harmr Di strict Collect on Yard 167,CXXl Repairs and I rrprovements to Central Los Angeles Transfer Station 156,CXXl Refurbishment of Nath Central Yard 350,CXXl Preparation of Des gns and Pl ans fcr I mprovements to North Central Yard, including alternative fuel fa::il ities l ,CXXl,CXXl TOTAL $45,2(9,500

See "DEPARTMENT OF PUBLIC WORKS, BUREAU OF SANITATION SOLID WASTE OPERATIONS-Processing and Disposal."

The Bonds are not secured b,r, and the owners have no security interest in or mortgage on, the Prqject.

Substitution of Prqj ect

The City may substitute other capital items for the Prqject described aoove and may add additional items in compliance with the provisions of the Trust Agreement.

SANITATION EQUIPMENT CHARGE

Background

The Sanitation Equipment Charge is imp:ised on all single family dwellings in the City and those multiple unit dwellings for which the City provides solid waste collection services. The City provides household solid waste collection services to any residential dwelling on the basis of whether solid waste containers are placed upon the street for City collection. In practice, most multiple unit dwellings that receive City collection consist of buildings with four or faver units. A moratorium, imp:ised b,r the City Council in 1990, stipulates that no nav multiple unit dwellings over four units may be added for City solid waste col I ecti on service.

The Sanitation Equipment Charge was instituted b,r the City Council pursuant to Ordinance No. 157819 effective July 21, 1983 (as amended to date, the "SEC Ordinance"). The SEC Ordinance originally imposed the Sanitation Equipment Charge forthe purp:ise of acquiring and repairing sanitation vehicles. In addition, the SEC Ordinance established billing and collection procedures, procedures in the event of improper billing, and qualification criteria for senior or disabled exerll)tions. By Ordinance No. 165950, the SEC Ordinance was amended to allcw for an increase in the Sanitation Equipment Charge as well as the expanded use of the Sanitation Equipment Charge to include the acquisition of solid waste containers. By Ordinance No. 166308, a special fund was established as the SEC Fund to receive the Sanitation Equipment Charge which is irrevocably pledged to the payment of the Bonds, the Series 2001-A Bonds, the Series 2003-A Bonds, the Series 2003--B Bonds, the Series 2004-A Bonds and the Outstanding Parity Bonds. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS." By Ordinance No. 169850, the SEC Ordinance was amended to all cw the expanded use of the Sanitation Equipment Charge to include construction of landfill prqjects. By Ordinance No. 171458, the SEC Ordinance was amended to expand the use of the Sanitation Equipment Charge to include the acquisition, leasing and improving of real properties for parking, repairing and maintaining the sanitation equipment.

15 By Ordinance No. 174699, the SEC Ordinance was amended to expand the use of the Sanitation Equipment Charge to include the cost of distribution, repair and maintenance of the solid waste containers. By Ordinance No. 175769, the SEC Ordinance was amended to expand the use of the Sanitation Equipment Charge to include the acquisition, leasing and improving of real properties for use as transfer stations for the transl oadi ng of solid waste.

Charges

The Trust Agreement requires that the City maintain the Sanitation Equipment Charge at a level sufficient at all times to provide for payment of all Debt Service within each Fiscal Year, together with certain other costs. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS-Maintenance of Sanitation Equipment Charge" herein. The City will continue to reviav the Sanitation Equipment Charge and the actual receipts thereof in order to ensure that its obligations under the Trust Agreement are met. All City charges are reviaved annually b,r the City Adninistrative Officer as part of the budgetary process. See APPENDIX A - "CITY OF LOS ANGELES-CITY FINANCIAL INFORMATION-Budgetary Process."

The Sanitation Equipment Charge was first enacted in 1983 and levied a fee of $1.50 per month for all single fanily residences and $1.00 per month per unit in a multiple dwelling unit residence served b,r the City. The Sanitation Equipment Charge has been increased five times and decreased one time b,r the City Council since 1983. Residents currently can dispose of 150 gallons a week per single family residence (60 gallons for general household refuse and 90 gallons for yard trimmings) and 60 gallons a week per unit in multiple unit dwellings for general household refuse (with an additional 90 gallons provided to each parcel for yard trimmings), at a rate of $11.00 per month for single family dwellings and $7.27 per month per unit for multiple unit dwellings.

The current rates are based on an ordinance adopted b,r the Mayor and the City Council in May 2004 and effective on July 1, 2004. As a result of such ordinance the Sanitation Equipment Charge rate was increased to $11.00 per month for single fanily dwellings and $7.27 per month for multiple unit dwellings for a period expiring on June 30, 2009. Such increase is intended to help offset the cost of purchasing the Central Los Angeles Recycling and Transfer Station. See also" Pro--Forma Statement of Debt Service Coverage." Absent additional action b,r the Mayor and the City Council, after the increase expires, the Sanitation Equipment Charge rates will return to the rates applicable prior toJ uly 1, 2004, specifically, $10.00for single fanily dwellings and $6.60 for multiple unit dwellings.

16 The follcwing table pr0.tides historical levels of the Sanitation Equipment Charge for single family and multiple dNelling unit residences. TABLE NO. 2 SANITATION EQUIPMENT CHARGE RATE HISTORY Monthly Charge Fi seal Years Single-family Dwelling Unit Multi-family Dwelling Unit 1983-199J 11 $1.50 $1.00 1990-1992121 3.00 2.00 1992-1994131 6.00 4.00 1994-1 gcxj4I 4.50 3.00 1996-2003151 6.00 4.00 2003-2004161 10.00 6.60 1 2004-2005 " 11.00 7.27

(lJ Esta!Jish=l:IJ uly 21, 1983. 2 ( J In:::reaseeffectiveJ Uy 5, 19SO. 3 ( J In:::rease effectiveJ anuaty 20, l Sl93. 4 ( J DecreaseeffectiveJuly l, 1994. (sJ In:::reaseeffectiveJ Uy l, 19S6. 5 ( J In:::rease effective Octo~r 25, 2003. (7! In:::reaseeffectiveJ Uy l, :JX)4, an::l ex)]resJ u~ 30, :JX)9.

By Ordinance No. 170868, onJ anuary 3, 1996, the City Council appr0.ted the Extra Capacity Fee Ordinance. The Extra Capacity Fee, which was first inµ:ised inJ uly 1996, is a charge of $5.00 per month for each addi ti anal 30 gal Ions of refuse, $2. 50 per month for each addi ti anal 30 gal Ions of yard tri rrmi ngs and $1.00 for a tag to all cw 30 gallons of intermittent extra capacity. Effective August 22, 2002, the City amended the Extra Capacity Fee by Ordinance No. 174699 to increase the standard yard trimning al Icwance to 90 gal Ions.

Exemptions From Sanitation Equipment Charge

Certain exemptions from the Sanitation Equipment Charge are available pursuant to the SEC Ordinance. Multiple dNelling unit residences which do not utilize household solid waste collection services from the City are not suqject to the Sanitation Equipment Charge imp:ised by the SEC Ordinance. An exemption forthis reason is available as long as a multiple dNelling unit residence can be verified as not receiving solid waste collection services from the City. Such exemptions are granted or rem0.ted upon verification of lack of service by field inspectors from the Department of Public Works, Bureau of Sanitation (the "Bureau"). Upon verification, exemption information is pr0.tided to DWP by the Bureau in order to update bi 11 i ng and col I ecti on information.

A second major category of exemptions applies to senior or certain disabled citizens who qualify for an exemption from the Sanitation Equipment Charge pursuant to the SEC Ordinance. An individual 62 years or older or a disabled individual shall not be liable for the payment of the Sanitation Equipment Charge pr0.tided that the aqjusted gross income forthe household in which such individual resides is less than a certain level specified in the SEC Ordinance. In addition, refund claim; for previously paid amounts of Sanitation Equipment Charge for a period within twelve months of the date of the filing may be subnined by senior or disabled individuals who qualify for an exemption for the first time. The amounts of such refund claim; historically have been negligible.

B ii ling and Collection

The collection of the Sanitation Equipment Charge imp:ised by the SEC Ordinance occurs under the direction, supervision and control of the City's Director of Finance. Hcwever, the SEC Ordinance also calls for the Director of Finance to arrange for the billing and collection of, and accounting for, the

17 Sanitation Equiprrent Charge through and b,r available facilities of the Departrrent of Water and Paver of the City of Los Angeles(" DWP") and to pay for the costs of such services. Underthe SEC Ordinance, the Director of Finance has the ability to establish separate billing and collection services; havever, since the inception of the Sanitation Equiprrent Charge, billing and collection services have been provided b,r DWP. The City currently expects to continue to use the billing and collection services of DWP but may elect not to do so at any ti rre.

As the exclusive provider of water service and practically the sole provider of electric service to the City's residents, DWP regularly bills for its services and collects accounts receivable from its customers. DWP includes the Sanitation Equiprrent Charge on its bimonthly bill which includes charges for water, electric and sewer services and certain State and local taxes as well as the Sanitation Equiprrent Charge (each a "B ii led Account'').

DWP's policy for most customers is that when a utility account in arrears reaches $35, procedures for discontinuing service are started and a delinquency charge of 18 percent per year is applied to outstanding electric and water balances greater than $150. The first step in the procedure to discontinue service is a "final notice." This notice is mailed to the custorrer within 30 to 35 days after the past due balance of the account reaches a certain level in arrears (ranging from $35 to $75, depending on the class of custorrer). This notice provides the customer a last day to pay which is typically accompanied b,r a grace period of 10 to 12 days. Field collection is then instituted if the delinquent amount remains over $35. Afterthe "last day to pay" a 48 hour notice is delivered to the customer. A customer's failure to pay b,r the conclusion of the 48 hour period leads to a shut off of water and/or electrical service on the second field call. Should a customer request an extension on the" last day to pay" and it is denied, a 48 hour verbal notice is made. Should the bill remain unpaid, the water andft)r electrical service may be shut off on the first field call thereafter.

Certain DWP customers receive water and electric service b,r rreans of a master rreterwhich may service multiple dNelling units. Water and electrical service to multiple dNelling unit residences serviced through a master rreter may be disconnected for delinquent payrrents. Havever, the DWP is authorized to uti Ii ze a I i en assessrrent col Iecti on mechanism agai nst the property for which payrrents are deli nquent. After specified hearing requi rerrents, the amount of the assessrrent becorres a I i en upon the real property. Fai Iure to pay the assessrrent for deli nquent amounts, i n accordance with normal property tax col Iecti on procedures, would Iead to i mposi ti on of i nterest and penal ti es b,r the County of Los Angel es and sale of the property to pay for outstanding liens after five years. Prior to January 1, 1996, the assessrrent for del i nquent amounts had the same priority as taxes and assessrrents on the property avner' s property tax bill. In accordance with legislation effective January 1, 1996, the assessrrent for delinquent amounts is nav subordinated to any prior recorded lien on the property. The law does provide, havever, that upon transfer the nav avner of the property may be required to make a security deposit of up to six months of estimated reasonable utility charges. The security deposit may be extended upon non-payrrent b,r the avner or waived in the discretion of DWP. There are approximately 33,000 multiple dNelling unit residences serviced through a master rreter which would be suqject to this lien assessrrent collection rrethod. It is not expected that the lien law will materially ad.tersely affect the payrrent of the Bonds.

Service locations involving customers whose water and electrical service is discontinued due to delinquent payrrents are monitored b,r DWP collections personnel. Unless a customer vacates the service location, DWP collections personnel will continue to regard the custorrer's account as an active account and attempt collection of the delinquent payrrents. Should the custorrer vacate the service location, a closing bill case file is generated which initiates further collection effort or, if the delinquent amount remains outstanding after 120 days, the amount aved is written off.

18 On the 26th day of each month, DWP transfers an amount equal to the actual Sanitation Equipment Charge collections from the 1st through approximately the 19th day of each month together with an amount equal to the estimated Sanitation Equipment Charge to be collected for the rest of the month (from the 20th through the end of that month), as acjjusted for the actual amount of Sanitation Equipment Charge collections previously estimated as part of the prior month's renittance to the City. The amount renitted to the City is also reduced by adninistrative charges (currently $109,600 per month), refunds of incorrectly billed charges and bank returned checks and other acjjustrrents. These receipts are deposited in the SEC Fund maintained by the City.

Payrrents received by DWP are credited first to the accounts in arrears in the follcwing order: (i) water reconnection charge, (ii) electric reconnection charge, (iii) water arrears greater than 90days, (iv) electric and city tax arrears greater than 90days, pro rata, (v) sewer charge arrears greater than 90 days, (vi) Sanitation Equiprrent Charge arrears greater than 90 days, (vii) water arrears greater than 60 days, (viii) electric and city tax arrears greater than 60 days, pro rata, (ix) sewer charge arrears greater than 60 days, (x) Sanitation Equiprrent Charge arrears greater than 60 days, (xi) water arrears greater than 30 days, (xii) electric and city tax arrears greaterthan 30 days, pro rata, (xiii) sewer charge arrears greater than 30days, (xiv) Sanitation Equipment Charge arrears greater than 30days (xv) water late payrrent charge and (xvi) electric late payrrent charge. Remaining amounts are then credited to the current amounts for each utility in the order set forth in the previous sentence. This procedure brings any customer's delinquent charges for each utility current prior to applying amounts received to such customer's current charges. Hcwever, for any individual payrrent, the customer may specify the application of payrrent to a specific charge. This is infrequent, occurring only when, in correspondence or in person, the customer specifically states such a direction. Then, for that payrrent only, a payrrent code is entered so that the charge specified by the customer is paid fi rst. Any remainder is then applied to the other charges in the alx:we sequence. For example, if a custorrer directs that hisfrier payrrent be applied to the water bill, items (i), (iii), (vii), (xi), and (xv) and current water charges are paid in that order. Any remainder is then applied from (ii) through (xvi) and then to current charges. Morec:wer, when accounts are assigned to collection agencies, payrrents received on those accounts are posted to DWP charges (water and electric) first, in the alx:we sequence, and then to non-DWP charges.

The follcwing table summarizes the collection history for the previous ten fiscal years for the Sanitation Equiprrent Charge. The amount shewn for billings and collections represents the amounts billed and the amounts collected by DWP. The remittance to the City reflects collections less (i) DWP's adninistrative charges, (ii) refunds of incorrectly billed charges and (iii) any corrections. The renittance to the City does not include interest earnings on collections.

19 TABLE NO. 3 DEPARTMENT OF WATER AND POWER Bl LLI NGS AND COLLECTIONS SANITATION EQUIPMENT CHARGE Fi seal Years 1994-95 through 2003-04 Fi s::al Year Billings Collections Collection Rate(O Renittance to City 1994-95 $33.()88,254 $34. 115. lll 103.1(% $32. lll .624 1995-96 32.242.241 31.195.529 96.75 32.543.055 1996-97 46.156, 145 46, 100.847 99.88 45.602.970 1997-98 47.720,498 47.041.581 98,58 47.385.940 1998-99 51.251.468 47.885.800 93.43 47.902.630 1999-00 48, 119,654 47.904.481 99.55 46,638,552 2CXXl-Ol 49.(£3.308 48,408, 174 98,57 47.180.689 2001-02 49.791.412 49, 146.811 98,71 48,864.041 2002-03 48,223.368 49,046.622 101.71 49,804.757 2003-04 69.315.104 66,555.962 96.02 66,440.624 en T~ collection rate varies from year to year an::l rrny exceed 10Cf}6 b::cause of differen:::es int~ a.;ercQe tirre taken IJ,,i custom::rs to pay t~ir blls an::l differen:::es int~ esti rrntims used to calcUate renittan::::esof t~ Saritatim Equiprrent Charge at fiscal year-err!. Source: DepartrrentofWater and Pc,,ver of the City of Los Angele~

Historical Debt Service Coverage

The follcwing table provides a history of debt service coverage on the Prior Parity Debt from fiscal year 1999-2CXXl through 2003-04. TABLE NO. 4 HISTORICAL DEBT SERVICE COVERAGE Fiscal Years 1999-00through 2003-04 (Dollar Amounts in Thousands) 1999-00 2CXXl-Ol 2001-02 2002-03 2003-04 Sanitatim Equiprrent Charge( 1l $46.639 $47.181 $48,864 $49.805 $66.441 Interest 980 282 178 230 250 Pledged Revenues $47.619 $47.463 $49.042 $50.035 $66.691 Debt Service $21.790 $20.530 $23.819 $24.891 $27.600 Debt Service Covercge 2.l9x 2.3lx 2.06x 2.0lx 2.42x

Sanitation Equipm::nt Charge actually remitted to City after Cff!Lrtitl'J DWP adninistrative charges. I n:::lu:les Extra Capacity Fees. Source: Departrrent of Pull ic W crks, Bureau of Sanitation.

Proforma Statement of Debt Service Coverage

The follcwing table presents a prqjection of Sanitation Equipment Charge and Extra Capacity Fee revenues available to pay debt service payable in each fiscal year on the Bonds and the Prior Parity Debt. This prqjection assumes that there will be no further increases in the Sanitation Equipment Charge or the Extra Capacity Fee. See "SANITATION EQUIPMENT CHARGE-Charges" herein. See also, "DEPARTMENT OF PUBLIC WORKS, BUREAU OF SANITATION SOLID WASTE OPERATIONS Future Borrcwing Plans."

20 TABLE NO. 5 PRO-fORMA STATEMENT OF DEBT SERVICE COVERAGES Fiscal Years 2004--05 through 2000-09 (Dollar Amounts in Thousands)

2CD4-D5 2005-lli 2CXX,..07 2007-{)8 2008-09 Sanitatim Equiprrent Charge( 1l $82.556 $85.170 $85.976 $86.791 $87.614 Interest 100 100 100 100 100 Pledged Revenues 82.656 85.270 86.076 86.891 87.714

Debt Service Series 1997-A Bonds 3.618 3.618 3.617 3.617 0 Series 1997-B Bonds 14.188 14.189 0 0 0 Series 1999-A Bonds 2.780 2.778 2.826 2.826 2.862 Series2001-A Bonds 4.646 4.624 18, 755 18,625 6.509 Series 2003-A Bonds 2.374 2.374 2.374 2.374 5.744 Series 2003-B Bonds 3.072 2.731 2.731 2.731 6.076 Series 2004-A Bonds 2.343 6.812 6.612 6.412 6.212 Series 2005-A Bonds 0 1.296 2.288 2.288 6.288 Total DebtService( 2l 33.023 38,422 39.203 38,873 33.691

Debt Service Covercge 2.50x 2.22x 2.20x 2.24x 2.60x

(lJ Estimated Sanitation Equipm::nt Char~ to~ renitted to City after dedu:::titl'J DWP a:lministrative charges. lrr::lu::les Extra Capacity Fees which b::gan collection inJ uly, 19S6. Also, reflects rate irr::reaseeffectiveJ uly l, 2C04 an::l expiritl'J onJ u~ 30, 2fJJ9. 2 ( J Totals tllay' mt add dLe to roun:li rg.

Source: Departrrent of Pull ic W crks, Bureau of Sanitation.

No assurances can be given that the abcwe levels of prqjected Sanitation Equiprrent Charge and Extra Capacity Fee revenues will, in fact, be realized. The number of single family and multiple dNelling unit residences served b,r the City could change due to several factors. The number of households eligible for solid waste collection and disposal service could increase due to the construction of nav single family residences or multiple unit dNellings. Likewise, the number of households eligible for solid waste collection and disposal service could be reduced to the extent that single fanily residences are replaced with multiple unit dNellings which do not utilize City solid waste collection, or b,r the corwersion of dNelling units to comrrercial or industrial uses. See "SANITATION EQUIPMENT CHARGE-Billing and Collection."

DEPARTMENT OF PUBLIC WORKS, BUREAU OF SANITATION SOLID WASTE OPERATIONS

Introduction

The City collects household refuse, yard trimnings and recyclables throughout the City from virtually all single family dNellings and from smaller multiple unit dNelling residences (typically from buildings of four or fewer units) where containers are placed at the curb. Larger apartrrents and comrrercial buildings utilize private collection. The service area for City collections includes approximately 745,000 households. There are six solid waste collection districts Citywide with major yards located in the East Valley, West Valley, West Los Angeles, North Central Los Angeles and South Los Angeles and a small yard located in the Harbor area. The Bureau operates a fleet of 686 heavy-duty collection trucks and 48 niscellaneous vehicles within its solid waste collection operations. In order to collect its scheduled routes, the Bureau requires approximately 550trucks to be available for service each day. Departrrent of Public Works' vehicles, including solid resources collection equiprrent, are maintained b,r the City's Departrrent of General Services-fleet Services Division.

21 City Residential Solid Waste Collection

Each solid waste collection district of the City is divided by the five days of the week and is divided, in turn, into five sections. The district is supervised by a district superintendent and his or her staff. Additional personnel assist with the collection of dead animals, white goods (composed of rretal and composite materials, such as appliances) and bulky items. Presently, the City collects an average of 3,800 tons of refuse, 1,900 tons of yard tri mni ngs, and 700 tons of recyclables for every day the City collects solid waste. The average number of collection clays per year is 261.

Within the City limits, all City residents are entitled to household solid waste collection services which must be provided by the City if so requested. The City is not obligated, nor does it presently intend to provide solid waste collection services to comrrercial and industrial custorrers. Throughout the County, comrrercial and industrial solid waste collection services are typically performed pursuant to service agreerrents with private companies. Residential solid waste collection contracts with individual homecwners, horrecwner groups and municipal iti es provide the balance of sol id waste col I ecti on services County wide. Private haulers operate under franchise agreerrents (in the case of the County) and business licenses (in the case of the City) to collect residential, multi-family, industrial and comrrercial solid waste within the City and unincorporated areas of the County.

The combined cost for residential solid waste collection and disposal for the City was $253 million (including, without linitation, costs incurred by the Departrrent of General Services and the SEC Fund for the maintenance of trucks, fuel, office leases and sanitation container roll out) for fiscal year 2003-04. Based upon the then current Sanitation Equipment Charge, annual Sanitation Equiprrent Charge revenues provided approximately $66 nillion in fiscal year 2003-04, or approximately 2fJ% of collection and disposal costs for such period. General City revenues provide for the balance of City costs of providing solid waste collection and disposal services over and alx:we the amounts collected as Sanitation Equiprrent Charge revenues. See "Departrrent of Public Works, Bureau of Sanitation Total Budgeted Cost of General Fund Programs-Table No. 6."

Organization and Management

The Board of Public Works manages and controls the Departrrent of Public Works ("Public Works"), which adninisters the City's solid waste and solid resources collection and disposal program, and is responsible for the follcwing bureaus: Contract Administration, Engineering, Sanitation, Street Lighting and Street Services and the Office of Accounting of the Board of Public W arks. The Board of Public Works is composed of five full-tirre salaried rrembers appointed by the Mayor, and confirrred by the City Council, for a term of four years. The Board of Public W arks ad.tertises and invites proposals for bids, .M'ards contracts for the construction of public buildings and coordinates the issuance of certain activity pernits for use of City-ewned property.

The Bureau is responsible for the collection and disposal of residential solid waste and other solid resources. The Bureau also has responsibility for the operation and maintenance of all facilities required for the conveyance and treatrrent of wastavater, including industrial waste enforcerrent, and for maintenance of Iocal storm drains.

The Office of Accounting of the Public Works Departrrent prepares accounting clocurrents, maintains budget data and cost accounts for PublicW arks, and accounts for special funds affecting Public Works activities, including the Acquisition Fund and the SEC Fund. The Office of Accounting of the Public Works Departrrent also prepares and maintains a record of Public W arks payroll data, maintains records of accounts receivable and payable, prepares staterrents and issues reports for use by managerrent

22 to control expenditures and operations, and develops and installs cost systems for various public works prqjects.

Department of Public Works, Bureau of Sanitation Budgeted General Fund Expenditures

The budgeted program and related costs for the Solid Waste M anagerrent operations of the Bureau, which were paid for b,r the City's General Fund for the last three fiscal years and which are proposed to be paid for b,r the City's General Fund for the 2004-05 fiscal year and 2005--06 fiscal year are summarized bel ON. These budgeted amounts include general adni ni strati on and 0.terhead as al I ocated to the household solid waste col Iecti on and disposal activities of the B ureau but excl ude the cost of col Iecti on and disposal of dead ani mal s.

TABLE NO. 6 TOTAL BUDGETED COST OF GENERAL FUND PROGRAMS Fiscal Years 200HJ2 through 2005--06

2001-{)2 2002-D3 2003-{)4 2004-D5 2005-0021 Hrusehold Solid Waste Collection $ 50.300.407 $ 54.173.718 $58, 771.857 $59.065.469 $119.041.135 Solid Waste Disposal 45.891.706 49.123.113 50.366, 189 57.261.776 NA Related Cost~ 11 67.653.960 71.143.758 78,624.257 88,546.649 90.651.887 Comb ned Total $163.846.073 $174.440.509 $187.762.303 $204.873.894 $209.693.022

Related costs in:::lu::le retirem:nt, fmth insuran::::e, workers' co~nsation, data processitl'J, o~r p::rson~I an::l g~ral costs an::l liability claims. Bu::l~ted costs for Housefnld Solid Waste Collection an::l Solid Waste Disrx,sal are combin::d for fiscal year 2C05-03 Soorce: Departm::nt of PLOI ic Works, B Lreau of Sanitation.

The table belON shONs the amount of City solid waste collections for the lastten fiscal years.

TABLE NO. 7 ANNUAL SOLi D WASTE COLLECTIONS Fi seal Years 1994-95 through 2003--04

YARD TRIMMINGS RECYCLABLES111 REFUSE TOTAL FISCAL YEAR (Tons) (Tons) (Tons) (Tons) 1994-95 185.076 57.246 1.073.907 1.316,229 1995-96 369.423 68,447 900.560 1.338,430 1996-97 417.897 97.701 879.506 1.395.104 1997-98 438,050 129.276 929.638 1.496,964 1998-99 438,805 213.237 875.251 1.527.293 1999-DO 434.377 188,041 881.537 1.503.955 2000-Dl 424.640 182.941 889.865 1.530,449 2001-D2 447.285 182.660 913.867 1.543.812 2002-D3 471.709 190.043 986.533 1.648,285 2003-{)4 491.422 181.176 991.021 1.663.619

I n:::I UEs contani natim tonrJcQe D=Qi nni tl'J l r:;J97---98. Source: Departrrent of Pull ic W crks, Bureau of Sanitation.

Recycling Implementation Plan -AB 939

The City began its recycling program plan in 1989 with the adoption of the "Recycling I rrplerrentation Plan." The same year, the State passed AB 939, which formed the California Integrated Waste Managerrent Board with the authority to regulate solid waste facilities and to monitor jurisdictions' waste diversion programs. It established a mandate to reduce baseline disposal amounts b,r 25% b,r the year 1995 and 5036 b,r the year 2000. See "REGULATION-California Integrated Waste

23 Managerrent Act." In November 2001, the City completed a disposalft:Jiversion study, which was approved b,r the State, confirming that the City has a diversion rate of 6036, which exceeded the State mandate goal for the year 2CXXl.

The City currently collects at curbside approximately 700 tons per day of source separated recyclables and over 1,800 tons per day of source separated yard tri mni ngs. These programs represent a significant component of the City's successful diversion efforts.

As of August 1995, all horres served b,r the Bureau were participating in the Recycling Program and the A utornated Col Iecti on Program M ateri al s accepted for recycl i ng i ncl ude glass, plastic containers, bi-rretal cans, aluminum, empty paint and aerosol cans, and any color or type of uncontaninated paper products.

Automated Collection

The City has been collecting all household solid waste through an automated collection process since August 1995. Automated collection is accomplished b,r a special-purpose vehicle having a rrechanical arm which can reach out, grasp a 60 or 90 gallon wheeled plastic container, lift and empty the container into the body of the truck and then place the container back on the ground. This particular type of vehicle eliminates manual lifting b,r the operator and enables a single driver to collect from at least twice as many horres as compared to manual collection.

Automated Container Systematic Replacement Program

In order to reduce costly service request calls and increase the level of custorrer service, the City is replacing solid waste containers that have exceeded or are near the end of their service life. The Automated Container Systematic Replacerrent Program (ACSRP) began July 15, 2002, replacing containers at an approximate rate of 210,CXXl containers per year. The ACS RP is a ten-vear replacerrent program corresponding to the ten-vear service I ife of the containers. The City also replaces about 200,CXXl lost or broken containers per year.

Alternative Clean Fuel Program

In June 2CXXl, the Los Angeles City Council adopted a clean fuel policy as part of its effort to reduce air toxins and pollutant enissions, and recomrrended support of the South Coast Air Quality Managerrent District (SCAQMD) Proposed Rule 1193 ("Rule 1193"). Rule 1193 requires solid waste collection fleet operators with 15 or more solid waste collection vehicles to acquire alternative-fuel solid waste collection heavy-duty vehicles when procuring or leasing such vehicles. Later that month, the SCA QM D adopted Rule 1193 with arrendrrents as requested b,r the City Counci I.

Consistent with the City Council's arnendrrents to Rule 1193 and in furtherance of the City's role as a leader in the clean air arena, the Bureau is committed to the developrrent of a combined liquefied natural gas (LNG) and liquefied compressed natural gas (LCNG) facility at all six solid waste sanitation district yards. The fueling stations will provide LNG and compressed natural gas (CNG) for the Bureau and other City departrrents operating in the vicinity of the fueling stations. The first fueling facility was constructed at the new East Valley Solid Resources Managerrent Complex in Sun Valley. The East Valley facility is equipped with four 15,000-gallon LNG tanks, six LNG dispensers and three CNG dispensers. The second LNG/1...CNG fueling facility is new operational at the West Valley Collection Yard. This facility is equipped with three LNG tanks, six LNG dispensers and two CNG dispensers. Furthermore, the Bureau has retrofitted its existing diesel-fuel sanitation trucks to use particulate traps and Icw-sulfur diesel fuel.

24 In order to accommxlate the clean fuel vehicles, expansion of the collection district yards is needed, including construction of LNG and LCNG fueling facilities, upgrade of the repair and maintenance facilities and additional vehicle parking. Additional properties need to be acquired to accommxlate the facility expansions. An estimated 6,500 square feet is required for an LNG/1...CNG station. The station has to be located at least 50-75 feet from the property line with a 25-50 foot "no parking perimeter" around the tank. Since alternative clean fuel vehicles have higher dcwntime and smal I er payload capacity than standard diesel, additional vehicles need to be purchased. Larger yards are needed to park the additional clean fuel fleet vehicles. Most of the City's solid waste sanitation district yards currently do not have adequate space for LNG/1...CNG stations andft)r 20to 30 additional solid waste trucks. A portion of Bond proceeds is expected to be used for designs and plans to improve the North Central Yard, including a LNG station.

Processing and Disposal

The Bureau currently utilizes the Falcon Disposal Transfer Station in Wilmington and the Central Los Angeles Recycling and Transfer Station in Los Angeles for the transfer of solid waste collected from residential units. The Falcon Disposal Transfer Station is cwned and operated b,r Brcwning--Ferris Industries, Inc. ("BFI"), and began operations in 1977 on a 5.7-acre property. The operations are comp! etely enclosed and uti Ii ze two transfer pi ts.

The City presently delivers an average of 90 tons ofrefuse per day to the Falcon Transfer Station in Wilnington. The City pays a tipping fee of $44.75 per ton to B Fl for the transfer of refuse from the Falcon Transfer Station in Wilnington and disposal of the refuse at the Sunshine Canyon Landfill in Granada Hi 11 s. The transfer station is perni tted to accept residential , commercial fi ndustri al, and demolition wastes, which are transported to the Sunshine Canyon Landfill in Granada Hills for disposal.

The City's Central Los Angeles Recycling and Transfer Station (CLARTS) is located immediately Southeast of dcwntcwn Los Angeles. The facility, which has a permitted capacity of 4,025 tons per day, is completely enclosed and utilizes two transfer tipping floors. The Bureau uses CLAR TS for transferring material collected within the North Central and South Solid Waste Collection districts to Sunshine Canyon Landfill. SinceJ uly 1, 2004, an average of 1,800 tons of City-Collected refuse per day is transferred and disposed of at the Sunshine Canyon Landfill. In addition, approximately 900 tons per day of privately hauled refuse is brought to CLARTS for transfer and disposal at landfills other than Sunshine Canyon L andfi 11.

The City of Los Angeles purchased CLARTS for $57 million from BLT Enterprises, the former cwner, in early 2004, with escrcw closing on April 5, 2004. The Series 2004-A Bonds provided the funds for the purchase. The City new operates the facility with its cwn personnel.

Green Recycling Facilities

The Bureau operates three facilities at which curbside collectedyardtrimmings are processed into mulch for land application. At the Van Norman Green Recycling Facility in Granada Hills, an average of 200 tons per day of yard trimnings and 100 tons per day of tree trimnings (supplied b,r the Bureau of Street Services) are mulched together. The resulting mulch is supplied at no cost to the City's Department of Recreation and Parks and to various farmers I ocated i n Los Angel es and Ventura counties.

At the Harbor Green Recycling Facility in San Pedro, an average of 80 tons per day of yard trimnings are mulched and then partially composted for at least 14days to produce weed and seed-free mulch. This material is then supplied to several local colleges and is also given away free to residents at several sites around the City.

25 The Lake View Terrace Green Recycling Facility began operation in December 2003 on a closed portion of the Lopez Canyon Landfill. The facility presently processes about lOOtons per day of curbside collected yard trimnings from the East Valley Collection District into mulch, which is distributed to residents at no cost at several sites located throughout the City. When the Lake View Terrace Green Recycling Facility is at its ultimate capacity of 300 tons per day of yard trimmings, the final products, which will include conµ:ist, will also be distributed to agricultural end-users in Los Angeles and Ventura Counties, to local colleges and universities, and to the California Department of Transportation for spreading along freeway right-Of-Ways.

Landfill Closure Construction Activities

The Bureau is responsible for the maintenance and closure construction of City-ONned sanitary landfills, as well as the construction of roads, support facilities and methane gas recovery systems, among other functi ans.

The City's sanitary landfills, Lopez Canyon, To,ron Canyon and Sheldon Arleta, are all in various stages of closure. Closure of Gaffey Street and Bishops Canyon landfills is complete and those two sites have been developed into active recreati anal faci I iti es.

Solid Waste Disposal Alternatives

Since refuse disposal operations ceased at the City-ONned Lopez Canyon Landfill in 1996, City collected refuse has been disposed primarily at the Sunshine Canyon Landfill with the Bradley Landfill and the Calabasas L andfi 11 as backup.

In 2000, the City approved a new disposal contract with BFI for disposing of the majority of City collected refuse at the Sunshine Canyon Landfill. This contract, which began in July 2001, allcws the City to deliver material at an increasing cost per ton for the first five years, with increases based on CPI beginning in the sixth year. The City has the sole option to renew each five years, and the contract terni nates in 2021.

Approximately 100 tons per day of the refuse collected in the Harbor District is delivered to the Southeast Resource Recovery Facility waste-ta-energy facility in Long Beach. The remainder is delivered to the Falcon Disposal Trans fer Station and then transported to Sunshine Canyon L andfi 11.

In mid 2004, the City issued a "Request for Proposals and/or Transfer Services for Residual Municipal Refuse Disposal at Other Solid Waste Facilities Located Outside the City Limits'' predicated on new operating conditions resulting from the City's purchase of CLARTS. Review of the responses to this Request for Proposal is currently in progress.

In addition to considering its options with regard to disposing of solid waste at facilities located outside the City Ii nits, the City has engaged in a study to identify and evaluate alternative technologies for the disposal of refuse generated b,r the City.

SolidW aste Management Plan

The City has addressed future solid waste collection, management, and disposal needs through a series of planning and study efforts. Afterthe issuance of a 1988joint report with the County Department of Public Works, entitled "Solid Waste Management Status and Disposal Options in Los Angeles," the Bureau initiated the development of a solid resources management plan. This plan, the "City of Los

26 Angeles Integrated Solid Waste Managerrent Plan" (CiSWMP), was completed in 1993 to serve as the policy guideline for the City until 2020.

There were four phases of the CiSWMP, which examined the current options for solid waste managerrent. Phase IV was the developrrent of the Policy docurrent, which incorporated both the information for the previous phases and the new mandates for waste diversion adopted by the State of California in 1989. The CiSWMP was adopted by the Mayor and the City Council of Los Angeles in October 1994. The goals are as follcws:

• Maximize Waste Diversion - Through innovative programs and an emphasis on resource conservation, the City's goal for waste diversion is 7036 by 2020. • Adequate Recycling Facility Development - This goal addresses the need for additional infrastructure to manage increasing amounts of recyclable materials. • Adequate Collection, Transfer, and Disposal of Mixed Solid Waste - This goal ackncwledges the continued need for transfer and disposal services for the residual waste that is not diverted for recycling or reuse. • An Environrrentally Sound System-All components of the system should be examined, and al I accompanying infrastructure wi 11 be examined for their impacts on the envi ronrrent. This exani nation wi 11 be taken into consideration for development of system components. • A Cost Effective System - The Bureau wi 11 strive to bring the greatest number of services to our residents at the Icw est cost.

More recently, the Bureau has prepared a Facilities Plan with a description of specific actions needed to provide for infrastructure needs. Several of the elerrents of the Facilities Plan have been implerrented, as follcws:

• In June 2003, the City took occupancy of its navly constructed $25nillion East Valley Services Center in Sun Valley. The new complex covers 14 acres, and replaces the forrrer East Valley District Yard. New district yard facilities include a tw0-story adninistration building, a 20-bay truck maintenance and repair structure, covered fuel islands, including LNG/1...CNG, and parking for emplo,rees and the fleet of collection vehicles. • The City has signed a joint pcwers agreerrent with the Los Angeles County Sanitation Districts to develop one or more recycling and transfer centers. The City originally was pursuingjoint purchase of the Central Los Angeles Recycling and Transfer Station pursuant to the agreerrent, but opted for sole cwnership instead. The City still retains the option to work with the Los Angeles County Sanitation Districts in the development of other needed facilities. • The City is seeking the developrrent of several residential special materials facilities to accept oi I, paint, batteries, and other residential special materials from the public and smal I quantity generators to keep these materials from the disposal wast est ream. A Iong with the facility to be included at the nav East Valley District Yard, the City is seeking agreerrents in various areas of the City for the developrrent of nine facilities. • The City has developed two City-ONned operations at the Van Norman Green Recycling Facility and the Harbor Green Recycling Facility to process a portion of the curbside yard trimnings. A third facility, the Lake View Terrace Green Recycling Facility, began operations in December 2003. • The City purchased CLARTS in April 2004 for $57 nillion. CLARTS transfers City collected refuse from the North Central and South Refuse Collection Districts to the Sunshine Canyon landfill in Granada Hills. Some privately-collected refuse is also transferred to various local landfills fromCLARTS.

27 Future Capital Prqjects and Borrcwing Plans

The Bureau has proposed several future capital prqjects, and equipment purchases, which may require increases to the Sanitation Equipment Charge and future borrcwing to finance these prqjects and equipment as shewn in Table No. 8. The capital prqjects and the rate increases are suqject to future Mayor and Council reviav and appr0.tal. Any rate increases may also be suqject to the pr0.tisions of Proposition 218. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS-Proposition 218."

28 TABLE NO. 8 DEPARTMENT OF PUBLIC WORKS, BUREAU OF SANITATION PROPOSED CAPITAL IMPROVEMENT PROGRAM AND EQUIPMENT Fiscal Years 2005--06 through 2009-10 (Dollar Amounts in Thousands)

2005-ffi 2CXX,..07 2007-08 2008-09 2009-10

CAPITAL FACILITIES South District Yard I rrproverrents $295 South Di strict Yard Relocation $15,CXXl $2,000 $5,000 $26,300 WestV alley Di strict Yard I mproverrents 3,615 HarOOr Di strict Yard Replacerrent 5,000 3,316 500 14,000 12,000 West LA Sanitation Yard Replacerrent 5,000 5,000 6,885 North Central Di strict Yard I mproverrents 743 Ge~ral I mproverrents an::l StormNater Pollution Mitigation 400 400 400 200 200 Liquid Natural GasRefLelitl'J 7,CXXl U mrades at CLARTS 844 1,700 West LosAnJeles Transfer Station 6,CXXl 9,442 6,750 3,484 East Valley Transfer Station 413 10,987 12,000 12,950 Alternative Techmlcgy De.;eloprrent 2,000 6,000 6,000 Subtotal Capital Facilities $10,567 $47, 146 $35,342 $49,900 $48,869

EQUIPMENT Automated Recycli tl'J Contai~rs $20,204 $21,012 $21,853 $22,727 $23,636 Automated Front an::l Side Loaditl'J Collection Tru:::ks 27,560 28,662 29,809 31,001 32,241 Additional Collection Vehicles 2,327 2,420 2,517 2,618 2,722 Lan:lfill an::l Mulchitl'J Equiprrent 10,471 9,177 3,303 3,795 5,035 Ot~r Equi prrent 758 789 820 853 887 Subtotal Equiprrent $61,320 $62,CXiO $58,302 $60,994 $64,521 TOTAL CAPITAL FACILITIES AND EQUIPMENT $71,887 $109,206 $93,644 $110,894 $113,390

The Bureau Capital lmproverrent Expenditure Program (CIEP) corrprises two general areas of need in the foreseeable future - transfer stations and yard i rrprc:werrents.

Landfills and Transfer Stations. There are very fav local landfills available to the City for direct haul b,r the City's fleet of refuse collection vehicles. The majority of the City's waste goes to the Sunshine Canyon Landfill at the north end of the San Fernancb Valley. City refuse trucks deliver waste from the northern area of the City comprising the San Fernancb Valley directly to the Sunshine Canyon landfill. Refuse from the remainder of the City is transferred into transfer trailers from transfer stations for disposal at the landfill. Facility upgrades need to be made at CLARTS. There is also an imrrediate need for transfer stations in the West Los Angeles area and in the San Fernancb Valley. This need will becorre more imminent when the Sunshine Canyon landfill is no longer available for City refuse.

Yard I mprc:werrents. Most of the City's refuse collection yards are inadequate for present day needs. The City's fleet of collection vehicles has increased as a result of the three corrmodities being collected - refuse, yard trimnings and recyclables. In addition, the City is committed to clean air vehicles necessitating alternative fuels, such as LNG fuels, which require vehicles, refueling facilities and specialized maintenance. The East Valley and West Valley District Yards have been expanded to accorrmodate LNG refueling, and plans are underway to upgrade the office and locker room facilities at

29 the West Valley Yard. Similar LNG refueling and retrofit of the maintenance facilities are being designed for the South and North Central District yards.

The West Los Angeles and Harbor District Yards need to be expanded, and either reconstructed at their existing I ocati ons or at new I ocati ons.

REGULATION

Potential Restrictions on Solid Waste Disposal

There are serious, often unforeseeable, risks and potentially substantial cost exposures associated with waste processing and disposal facilities. These risk factors include, but are not linited to: (i) an increasing shortage of disposal capacity available to the City, coupled with the difficulty of obtaining pernits to expand or establish nav sites and facilities, and public and private opposition to the location, expansion and operation of these facilities, (ii) increasing governmental actions at all levels that seek to restrict the operation of disposal facilities as well as the interstate rmvement of waste for disposal, (iii) landfill costs associated with liner requirements, leachate and methane gas control, post-closure monitoring, site cleanup, other remedial work and maintenance, and perpetual care obi i gati ons, (iv) alleged possible ad.terse effects on groundNater and the environment, (v) substantial regulatory compliance expenditures, fines or other sanctions and civil damage liabilities, (vi) demonstrating financial responsibility (see "REGULATION-Federal and State Laws Governing Solid Waste Disposal") and conforming to prescribed or changing standards and methods of operation, (vii) j udi ci al and adninistrative proceedings regarding alleged possible ad.terse environmental and health effects of landfills or treatment and disposal facilities, and (viii) legislation that requires waste recycling, ni ni ni zati on and i nci nerati on.

Provision for City Landfill Closure and Postclosure Maintenance Costs

In 1987, the State enacted the Solid Waste Disposal Site Hazard Reduction Act ("AB 2448''), which requires landfill operators to subnit closure and postclosure maintenance plans to the California Integrated Waste Management Board ("CIWMB") for approval, including evidence of financial responsibility to provide for landfill closure and 30 years of postclosure maintenance. Evidence of financial responsibility is required in the form of a trust fund or other financial mechanism acceptable to the CIWMB into which sufficient funds are deposited to provide for these costs.

In 1989, Ordinance No. 164896 established the Landfill Closure and Postclosure Maintenance Trust Fund and began funding for closure and postclosure maintenance of City-ewned landfills. In 1993, b,r Ordinance No. 168581, the Landfill Closure and Postclosure Maintenance Trust Fund was amended to provide for a new special fund entitled" Lopez Canyon Landfill Closure Trust Fund." The Lopez Canyon L andfi 11 CI osure Trust Fund was establ i shed for the purposes of receivi ng and expending monies for the closure costs of the Lopez Canyon Landfill. Funds previously appropriated in the Landfill Closure and Postel osure Maintenance Trust Fund for Lopez Canyon L andfi 11 were transferred to the nav Trust Fund.

In accordance with AB 2448, the City estimated that $17.54million (in 1994 dollars) in construction costs would be required to close the Lopez Canyon Landfill. That amount was made available to the Lopez Canyon Landfill Closure Trust Fund for closure activities in March 1995. Closure construction is underway at Lopez Canyon Landfill and is expected to be completed b,r nid-2007.

Ordinance No. 168581 also established the Landfill Maintenance Special Fund for the purpose of receiving al I revenues received b,r the Department of Public W arks from the sale of recyclable materials from curbside recycling. Money in the Maintenance Fund would be used for postclosure maintenance

30 costs of City-ewned landfills. Also, a Pledge of Revenue Agreerrent was signed b,r the City with the CIWMB pledging that money in the Landfill Maintenance Special Fund will be used for purposes of pastel osure maintenance at the Lopez Canyon L andfi 11. Postel osure maintenance costs are estimated to be about $1.2 nil lion per year for 30years until the year 2035, or approximately $36 million.

Federal and State Laws Governing Solid Waste Disposal

Si nee the passage of the Hazardous and Sol id Waste Arrendrrents of 1984 (" HSW A Arrendrrents'') to the Resource Conservation and Recovery Act of 1976 (" RCRA"), the emphasis of the Federal waste program has been the reduction of waste volurres and encouragerrent of recycling and treatrrent of waste instead of land disposal. The HSWA Arrendrrents prohibit the land disposal of untreated hazardous waste. Restriction on land disposal of certain hazardous waste became effective in 1986, 1987, 1988and 1989. These restrictions identifiedtreatrrent levels thatthewaste must rreet before it can be land disposed. Currently, the City's wastes are not considered" hazardous wastes" for purposes of Federal and State regulations.

Since its enactrrent, RCRA included the authority for the Environrrental Protection Agency ("EPA") to control the disposal of solid waste, as well as the managerrent of hazardous waste. In the past, the EPA relied on general solid waste managerrent guidelines and did not develop a comprehensive solid waste regulatory program. The regulatory frarrevork covering solid waste managerrent was developed b,r individual states and the stringency of these frameworks was highly variable. In August 1988, the EPA proposed comprehensive location, design, operating, groundNater monitoring, corrective action, closure and post-closure, and financial assurance criteria for municipal solid waste landfills. The EPA released final criteria referred to as "Subtitle D" regulations whereb,r the states were required to develop state regulatory programs at least as stringent as the EPA's criteria. In 1993, the State of Cal i forni a adopted the EPA criteria with mi nor and stricter revisions. Currently, the regulatory regi rre for controlling solid waste managerrent is substantially similar to that in place for hazardous waste managerrent faci Ii ti es.

The HSWA Arrendrrents to RCRA have substantially increased the quantity of hazardous waste brought under regulation, including large quantities of organic waste that were brought under the regulatory system for the first tirre in 1990. Land disposal regulations require increased use of treatrrent technologies and the Federal "Subtitle D" landfill regulations have resulted in the closure of a significant number of smaller, older existing landfills, increasing the demand for solid waste capacity at other landfills that comply with the new regulations. The EPA's financial responsibility regulations require cwners or operators of hazardous waste facilities to demonstrate financial assurance for sudden and accidental pollution occurrences. For facilities with surface impoundrrents, landfills and land treatrrent units, the cwner or operator must also demonstrate financial assurance for non-sudden or gradual pol I uti on occurrences.

State regulations also require cwners and operators of waste facilities to provide financial assurance of their ability to cover the estimated costs of proper closure and post-closure monitoring and maintenance of these facilities. The City has been able to rely on its financial position, rather than upon other very costly financial assurance rrechanisms, to satisfy these requirerrents. See "REGULATION Provision for City Landfill Closure and Maintenance Costs."

The City is suqject to the Comprehensive Environrrental Response, Compensation, and Liability Act ("CERCLA"), which could result in the City incurring costs to clean up sites on which "hazardous wastes" have been disposed. None of the closed sanitary landfill sites, which have been operated b,r the City, are or were licensed to accept" hazardous wastes." As a result, the City is not aware of any sites at which the City would be responsible for cleanup costs under CERCLA.

31 Regulatory Agencies

Certain regulatory agencies, including CIWMB, the County Departrrent of Health Services (the "CHSD"), the South Coast Air Quality Managerrent District (the "SCAQMD"), the Los Angeles Regional Water Quality Control Board (the "RWQCB"), the City's Erwironrrental Affairs Departrrent, and the Tri-Technical Ad.tisory Comninee (the "TRI-TAC") representing the League of California Cities, the CaliforniaAssociation of Sanitation Agencies and the California Water Pollution Control Association, are involved in developing plans and monitoring compliance with Federal RCRA requirerrents associated with solid waste disposal operations. The CHSD, SCAQMD and RWQCB are responsible for issuing pernits to apply rninirnurn standards for control of pollution irwolving the erwironrrent that typically arise during the handl i ng of solid wastes.

California Integrated Waste Management Act

Revisions to State law constituting the California Integrated Waste Managerrent Act of 1989 ("AB 939''), which becarre effective January I, 1990, among other things, directs all California cities and counties to rnaxinize all feasible source reduction, recycling and composting options in order to reduce the amount of solid waste that must be disposed by transformation (through waste-to-enerw prqjects or other processes) and land disposal. As a result of AB 939, solid waste rnanagerrent has been changed to an integrated solid waste rnanagerrent approach in which source reduction and recycling play an integral role in the waste rnanagerrent stratew. A companion piece of legislation titled "CIWMD Funding Clarification of AB939 Mandates" ("AB 1820'') was enacted in 1990which became effectiveJanuary 1, 1991, altered various compliance deadlines and requirerrents contained in AB 939.

By January 1, 1995, each city in the State was required to achieve a 25% reduction, through waste reduction or recycling, in solid waste disposed of to landfills or by incineration. A 5036 reduction was required to be achieved by January 1, 2000. Cities are responsible for these goals whether or not they control wastes generated within their jurisdiction. Cities could face monetary fines of up to $10,000 per day if the CIWMB deems local plans to be inadequate or if localities fail to satisfactorily irnplerrent plans to achieve the 25% and 5036 goals.

To demonstrate compliance with the 5036 waste diversion mandate by the year 2000, the City conducted a series of studies including audits of ewer 500 Los Angeles businesses and surveys of waste diversion facilities, non-City gcwernrrent facilities, City departrrents, landscapers and contractors. The results of the diversion study demonstrates that the City of Los Angeles has achieved a 6036 diversion rate for the year 2000 and has complied with AB 939. The City has also conducted a massive waste composition study for future planning purposes.

Under AB 939, each city was required to subnit four reports: (1) a waste characterization study, which categorizes the wastestrearn of the city, (2) a Source Reduction and Recycling Plan ("SRRP"), which details the rreans by which the city will achieve, finance and docurrent the mandated 25% and 5036 goals through source reduction, recycling and composting; anticipated revenues, costs and revenue sources; and the proposed program for education and public information, (3) a Household Hazardous Waste Elerrent ("HHWE"), which outlines the city's efforts to reduce the amount of household hazardous wastes reaching landfills through safe collection and recycling or proper disposal and (4) a Non-Disposal Facility Elerrent ("NDFE"), which describes the nondisposal facilities such as transfer stations and composting facilities which exist in thejurisdiction.

Yearly surnrnaries of activities and periodic updates to the SRRP, HHWE and NDFE are required. In calendar year 2000, the City perforrred sampling of the solid waste collected by both public and private haulers. The sarnpl i ng shewed both the current recycling rate and the opportunities for further

32 waste diversion will m2et the year 2020 diversion goals set by the City. In addition, standardized summaries of activities are submitted to the CIWM B on an annual basis.

CONTINUING DISCLOSURE

The City will execute a Continuing Disclosure Certificate, to be dated the date of delivery of the Bonds (the "Continuing Disclosure Certificate"), which provides for certain disclosure obligations on the part of the City. Under the Continuing Disclosure Certificate, the City will covenant for the benefit of Owners and Beneficial owners of the Bonds to provide certain financial information and operating data relating to the City by not later thanJ une 30 of each year, comm2ncingJ une 30, 2006 for the report for the 2004-05 fiscal year, or if the fiscal year-end changes fromJ une 30, not later than 365 days after the end of the City's fiscal year (the "Annual Reports''), and to provide notices of the occurrence of certain enum2rated events (the "Listed Events"), if material. The Annual Reports will be filed with each Nationally Recognized Municipal Securities Information Repository and with any then-existing State Repository for the State of California (collectively, the "Repositories"). Currently, there is no State Repository for the State of California The notices of Listed Events will be filed with the Repositories. These covenants will be made in order to assist the underwriters of the Bonds in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the "Rule"). Except as described in the follcwing two paragraphs, the City has not failed in any material respect to comply with any prior such undertaki ng under R ul e 15c2-1 2.

In connection with the issuance of the Mella-Roos Community Facilities District No. 3 (Cascade Business Park and Golf Course) Special Tax Bonds, the City executed and delivered a Continuing Disclosure Certificate, dated October 2, 1997 (the "Cascades Disclosure Certificate''). In one instance, the City did not file as required in the Cascades Disclosure Certificate with each nationally Recognized Municipal Securities Information Repository by the date specified therein the annual report described therein. Such annual report was subsequently fi Ied.

Also, in connection with the issuance of the 1911 lmprovem2nt Act Assessm2nt Bonds (Westwood Village Streetscape Phase I-A'13-E6000280), the City executed and delivered a Continuing Disclosure Certificate, dated November 5, 1996 (the "Westwood Disclosure Certificate''). The City did not file the annual report for each of the fiscal years 1997 through 2001 as required in the Westwood Disclosure Certificate with each Nationally Recognized Municipal Securities Information Repository. The annual reports required by the Westwood Disclosure Certificate for subsequent fiscal years have been fi I ed on a ti m2ly basis.

For a form of the Continuing Disclosure Certificate, see APPENDIX F - "FORM OF CONTINUING DISCLOSURE CERTIFICATE."

TAX MATTERS

In the opinion of Sidley Austin Brcwn& WoodLLP, Special Tax Counsel, based on existing statutes, regulations, rulings andjudicial decisions and assuming compliance with certain covenants in the Trust Agreem2nt and requirem2nts of the Internal Revenue Code of 1986, as amended (the "Code''), regarding the use, expenditure and investm2nt of proceeds of the Bonds and the tim2ly paym2nt of certain investm2nt earnings to the United States, interest on the Bonds is not includable in the gross income of the cwners of the Bonds for federal incom2 tax purposes. Failure to comply with such covenants and requi rem2nts may cause interest on the Bands to be included in gross i ncom2 retroactively to the date of issuance of the Bands.

33 In the further opinion of such Counsel, interest on the Bonds is not treated as an item of tax preference in cal cul ati ng the federal alternative mini mum taxable i ncome of individuals and corporations. Interest on the Bonds, hcwever, is included as an adjustment in the calculation of federal corporate alternative minimum taxable income and may therefore affect a corporation's alternative minimum tax liability.

Ownership of, or the receipt of interest on, tax-exempt obligations may result in collateral tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, certain foreign corporations doing business in the United States, certain S corporations with excess passive income, individual recipients of Social Security or Railroad Retirement benefits, taxpayers that may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations and taxpayers who may be eligible for the earned income tax credit. Special Tax Counsel expresses no opinion with respect to any collateral tax consequences and, accordingly, prospective purchasers of the Bands should consult their tax advisors as to the appi icabi I ity of any col Iateral tax consequences.

Certain requirements and procedures contained or referred to in the Trust Agreement may be changed, and certain actions may be taken, under the circumstances and suqject to the terms and conditions set forth in such documents, upon the ad.lice or with the appr0.ting opinion of counsel nationally recognized in the area of tax-exempt obligations. Special Tax Counsel expresses no opinion as to the exclusion of interest on the Bands from gross income for federal income tax purposes on and after the date on which any such change occurs or action is taken upon the ad.lice or appr0.tal of counsel other than Sidley Austin Brcwn& Wood LLP.

Legislation affecting municipal obligations is continually being considered b,r the United States Congress. There can be no assurance that legislation enacted after the date of issuance of the Bonds will not have an ad.terse effect on the tax-exempt status of the Bonds. Legislation or regulatory actions and proposals may also affect the econonicvalue of tax exemption or the market price of the Bonds.

In the further opinion of Special Tax Counsel, interest on the Bonds is exempt from personal income taxes imposed b,r the State of California

A cop,r of the proposed form of opinion of Special Tax Counsel is attached hereto as APPENDIX E.

Original Issue Premium

Certain of the Bonds may be purchased in the initial offering for an amount in excess of their principal amount (hereinafter, the "Premium Bonds"). The excess, if any, of the tax basis of the Bonds to a purchaser (other than a purchaser who holds such Premium Bonds as inventory, stock in trade or for sale to customers in the ordinary course of business) 0.ter the amount payabie at maturity is "Bond Premium" Bond Premium is amortized 0.ter the term of such Premium Bonds for federal income tax purposes (or, in the case of a bond with Bond Premium callabie prior to its stated maturity, the amortization period and yield may be required to be deternined on the basis of an earlier call date that results i n the Icw est yield on such bond). No deduction is al Icwed for such amortization of Band Premium; hcwever, Bond Prenium is treated as an offset to qualified stated interest received on the Premium Bonds. An cwner of such Premium Bonds is required to decrease his acjjusted basis in such Premium Bonds b,r the amount of amortizable bond prenium attributable to each taxable year such Premium Bonds are held. An cwner of such Premium Bonds should consult his tax ad.tisors with respect to the precise deternination for federal income tax purposes of the treatment of bond premium upon sale,

34 redemption or other disposition of such Prenium Bonds and with respect to state and local income tax consequences of cwning and disposing of such Prenium Bonds.

CERTAIN LEGAL MATTERS

The opinion of Fulbright& Jaworski L.L.P., Los Angeles, California, Bond Counsel, approving the validity of the Bonds, will be furnished to the purchaser at the time of delivery of the Bonds at the expense of the City. Compensation for Bond Counsel's services is contingent upon the sale and delivery of the Bonds. See APPENDIX D -"PROPOSED FORM OF BOND COUNSEL OPINION."

Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement.

Sidley Austin Brcwn & Wood LLP, Los Angeles, California, Special Tax Counsel, will also render an opinion on applicable federal and State of California income taxation in substantially the form of APPENDIX E to this Official Statement, which opinion will be available at the time of delivery of the Bonds. Certain legal matters will be passed on for the City b,r the City Attorney of the City of Los Angel es, California.

LITIGATION

There is no controversy of any nature new pending against the City or, to the kncwledge of its officers, threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery of the Bonds or in any Wify contesting or affecting the validity of the Bonds or any proceedings of the City taken with respect to the issuance or sale thereof or the pledge or application of any moneys or security provided for the pifyment of the Bands or the use of the Band proceeds.

There are no pending lawsuits which in the opinion of the City Attorney challenge the validity of the Bonds, the corporate existence of the City, orthe title of the officers to their respective offices.

Attached hereto as part of APPENDIX A is a list prepared b,r the Office of the City Attorney of pending matters or cases relating to the City each of which involves in excess of $4,000,000 of potential liability. This information is presented for general information purposes only.

RATINGS

Moociy's Investors Service, Inc. (" Moociy's"), Standard & Poor's Ratings Services ("Standard & Poor's") and Fitch Ratings ("Fitch") have assigned the ratings to the Bonds of "Aaa'', "AAA" and "AAA," respectively, based on delivery of the Policy b,r the Bond Insurer. In addition, Moociy's has assigned the Bonds an underlying rating of "A 1," Standard & Poor's has assigned the Bonds an underlying rating of "AA" and Fitch Ratings has assigned the Bonds an underlying rating of "A+." Such ratings reflect only the views of such organizations and an explanation of the significance of such ratings may be obtained from the respective agencies at the follcwing addresses: Mocxly's Investors Service, Inc., 99 Church Street, New York, New York 10007, Standard & Poor's Ratings Services, 25 BroadNay, New York, New York 10004, and Fitch Ratings, One State Street Plaza, New York, New York 10004. There is no assurance that such ratings will continue for any given perioc:l ohime or thatthey will not be revised dcwnward or withdrawn entirely b,r the rating agencies, if in the judgment of such rating agency circumstances so warrant. Any such dcwnward revision or withdrawal of such ratings may have an ad.terse effect on the market price of the Bonds.

35 UNDERWRITING

Pursuant to the term; of a public sale held on June 22, 2005, Morgan Stanley & Co., Incorporated, as Underwriter (the" Underwriter"), has agreed to purchase the Bonds at the purchase price of $50,225,038.25 (which reflects an underwriting discount of $48,607.25 and an original issue prenium of $4,523,645.50). The Underwriter will be obligated to purchase all of the Bonds, if any Bond is purchased.

FINANCIAL STATEMENTS

Excerpts from the City's comprehensive annual financial report for the year endedJ une 30, 2004 included in APPENDIX B hereto, have been audited b,r Simpson & Simpson, independent auditors (other than the financial statements for the City's Departments of Airports, Harbor, and Water and Paver, Fire and Police Pension System, and Los Angeles City Emplo,ree's Retirement System, which were audited b,r other auditors). See "INDEPENDENT AUDITOR'S REPORT" in APPENDIX B hereto. Neither Si mpson & Si mpson nor any other auditor was requested to consent to the incl usi on of its report i n APPENDIX B and no auditor has undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in the Official Statement, and no opinion is expressed b,r Simpson & Simpson or any other auditor with respect to any event subsequent to the date of its report.

AVAILABILITY OF DOCUMENTS

Copies of the Official Statement and the Trust Agreement will be available, upon written request, from the Office of the City Adninistrative Officer, 200 North Main Street, City Hall East, Room 1500, Los Angeles, California 90012, Attention: Mr. Mario Vasquez.

CO-fl NANCI AL ADVISORS

Fieldman, Rolapp& Associates and Acacia Financial Management have acted as Co-financial Ad.tisors to the City in conjunction with the issuance of the Bonds. The Co-financial Ad.tisors have assisted the City in matters related to the planning, structuring, execution and delivery of the Bands. The Co-financial Ad.tisors have not audited, authenticated or otherwise independently verified the information set forth in the Official Statement, or any other related information available to the City, with respect to accuracy and completeness of disclosure of such information. Because of this linited participation, the Co-financial Ad.tisors make no guaranty, warranty or other representation respecting accuracy and completeness of the Official Statement or any other matter related to the Official Statement. The Co-financial Ad.tisors will receive compensation contingent upon the sale and delivery of the Bonds.

36 MISCELLANEOUS

References are made herein to certain docurrents and reports that are brief summaries thereof that do not purport to be complete or definitive, and reference is made to such docurrents and reports for a full and comp! ete staterrent of the contents thereof.

Any staterrents in this Official Staterrent involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Staterrent is not to be construed as a contract or agreerrent between the City and the purchasers or owners of any of the Bands.

The execution and delivery of this Official Staterrent has been duly authorized b,r the City.

CITY OF LOS ANGELES, CALIFORNIA

By: ts[D'Arlynn Carey Assistant City Adninistrative Officer

37 APPENDIX A

CITY OF LOS ANGELES Table of Contents

Page INTRODUCTION ...... 1 ECONOMIC AND DEMOGRAPHIC INFORMATION ...... 2 Pop.,1latim ...... 2 Industry and Employment ...... 2 M aj or Ernpl ayers ...... 4 Effective Buying I ncome ...... 5 Retail Sales ...... 6 Cmstruction Activity ...... 6 Commercial Real Estate Markets in Los Angeles ...... 7 Education ...... 7 Seismic Considerations ...... 8 MUNICIPAL GOVERNMENT ...... 9 BUDGET AND REVENUES ...... 10 B udgetary Process ...... 1O 5 tate of California Budget ...... 1O City's 2004-05 Adopted Budget and 2005-0:i Adop:ed Budget ...... 12 I nteri m Financial 5 tatus ...... 13 B udget Forecast ...... 14 MAJOR GENERAL FUND REVENUE SOURCES ...... 16 Property Taxes ...... 16 Utility Users' Tax ...... 19 Sales Tax ...... 20 Business Tax ...... 21 State Motor Vehicle License Fee ...... 22 Licenses, Permits, Fees and Fines ...... 23 Parking Fines (Formerly Municipal Court Fines) ...... 24 Water and POvVer Transfers to General Fund ...... 25 LIMITATIONS ON TAXES ANDAPPROPRIATIONS ...... 26 Article XI 11 A of the CaliforniaConstitutim -Propositim 13 ...... 26 Article X 111 B of the California Constitutim -Gann Li rrit ...... 26 Articles XI 11 C and XI 11 D of California Constitution -Propositim 218 ...... 27 Future Initiatives ...... 28 FINANCIAL OPERATIONS ...... 29 Fi nanci al 5tatements ...... 29 Reserve Fund and Financial Management Policies ...... 32 B udgetary Reserves ...... 33 GAAP--Based Fund Balance ...... 33 Risk Retention Program ...... 34 Workers' Compensation, Employee Health Care and Other Human Resources Benefits ..... 35 Lator Relations ...... 35 Retirement and Pensim Systems ...... 37 City Treasury Investment Practices and Pd icies ...... 43 Capital Program ...... 45 BONDED AND OTHER INDEBTEDNESS ...... 46 I ntroducti on ...... 46 General Obligation Bonds ...... 46 Citywide Lirrited Oljigation Bonds ...... 47 Lease Oljigations...... 47 Comnercial P~r Program ...... 47 J udgment Obi i gati on Bands ...... 50 Revenue Bands ...... 50 Conduit Debt Obligations ...... 50 Cash-fl ON Borro,vings ...... 50 Sumrrary of Long-Term BorrOvVi ngs ...... 52 Debt Management Policies ...... 55 Varialje Rate Obligations and Swap Agreements ...... 56 O~rating and Other Financing Leases ...... 57 ProlX)sed Addi ti anal Fi nanci ngs ...... 57 Overlapp ng Banded Debt ...... 57 LITIGATION ...... 59 INTRODUCTION

The City of Los Angeles (the "City"), California is the second rnost pop.,1lous city in the United States with an estirrated 2004 IX)pulation of 3.9 rrillion persons. Los Angeles is the principal city of a metropolitan region stretching frorn the City of San Buenaventura to the north, the City of San CI emente to the south, and the City of San B ernardi no to the east. Founded in 1781, Los Angeles was for its first century a prCNincial outlX)st under a succession of Spanish, Mexican, and American rule. It experienced a pop.,1lation boorn fdlcwing its linkage O{ rail with San Francisco in 1876. Los Angeles was selected as the Southern California rail terrri nus because its natural harbor, uni ike San Diegd s, seemed to offer little challenge to San Francisco, home of the railroad barons. But what the region lacked in commerce and industry, it rm.de up in temperate cl i rrate and unslX)i I ed real estate, and soon tens and then hundreds of thousands of people living in the northeastern and rriclvvestern United States migrated to new homes in the region. The City's population climbed to 50,000 persons in 1890, and then swelled to 1.5 rri Ilion persons b,t 1940. Agricultural and oil production, follcwed O{ the creation of a deep water IX)rt, the opening of the Panama Canal, and the cornpl eti on of the City-financed Owens Valley Aqueduct to provide additional water, all contributed to an expanding econorri c base. During this sarne period, the rnctor car became the principal rnode of American translX)rtation, and the City developed as the first rrajor city of the automotive age. Follavving World War II, the City became the focus of a new wave of rrigration, with its population reaching 2.4 rri 11 ion persons O{ 1960. Beth the City and its surrounding metropditan region have continued to experience gravvth in IX)pulation and in econorric diversity. Services, whdesale and retail trade, rranufacturing, government, financial service industries, transportation, utilities and construction contribute significantly to local employment. The City's 470 square rriles contain 11.5% of the area and 38.7"/o of the population of the County of Los Angeles (the "County"). The County is a top ranked county in rranufacturi ng in such diverse iterns as aircraft, aircraft equipment, al urni nurn, dental equipment, games and toys, gas transrni ssi ons and di stri buti on equi prnent, guided missiles, space vehicles and propulsion units, and women's apparel. Fueled b,t trade with the Pacific R i rn countries, the Ports of Los Angel es and Long Beach cornbi ned rank first in the nation in volume. As home to the fi I rn, tel evi si on and recording industries, as wel I as i rnportant cultural faci Ii ties, the City serves as a principal global cultural center.

A-1 ECONOMIC AND DEMOGRAPHIC INFORMATION The ecmorric and demograpiic inforrration p-ovided belcw has been cdlected from sources which the City deems to be reliable. Because it is difficult to attain timely regional economic and demographic inforrration, the City's econorric condition rray net be fully apparent in al I of the publicly avai Iable regi anal economic statistics p-ovi ded herein.

Population Talje 1 summarizes City, County, and State populatim estirrated at January 1 of each year.

Table l CITY, COUNTY AND STATE POPULATION STATISTICS

City of Annual County of Annual State of Annual LosArpeles G rCM!th Rate LosArpeles G rCM!th Rate California G rONth Rate 1980 2.968.579 0.54% 7,477,421 0.63% 23,782,000 l.86% 1985 3.216.900 0.84 8,121,000 0.86 26,113,000 0.98 1900 3.485.557 0.84 8,863,052 0.91 29,758,213 l.40 1995 3.547.700 0.36 9,103,900 0.54 31,617,000 l.25 20CQ 3.694.820 0.83 9,519,330 0.91 33,984,980 1.49 2001 3.747.800 1.43 9,661,800 l.50 34,431,000 l.31 2002 3.807.800 l.60 9,822,600 l.66 35,049,000 l.79 2003 3.859.400 l.36 9,966,200 l.46 35,612,000 l.61 2004 3.912.200 l.37 10,103,000 l.37 36,144,000 1.49

Source U.S. Census for 1980, 19SO an::l 2CCO; ot~r figures are California Departrrent of Fi nan:::e estimates as ofJ anuaJV l of ea:::h year.

Industry and Employment The average number of ernpl oyed and unernpl oyed residents of the County, together with the average annual unemp oyment rate, is summarized in T alj e 2. Historically, the County's unemployment rate has been higher than the State's rate.

Table 2 ESTIMATEDAVERAGE ANNUAL EMPLOYMENT AND UNEMPLOYMENT OF RESIDENT LABOR FORCE

2000 2001 2002 2003 2004 County of Los AnJeles Civilian Labor Force(lJ Employed 4,427,800 4,483,000 4,446,100 4,478,000 4,494,000 U remployed 253 500 269 900 323 800 334 200 315 700 Total 4,681,300 4,752,900 4,769,900 4,782,000 4,809,700

U ~mployrrent Rates County 5.4% 5.7% 6.8% 7.6% 6.6% State 5.6% 5.4% 6.7% 6.8% 6.2% United States 4.6% 4.7% 5.8% 6.6% 5.5%

('I March 2004 Berr::hmark; mt seasonally adjusted.

Source California Employrrent Developrrent Departrrent, Labor Market Information Division fort~ State an::l County; U.S. Bureau of Lai:xJr, Departrrent of Labor Statistics for the U.S.

A-2 Table 3 sumrrwi zes the State E rrpl oyment Department Devel q:Jment' s estimated average annual errployment of wage and salary workers in the County. (Separate figures for the City are not rrai ntai ned.) Percentages indicate the percentage of the total employment for each type of employment for the given year. For purposes of comparison, employment for the State is also sumrrwized. The trade, transportation and utilities sector was the major employment sector in the County in 2004, errploying 19.5°/o of the nonagricultural wage and salary workers in the County. GOJernment, at 14.9'/o, is the second highest empoyment sector in the County, fdlavved O)' professional and business services, which employs 14.CJ'/o of the nonagricultural wage and salary workers in the County.

Table 3 LOS ANGELES COUNTY INDUSTRY EMPLOYMENT AND LABOR FORCE"'

County State of California

% of % of % of 1999 Total 2e04(2) Total 2004-(2) Total

Agricultural 13.700 0.3% 7,000 0.1% 370,300 2.5 Natural Resources an::! Minitl'J 8,200 0.2 3,S\XJ 0.9 22,S\XJ 0.1 Constru:::tion 145,100 3.5 139,400 3.4 847,300 5.7 M anufacturi tl'J 811,600 19.6 484,200 12.l 1,532,700 10.3 Trade, Transrx,rtation & Utilities 794,700 19.l 780,200 19.5 2,718,000 18.4 Information 186,200 4.5 208, 100 5.2 476,200 3.2 Finan:::ial Activities 280,300 6.8 243,200 6.0 885,000 5.9 Professional an::l Busi~ssServices 541,S\XJ 13.2 561,000 14.0 2,080,000 14.0 Edu:::ational an::l Health Services 384,700 9.3 467,700 11.6 1,536,400 10.4 Leisure an::l Hospitality 306,000 7.4 373, 100 9.3 1,400,200 9.4 Ot~r Services 136,700 3.3 144,800 3.6 504,300 3.4 G overnrrent 539 800 13.0 599,300 14.9 2,425,500 16.4 Total 4,149,500 3,999,700 14,769,700

Sirr::e 2CCO, t~ EDD has cot111erted employer records from t~ Stan:lard ln:lustrial Classification (SIC) ccditl'J system tot~ North Am::rican I n:lustty Classification System (NAI CS). Items may mt add to totals dLe to in::le~n::lent roun:litl'J. March 2004 Berr::hmark. T~ "~rr::hmark" is t~ annual revision process in which tTDnthly lai:xJr force an::l payroll employrrent data, which are based on estimates, are updated based on detailed tax records.

Source California E mployrrent Developrrent Departrrent, Lai:xJr Market Information Division.

A-3 Major Empl0yers The major non-governmental ernpl0yers in the County are listed in Table 4. In addition, GOJernrnent ernpl0yrnent represents approximately 15% of the labor force (see Table 3 - I ndustry Empl 0yment & Labor Force).

Table4 LOS ANGELES COUNTY MAJOR NON-GOVERNMENTAL EMPLOYERS

Employer Prcdu:::t5etvice Employees

Kaiser Penmnente Health care provider 29.225 T~BC€itl'JCO. Aerospace high techmlcgy 22.058 Northrop G rummann Corp. Aerospace/Defense design and manufacturi tl'J ;,n.rm Ralph's Grocery Co. Supermarket o~rator 16.855 Target Departrrent retailer 12.137 University of Sout~rn California Education-private university 11.703 Te~t Healthcare Corp Hospitals 11.673 Bank of A rreri ca Comrrerci al banki tl'J 11.110 CPE Employee ~~fit consultants 10.945 SBC Pacific Bell Communications 9.977 ABM I n:lustries, Inc. Janitorial, I ighti tl'J, parking an:l security service 9.6'D washi tl'JtOll Mutual Inc. Comrrerci al banki tl'J 8.129 Cedars-Sinai Medical Center Medical center 6.831 Cath:Jlic Health:::areWest Hospitals 6.718 AOL Titre War~r Mediaan:l entettainrrent 6.700 Edi son I nternati anal Electric utility 5.956 Sempra E ~rgy E~rgy services 5.877 AITTJen Irr::. Bi otechml cgy 5.813 Countrywide Finan:::ial Corp. Harre ITTJttgage origination an:l service 5.(i61 Providerr::e Health System Full service rredical facilities 5.436 DaUJhters of Charity Health System Health care provider 4.056 Children's Hospital LosAnJeles Medical center 3.986 Adventist Health Hospitals 3.832 L ockh::£d Martin Corp Defense, space, information, techmlogy 3.811 Wellrx,i nt Health Networks, Irr::. Heal th pl ans 3.458

Source LosAtl'Jeles B usi~ssJ ournal, "T~ Lists 2004."

A-4 Effective Buying I ncome "Effective Buying I ncome" ("EB I"), al so referred to as "di slX)saJj e'' or "after tax" income, consists of money income I ess personal tax and certain non-tax payments. Personal income includes wages and salaries; retirement income (including Social Security income); public assistance, unemployment compensation, and di salbi Ii ty income; and certain ether income (e.g., rental and royalty income), dividends and interest, child SUPIXJrt and alimony, and other periodic income. Deducted from this tetal are personal taxes (federal, state and local), and personal contributions to social insurance (Social Security and federal retirement payroll deductions). Certain receipts are net included as money income, such as non-cash public assistance; bank withdrctNal sand I oans; and various I ump-sum recei p:s. Table 5 summarizes historical median househdd EBI, for the City, County, State and United States of America as annually relX)rted O)' Sales and Marketing Management Magazine.

Table 5 CITY, COUNTY, STATE AND U.S. MEDIAN HOUSEHOLD EFFECTIVE BUYING INCOME"'

Year City of Los Amel es Countv of Los Amel es State of California United States of Arrerica 1999 $32,737 $36,730 $39,492 $37,233 2000 37,321 41,628 44,464 39,129 2001 36,548 40,789 43,532 38,365 2002 33,398 37,983 42,484 38,035 2003 33,541 38,311 42,924 38,201

('I T~ 2C04 Sutve,i is expected to~ publisf-ffl in August 2005.

Source Sales an::l Marketitl'J Managerrent Magazi~ "Sutve,i of B Uy'itl'J Pa,;ver."

A-5 Retail Sales As the largest city in the County, the City accounted for $33,438,515,CXX) (or 29.4'/o) of the total $113,685,422,CXX) in County taxalje sales for 2003. Table 6 sets forth a history of taxable sales for the City.

Table 6 CITY OF LOS ANGELES TAXABLE SALES"' (in thousands)

1999 20CQ 2001 2002 2003 Apparel stores $ 1.151.319 $ 1.213.763 $ 1.237.498 $ 1.333.%7 $ 1.451.760 Ge~ral rrerchan:lise stores 2.904.725 3/E3.289 3.121.521 3.173.481 3.351.395 Focd stores 1.480.721 1.566.768 1.562.989 1.574.751 1.590.925 Eati tl'J an::l dri nki tl'J establ i shrrents 3.415.261 3.691.864 3.832.553 4.050.080 4.267.618 Harre furnishitl'JS an::l applian::::es l.Cl86.801 1.156.5136 1.114.428 1.166.157 1.221.327 B uilditl'J materials an::l farm implerrents 1.404.5% 1.584.737 l.747.G25 1.868.657 1.971.383 Auto dealers an:l auto supplies 2.883.414 3.275.664 3.'lli.186 3.759.209 4.057.625 Service stations 2.()92.152 2.676.542 2.563.()82 2.422.631 2.789.646 Other retai I stores 4043%3 4 408 228 4 324 943 4 368 574 4 543 304 Retail stores total 20.462.952 22.642.441 23.010.225 23.717.507 25.244.983 A 11 other outlets 8198482 86491% 8 631 925 8 127353 8 193 532 TOTAL ALL OUTLETS $28.(£1.434 $31.291.637 $31.642.150 $31.844.860 $33.438.515

In T~ rE

Source: California State Board of Equalization, Research an::l Statistics Division.

Construction Activity Talje 7 p-CNides a summary of building permit valuations and number of new units in the City.

Table 7 CITY OF LOS ANGELES BUILDING PERMITVALUATIONS AND NEW UNITS

1999 2000 2001 2002 2003 1 Valuatiorf J Resi denti al $ 677 $ 954 $1.0% $ 974 $1.062 Non-residential 1199 1140 l 204 __1_J__:,;> 1190 Total Valuation $1.876 $2.094 $2.300 $2.126 $2.252

NuniJerofUnits Sitl'.Jlefamily 1.532 1.563 1.443 1.364 1.397 Multi-family 2,881 4 735 5,385 5,300 4 509 Subtotal Residential 4.413 6.298 6.828 6.664 5.906 Non-residential _'ill 926 ___Eill 2,302 1877 Total Units 4.926 7.224 7.441 8.%6 7.783

(lJ Millions of dollars

Source City of LosAtl'Jeles, Departm::nt of Bui lditl'J an::l Safety.

A--6 Canmercial Real Estate Markets in LosAngeles Table 8 shews vacancy rates for non-residential space in dOvVntcwn Los Angel es and the remai nder of the Los A ngel es M etrqJCJI i tan A rea.

Table 8 LOS ANGELES METROPOLITAN AREA NON-RESIDENTIAL VACANCY RATES"'

DONntown Suburban Total Quarter 2002 2003 2004 2002 2003 2004 2002 2003 2004

First 15.4% 18816 16.9,?6 12.7% 13.4% 14.4% 13.1% 14.3% 14.8% Secon::l 15.4 19.l 15.8 12.6 14.0 14.3 13.l 14.8 14.5 Third 16.2 18.7 16.8 13.2 14.3 14.3 13.7 15.0 13.8 Fourth 16.7 17.4 16.7 11.5 14.7 13.4 12.4 15.2 12.7

Average 15.9,?6 18.5% 16.5% 12.5% 14.1% 14.1% 13.1% 14.8% 13.9,?6

T~ dCM1ntCM1n in:lex covers office builditl'JS int~ central core. The corresrx,nditl'J suburban area irr::lu::les t~ remain:ler oft~ rretrorx,I itan area, excl u::li tl'J t~ central core.

Source RAND California

Education The Los Angeles Unified School District ("LAUSD") adrrinisters public instruction for grades K-12, adult, and occupational schools in the City and all or significant portions of a number of smaller neighboring cities and unincorporated territory. The LAUSD, which encanpasses approximately 704 square rriles, was formed in 1854 as the Common Schools for the City of Los Angeles, and became a unified school district in 1%0. The LAU SD is governed by a seven-member Board of Education, elected by district to serve alternating four-year terms.

A-7 Taije 9 prCNides a sumrrary of the Enrollment and Average Daily Attendance ("ADA") of Ki ndergarten-12 (" K -12") students for the LAU SD.

Table 9 LOS ANGELES UNIFIED SCHOOL DISTRICT TOTAL ANNUAL AVERAGE DAILY ATTENDANCE

1 Fiscal Year Average Daily Atten::lan::::e( J

2001 744.729 2002 768.313 2003 777/ES 2004 777.104 20092) 783.749

('I I rr::lu::les stu::lents in Adult Edu:::ation Prcgram an::l District Charter Sch::x:Jls. '" Estimated.

Source Los Angeles Unified School District Compre~nsive Annual Finan:::ial Rerx,tt for Fiscal Years 2CXX)f)l throUJh 2002;()3. Fiscal years 2003;()4 and 2C04;05 are from t~ Final B u::lget for 2C04/05.

There are many public and private colleges and universities located in the City. Major colleges and universities located within the City include the University of California at Los Angeles, the University of Southern California, California State University at Los Angeles, California State University at Northridge, Occidental College and Loyda Marymount University. There are seven community cdleges located within the City.

Seismic Considerations Like most regions in the State, the City is subject to unpredictalje seismic activity. A number of knavvn faults run through the City, and the City lies near the San Andreas Fault. The comp ex Los Angeles fault system interacts with the alluvial soils and cther gedogic conditions in the hills and basins. This interaction appears to pose a pctential sei srric threat for every part of the City, regardless of the underlying geologic and soils conditions. In addition, there are likely to be unmapped faults throughout the City. The most recent major earthquake, the Northridge earthquake in 1994, occurred along a previously unmapped blind thrust fault. Although the Northridge earthquake was listed O)' seismologists as a moderate earthquake, it was the most costly seisrric event in the United States since the 19CXi San Francisco earthquake, resulting in the I oss of 72 I ives and darrage to approximately 93, CXX) bui I dings. The City does not maintain insurance for earthquake risks, relying on its general reserves and the expectation that funds will be available from the Federal Emergency Management Agency(" FEMA"). There is no guarantee that sufficient reserves or FE MA assistance would be available in the event of a national disaster. See "FINANCIAL OPERATIONS - Reserve Fund and Financial Management Policies'', "Budgetary Reserves'' and "Risk Retention Program" herein.

A--8 MUNICIPAL GOVERNMENT

Under the State Constitution, charter cities are generally independent of the state legislature in matters relating to municipal affairs, and in their ability to raise revenues. Charter cities are subject to State Constitutional restrictions; see" LIMITATIONS ON TAXES AND APPROPRIATIONS" herein. The City is a charter city originally incorporated in 1850. The most recent charter was adop:ed in 1999, effectiveJ uly 1, 2000. The City is governed b,' the Mayor and the Council. The Mayor is elected at large for a 4-year term. As executive officer of the City, the Mayor has the overall responsiblity of admi ni strati on. The Mayor recommends and submits the annual budget to the Counci I and passes upon subsequent app-opri ati ons and transfers, app-oves or vetoes ordinances, and appoints certain City officials and comrrissioners. He supervises the administrative process of local government and works with the Council in matters relating to legislation, budget, and finance. As p-escri bed b,' the Charter and City ordinances, the Mayor operates an executive department, of which he is the ex-officio head. J arnes K. Hahn was elected Mayor onJ une 5, 2001 and took office onJ uly 1, 2001. On May 17, 2005 Antonio Vil laraigosa was elected Mayor. He wi II take office onJ uly 1, 2005. The Council, the legislative~ of the City, is a full time council and enacts ordinances subject to the approval of the Mayor. I f the Mayor vetoes, the Counci I may override the veto of the Mayor b,' a two-thirds vote. It orders elections, I evi es taxes, authorizes public i mp-ovements, approves contracts, adopts zoning and other I and use contrd s, and adop:s traffic regulations. The Counci I adopts or modifies the budget proposed b,' the Mayor. It authorizes the number of employees in budgetary departments, creates positions and fixes salaries. The Council consists of 15 members elected b,' district for staggered 4-year terms. The other two elective offices of the City are the Controller and the City Attorney, both elected for 4-year terms. The Contrdler is the chief accounting officer for the City. The current Controller, Laura N. Chick, was elected to her first term at the April 2001 election and took officeJ uly 1, 2001. She was elected to a second term in the March 8, 2005 Norri nati ng Election. The City Attorney is attorney and legal advisor to the Council and all officers, boards, and departments of the City, and prosecutes misdemeanors. The current City Attorney, RockardJ. Delgadillo, was elected on June 5, 2001 and took office on July 1, 2001. He was elected to a second term in the March 8, 2005 Norri nati ng EI ecti on. The City Administrative Officer, appointed b,' the Mayor and confirmed b,' the Council, is the chief financial advisor to the Mayor and Council and reports directly to bcth. William T Fujioka has served as the City Administrative Officer since August, 1999. The City Treasurer (the "Treasurer"), appointed b,' the Mayor and confirmed b,' the Council, receives, invests and is the custodian of the City's funds and those of affiliated entities. The Treasurer also serves as the City's central bank. The current Treasurer isJ oya C. De Foor. The Office of Finance is responsible for revenue cdlection within the City. The current Director of the Office of Finance is Antd nette Christovale. The City has 40 departments, bureaus, commissions and offices for which operating funds are annually budgeted b,' the Council. In addition, five departments (the Department of Water and POvVer ("DWP"), Harbor, Airports, and two pension systems), the Community

A--9 Redevelq:imentAgency of the City of Los Angeles and the HousingAuthcrity of the City of Los Angel es are under the control of Boards awoi nted b,' the M aycr and confi rnned b,' the Counci I. Puljic services p-ovided b,' the City include police; fire and parannedics; residential ref use col I ecti on and di sposal , wastewater col I ecti on and treatment, street rrai ntenance, traffic management, storm water pol I uti on abatement, and ether public works functions; enforcement of ordinances and statutes relating to building safety; public libraries; recreation and parks; community develop-nent, housing and aging services; and panning. The City obtains water and electricity from the Los Angeles DWP, one of the largest publicly--avvned utilities in the nation.

BUDGET AND REVENUES

Budgetary Process The City's fi seal year extends fromJ uly 1 through June 30. Under the City Charter, the Maya- is required each year to subrrit to the Council a Proposed Budget b,' Ap-il 20. The Proposed Budget is based on the Mayor's budget p-i cri ti es, and includes estimates of recei p:s from the City's various revenue sources. The Mayor's Proposed Budget is reviewed b,' the Council's Budget and Finance Committee, which reports its recommendations to the full Council. The Council is required b,' law to adopt the Maycr's Proposed Budget, as modified b,' the Council, b,' June 1. The Mayor has five working days after adop:ion to approve or veto any items modified b,' the Council. The Counci I then has five working days to override b,' a two-thirds vote any items vetoed b,' the Maya-. The final Adop:ed Budget is subject to revision throughout the fiscal year to reflect any changes in revenue and expenditure projections.

State of Califcrnia Budget A number of the City's revenues are col I ected and sutwened b,' the State (such as sales tax and motor-vehicle license fees) or allocated in acccrdance with State law (most importantly, p-operty taxes). Therefore, State budget decisions can have a material impact on City finances. The State's fi seal year begins on July 1 and ends on June 30. The State Constitution requires the Governcr to submit a budget fcr each fiscal year to the Legislature b,' the preceding January 1O (the "Governcr's Budget"). The Constitution requires the Legislature to pass a budget all b,' June 15 (although the Legislature has rrissed this date over the past several years). Because more than half of the State's general fund income is derived from the A pri I 15 personal income tax, the Governor subrri ts a" May Revised Budget" b,' May 14. The L egi sl ature typ cal ly waits for the May Revised Budget before making final budget decisions. Once the budget bi 11 has been approved b,' a two-thirds vcte of each house of the L egi sl ature, it is sent to the Governor fcr signature. On March 2, 2004, California vcters approved Proposition 57, a bond act authcrizing the issuance of upto $15 billion of Economic Recovery Bonds, to fund the accumulated State budget deficit. These bonds are secured b,' a pledge of revenues from an increase in the State's share of the sales and use tax of one-quarter cent beginning July 1, 2004. The share of the tax going to Iocal governments wi 11 be reduced b,' the same annount and, in exchange, Iocal governments wi 11 receive an increased share of the local property tax (and K-12 school districts and community

A-10 col I eges a reduced share) during the ti me the one-quarter cent is being used to pay off the bonds (estimated to be between 9 and 14 years). This shift in revenues between the State and local governments is kncwn as the "Triple Flip." The 2004-05 State budget rnade rrajor changes to local government revenues and proposed a constitutional amendment to greatly restrict future State authority over local finance. Speci fi cal ly, the Adopted Budget: • Placed a Constitutional Amendment before the State's Voters. State voters apprCNed Proposition lA at the NCNernber 2, 2004 election, which reduced future legislative authority to reduce or reallocate local revenues frorn the sales tax, property tax, or vehicle license fee (VLF). • EI i rni nated the Statutory VLF Trigger and B ackfi 11. The budget package set the VLF rate at 0.65°/o of vehicle value (dcwn frorn the historical rate of 2%) and el i rni nated the trigger mechani srn that increased the VLF rate in the event that the State's General Fund has insufficient funds to rnake the required backfill payments to cities and counties. The budget package permanently replaced city and county VLF backfill revenues with an equal annount of property taxes shifted frorn schools and cornrnunity cdleges. (All education agency property tax reductions are offset O)' increased State aid.) • Two-year Shift of Property Taxes to K-12 and Cornrnunity College Districts. The budget package shifted $1.3 billion of property taxes frorn cities, counties, special districts, and redevel oprnent agencies to K -12 and Cornrnunity Cdlege district schools in 2004-05 and 2005-0:i for the fiscal benefit of the Stare. It cannot be predicted what actions wi 11 be taken in the future O)' the State L egi sl ature and the Governorto implement specific provisions of the Final Budget, to deal with changing State revenues and expenditures, or the effect of national and state econorric conditions on future State budgets. On J anuary 10, 2005, Governor Schwarzenegger rel eased the 2005-0:i Governor's Budget (the "Governor's Budget"). The Governor's Budget proposes funding reductions in virtually every part of State government including: (i) eliminating Proposition 98 (school and cornrnunity col I ege funding) increases of $1. 1 bi 11 ion in 2004-05 and $1.1 7 bi 11 ion in 2005-0:i attributable to the postponement of $2 bllion of Proposition 98 funds frorn prior fiscal years, (ii) reducing approximately $4. 7 b Ilion of non-Proposition 98 program areas, (iii) issuing approximately $1. 7 billion of econorric recCNery bonds and (iv) increasing revenue O)' $409 million. The Governor's Budget also proposes a reduction of $567.4 rrillion in the State's contribution to CalSTRS, a decrease of 49.4 percent over fi seal year 2004-05, the burden of which wi 11 be shifted to schod districts or the covered ernpl oyees. The G CNernor' s B udget did not propose significant actions affecting the revenues or expenditures of the City of Los Angeles. On May 13, 2005, the G CNernor rel eased the May R evi si on to the 2005-0:i Proposed Budget (the "May Revision"). The May Revision includes approximately $6.6 bllion in additional revenues for Fiscal Years 2004-05 and 2005-0:i than was assumed in the 2005-0:i Proposed Budget. The GCNernor proposes no new borrcwing in the May Revision. Certain of the features of the May Revision affecting the City include the follavving:

A-11 1. The May Revision assumes the State will accelerate repayment b,' one year of approximately $593 rrillion cwecl to cities and counties for VLF revenues withheld b,' the State in Fiscal Year 2003-04. The May Revision also proposes $108 million in increased funding for State mandate reimbursements. 2. The May Revi si on proposes to reinstate the transfer, eliminated in the 2005-06 Proposed Budget, of gasoline sales tax revenue from the General Fund to transportation purposes pursuant to Proposition 42, in the amount of $1.3 billion, with $254 million to be prCNided to cities and counties for I ocal streets and roads. On May 17, 2005, the LAO released an analysis of the May Revision entitled Overview of the 2005-06 May Revision (the "LAO Overview"). The LAO Overview indicates that the May Revi si on has el i rri nated some of the risky assumptions set forth in the 2005-06 Proposed Budget, but that the May Revision continues to include significant risks with respect to, among other things, employee compensation and retirement costs. The LAO concludes that, absent long-term solutions, the State would face a major budget problem in fiscal year 2CXXi--07 and beyond. Additional information concerning the GCNernor's Budget and the State's financial condition may be found on the website of the State of California Department of Finance at http: /;WWW.dof.caqov, and of the State's Legislative Analyst's Office at http:/,www.lao.caqov, which are not incorporated as part of this official statement.

City's 2004-05 Adopted Budget and 2005-06 Adopted Budget The City's 2004-05 Adopted Budget is $5.388 billion, comprised of approximately $3.048 bllion for departmental expenditures and $2.340 bllion for non-departmental expenditures. Tctal receip:s are budgeted at $5.388 bl lion, comprised of approximately $3.671 billion in General Fund receipts (including a $123 rrillion transfer from the general Reserve Fund) and $1.717 billion in special receipts and availal:fo balances. The Adop:ed Budget includes a Reserve Fund of $112.7 rrillion, which represents approximately 3.1% of budgeted General Fund revenues. The City's 2005-06 Adopted Budget is $5.985 billion, comprised of approximately $3.300 bllion for departmental expenditures and $2.685 bllion for non-departmental expenditures. Tctal receip:s are budgeted at $5.985 bl lion, comprised of approximately $3.947 billion in General Fund receipts (including a $295 rrillion transfer from the general Reserve Fund) and $2.038 billion in special receipts and availal:fo balances. The Adop:ed Budget includes a Reserve Fund of $131.5 rrillion, which represents approximately 3.3"/o of budgeted General Fund revenues. The 2005-06 Adopted Budget assumes a net reduction of $48.3 million in property taxes due to an increase in the shift of taxes to the Educati anal Revenue Augmentation Fund (ERAF). See" State of California Budget" herein. Talje 10 presents the Adop:ecl Budget for the Fiscal Year 2004-05 and prior fiscal years. This budget includes the General Fund and most special revenue funds, but excludes those operations nct directly under the direct control of the City Council (i.e., Airport, Harbor, Water and Pcwer, and City Employees' Retirement and Pensions departments).

A-12 Table lO CITY OF LOS ANGELES ADOPTED BUDGETS (ALL BUDGETED FUND TYPES)

Adopted Adopted Adopted Adopted Revenues 2002-03 2003-04 2004-05 2005-ffi Taxes( 1J $2, 144,036,CXXJ $2,403,245,716 $2,537,799,818 $2,953,265,207 2 Licenses, Permits& Fi~s( J 755,426,CXXJ 827,240,369 839,479,228 617,623,CXXJ 3 Sr:x=cial Assessrrents( J 77,381,998 76,332,881 78,963,100 78,933,322 4 Charges For Services & O~rationS J 763,482,429 724,408,200 737,432,441 835,610,401 I ntergovernrrentaJ(sJ 318,048,091 299,461,879 372,872,fJJS 304,874,193 Interest 29,179,000 20, 500,CXXJ 11,500,CXXJ 31,110,000 6 Transrx,rtation Fund5 J 208,661,688 211,202,662 219,781,323 251,112,103 Ot~r G~ral Fun:l7! 96,882,628 168,582,501 137,686,472 330,513,993 Ot~r Sp:=<::ial Fund 254604481 134834609 151 839 200 231 332 893 Subtotal RevenLes 4,647,702,315 4,865,808,817 5,087,354, 190 5,640, 134, 112 Available Balances 179 391 940 297 561 562 300 713 742 345139 967 Total $4,827,094,255 $5, 163,370,379 $5,388,067,932 $5,985,274,079

AppropriationSSJ Community Safety $1,088,430,547 $1, 150,386, 112 $1,201,622,965 $1,834,370,752 Horrean::l Community Environrrent 787,018,719 751,048,311 866,689, 128 1,034, 162,098 T ransrx,rtati on 476,919,126 455,652,826 471,322,454 566,773,701 Cultural, Edu:::ational & 187,338,904 208,980,316 203,626,493 253,617,650 Recreational Services Ecommic Developrrent 118,082,802 73,865,950 65,518,823 106,563,121 Pensionsan:l Retirerrent 219,475,639 308,549,446 435,069,422 447,643,426 Capital Outlay 359,239,009 455,429,227 432,791,994 428,537,432 General Governrrent 1,590,589,509 l 759458191 l 711426653 1,282,924,792 Total $4,827,094,255 $5, 163,370,379 $5,388,067,932 $5,954,592,972

Major tax revenLe sources irr::lu::le Pro~rty Tax, Utility Users' Tax, Sales Tax, Busi~ss Tax, Transient Occuparry Tax, Docurrentaiy Transfer Tax, Parkitl'J Users' Tax, Residential De.;eloprrent Tax, an::l Sp:=<::ial Police Communicationsf)l l System Tax. RevenLe sources irr::lude State VLF, Municipal Coutt Fi ~s, an::l Franchise I 11'.:0tre. RevenLe sources itl'.:lude Street L ightitl'J Maintenan::::eAssessrrent Fun::! an::l StormNater Pollution Abaterrent Fun::!. Major revenLe sources itl'.:lu::le S61Ver Constru:::tion an::l Maintenan::::e Fun::!, Sanitation Equiprrent Charge Revenue Fun::!, Cot111ention Center RevenLe Fun::!, Sp:=<::ial Parking RevenLe Fun::!, an::l Zoo Enterprise Fun::!. ISi Major revenLe sources itl'.:lu::le Community Developrrent Block Grant, grant receipts, Local Public Safety Fun::!, and Workforce I t111estrrent Act. Also itl'.:lu::les proprietaiy departrrenttransfers. (Cl RevenLe sources itl'.:lude Sp:=<::ial Gas Tax Street I mprovem::nt Fun::!, Prorx,sition A Local Transit I mproverrent Fun::!, an::l Prorx,sition C Anti-Gridlock Transit I mproverrent Fund. I 11'.:lu::les transfers from t~ Reserve Fun::!. 2005-03 Appropriations reflect t~ Prorx,sed B u::lget. Adopted bu::lget data is mt yet available in this format.

Source City of LosAtl'Jeles, Office oft~ City Administrative Officer.

Interim Financial Status During the fi seal year, the City monitcrs its revenues, expenditures and reserve estimates, and wi 11 make budgetary adj ustrrents throughout the year as deerred necessary. As i nstructed O)' the Mayor and Council, the City Administrative Officer issues interim financial status reports. Additimal information concerning the City's financial cmdition may be found on the website of the City Adrri ni strative Officer at http: /,\1\,WW.lacity.orgit:ao,.financial_rerprts.htm, which is nct incorporated as part of this official staterrent. On May 26, 2005, the City Administrative Officer released his Year--EndAdjustrrent and Financial Status Report for the fiscal year. Revenues for the fiscal year were estimated to be $206 rrillion greater than the AdqJted Budget, prirrwily due to the strong local real estate

A-13 rrwket and increased prqJerty and real prqJerty transfer taxes, as wel I as higher eel I ul ar telephone activity, strong building permit revenue and increasing hotel occupancies. Expenditures were prqjected to be $54.2 million belcw the Adopted Budget.

Budget Forecast As part of its budget planning, the City Adninistrative Officer prepares a five-year budget forecast, based on the existing budget and knavvn future obi i gatory expenditures, to identify future budget chal I enges, including whether a budget gap is Ii kely to occur. This process allavvs for earlier impementation of budget adjustments, either through the annual budget process orthrough interim action. The forecast is updated in connection with the City's periodic interim financial status reports. The most recent update of this forecast suggests some I evel of structural deficits in each of the next five fiscal years, which will need to be addressed through some combination of revenue increases, expenditure reductions, and transfers from reserves.

A-14 The fd lcwing rep-esents the City's most recent planning forecast.

Table ll FIVE-YEAR GENERAL FUND BUDGET FORECAST ($MM)"'

2005[Xi 2006[)7 2007 f)f3 2008[)9 200900 2 Estimated General Fund Re.;enue( J G eneral F un::l B ase $3.651.8 $3.767.6 $3.897.8 $4.028.3 $4.165.0 Transfer from Reserve Fun::J(3J 295.3 107.0 107.0 107.0 107.0 Total RevenLe 3.947.l 3.874.6 4.(X)4.8 4.135.3 4.272.0

General Fun::l Base lrr::rease% 7.5 (l.8)% 3.4% 3.3% 3.3% General F un::l Base I rr::rease $ 276 (72) 130 130 137

Estimated General Fund Expenditures G eneral F un::l B ase 3.671. l 3.947.l 4.130.2 4.283.8 4.333.9 Obligatory I rr::rerrental Chan-Jes to Base 4 Employee Com~nsation Adj ustrrentS J 88.6 33.3 31.4 12.0 12.0 Estimated Full-Year Cost of Partially Finan:::ed Positions 4.9 7.3 Fi re an::l Police Pensions(sJ 9.0 34.l 16.4 (6.0) (7.7) 5 City Employees' Reti rerrent Systerrf J 85.6 42.9 9.7 (6.8) (11.4) Workers' Com~nsation Be~fits(sJ (18.0) 6.8 7.2 7.6 7.9 Health an::l Dental Be~fits(7! 26.5 27.0 32.6 36.0 39.7 Debt Service 2.2 (4.7) 12.0 6.1 (0.2) E~nseCPI lrr::reases(SJ 6.5 6.6 6.8 6.9 Delete O~-Ti rre Costs (24.5) (8.7) 9 Unappropriated Balan::::e( J (22.9) (25.7) Net - Ot~r Additions an::l Deletions 138.7 N61V Facilities 15.0 10 City Elections( J (14.2) 14.6 (14.6) 15.l (15.l) Additional 265 Police Hires 15.2 12.5 Ful I Year Fun:litl'J of 05-03 Police Hi ritl'J Plan 4.1 Subtotal E~n:li tures 4 C£!9.7 Subtotal Deficits (225. ll

Other Potential Expenditures Traffic Signal Replacerrent 0.5 Regional CrirreLai:xJratoty 1.7 (l.O) EOC/POC;fire Dispatch Facility 8.8 34.8 (34.2) 4.5 Tip Fees 10.0 StormNater Bond O~ration an::l Maintenance 2.0 4.0 (8.0) 11.0 FM IS Replacerrent ___L'i __(Q,§) (6.Z] Subtotal Other Potential E~n:litures ---212 ___ill) (32.9) _____li_5 Total Obligatoty an::l Potential E~n:litures 3947.l 4,130.2 4,283.8 4 333.9 4,381.6

E~n:li tures G rCM!th % 7.'3!6 4.6% 3.7% l.2% l.1% E~n:li tures G rCM!th $ 276 183 154 'D 48

Deficit $ (255.6) $ (278.9) $ (198.6) $ (109.6)

Dated as of May 26. 2005. Annual revenLe growth is projected to average ai:xJut 3.5%. Reflects State bu::lget action that redu:::ed current Fiscal Year 2005-03 re.;enLe ly $49 million. Reserve Fund transfer represents transfer of surplus fun:ls carried forward from prior fiscal year. Forecasts are based on t~ three-year (2001--02 to 2003-04) historical average of unallocated revenLe an::l departrrental an::l mn:lepartrrental reversions. Employee Com~nsation Adjustrrents: lrr::ludes Sworn Cost of Living Adjustrrent (COLA) of 4% an::l Civilian Employees COLA of 2% in 2005-03 an::l ot~r adj ustrrents; Civilian COLA of 2% onJ uly l, 20C6 an::l 2.25% Januaiy l, 2007, an::l 0% t~reafter; 0% Sworn COLA from 2006-07 throUJh 2009-10. Employee com~nsation i rr::reases (ai:xJve 0%) may occur in latter years. See" Lai:xJr Relations", ~rein. ISi Fire & Pol ice Pensions (Pensions) an::l LA City Employrrent Retirerrent System (LACE RS): The contribution i rr::reases for Pensions an::l LACE RS are estimated based on information from t~ two systems' actuaries. (Cl Workers' Com~nsation Be~fits: Based on Pric61Vater Coo~r's" realistic" scenario" forecast rerx,tt dated 4/2004. IS Health an::l Dental Benefits: Based on Person~I Departrrent;1'v1ercer Consultitl'J rerx,rt dated 7 f29[2fJ)4. IS CPI lrr::reases: Reflects2% annual irr::reaseinvolatilecommxlities. (SI Deletes prior year fun:ling w~re m lotl'Jer required. (10) Citywide elections occur evay two years.

Source City of LosAtl'Jeles, Office oft~ City Administrative Officer.

A-15 MAJ OR GENERAL FUND REVENUE SOURCES

Follcwing is a discussion of the City's principal General Fund revenue sources. See "LIMITATIONS ON TAXES AND APPROPRIATIONS" herein.

Property Taxes Property taxes represent 28.9'/o of General Fund revenues in the 2005-0:i Adopted B udget. Under Article X 111 A of the State Constitution ( enacted in 1978 through the passage of Proposition 13) and its impementing legislation, ad valorem taxes on real property (other than taxes relating to certain voter--apprCNed indebtedness) are limited to one percent of the "full cash value." Full cash value is generally defined as the valuation of real property as shcwn on the 1975-76 tax b 11, or thereafter, as the appraised value of property when purchased or newly constructed after the 1975 assessment period. Real property valuation may be increased to reflect inflation, notto exceed two percent per year. (See" LIMITATIONS ON TAXES AND APPROPRIATIONS" herein.) The assessed valuation of property is estalj i shed b,' the County Assessor, and reported at lOCP/o of the full cash value as of each January 1, except for public utility property, which is assessed b,' the State Board of Equalization. B egi nni ng in 1983, State I aw prCNi ded for the estalj i shment of a "supp emental rol I"; real property is reassessed at market value on the date property changes cwnership or upon completion of new construction (kncwn as the "floating lien date"). A supplemental tax is cd I ected for the remainder of the tax year. The County collects the ad valorem taxes. Taxes arising from the one percent levy are apportioned among local taxing agencies on the basis of a formula estalblished b,' State law. Under this formula, the City receives a base year allocation pus an allocation on the basis of grcwth in assessed value ( consisting of new construction, change of cwnershi p and i nfl ati on). Taxes relating to voter-approved indebtedness are al I ocated to the relevant taxing agency. Beginning in Fiscal Year 1990-91 (with the adoption of new State legislation), the County deducts the pro--rata cost of collecting property taxes from the City's al location. The State Constitution and statutes provide exemption from reassessment for property upon certain changes of cwnership, and from ad valorem property taxation for certain classes of property such as local governments, churches, colleges, non-profit hospitals, and charitalje institutions. State law also allcws exemptions from ad valorem property taxation at $7,000 of full value of cwner--occupied dwellings and 100 percent of business inventories. Revenue losses to the City from the homecwner's exemption are replaced b,' the State. The California Community Redevelopment Law authorizes redevelopment agencies to receive the allocation of tax revenues resulting from increases in assessed valuations of properties within designated project areas. In effect, the other local taxing authorities realize tax revenues from such properties only on the base year valuations, which are frozen at the ti me a redevelopment project area is created. The tax revenues which result from increases in assessed valuations flew to the redevelopment areas. The City has created redevelopment prqject areas pursuant to California law. Generally, funds must be spent within the redevelopment areas in which the tax increment revenues were generated, and may only be spent on prqjects that qualify under California redevelopment law.

A-16 All taxable real and persmal prqJerty is classified as either" secured' IT" unsecured" and is listed accordingly on separate parts of the assessment rdl. The "secured roll" contains real property (I and and i mprCNements), certain taxable personal prqJerty ( such as business equi prnent on business---cwned prqJerty), and possessory interests (a leasehdd on ctherwise exemp: government prqJerty). The "unsecured rol I" contains taxable property that is not secured by the underlying real property, the majITity of which is business equipment on leased IT rented premi ses, and other taxable personal property such as boats and ai rcraft, as wel I as del i nquent possessory interests. The balance of personal property has been exemp:ed by State Iaw from property taxes. For recent years, approximately 94'/o of the City's assessed valuation represents property contained on the secured rd I. Property taxes on the secured rd I are due in two i nstal I ments: on November 1 and February 1 of the fi seal year. If unpaid, such taxes become delinquent after December 1O and Apri I 10, respectively, and a 1O'/o penalty is added to delinquent taxes. In addition, property on the secured rol I on which taxes are delinquent has a delinquency certificate recorded after June 30 of the fi seal year. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus a redemption penalty of 1.5% per month to the ti me of redemption. If taxes are unpaid for a period of five years IT mcre, the property is deeded to the State and is subject to sale by the County Tax Collector. California counties can elect to implementthe Alternative Method of Distribution of Tax Levi es and Col Iecti ons and of Tax Sale Proceeds ( commonly referred to as the "Teeter Pl an"), as provided for in Section 4701 et. seq. of the State Revenue and Taxation Code. Under the Teeter Plan, each participating local agency levying secured property taxes receives from its county the amount of uncollected taxes credited to its fund, in the same manner as if the amount credited had been collected. In return, the county receives and retains delinquent payments, penalties and interest as cdlected that would have been due the local agency. Los Angeles County does net participate in the Teeter Plan, and the City's prqJerty tax revenues reflect beth delinquencies and the recei pt of i nterest and penal ti es payments. Property taxes on the unsecured rdl are due as of March 1 and become delinquent on August 31. A 1O'/o penalty attaches to delinquent taxes on property on the unsecured rol I, and an additional penalty of 1.5% per month begins to accrue on NCNember 1. The taxing authITity has four ways of collecting delinquent unsecured persmal property taxes: (1) civil action against the taxpayer; (2) filing a certificate in the Office of the County Clerk specifying certain facts to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency fIT recordation in the County RecITder's Office, to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of persmal property, imprCNements or possessory interests belonging or assessed to the delinquent taxpayer.

A-17 Recent assessed valuations, property tax I evi es, and col I ecti ons appear in Table 12.

Table 12 ASSESSEDVALUATION,TAX LEVY AND COLLECTION (in thousands)

Gross Net Fiscal Assessed Assessed Total Current Collection Ot~r Net Property 1 2 4 5 Year Val uations( J Val uati onS J Le.;y (3J Collections( J Rate(,i Collections ( J Tax RevenLes(7J 20CQ-Ol $227.'ID. l 74 $214.(i89.S\XJ $554.824 $538.921 97.1% $49,386 $588,307 2001-02 243,267,919 229,978,775 591,029 575,r:£7 97.3% 47,326 622,393 2002-03 258,385,268 244,252,348 624,634 611,744 97.9!6 51,696 663,440 2003-04 277,855,570 263,378,270 673,416 660,531 98.1% 57,270 717,801 2004-05 299,880,000 284,280,000 732,523 N/A N/A N/A N/A

Represents Gross Total Locally Assessed Val uati ans ~r County Assessor. Valuations on which revenLe is collected IJ,,i t~ County; consists of Gross Total Locally Assessed Valuations, less exemptions for churd~s. schools, an::l hoITT:DN~rs. (,) Secured an::l unsecured basic 1% pro~rty tax levy rerx,rted by t~ County Au::litor--Controller. Exel Wes tax override for debt service. ('I Total current year receipts for secured an::l unsecured pro~rty taxes received IJ,,i t~ County. ISi Current collections divided IJ,,i total levy. (Cl lrr::lu::les redemptions, supplerrental taxes (pro~rty taxes levied after t~ lien date dLe to reassessrrent urx,n char)'Je of ON~rship), reimbursem::nt of ITTITECMl~rs' exemption IJ,,i t~ State, and other adjustrrents IJ,,i t~ County, less County charges an::l refun::ls to taxpayers. Reasons fort~ year-to-year variation incl We significant annual flu:::tuations in current year receipts for prior year taxes, ~nalties, supplerrental tax payrrents, an::l refun::ls; restoration oft~ City Community Redeveloprrent Agerry ("CRA") i rr::rerrent; an::l County property-tax-year-related accountitl'J adj ustrrents. For example, ITTJst oft~ irr::rease in 2000-01 was due tot~ return tot~ City roll oft~ CRA tax irr::rerrent fort~ Central B usi~ss District. Total pro~rty tax received from t~ County duri tl'J t~ fiscal year. N/A Not available.

Source City of LosAtl'Jeles, Office oft~ City Administrative Officer.

The State Budget has resulted in various reallocations of property tax revenues, including the "triple flip'' of property tax, sales tax, VLF revenues, and the terrporary ERAF transfers (see "State of California Budget").

The 2005-06 Adopted Budget includes $1.14 billion in property tax revenues, composed of $830 million as the City's share of the 1% p-operty tax levy, $103 million in sales tax replacerrent, $254 million in vehicle license fee repacerrent, reduced O)' $48 rrillion fcr the ERAF shift.

In p-eparing its b.Jdget, the City forecasts property taxes based on each of the specific categcries of receip:s (secured and unsecured, current and delinquent receipts and State replacerrent funds). Current receipts are based on the County Assessor's estirrate of grOvVth in assessed valuation, adjusted fcr esti rrates in grOvVth for redevel oprrent p-qj ect areas. The estimate of current secured I evy recei p:s is discounted O)' 3"/o for delinquencies. E sti rrates of cther property tax recei p:s are p-i mari ly based on historical col I ecti ons.

A-18 A list of the 20 largest taxpayers, based on secured assessedvaluationswithin the City for the Fiscal Year 2004-05, ap~arsinTable 13.

Table 13 1WENTY LARGEST TAXPAYERS LARGEST 2004-05 LOCAL SECURED TAX PAYE RS

2004;{)5 Percent 1 2 Prot;Erty 0w~r J Prima.JV Lan::! Use Assessed Valuation ofTotal( J DoUJlas Emrrett Realty Fun::l 2CCO Office Builditl'J $804.672.869 0.30% An~user Busch Irr:. I n:lustrial 767,108,454 0.28 O~ H un:lred Towers LL C Office Building 521,447,324 0.19 Maguire Part~rs 3 55 S. G ran:l LL C Office Building 460,855,687 0.17 Para.nnunt Pictures Corp. Motion Picture[felevision Stu::lio 353,499,554 0.13 DL.esen~rg I t111estrrent Company Office Builditl'J 341,228,392 0.13 Century City M~I LLC Shoppitl'J Center;1'v1all 336,758,548 0.12 lg;J0StarsLLC Office Building 315,670,600 0.12 AP Pro~tties Ltd. Office Building 310, 577,294 0.11 T\i\€ntieth Century Fox Film Corp. Motion Picture[felevision Stu::lio 287,958,493 0.11 Maguire Pro~tties 555 W. Fifth L LC OfficeBuilditl'J 283,000,000 0.10 South Ho~ Street LL C OfficeBuilditl'J 275,040,900 0.10 Arden RMty LP Office Builditl'J 272,986,238 0.10 2121 AvenLe of t~Stars LLC Office Building 260,000,000 0.10 Prirre Park La Brea Holditl'JS LP A partrrents 246,974,260 0.09 L ibraiy Square Associates L LC Office Builditl'J 227,846,813 0.08 W i I shire Courtyard LL C Office Building 216,204,149 0.08 FigLeroa atWi I shire LL C Office Builditl'J 207,231,677 0.08 Pivotal Century Plaza Hotel LLC Hotel 206,787,190 0.08 Maguire Pro~tties O~Cal PlazaLLC OfficeBuilditl'J 200,000,000 0.07

In Excl Wes taxpayers with val Les derived from mi ~ral rights and;br rx,ssessory interests. '" 2C04-05 Local Secured Assessed Valuation $270,6C6,024,833

Source: California Municipal Statistics, Irr:.

Utility Users' Tax Utility users' taxes rep-esent 14.9'/o of General Fund revenues in the 2005-06 Adopted Budget. The utility users' tax is imposed on all users of natural gas, electricity and telephone services within the City's lirrits. The tax rate is established b,' the Council. The tax is lCJ'/o of utility charges, with the excep:ion that the rate for electricity for commercial users is 12.5%. These tax rates have been in effect si nceJ uly 1983. An exemption from the utility users' tax is available to senior citizens CNer the age of 62 and to disabled individuals, provided that the corrbi ned adjusted gross income of al I household members is belcw $23,800. As p-CNided b,' the State Constitution, insurance companies are exerrpt from the tax. In addition, county, state, federal and foreign gCNernments within the City are not suqject to this tax, as the City has no authority to irrpose a tax on these entities. Exemptions account for app-oxi mately 1O'/o of the total tax base. U ti Ii ty tax revenues can be vol ati I e, as they reflect net only pcwer, gas and telephone rates, but also business activities and changing techndogies. Both electricity and natural gas sales are sensitive to weather (warm winters and cool summers reduce demand).

A-19 T radi ti anal understandings of the telephone market pl ace have teen chal Ienged O)' the shift to wireless telephone and vdce---over internet services. As a result, a portion of the utility users' tax, representing the tax on users of telephone services is threatened O)' several pending I egal chal Ienges and O)' proposed federal Iegi sl ati on to I i rni t Iocal cont rd of thi s Iong-terrn Iocal revenue. The portion of the utility users' tax that is derived frorn telephone service is estimated to ce $262 million of the 2005-06 General Fund Adopted Budget. See also" LI Tl GATI ON - AB Cellular-lA, et al v. City of Los Angeles," herein, for a discussion of a challenge to a portion of the City's Utility Users' Tax. Utility companies, with the exception of the DWP, collect and transrnitthe tax monthly to the Office of Finance, which deposits the revenue into the General Fund. Tax revenue col Iected O)' the OW P is transferred directly to the General Fund on a weekly basis. Table 14 shCM's the actual or esti nnated receipts frorn the utility users' tax:

Table 14 UTILITY USERS' TAX RECEIPTS (in thousands)

1 Fiscal Year Receipts( J 2001-02 $488.778 2002-03 510.339 2003-04 576,251(2) 2004-05 (Estimated) 587.340 2005-ffi (Adopted B wget) 588.394

Cash basis. lrr::rease primarily attributed to irr::reased collection from wireless teleph:J~ services reflectitl'J greater use an::l t~ Federal Mobile Sourci tl'J Telecommunications Act, which eased local enforcerrent of su:::h taxes.

Source City of LosAnJeles, Office oft~ City Administrative Officer.

Sales Tax Sales taxes represent 7.9'/o of General Fund revenues in the 2005-06 Adop:ed Budget. The sal es tax esti mate ref Iects a sales tax rate reduction frorn 1% to 3 /4'/o and the property tax estimate is increased to reflect additional revenue equal to a sales tax rate of 1/4%. Sales and use taxes are cd Iected on the tctal retai I price of tangible personal property sd d, uni ess specifically exempted. Included in the county-wide tax rate of 8.25% is a sales tax cd lected O)' the State on cehalf of cities (or, for unincorporated areas, on cehalf of counties). Allocation of this local component (often referred to as the "Bradley-Burns Sales Tax") is on the basis of "situs," or the point of sale. Additional sales taxes can ce collected based on local vcter approval. Included in the 8.5% county-wide rate is a sales tax cdlected for the Los Angeles Metropditan Transportation Authority for transportation purposes. A portion of those taxes is remitted to the City for deposit in two special revenue funds. Effective July 1, 2004, the traditional Bradley-Burns city sales tax was modified O)' a State budgetary change kncwn as the "tripe flip." The "tripe flip'' puts in pace a complex revenue swap to fund the 5 tate' s deficit bonds apprCNed O)' the electorate in March 2004 to balance the State budget. The "triple flip'' trades 0.25% of the 1% city share of the Bradley-

A-20 Burns sales tax for an equal share of property taxes fran the countywide Education Revenue Augmentation Fund (ERAF). See" State of California Budget" herein. The canponents of the sales tax collected in the City are presented belCM'.

Table 15 LOS ANGELES CITY SALES TAX COMPONENTS

State-wide Ge~ral Fun::! Pottion 5.00,?6 "Triple Flip" replaced an equal a.nnunt oft~ local rx,int of sale tax, an::l secures State ecommic Fiscal Recovery Fun::! 0.25 recovay bon::ls. Local Public Safety 0.50 Approved IJ,,i t~ voters in 1993 to suprx,tt local criminal justice activities. T~ City receives a small share, approximately $32 mill ion, which is derx,sited int~ Local Public Safety Sp:=<::ial RevenLe Furn. Local RevenLe Fun::! 0.50 To suprx,rt heal th pr cg ram costs, primarily to counties. County Transrx,ttation 0.25 LosAtl'Jeles County allocates a small rx,rtion of this tot~ City. Local Point of Sale 0.75 This represents t~ City" B radlBf--8 urns" sales tax, an::l is deposited in t~ Ge~ral Fun::l. State-wide rate 7.2'3!6

Opti anal Local Rates Prorx,sitionA O.'D'6 Voter approved measure to imp rove public transit an::l redu:::e traffic cor)'Jestion. Prorx,sition C 0.50 Voter approved rreasure to imp rove public transit an::l redu:::e traffic cor)'Jestion. Total Optional Local Rate 1.00,?6

Total Sales Tax Rate int~ County 8.2'3!6

Source City of LosAnJeles, Office oft~ City Administrative Officer.

Table 16 shCM's the actual or estirrB.ted General Fund receipts fran the Sales Tax:

Table 16 GENERAL FUND SALES TAX RECEIPTS (in thousands)

Fiscal Year Recei pts( 1J 2001-02 $351,CXi2 2002-03 363,787 2003-04 377,8CfJ 2004-05 (Estimated) 316,171(2) 2 2005.ffi (Adopted B wge:) 310,2(Xi J

Cash basis. I rr::lu::les redu:::tion from "triple flip".

Source City of LosAnJeles, Office oft~ City Administrative Officer.

Business Tax Business taxes represent 9.8"/o of General Fund revenues in the 2005-a:i Adopted Budget. The business tax is imposed on persons engaged in a business in the City. The tax rate formula, which is established b,' the Counci I, varies based upon the type of business. Most businesses are

A-21 taxed on gross receipts at rates varying from $1.18 per $1,000 of gross receipts for whdesalers to $5.91 per $1,000 of gross receipts for selected businesses and occupations. The City revised its business taxes as of January 2005, rraking changes affecting a variety of mostly small businesses. The City p-qjects the net impact of these measures will be a reduction of approxirrately $3 rrillion beginning in Fiscal Year 2004-05 and another $15 rrillion in Fiscal Year 2005-06 business tax receip:s, offsetting grcwth within the tax base. Los Angeles Municipal Code §21.03.1 requires that if Fiscal Year 2004-05 revenue exceeds specified announts, a tax rate reduction of 1% to 4% would autorrati cal ly occur in Fi seal Year 2005-06. The 2005-06 Budget prCNides that 2004-05 revenue in excess of $386.9 million will be impounded in the reserve fund to finance reduction in 2005-06. Table 17 shCM's the actual or esti rrated receipts from the business tax:

Table 17 BUSINESS TAX RECEIPTS (in thousands)

1 Fiscal Year Receipts( J 2001-02'" $36().336 2002-03 356.041 2003-04 373.248 2004-05 (Estimated) 386.895 2005-ffi (Adopted B wget) 385.145

Cash basis. I rr::lu::led $17 million in receipts from o~-ti rre am~sty program.

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

State M ctor Vehicle License Fee A vehicle license fee ("VLF") equivalent to 0.65% of the market value of motor vehicles is imposed annually b,' the State in lieu of local p-operty taxes, and represents a fee on the OvVnershi p of a registered vehicle in California A utornobi Ies, motorcycles, pi ck-up trucks, commercial trucks and trai I ers, rental cars and taxi cabs are al I subject to the V L F. Begi nni ng in 1999, the State began to reduce the fee from its historic Ievel of 2% . State law provided that the State "backfill" (and thus rrake local governments whole) the difference between the lcwer VLF rate and the 2% rate, unless the State has "insufficient moneys'' with which to rrake such payments. As part of the State's Fiscal Year 2004-05 Budget, the VLF rate was permanently reduced to 0.65%, with the lost revenue replaced b,' an incremental allocation of p-operty tax. In addition, funds attributable to a 90-day "gap'' in backfill, which represented approxirrately $66.5 million for the City, were programmed to be repaid b,' August, 2006. See "State of California Budget" herein. On March 2, 2005, the City assigned its VLF "gap'' receivable to ajd nt pOvVers authority for $60,638,056 in proceeds. These funds were deposited into a special account to be used to hire 265 police officers under the federal COPS grant in Fiscal Year 2005-06 and beyond until al I proceeds are exhausted.

A-22 About three-quarters of the 0.65% remaining fee, is allocated to the state Local Revenue Fund to p-ovide for county health and welfare costs. The balance is deposited into the Motor Vehicle Account to pay for state Department of Motor Vehicles administrative costs and to provide for specific purposes as prCNi ded in the Revenue and Taxation code. The remainder is distributed to cities on a per capta basis. Vehicle License Fees new represent 0.5% of General Fund revenue. Table 18 shCM's the actual or estimated receipts from 5 tate M ctor Vehicle License Fees:

Table 18 STATE MOTOR VEHICLE LICENSE FEE RECEIPTS (in thousands)

1 Fiscal Year Receipts( J 2001-02 $209.(i83 2002-03 223.641 2003-04 174.21~" 3 2004-05 (Estimated) 43,214 ) 2005-ffi (Adopted B wget) 2!J,9CIJ3)

Cash basis. Reflects loss from su~nsion of State backfil I. Reflects VLF redu:::tions from" tri pie flip," which replaces a substantial rx,ttion of this revenLe with pro~rty taxes.

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

Licenses, Permits, Fees and Fines This category of revenues includes rei rnbursements to the General Fund from various special and enterp-i se funds of the City, and charges for special services performed O)' City departments. Reimbursements include the costs of police, fire and other City services to the Airports and Harbor Departments, staff costs for the sewer construction and maintenance p-ogram, and costs financed O)' the Los Angeles Metropolitan Transportation Authority. These revenues also include charges imposed as regulatory measures O)' City departments, fees charged for paramedic ambulance services, and court fines.

A-23 Table 19 shcws the actual or esti rrated receipts from Ii censes, permits fees and fines:

Table 19 LICENSES, PERMITS AND FEES

Adopted Estimated Bwget 2001-02'" 2002--03(l) 2003-04(l) 2004-05 2005-ffi Ambulan::::e Fees $40,910,532 $44,317,733 $ 49,S\J7,278 $ 49,500,000 $ 52,561,0C£ Services to S61Ver Prcgram 41,156,752 42,086, 172 38,718, 169 49,086,837 60,403,447 Services to Dept. of Airp:Jtts 37,631,498 48,413,727 52,929,858 51,659,533 42,269,061 Services to HarOOr Dept. 20, 198,386 17,616,707 19, 130,323 16,995,981 18,444,916 LA Metro. Trans. Auth. Rei mburserrent 27,376,456 26,464,235 4,603,279 0 0 M iscellarrous Reimburserrents From Ot~r Sp:=<::ial Fun:ls and Other Agerr::ies 137,697,682 107,740,609 105,822,408 106,820,932 138,003, 512 2 Builditl'J an::l Safety Fee~ J 67,572,424 73,781,549 82,428,190 93,982,830 2,482,S\JO Ot~r Departrrental Receipts 100618177 107 301 845 109060627 127315617 124 779 820 Total $473,161,S\J7 $467,702,577 $462,600, 132 $495,361,730 $438,944,662

Cash basis. Bui lditl'J Permit revenLe forrrerly credited in this account will ~ credited to a sr:e::ial fun::l startitl'J in Fiscal Year 2005-03.

Source City of LosAnJeles, Office oft~ City Administrative Officer.

Parking Fines (Formerly Municipal Court Fines) The City receives revenues from parking fines; the schedule of fines is established b,' the Counci I. For budgeting purposes, parking ticket revenue forecasts are based on the number of parking enforcement officers emp0yed b,' the City's Department of Transportation, an estimate of average revenues per ticket based on historical trends and an esti rrate of average worker productivity.

A-24 Table 20 shcws the actual or esti rrated receipts fran al I municipal court fines:

Table 20 PARKING FINES (PRIOR TO FY 2005--06 KNOWN AS MUNI Cl PAL COURT Fl NES) (in thousands)

1 Fiscal Year Receipt~ J 2001-02 $ 94,352 2002-03 112,448 2003-04 107,448(2) 2004-05 (Estimated) 116,000 2005-ffi (Adopted B wget) " 1 113,000

Cash basis. Decrease attributable to unusually large bail refun::ls. Staltitl'J in Fiscal Year 2005-03, t~ bu::lget category forrrerly krDNn as" Municipal Coutt Fi ~s," was re-classified as," Parkitl'J Fi ~S' an::l exclu::les mn--parkitl'J--related court fines mt derx,sited into t~ Traffic Safety Fund which are rDN irr::lu::led in Licenses, Permits, Fees an:l Fi ~s.

Source: City of Los AnJeles, Office oft~ City Administrative Officer.

Water and Pcwer Transfers to General Fund The I argest revenue source in this categay is the annual transfer to the General Fund from the Pcwer Revenue Fund of the DWP. Historically, this transfer has equaled approxirrately 5°/o of the total qJerating revenue of the Pcwer Revenue Fund in the preceding Fi seal Year. This transfer was increased to 7"/o beginning in 2002--03 pursuant to Charter Section 344, which provides that, with the consent of the Board of Water and Pcwer Commissioners, the Council rray direct by ordinance the transfer of surplus revenue to the General Fund. The transfer is restricted by the Charter and the DWP's revenue bond covenants, which specify that a transfer rray not be greaterthan the previous fiscal year's net income, nor rray it result in a reduction of the surplus to Iess than 33-1 /3% of the Department Water and Pcwer' s total outstanding debt. Transfers are rrade periodically fdlcwing Council's adoption of the ordinance. In 2002--03, 2003-04, and 2004-05, additional suppemental transfers were also apprCNed. A suit has been fi Ied chal I engi ng the transfers from the Department of Water and Pcwer. See " L I TI GA TI ON, J acobsetal v. CityoflosAngelesetal."

A-25 Table 21 shcws the actual or estimated transfers from the Pcwer Revenue Fund:

Table 21 TRANSFERS FROM POWER REVENUE FUND (in thousands)

1 Fiscal Year Receipts( J 2001-02 $154,153 2002-03 181,358(2) 2003-04 179,214(2) 2004-05 (Estimated) 219,4(Xi3l 2005-ffi (Adopted B wget) 160,000

('I Cash basis. I rr::lu::les supplerrental transfer of $25 million in 2002--03, an::l $29 mil lion in 2003-04. T~se supplerrental transfers were derx,sited in '" t~City's Reserve Fun::!. I rr::lu::les supplerrental transfer estimated at $60 mi Ilion.

Source: City of Los AnJeles, Office oft~ City Administrative Officer.

LIMITATIONS ON TAXES AND APPROPRIATIONS

Article XI 11 A of the California Constitution -Proposition 13 Article XI 11 A of the California Constitution limits the amount of ad valorem taxes on real property to one percent of "ful I cash value'' as determined by the County Assessor, excel=( that additional ad valorem taxes may be levied to pay debt service on indettedness approved by the voters prior toJ uly 1, 1978 and on bonded indebtedness for the acquisition or improvement of real property that has been approved on or after July 1, 1978 by two-thirds of the voters on such i ndebtedness. Article X 111 A defines "ful I cash value" to mean the County assessor's valuation of real property as shcwn on the 1975-76 tax bi 11 under ful I cash value or, thereafter, the appraised value of real property when purchased, mwly constructed or when a change in cwnershi p has occurred after the 1975 assessment period. The full cash value may be adjusted annually to reflect i nfl ati on at a rate, as shcwn by the consumer price index, notto exceed two percent per year, or may be reduced. Article XIII A also permits the reduction of the "full cash value" base in the event of declining property values caused by damage, destruction or other factors. OnJ une 18, 1992, the United States Supreme Court upheld the constitutionality of certain challenged provisions of Article XI 11 A in connection with its review of the Nordlinger v. Hahn case.

Article XI 11 B of the California Constitution -Gann Limit On November 6, 1979, California voters approved Proposition 4, the so-called Gann Initiative, which addedArticleXIII B to the California Constitution. In June 1990, Article XIII B was amended by the voters through their approval of Proposition 111. Article X 111 B of the California Constitution limits the annual appropriations of the State and any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior fiscal year, as adjusted annually for changes in the cost of living, population and services

A-26 rendered O)' the gOJernmental entity. The "base year" for estaljishing such app-opriation lirnit used to ce the 1978-79 fi seal year, rut is navv the 1986--87 fi seal year as a result of Proposition 111. Approp-iations suqject to Article XI 11 B include generally any authorization to expend during the fiscal year the "proceeds of taxes" levied O)' the State or other entity of local government, exclusive of certain State sul:Nentions, refunds of taxes, cenefit payments frorn retirement, unernr::k>yment insurance and disability insurance funds. "Proceeds of taxes'' include, but are net linited to, all tax revenues and the p-oceeds to any entity of government frorn: (1) regulatory Ii censes, user charges and user fees to the extent such proceeds exceed the cost of providing the service or regulation; (2) the investment of tax revenues; and (3) certain State sul:Nenti ons received O)' I ocal gOJernments. Article X 111 B includes a requirement that if any entity's revenues in any year exceed the amounts perni tted to ce spent; the excess would have to ce returned O)' revising tax rates or fee schedules OJ er the subsequent two fi seal years. Approp-iations suqject to I imitation pursuanttoArticle X 111 B do net include debt service on indebtedness apprOJed according to I aw O)' a vete of the electors or approp-i ati ons required to cornpy with mandates of courts or the federal government or certain captal expenditures. Article XIII B permits any government entity to change the approp-iations lirnit O)' vete of the electorate in conformity with statutory and Constitutional voting requirements, rut any such veter--apprOJed change can only ce effective for a rnaxi rnurn of four years. Taije 22 is a cornpari son of the City's approp-iations I irnit and approp-iations suqject to I i rni tati on.

Table 22 APPROPRIATIONS LIMITS AND APPROPRIATIONS SUBJECT TO LIMITATIONS

Appropriations Subject Differerr::e Between Limit Fiscal Year City Appropriations Limit to Limitations an::l Actual Appropriations

2001-02 3.340.743.864 2.450.909.110 889.834.754 2002-03 3.301.991.235 2.398.075.507 903.915.728 2003-04 3.430.108.495 2.496.S62. l 84 993.146.311 2004-05 3.587.207.464 2.(i83.430.589 903.776.875 2005-ffi 3.820.375.949 2.792.309.771 1.028.066.178

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

ArticlesXI 11 C and XI 11 D of California Constitution -Proposition 218 On Noverncer 5, 1996, the voters of the State approved Proposition 218, knavvn as the "Right to Vete on Taxes Act." Proposition 218 addedArticlesXI 11 C and XI 11 D to the California Constitution, which contain a nurncer of p-ovisions affecting the ability of the City to levy and col I ect both existing and future taxes, assessments, fees and charges. Article X 111 C requires that al I new I ocal taxes or increases in existing I ocal taxes ce submitted to the electorate cefore they cecome effective. Taxes for general governmental purposes of the City require a mtjority vete and taxes for specific purposes, even if deposited in the City's General Fund, require a two-thirds vete. The veter-approval requirements of

A-27 ProlX)sition 218 reduce the flexi b lity of the City Council to raise revenues for the General Fund, and no assurance can be given that the City will be able to impose, extend or increase such taxes in the future to meet any increased expenditure requirements. Article X 111 D contains mw provisions relating to hCM' I ocal agencies rray I evy and maintain "assessments'' for rnuni ci pal services and programs. "Assessment" is defined to mean any levy or charge upon real property for a special benefit conferred upon the real property. Article XIIID also contains several new prCNisions affecting "property-related fees'' and "charges," defined for purposes of Article XI 11 D to mean "any levy other than an advaloremtax, a special tax, or an assessment, imposed by a I ocal government upon a parcel or upon a person as an incident of property cwnershi p, including a user fee or charge for a property related service." All new and existing property-related fees and charges must conform to requirements prohibiting, annong other things, fees and charges which (i) generate revenues exceeding the funds required to prCNide the property-related service, (ii) are used for any purpose cther than those for which the fees and charges are imlX)sed, (iii) are for a service not actually used by, or immediately avai I able to, the OvVner of the property in question, or ( iv) are used for general governmental services, including police, fire or Ii brary services, where the service is avai I able to the public at large in substantially the same manner as it is to property OvVners. Further, before any property-related fee or charge rray be imposed or increased, written notice must be given to the record OvVner of each parcel of land affected by such fee or charge. The City must then hold a hearing UIX)n the prolX)sed imposition or increase, and if written protests against the proposal are presented by a rraj ori ty of the cwners of the identified parcel s, the City rray not i mlX)se or increase the fee or charge. Moreover, excel=( for fees or charges for sewer, water and refuse col I ecti on services, or fees for electrical and gas service, which are nct treated as "property rel ated' for purlX)ses of Article XIIID, no property-related fee or charge rray be imposed or increased without rrajority approval by the property OvVners subject to the fee or charge or, atthe option of the local agency, two-thirds voter apprCNal by the electorate residing in the affected area In addition to the provisions described abOJe, ProlX)sition 218 removes many of the limitations on the initiative pOvVer in rratters of reducing or repealing any local tax, assessment, fee or charge. No assurance can be given that the voters of the City will not, in the future, approve an initiative or initiatives which reduce or repeal local taxes, assessments, fees or charges currently comprising a substantial part of the City's General Fund.

Future Initiatives Article XIIIA, Article XIIIB, Article XIIIC and Article XIIID were each adopted as measures that qualified for the bal lct pursuant to the State's initiative process. From time to time, cther initiative measures could be adopted, which rray pace further limitations on the ability of the State, the City or local districts to increase revenues or to increase appropriations which rray affect the City's revenues or its ability to expend its revenues.

A-28 Fl NANCI AL OPERATIONS

Financial Statements Tables 23 and 24 summarize financial infcrmation for the General Fund contained in the City's audited Basic Financial Statements prepared in accordance with generally accepted accounting pri nci p es ( GAA P) for the periods indicated. Fiscal Year 2001--02 represented the first period for which the City presented its financial statements under the new reporting model required b,' the Governmental Accounting Standards Board ("GASB") Statement No. 34, Basic Financial Statements -and Management's Discussion and Analysis -fcr State and Local GOJernments, as amended b,' GASB Statement No. 37.

A-29 The follcwing tables summarize the General Fund conditim as relX)rted in the City's audited financial statements over the last five years.

Table 23 BALANCE SHEETS FOR THE GENERAL FUND J u ne 30, 2000 through 2004 (in thousands)

20CQ 2001 2002 2003 2004 Assets Cash and Pooled I t111estrrents $448.475 $ 62').937 $ 7CXi.616 $ 801.219 $ 776.978 Taxes Receivable 135.168 264.262 232.032 242.284 253.548 Accounts Receivable 53.419 76.892 103.209 144.277 l 'D.764 Sp:=<::ial Assessrrents Receivable 6.328 7.282 7.817 8.821 7.319 I t111estrrent I 11'.:0tre Receivable l0.6CXi 12.6'D 12.6'D 9.855 12.172 I ntergovernrrental Receivable 23.3SQ 26.467 75.971 65.169 23.311 D Le from Ot~r Fun::ls 48.681 44.820 63.399 51.954 87.582 I t111entories 19.974 24.075 24.791 30.345 16.615 Advan::::es to Ot~r Fun:ls 15.318 11.424 10.807 l0.4'D 19.795 Restricted Assets _____:,,im 15 0 ___o 0 Total Assets 767.191 1.097.824 1.237.292 1.364.374 1.348.084

Liabilitiesan:l Fun::! Equity Liabilities Accounts, Contracts an::l Retainage Payable 63.691 76.853 48.663 44.964 39.551 Obligations U n::ler Securities Len::li tl'J Transactions 68.683 99.809 157.457 191.409 196.720 Accrlffl Wages and Ovettirre Payable 89.292 S\J.405 88.282 97.423 124.079 Accrlffl Com~nsated Abserr::es Payable 14.446 13.752 3.CXiO l.5'D 2.100 Estimated Claims andJ u::lgrrents Payable 127.583 113.649 27.386 19.224 14.495 I ntergovernrrental Payable 46 54 137 86 81 D Le to Ot~r Fun::ls 41.487 39.235 32.980 17.796 24.739 Deposits an::l Advan::::es 34.201 5.201 7.370 4.366 240.854 Deferred RevenLe an::l Ot~r Credits 93.SQ7 151.054 209.810 243.800 3.724 Advan::::es from Ot~r Funds 7.487 62.118 57.093 51.998 59.780 Ot~rliabilities _____J_j)fJl 7748 7664 9887 12356 Total Liabilities 547.S\J5 659.878 638.902 682.'D3 718.479

Fun::l Balance Reserved for E11'.:umbran::::es 93.339 126.970 122.132 105.309 110.727 Reserved for Assets NotAvai Iable for Appropriation 35.292 35.499 35.598 40.795 36.410 Reserved for Debt Service 0 1.057 0 0 0 Reserved for Sp:=<::ial Purposes 0 0 28.451 25.941 16.283 Designated forSp:=<::ial Purrx,ses 75.663 115.802 71.100 71.000 71.000 Unreserved and U n:lesignated 14992 158618 340 209 438826 395185 Total Fun:! Balan::::es 219.286 437.946 597.3SQ 681.871 629.605

Total Liabilitiesan:l Fun:! Equity $ 767191 $1.097.824 $1.237.292 $1 364 374 $1 348 084

Source: City of LosAnJeles, Compre~nsiveAnnuaJ Fi nan::::ial Staterrents.

A-30 Table 24 STATEMENTS OF REVENUES, EXPENDITURES AND CHANG ES IN FUND BALANCE FOR THE GENERAL FUND For the Years EndedJ une 30, 2000through 2004 (in thousands)

20CQ 2001 2002 2003 2004 Revenues Pro~rty Taxes $ 537,114 $ 589,628 $ 632,329 $ 666,977 $ 724,930 Sales Taxes 330,950 362,735 346,302 367, 112 381,090 Utility Users' Taxes 491,881 556,425 478,343 521,148 572,018 Busi ~ss Taxes 319,231 344,170 358,865 356,937 372,376 Ot~rTaxes 290,887 307,631 284,989 311,004 382,615 Licensesan:l Permits 36,706 35,074 36,939 38,345 37,014 I ntergovernrrental 198,727 211,747 233,592 225,968 183,933 Charges for Services 324,795 312,794 345,451 360,372 363,138 Services to Enterprise Fun::ls 171,616 177,914 190,024 206,412 230,712 Fi~s 95,394 98,737 95,794 116, 115 106,240 Special Assessrrents 2,068 1,507 2,095 1,397 3,509 I t111estm::nt Earni tl'JS 27,841 48,988 39,913 49,424 1,101 Ot~r 38 215 40897 28 520 33664 28 593 Total RevenLes 2,865,425 3,088,247 3,073, 156 3,254,875 3,387,269 E~n:litures Current Ge~ral Governrrent 586,936 713,165 659,912 931,700 948,037 Protection of Persons an::l Pro~rty 1,543,552 1,528,077 1,590,922 1,556,554 1,701,989 Public Works 158,646 154,926 175,582 170,546 177,208 Health an::l Sanitation 202,515 197,408 211,780 186,286 213,846 T ransrx,ttati on 84,027 89,983 102, 162 103,113 lll,919 Cultural an::l Recreational Services 33,501 29,284 32,358 30,502 38,290 Community Developrrent 32,197 28,558 28,381 26,488 32,980 Capit~ Outlay 32,224 29,315 34,679 22,013 26,261 Debt Service: Cost of I ssuan:::e 0 0 173 223 196 Total E~n:li tures 2,673,598 2,770,716 2,835,949 3,027,435 3,250,726 Excess (Deficierry) of Re.;enLes Over Expenditures 191827 317 531 237 207 227 440 136 543 Ot~r Finan:::i tl'J Sources (Uses) Proceeds from I ssuan:::e of Debt 25,002 0 0 0 0 O~rati rr:i Transfers In 136,054 151,393 226,832 227,227 221,793 O~rati tl'J Transfer Out (333,835) (366,938) (402,853) (375,740) (396,872) Total Ot~r Finan:::itl'J Sources(Uses) (172,779) (215,545) (176,021) (148,513) (175,079) Excess (Deficierry) of Re.;enLes an::l Ot~r Sources Over E~n:litures an::l 19,048 101,986 61,186 78,927 (38,536) Ot~r Uses 1 Fun:! Balan::::es,July l, Restated( J 200,604 330,346 534,958 597,390 681,871 (Decrease) I rr::rease in Reserve for Inventories (3,941) 4,782 1,246 5,554 (13,730) Residual Equity Transfers In 3,575 832 0 0 0 Residual Equity Transfers Out 0 0 0 0 0 Fun:! Balan::::e,J u~ 30 $219,286 $437,946 $597,390 $681,871 $629,605

('I Prior ~ricd adjustrrents occurred in 2000, 2001, an::l 2002. Accordingly, prior year en:linJ fun:! balan::::e dC€s mt equal D=QinninJ fun:! balan::::e for that year. T~ adjustrrent to D=QinninJ fun:! balan::::e in 2001 reflects $111.0 million from t~ implerrentation of GASB Staterrent Nos. 33 and 36, affectinJ t~ timinJ of reccgnition of certain sales tax and utility users' tax receivables. T~ adjustrrent to D=Qinni nJ fun:! balan::::e in 2002 reflects $97 million resulting from t~ implerrentation of GASB Interpretation No. 6, which reduced t~ accruals for com~nsated abserr::es, claims an::lj udgrrents.

Source: City of LosAnJeles, Corrpre~nsiveAnnual Finan::::ial Staterrents.

A-31 Reserve Fund and Financial Management Pdicies The Reserve Fund was created by the City Charter and cmtains those actual General Fund cash receip:s that are not ctherwise awroixiated to the City's Adop:ed Budget. The City expects that funds will ce transferred from the Reserve Fund as part of the Adop:ed Budget or throughout the fiscal year for awropriation, or may ce transferred as a loan to cther funds to maintain those funds on a parity with their obligations. All unencumcered cash amounts in the General Fund revert to the Reserve Fund atthe end of the fi seal year; sane of those funds wil I ce reappropriated at the ceginning of the follcwing fiscal year (primarily for General Fund capital projects). In April 2005, the City adopted comprehensive Financial Pdicies of the City of Los Angeles, which consolidated, revised and expanded various pre-existing policies. These included a revised Reserve Fund policy that requires the City to maintain a budget-basis Reserve Fund increasing each year unti I the goal of 5% of General Fund revenues is reached. The Reserve Fund is comprised of two accounts -a Cmti ngency Reserve Account and an Emergency Reserve Account. The Emergency Reserve Account, representing 2"/o of General Fund revenues, may not ce uti Ii zed for funding uni ess the Mayor and Counci I find that there is an "urgent ecmomi c necessity," and determine that no other viable sources of funds are avai I able. The Reserve Fund is reported as part of the General Fund in the City's Financial Statements, with the amount of the Emergency Reserve designated for special purposes as part of the City's GAAP based fund balance. The Contingency Reserve Account is available for unexpected expenditures andpr revenue shortfalls upon authorization by the Mayor and City Council. The City's Reserve Fund pd icy addresses budget-based reserves, and does not set specific goals for GAAP--basedyear--end fund balances. The 2004-05 Reserve Fund for the Adopted Budget was $112.7 rrillion or 3.1% of budgeted General Fund revenue. Of this annount, $61 rrillion was allocated to the Emergency Reserve Account and $51.7 million to the Contingency Reserve Account. The 2005-06 Reserve Fund for the Adopted Budget is $131.5 million or 3.3% of budgeted General Fund revenue. Of this annount, $78. 9 mi 11 ion was al I ocated to the Emergency Reserve Account and $52.5 million to the Contingency Reserve Account. The new Financial Pd i ci es included several significant fi seal policies. One of these policies requires that one-time revenues mly ce used for one-time expenditures. A second requires that any new programs, unbudgeted expenditures, or new positions must identify a revenue source at the time of their awroval. These "Pdicies'' are available on the City's website, http:/11MNw.lacity.orq1tao1Del:x_Mqrrt1index.htm, which are not incorporated as part of thi s official statement.

A-32 Budgetary Reserves In addition to the Reserve Fund established under the City's charter, the City maintains several other budgetary reserves within the General Fund, which are summarized in Table 25 and further described belOvV.

Table 25 BUDGETED RESERVES (in millions)

Bwgeted Reserves as a Bwgeted Bwgeted Resetvefor Resetvefor Total % of Total General B u::lget for Fiscal Year Reserve Unappropriated Ecommic ExtraordinaJV Budgeted F un::l Budgeted 1 1 2 3 4 En::lirp lu~30 Fund J Balan::::e( J Urr::ettaintie~ J Liability Claims( J Reserves RevenLes( J 2001-02 $105.l $65.8 $54.7 $40.0 $265.6 8.3% 2002-03 101.9 31.8 46.5 35.0 215.2 6.6 2003-04 96.6 86.6 12.3 28.9 224.4 6.1 2004-05 112.7 23.7 14.2 16.7 167.3 4.3 2005-ffi 131.5 45.9 N/A 0 177.4 4.5

('I Adopted B wget. IS Fun:ls received follONitl'J budget adoption that have ~n set aside in t~ Reserve for Ecommic Uncertainties account of t~ Unappropriated Balan::::e. Estimate for current bu::lget year mt available. Allocated for Rampart Division litigation. See "LI Tl GATI ON" h::rein. T~se fun::ls are "reserved for special purrx,seS' in Ge~ral Fun::! balan::::e int~ City's GAAP--based financial staterrents. I rr::I Wes O~rati tl'J Transfers I n.

Source: City of Los Angeles, Office oft~ City Administrative Officer.

The City annually allocates funds to the Unawroixiated Balance to be available for apprqJri ati ons I ater in the fi seal year to meet contingencies as they may arise. A preliminary allocation of these funds is included in the City's budget. The 2005-0:i allocation of $45.9 million included $7.6 million for 105 additional Police Officers, $4.3 million tcwards replacement of the City's financial management information system, $3.2 million for the 311 Service Request System, $3.0 million for outside counsel, $2.0 million for unanticipated workers' compensation claims (see "Workers' Compensation, Employee Health Care and Other Human Resources Benefits," herein), and $1.5 million for fire and police communications, as wel I as other smal I al Iocati ons. The City maintains two other reserves as part of its budget. B egi nni ng in 1999-2CXX), the City began to transfer unbudgeted revenues throughout the year to a Reserve for Econorric Uncertainties. Beginning in 2CXX}-()1, the City began funding a Reserve for Extraordinary Liabilities Claims to prepare for financial exlX)sure from police-related litigation. (See "LITIGATION" herein.)

GAAP-Based Fund Balance Table 26 presents the City's year-end unreserved fund balance, as reported in the City's annual Basic Financial Statements, which are p-epared in accordance with Generally Accepted Accounting Principes ("GAAP"). Designations of the General Fund balance are made on a

A-33 budgetary basis, and rep-esent the amount app-q:Jriated to the Emergency Reserve Account in the Reserve Fund as wel I as certain advances and technical adjustments.

Table 26 ANALYSIS OF UNRESERVED GENERAL FUND BALANCES GAAP BASIS ($ in millions)

Unreserved Ge~ral Fun::! Balan::::e Unreserved F un::l General Fun::! Balan::::e as Percent 2 1 3 Fiscal Year DesignarecJ(lJ ( J U n:lesignated( J Total RevenLe5 J Of RevenLes

1999-00 $ 75.7 $ 15.0 $ CfJ.7 $ 3,001.5 3.(]!6 20CQ-Ol 115.8 158.6 274.4 3,239.6 8.5 2001-02 71.0 340.2 411.2 3,300.0 12.5 2002-03 71.0 438.8 509.8 3,482.l 14.6 2003-04 71.0 395.2 466.2 3,609.l 12.9

('I I rr::lu::les t~ City's contir)'Jerry an::l errergerry reserves in a:::cordan::::ewith the City's Reserve Fund Policy. I rr::lu::les t~ a.nnunt appropriated tot~ Errergerry Reserve Account int~ Reserve Fun::l as well as cettain a:lvan::::es an::l technical '" adj ustm::nts. I rr::I Wes O~rati tl'J Transfers In.

Source: City of LosAtl'Jeles Compre~nsiveAnnuaJ Finan:::ial Rerx)tt.

Risk Retention Program Because of its size and its financial capacity, the City has long fdlcwed the practice of directly assuming virtually al I insurable risks without procuring commercial insurance policies. The extent and variety of City exposure is such that the cost of the preniumswould outweigh the benefits of such coverage. The City administers, adjusts, settles, defends and pays claims from budgeted resources. The City is self-insured for workers' compensation as permitted under State law. The City procures commercial insurance when required by bond or lease financing covenants and for other Ii mited purposes. Funds are budgeted annually to prCNide for claims and cther liablities based both on the City's historical record of payments and an evaluation of knavvn or anticipated claims.

A-34 The City's claim payment experience is listed in Talje 27.

Table 27 LIABILITY CLAIMS PAID"' (in millions)

Fi seal Year Budge: Claims Paid 2001-02 $59.5 $48.0 2002-03 55.0 47.l 2003-04 50.0 46.2 2004-05 (Estimated) 45.4 31.9 2005-ffi (Adopted Budget) 41.0 N/A

DC€s mt irr::lu::le Workers' Com~nsation claims paid IJ,,i t~ City.

N/A Not Available.

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

Wcrkers' Ccrnpensation, Empl0yee Health Care and Other Human Resources Benefits The City appropriates funds to a Human Resources Benefits Fund to account fcr various programs to benefit its empl0yees. The Fund is administered by the Personnel Department. Since 2001-02, all civilian health, dental, union supplemental benefit and life insurance subsidies have been consolidated into the "Civilian Flex Program'' line item. Total benefits expenditures are shavvn in Talje 28. The City anticipates that the cost of these programs wi II gravv at a rate that is greater than the rate of i nfl ati on in the future.

Table 28 HUMAN RESOURCES BENEFITS"'

Adopted Estimated Budget 2001-02 2002-03 2003-04 2004-05 2005-ffi

Workers' Com~nsation;Rehabilitation $115,380,3(6 $130, 117,029 $142,082, 118 $126,000,000 $136,796,698 Civilian FLEX Prcgram 102,732,732 120, 151,000 137,436,974 155, 700,000 172,524,410 Supplerrental Civilian Union Benefits 3,407,548 3,682,928 3,620,010 4,429,000 4,298,519 Police Health an::l Welfare Program 52,026,355 59,127,006 64,474,583 69,986,000 79,568,141 Fire Health an::l Welfare Prcgram 21,558,231 23,238,916 25,864, 154 28,301,000 31,326,391 U ~rrployrrent I nsuran::::e 2,337,237 4,232,029 3,883,900 5,230,000 6,160,000 EmployeeAssi stance Prcgram 946162 l 267 559 l 188 510 l 142000 l 185 590 Total $298,388,571 $341 816 527 $378,550,249 $390, 788,000 $431859749

(lJ Cash basis.

Source City of LosAnJeles, Office oft~ City Administrative Officer.

Labor Relations As of March 2005, there were approximately 45,777 current full-time City ernpl0yees; 33,791 in Council-controlled departments and 11,986 in the departments having control of their avvn funds (Airports, Harbor and Water and Pavver). The average salary for a civilian empl0yee is $61,071 a year.

A-35 The City adop:ed an employee relations ordinance under the provisions of the Meyers Milias--Bravvn Act. The City Administrative Officer represents the Mayor and Council in negetiations with bargaining units. He gets direction from the Executive Employee Relations Committee, consisting of the Mayor, the President of the Council, the President Pro-Tempore of the Council and the chairpersons of the Council's Budget & Finance and Personnel Committees. Forrral memoranda of understanding are executed between the City and the bargaining units incorporating the negotiated wages, hours and working conditions. Typcally, cost of living increases foll cw a pattern set b,' the larger bargaining units. The term of the various memoranda of understanding are staggered so that sworn and civilian bargaining units are on different bargaining cycles. Approximately 44,375 City empoyees are associated with some 52 empoyee units represented b,' 24 unions and employee associations; the ether 1,402 empoyees are net represented. The fol I cwi ng summarizes the membership and status of the I argest unions and ernpl oyee associations.

Table 29 STATUS OF LABOR CONTRACTS LARGEST EMPLOYEE ORGANIZATIONS"' (As of March 2005)

Approxi rrnte NuniJer of Full- Num~r of Status of Cost of Titre Employees Bargainitl'J M etTDran:lum of Living Organization Represented Units U n:lerstan::li nq Adj ustm::nt

2% on7~/2003 LosAtl'Jeles Police Protective LeagLE 9.048 Three-year contract throUJhJ u~ 30, 20C6. 3% on 7 ~ /2004 4% on7~/2005

2% on7~/2003 United Firefighters of Los AnJeles 3.377 Three-year contra:::t throUJhJ u~ 30, 20C6. 7~ City. Local 112.AFL-CIO 3% on /2004 4% on7~/2005

CJI{, on 7~ /2004 Los Angeles City Employees Union, 2% on7~/2005 8.781 7 Three-year contra:::ts throUJhJ une 30, 2007 Local 347.SEIU.AFL-CIO 2% on 7~ /20C6 2.2'116 on l ~ /2007

2 E tl'Jineers an::l Architects Association 6,656 7 Three-year contra:::ts throUJhJ une 30, 2004.( J NA

A m::rican Federation of State, County, an::l Municipal Employees, 5,453 7 Three-year contra:::ts throUJhJ une 30, 2004.( 2! NA AFL-CIO

Exel Wes DWP. N e.;v contra:::ts are un:ler rBJOtiati on. If an agreerrent expires wi th:Jut a replacerrent, t~ terms oft~ expired agreerrent remain o~rative.

N/A NotApplicable.

Source City of LosAnJeles, Office oft~ City Administrative Officer.

Talje 30 shavvs total authorized City staffing for all departments of the City excluding Airports, Harbor and Water and Pavver.

A-36 Table 30 AUTHORIZED CITY STAFFING"'

Police l3,6'D 13,753 13,788 13,892 13,805 All Others 20 749 21 715 22,042 22,092 21,833 Total 34,399 35,468 35,830 35,984 35,638 rn Exclu::lesAirrx,rts, HarOOr, an::l DWP.

Source: City of Los AnJeles, Office oft~ City Administrative Officer.

Retirement and Pension Systems The City contrib.Jtes to three single--errployer defined benefit pension pans created O)' the City Charter: the Los Angeles City Empoyees' Retirement System ("LACE RS"), the City of Los Angeles Fire and Pd ice Pension Plan ("FPPP"), and the Water and Pcwer Empoyees' Retirement, Disability and Death Benefit Insurance Plan. No general funds of the City are al I ocated to the Water and Pcwer pl an. Bcth LACERS and FPPP (cdlectively the "Pensions Systems'') provide retirement, disability, death benefits, post--errployment healthcare and annual cost-of-living adjustments to pan members and beneficiaries. The Charter requires that the City contribute to the appropriate pan based on rates deterrri ned O)' each plan's actuary. The actuarial assump:ions regarding interest and inflation rates, salary grcwth, demographic data and mortality impact the actuary's valuation of each pl an. The valuation determines the amount needed to fund the normal retirement costs and to amortize any unfunded accrued actuarial liability ("UAAL"). The actuarial valuations for bcth Pension Systems are prepared on an annual basis and, in the actuarial valuation for each of the Pension Systems, the applicable actuary recommends contribution rates for the fi seal year beginning after the completion of that actuarial valuation. When approved O)' the respective boards of admi ni strati on of the Pension Systems, these become the City's I egal ly required contri ruti on rates for such years. The UAAL for each pan is an estimate based on a series of assumptions that operate on demographic data of the Pension Plans' respective memberships. This process is necessary to determine, as of the date of the calculation, hew sufficient the assets in the Pension Systems are to fund, as of the date of calculation, the accrued costs attributable to currently active, vested terrri nated and retired emp oyees. Examples of the actuarial assump:i ons that are used in this process are the assumed rate of earnings on the assets of the pan into the future, the assumed future pay increases for current empoyees, assumed rates of disability, the assumed retirement ages of active empoyees, the assumed marital status at retirement, and the post-employment life expectancies of retirees and beneficiaries. As pan experience differs from adopted assump:ions, the actual amount paid out O)' a pl an wi 11 be more or I ess than the amounts contemp ated O)' the calculation of the UAAL. When measuring assets for deterrrining the UAAL, many pension plans, including each of the Pension Systems, "smocth" market value gains and losses to reduce volatility. With respect to either of the Pension Systems, if in the period for which an actuarial valuation is

A-37 p-epared the actual investment return m that Pension Systems' assets is lcwer or higher than the actuarial assumed rate of return, then 20'/o of the shortfall or excess is recognized in each of the fiscal years for which contribution rates are recommended in that actuarial valuation, resulting in the srnoothi ng or spreading of that shortfal I or excess over a five-year period. The i rnpact of this will result in "smoothed' assets which are lcwer or higher than the nwket value of assets depending upon whether the rernai ni ng amount to be smoothed is either a net gain or a net I oss. Actual investment returns for the past five years for both of the Pension Systems are shcwn in Table 31.

Table 31 LOS ANGELES PENSION SYSTEMS HISTORICAL INVESTMENT RETURNS

1999-20CQ 2CXXJ-Ol 2001-02 2002-03 2003-04 LACERS 10.92% (4.35)% (4.85)% 4.54% 18.6(1?6 FPPP 16.3(),?6 (10.00)% (7.97)% 5.47% 16.9(1?6

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

LACE RS, estaljished in 1937 under the Charter, is a contributory pan covering rnost City employees excer,t uniformed fire and pol ice persmnel and ernpoyees of the Department of Water and Pcwer. On June 30, 2004, LACE RS had 27,092 active members and 14, 137 retired members. LACERS is funded pursuant to the Prqjected Unit Credit Cost Method, which p-oduces a pattern of increasing cost as a percent of pay. Arnong the actuarial assumptions currently used in valuing the pan are that future earnings wi 11 be 8Vo , and this sarne rate is used to discount future values. Actuarial losses are funded and actuarial gains credited over fixed 15 year periods. Any liability or surplus due to benefit or assumption changes is funded over 30 years. Taije 32 shcws the present value of retirement benefits, the actuarial value of assets available for retirement benefits, and two indicators of funding progress for LACERS, the funding ratio and the ratio of UAAL to annual payrdl. As of June 30, 2004, LACE RS' actuarial valuation of assets still reflected the deferral of $183 rnill ion in net losses due to the recognition of gains and I asses on an actuarial basis over a five-year "srnoothi ng" period. The funding ratio is likely to decline and City ernpoyer contributims increase over the short-terrn with the recognition of these I asses.

A-38 Table 32 LOS ANGE LES CITY EMPLOYEES' RETIREMENT SYSTEM SCHEDULE OF FUNDING PROGRESS (Dollars in Thousands)

U ndetfun:led or Actuarial umerfumed (Overfunded) AAL Actuarial Actuarial Accrlffl Or as a Percentc(le Valuation Val Le of Liability (Overfumed) Funded Covered Of Covered 1 2 Asoflu~30 Assets (AAL) AAL( J Ratid J Payroll(3J Payroll(4J

20CQ $6,561,365 $6,012,931 $ (548,434) 109.1% $1,182,203 (46.4)% 2001 6,988,782 6,468,CXi6 (520,716) 108.l l ,293,3'D (40.3) 200i 5l 7,660,188 7,252,118 191,930 97.4 1,334,335 14.4 2003( 5) 6,999,647 7,659,846 660,199 91.4 1,405,058 47.0 2e04(S) 7,042,108 8,533,864 1,491,756 82.5 1,575,285 94.7

ComtTDnly referred to as UAAL. Actual val Le of assets mi nus actual acer Led Ii abi I ity. Positive nuniJers represent an a:::tuarial stnrtfal I. Actuarial val Le of assets divided IJ,,i actuarial a:::crlffl liability. Annual payroll against which UAAL aJTDttized. UAAL divided IJ,,i covered payroll. Drop in fun::led ratio is primarily attributable to i t111estrrent losses an::l char)'Jes in actuarial assumption and mt irr::reased ~refits.

Source T~ City of LosAnJeles City E mplayees' Retirerrent System Actuarial Valuation as of Ju~ 30, 2C04.

Taije 33 summarizes the City's payments to LACE RS overthe past five years.

Table 33 LOS ANGE LES CITY EMPLOYEES' RETIREMENT SYSTEM SOURCES AND USES OF CONTRIBUTIONS (Dollars in Thousands)

2000-01 2001-02 2002-03 2003-04 2004-05 Sources of Contributions Ge~ral Fun::l $59,402 $52,607 $69,213 $104,665 $183,786 Sp:=<::ial Fun::ls 8122 7710 9 568 16443 27996 Total $67,523 $60,317 $78,781 $121,108 $211,782

Percent of payrol I 5.63% 4.71% 5.85% 8.3(1?6 14.7(1?6

Uses of Contributions Current Service Liability (Normal cost) $99, 104 $123,839 $141,613 $177,'D3 $161,078 UAAL (31,915) (63,954) (63,430) (56,920) 'D,244 1 Adj ustrrents( J 334 ----.'ill -----22§ ~ -----'1§1 Total $67,523 $ 60,317 $78,780 $121,108 $211,782

(lJ lrr::lu::le t~excess ~~fit plan, t~family death benefit plan, t~ limited term planfun::l and prior service liability.

Source: City of LosAnJeles, Officer oft~ City Administrative Officer.

LACE RS reported a Net Pension Obligation (NPO) of $58.674 million for FY 2003-04, representing the difference between the contributions rrB.de by the City and the Annual Required Contrirution (ARC) that GASB Statement No. 27 requires the system to calculate and report. The N PO reflects a three-year phase-in of a rate increase lxought about by a recent experience study, and the results of a GASB requirement that the ARC be no less than the amount that would amortize the ccnesponding balance of the UAAL CNer a 40-year period. Because

A-39 LACE RS is amortizing various liablities and gains CNerterms of 15 or 30 years from the dates of change, its remaining amortization schedule is not level, and the system's ARC for GASB purposes, based on current contributions and 40-year amortization, is higher than the contribution calculated using the system's regular funding IX)licy. The City projects an additional NPO of $25 million for FY 2004-05. These announts will be amortized over 15 years.

Talje 34 belOvV projects the City's contributions to LACE RS forthe next five years based on information provided O)' the system's current actuary, the Segal Company. Among the assump:ions used in the projection are thatthere will be no cost of living adjustment from 2007- 08 through 2009-10, and the investment rate of return wi 11 be 8'/o each year.

Table 34 LOS ANGE LES CITY EMPLOYEES' RETIREMENT SYSTEM PROJECTED CONTRIBUTIONS (Dollars in Thousands)

2005-ffi 20C6-07 2007-08 2008-09 2009-10 LACERS Ge~ral Fun::l $26().146 $312.305 $321.993 $315.154 $303.756 Sp:=<::ial Fun:ls 43 705 52 550 54 180 53 029 _'illJ_J_ Total $303.851 $364.855 $376 173 $368.183 $354 867

I 11'.:rem:ntal I rr::rease $ 92.069 $ 60.104 $ 11.318 $ (7.990) $ (13.316)

Source: City of LosAnJeles, Officer oft~ City Administrative Officer as of April 14, 2005.

The City of Los Angeles Fire and Pd ice Pension Plan ("FPPP"), established in 1923 under the Charter, represent contributory plans cCNering uniformed fire and IX)lice personnel. Five tiers of benefits are provided, depending on the date of the member's hiring. As of June 30, 2004, the FPPP had 12,649 active members and 11,782 retired members. The FPPP is funded pursuant to the Entry Age Normal Funding Method. Among the actuarial assumptions used in valuing the plan are that future earnings will be 8.5%, and this same rate is used to discount future values. The FPPP's current actuary, Gabriel, Roeder, Smith & Company, has recommended that the actuarial earning assumption be reduced to 8. 25% , as the current assump:ion is abOJe the median for funds of the FPPP's size. At its meeting of Sep:ember 2004, the Board of Fire and Police Pension Commissioners elected not to change this actuarial assump:ion. For Tiers 1 and 2, any UAAL are amortized over a fixed term ending on July 1, 2037. For Tiers 3, 4 and 5, actuarial losses are funded and actuarial gains credited over a fixed 15 years; any liability changes due to benefit or assump:ion changes are funded over 30years. The FPPP also administers a Deferred Retirement Option Program ("DROP"), which became effective May 2002. DR OP is a voluntary program whereO)' a member with a mini mum of 25 years of service may file for a service pension but continue to work and earn salary and benefits as an active member. The monthly service pension benefit is deposited into a DROP account that earns a 5% per annum return, payable upon exiting the DROP program Participation in the DROP program is limited to a maximum of five years. It is a five-year program designed to be cost-neutral, with prCNisions for review and adjustment of the design to retai n its cost neutral i ty.

A--40 Table 35 shcws the present value of retirerrent benefits, the actuarial value of assets available for retirerrent benefits, and two indicators of funding progress for FPPP, the funding ratio and the ratio of UAAL to annual payroll. Due to i nvestrrent losses in Fiscal Years 20CD-01 and 2001--02, and the recognition of gains and losses on an actuarial basis over a five-year period, the funding ratio is expected to continue to decline and City emr::k>yer contributions increase. As of June 30, 2004, FPPP's actuarial valuation of assets still reflected the deferral of $732 rri Ilion in losses due to the smocthi ng of short-term market performance.

Table 35 LOS ANGELES FIRE AND POLICE PENSION SYSTEM SCHEDULE OF FUNDING PROGRESS (Dollars in Thousands)'"

U ndetfun:led or Actuarial umerfumed (Overfunded) AAL Actuarial Actuarial Accrlffl Or as a Percentc(le Valuation Val Le of Liability ( Overfumed) Fumed Covered Of Covered 2 3 4 Asoflu~30 Assets (AAL) AAL( J Ratid J Payroll( J Payroll(,i

20CQ $10.985.936 $ 9.604.174 $ (l.381.763) 114.4% $ 845.426 (163.4)% 2001 11.835.549 9.954.056 (1.881.492) 118.9 882,758 (213.l) 200i5l 11,491,922 10,606,825 (885,097) 108.3 946,037 (93.6) 2003(5) 11,690,750 11,203,558 (487, 192) 104.3 970,727 (50.2) 2e04(6) 11,735,696 11,389,981 (345,715) 103.0 1,001,004 (34.5)

In DC€s mt irr::lu::le DROP prcgram. ComtTDnly referred to as UAAL. Actual val Le of assets mi nus actual acer Led Ii abi I ity. Positive nuniJers represent an a:::tuarial surplus. (,) '" Actuarial val Le of assets divided IJ,,i actuarial a:::crlffl liability. ('I Annual payroll against which UAAL aJTDttized. ISi UAAL divided IJ,,i covered payroll (Cl Drop in fun::led ratio is primarily attributable to it111estrrent losses an::l char)'Jes in a:::tuarial assumption and mt irr::reased ~refits.

Source T~ Fire an:l Police Pension System Actuarial Valuation as of Ju~ 30, 2C04.

A-41 Table 36 summarizes the City's payments to FPPP overthe past five years

Table 36 LOS ANGELES FIRE AND POLICE PENSION PLAN SOURCES AND USES OF CONTRIBUTIONS (Dollars in Thousands)

20CQ-Ol 2001-02 2002-03 2003-04 2004-05

Ge~ral Fun::l $136,164 $99,481 $78,475 $120,763 $151,356 1 Tier 5 ( 1% pick up)( J 0 _____llZ() 8 500 7 CfJJ 8 200 Total $136 164 $100 351 $86,975 $128,663 $159,556

Percent of payrol I 17.4% 11.8% 9.6% 13.3% 15.9,?6

Current Service Liability $149,210 $167,288 $173,280 $174,791 $183,071 UAAL (13,546) (67,437) (86,805) (46,802) (24,183) Adj ustrrents(2l _____:ill _____:ill _____:ill ______@! 668 Total $136,164 $100,351 $86,975 $128,623 $159,556

(lJ Pursuant to the Charter, t~ City pays 1% oft~ required employee contributionw~re;er t~ retirerrent OOlefits are at least 100% fun::led. 2 ( J I rr::lu::le t~ settlerrent with t~ United Firefighters of Los Angeles City (U FLAC) an::l t~ excess ~~fit plan.

Source: City of Los Angeles Office oft~ City Administrative Officer.

Taije 37 b:lcw p-qjects the City's contrirutions to FPPP fcr the next five years rnsed on infonrntion p-OJided b,t the Syt9:em's crtJary. Armng the assurrpions used in the p-qection are that there wi 11 be no cm of Iivi ng acJj U9:ment from 2007-00 through 2CXB-10, and the i nve9:ment rate cf return wi 11 be 8.5°/o =h year.

Table 37 LOS ANGELES FIRE AND POLICE PENSION PLAN PROJECTED CONTRIBUTIONS (Dollars in Thousands)

2005-06 2006-07 2007-08 2008-09 2009-10

General Fun::l $180,640 $215,158 $231,566 $225,578 $217,905

I rr::rerrental Increase $ 8,667 $ 34,518 $ 16,408 $ (5,988) $ (7,673)

Source: City of LosAnJeles, Office oft~ City Administrative Officer

LACERS and the Fire and Pdice Pension Systems are currently actuarially funding retiree health insurance benefits for current retirees and active eligible members for retired health insurance benefits. There are no member contributions fcr health subsidy benefits; all such costs are funded out of the empl ayer' s contribution. As of June 30, 2004, the unfunded healthcare benefits liablity of LACE RS and the Fire and Police Pension Systems, based on the actuarial cost method and assump:ions used for the related pension fl ans, are as fd Icws:

A-42 Table 38 POST-EMPLOYMENT HEAL TH CARE BENEFITS LACE RS AND THE POL ICE AND Fl RE PENSION SYS TE MS ($ in thousands)

As of Ju~ 30, 2003 As of Ju~ 30, 2C04

Valuation Assets $848,983 $592,539 $858,997 $605,999 Actuarial Accrlffl Liability 1,205,811 926,761 1,419,813 1,009,062 U nfun:led Actuarial Accrlffl Liability 356,828 334,222 560,816 403,064 Fun::led Ratio 70.4% 63.9,?6 60.5% 60.1%

Source City of LosAnJeles, Compre~nsiveAnnual Finan:::ial Repott for the Fiscal Year E n:ledJ une 30, 2004.

The infcnnation in Taije 38 does not puqxirt to reflect the appication of GASB Statements Num~r 43 and 45, which will require that LACE RS, FPPP, and the City report the cost of other post employment ~nefits as part of their respective financial statements. LACE RS and FPPP are required to campy with the Statements ~ginning Fiscal Year 2006-07, with the City complying the follavvingyear (Fiscal Year 2007-08).

Investors are cautioned that, in considering the amount of the UAAL, the funded ratio, and the calculations of normal cost as reported by the Pension Systems and the resulting amounts of required contributions by the City, this is "forward looking" information. Such "forward looking" information reflects the judgment of the boards of the respective Pension Systems and their respective actuaries as to the amount of assets which the Pension Systems will ~ required to accumulate to fund future ~nefits over the lives of the currently active employees, vested terninated employees and existing retired empoyees. These judgments are based upon a variety of assumptions, one or more of which may prove to~ inaccurate or~ changed in the future, that may change with the future experience of the Pension Systems.

For additional infOITTEtion, 9:e Ncte 5A. in the "Nctes to the City's Basic Financial Statements Fiscal Year Ended June 30, 2004," which appears as an A1=P=11dx to this Official Statement Various reports for LACERS and FPPP are posted from time to time on the City's website, at http: /M!l,WV.I a::ers.org;j:ubl icaU ndex.htm'lre[Xrts and http: /i.M,\,w.lacily.org,PE N Andex.h1m, respectively. Such reports are nct incorporated as pc!rt of this Official Statement

City Treasury Investment Practices and Pd icies The Treasurer invests temporarily idle cash forthe City, including that of the proprietary departments, as part of a pooled investment program which combines general receip:s with special funds for investment purposes and al I ocates interest earnings on a pro-rata basis when the interest is earned and distributes interest receip:s based on the previously established allocations. The Treasurer also maintains a limited num~r of special pods established for specific purposes. As of Novem~r 30, 2004, the book value of the General Pod was $4.706 billion, with a market value (including accrued interest) of $4.763 billion. The City's General Pool is further divided into a core pod and a reserve pool. The core or liquidity portion is targeted at the City's net liquidity requirements for 12 months. All

A-43 investments in this secti m of the portfd i o have maturities of one year or Iess. The balance of the General Pod not required for the City's 12--rmnth liquidity requirement is invested in the reserve portfd i o. This portfd i o hd ds investments from one to five years.

Table 39 POOLED INVESTMENT FUND GENERAL POOL I nvestments as of February 28, 2005

Core Pottfolio Reserve Portfolio Consoli dated Average Duration (Years) O.CXi 2.5 1.7 Average Market Yield to Maturity 2.54 3.47 3.18

Percent Percent Percent Market:ValLe of Total Market Val Le of Total Market Value of Total

1 Bank Derx,sitS J $ 47,801,S\J8 2.9!6 $ 0 O.CJ,?6 $ 47,801,S\J8 0.9!6 BNY SweepAccount 0 0.0 552 0.0 552 0.0 US Treasury 0 0.0 541,958,463 15.4 541,958,463 10.5 Federal Agerry Securities 417,727,917 25.2 2,184,003,914 62.0 2,601,731,831 50.3 Comrrercial P~r 1,099,341,225 65.8 9,360,864 0.3 1,099, 702,089 21.2 US Corrx,rate 0 0.0 786,053,209 22.3 786,053,209 15.2 State of California Local Agerry I t111estm::nt F un:l 100000001 6.0 0 0.0 100000001 1.9 Total $1 655 871 051 $3,521,377,002 $5177248053

(lJ Collected Balan::::e for Bank of ArrericaActiveAccount.

Source: City of LosAnJeles, Office oft~ Treasurer.

The City's treasury qJerations are managed in compliance with the California Government Code and according to the City's statement of investment pd icy, which sets forth permitted investment vehicles, liquidity parameters and maximum maturity of investments. The investment pd icy is reviewed and approved O)' the Council on an annual basis. The Investment Advisory Committee, comprised of the Treasurer, the Cmtrdler, the Chief Legislative Analyst, the City Administrative Officer, the Director of the Office of Finance and a cmtracted investment advisor, has oversight responsibility to ensure conformity with the investment pd icy and Government Code. The City's General Investment Pod has aAAAf f-; 1 rating from Standard and Poor' s. The Municipal TreasurersAssociatim of the United States and Canada has certified the City's Investment Policy. During its audit of the City's financial statements for the fi seal year endedJ une 30, 2004, the City's external auditor identified significant deficiencies in the internal contrds for accounting and reporting of cash and investments. Because of these deficiencies, the City has contracted with the external auditor to expand their scope of the audit. As a result of the increased assurance from the additional audit procedures and testing, the external auditor has determined that cash and investments were fairly presented and issued an unqualified opinion m the City's financial statement. Hcwever, the external auditor cmsidered the deficiencies as materi al weakness i n thei r report m i nternal control.

A-44 The City's external auditor has identified significant deficiencies in the City's internal controls for properly reporting cash positions in its financial statements. These significant internal contrd deficiencies resulted in a rraterial weakness in the Auditors' report on internal controls at the financial statement level. The City has contracted with the external auditor to expand the scope of the audit to determine if, and to prCNide assurances that, the cash and investment balances are fairly stated. The Treasurer does not invest in securities that include, but are not limited to, structured and range notes, securities that could result in zero interest accrual if held to rraturity, variable rate, floating rate or inverse floating rate investments and mortgage-derived interest or principal only strips. The investment pd icy permits the Treasurerto engage custodial banks to enter into short terrn arrangements to loan securities to various brokers. Cash and/or securities (United States Treasuries and Agencies only) collateralize these lending arrangements, the tctal value of which is at least 102"/o of the rrarket value of securities loaned out.

Capital Program The City annually budgets capital improvements in a number of special purpose funds, as well as the General Fund, hOvVever the City does not prepare a long-terrn Captal lrnprCNement Program for all of its capital activities. Table 40 represents the expenditures tOvVard capital improvements by revenue type. This table excludes the expenditure of proceeds of general obi i gati on bonds or special parking revenue bonds.

Table 40 CAPITAL IMPROVEMENT EXPENDITURE PROGRAM (in thousands)

Prorx,sed Estimated Budget 2001-02'" 2002-03(l) 2003-04_(l) 2004-0~" 2005-ffi

Ge~ral Fun::! $ 10.673 $ 13.669 $ 16.926 $ $ 11.126 Sp:=<::ial GasTaxStreet lmproverrent Fun::! 3.205 5.799 3.186 14.665 11.987 StormNater Pol I uti on Abaterrent F un::l 2.(X)5 5'D8 2.539 6.458 3.340 2 Mobile Source Air Pollution Redu:::tion Trust Fun::J( J 1.475 Sp:=<::ial Parkitl'J RevenLe Fun::! 2.827 5.584 960 867 S61Ver Constru:::tion an::l Mai ntenan:::e Fun::! 211.017 275.634 205.939 245.040 230.800 Street L ighti tl'J Maintenan:::e Assessrrent Fun::l 3.629 3.004 5.398 7.500 7.500 Local Sales Tax Transit I rrproverrent Fun:ls 7.096 3.589 1.364 1.319 2.760 Allocation from Ot~r Governrrent Agerr::ies 3.530 5.783 4.044 3 Local Transpottation Fun:J J 2.796 1.225 431 2.915 4.254 Ot~r ____L(fil 2,146 l 693 l 912 Total $245.426 $318.070 $247.557 $280.550 $274.545

Cash basis. Fun::led IJ,,i local supplerrental vehicle fee. Fun::led IJ,,i rx,ttion of State sales tax dedicated tONards this purrx,se.

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

A-45 BONDED AND OTHER INDEBTEDNESS

I ntroductim The City has issued or caused the issuance of a variety of bonded and other debt obligatims as provided for under the State Constitutim, judicial interpretation of the State Cmstitution, State statutes, and its OvVn Charter pOvVers. The follOvVing summarizes that indebtedness. The City has never failed to pay principal of or interest m any debt or lease obi i gati on when due. The City Adrrinistrative Officer serves as the City's dett manager. Staff of the Office of the City Administrative Officer structures dett issuances and oversees the ongoing management of all General Fund and certain special fund dett programs. These include general obligation bonds, lease obligations, tax revenue anticipation notes, wastewater system, sanitation equipment charge and parking system revenue obligations, judgment obligation bonds, special tax obi i gati ons, Mel Io-Roos bonds and certain special assessment obi i gati ms.

General Obligation Bonds The City may issue general obligatim bonds for the acquisition and improvement of real property, suqject to two-thirds voter authorization of the bond propositim. A tax on all taxable real property to pay principal and interest on general obligatim bonds is levied O)' the City and collected O)' the County m the secured and unsecured property tax bills within the City. (See "MAJOR GENERAL FUND REVENUE SOURCES c Property Taxes'' herein). The f d I CM'i ng sumnnari zes the various voter authorizations for general obi i gati on bonds.

Table4l GENERAL OBLIGATION BONDS As of January l, 2005

Am:Junt Date of Am:Junt Am:Junt Auth:Jrized 1 Election Projects Auth:Jrized ISSLecl J but Uni sslffl 4/llft39 Bran::::h Libraiy Facilities $ 53.400.(XXJ $ 53.400.(XXJ $ 0 4/llft39 Police Fa:::il ities 176.000.000 176.000.000 0 4/llft39 Fire Safety Facilities 60.000.000 60.000.000 0 6fjf!J Seismic Safety Projects 376.000.000 376.000.000 0 11 /3;')8 Libraiy Facilities 178.300.000 178.300.000 0 11 /3;')8 Zoo Facilities 47.600.000 47.600.000 0 11 /7 fX) Fire, Pararredic, Helicopter an::lAnimal 532.648.000 396.120.000 136.528.000 S~lter Projects 3fif)2 E rrergerry O~rati ans, Fi re, Di spat ch an::l 000.000.000 583.705.000 16.295.000 Police Faci Ii ties 11 /2;{)4 Storm Water Projects 500 000 000 0 500,000,000 Total $2.523.948.000 $1.871.125.0000 $652.823.000

Not all isslffl bon::ls remain outstan:litl'J. As of JanuaJV l, 2005, the City had $1,418,500,CXX) in ge~ral obligation OOn::ls outstan:li tl'J.

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

A--46 Citywide Limited Obligatim Bonds The City has received two-thirds voter authorization to levy special taxes m real property based on the size of imprCNements (rather than assessed valuatim) to secure $235,000,000 in bonds for a Police Emergency Communicatims System (911). The last series of these bmds was issued February 14, 2002. As of January 1, 2005, $158,275,000 of these bonds rerrained outstandi ng. In addition, the City received majority voter approval to create a Citywide Landscaping and Lighting Assessment District to finance various park and recreati anal improvements throughout the City (Propositi m K, creating the City of Los Angel es L andscap ng and Lighting District No. 1). The City has issued $44,290,000 of bonds secured O)' these assessments, of which $35,650,000were outstanding as of January 1, 2005.

Lease Obligations The City may enter into lmg--term lease oljigatims without first obtaining vcter apprCNal, so lmg as these agreements meet certain requirements of State law. The City has entered into various lease arrangements under which the City must malke annual payments to occupy public buildings or use equipment necessary for City operatims. These lease agreements have been with a nonprofit corporation established O)' the City for this purpose, the Municipal Improvement Corporation of Los Angeles (MICLA), or with ajoint in,vers authority, the Los Angeles Convention and Exhibitim Center Authority. Securities have been issued, either in the form of I ease revenue bonds or certificates of parti ci pati on, the debt service on which is paid from these annual I ease payments. Talje 41 summarizes the bmded and certificated lease obligations payable out of the general funds of the City as of January 1, 2005, as wel I as lease revenue bmds payable out of the Police Emergency Communi cati ms System special tax described abOJe.

Commercial Paper Program I nJ une 2004 the City and MICLA estaljished a commercial paper program under which MICLA is authorized to issue up to $200,000,000 in Lease Revenue Commercial Paper Nctes (the "Commercial Paper Notes''). The commercial paper program will be used to finance equipment and real property. The City expects to issue lease revenue bonds through MICLA from time to time to refund the Commercial Paper Notes. Principal of and interest m the Commercial Paper Nctes are payable from the proceeds of Commercial Paper Nctes issued to pay such principal and interest and are also payable from lease payments to be made O)' the City. The payment of principal of and interest on the Commercial Paper Notes is further supported O)' a direct pay letter of credit. As of January 1, 2005, $50.0 millim in Commercial Paper Notes were outstanding.

A-47 Table42 BONDED AND CERTIFICATED LEASE OBLIGATIONS As of January l, 2005

Am:Junt Am:Junt Final Series Project I sslffi Outstan:li ng Maturity

LosAnJeles Cot111ention an::l Exhibition Center Auth:Jrity Certificates of Participation, l 9SO Series (dated ALKJUSt l, 19SQ) Cot111ention Center Expansion $ 202,030,CXXJ $ 5,382,539 8/l 5;tl5 LosAtl'Jeles Cot111ention an::l Exhibition Center Auth:Jrity, Refun:litl'J of Cot111ention Center Lease RevenLe Bonds 1993 Certificates 503,870,CXXJ 51,180,CXXJ 8/15~1 MI CLA Certificates of Partici pa.ti on, Prcgram S (dated June l, 1994) Equiprrent an::l Real Pro~tty 57,260,000 6,510,000 6Mll MI CLA Certificates of Partici pa.ti on, Prcgram T Refun:litl'J of Pi~r Technical (datedALK)USt l, 1994) Center Bon:ls 4 5,340,CXXJ 14,035,000 8~;tl7 MI CLA Certificates of Partici pa.ti on, Prcgram U ( dated October l, 1994) Equiprrent 41,595,CXXJ 4,230,CXXJ 9Ml0 MICLA LeaseRevenLeBonds, PrcgramX (dated December l, 1995) Equiprrent an::l Real Pro~tty 24,625,000 2,995,000 l~/(6 MI CLA Certificates of Participation, PrcgramW (dated February l, 1996) Equiprrent 65,470,CXXJ 8,545,CXXJ 2Ml2 MI CLA Add'I Certificates of Partici pa.ti on, Prcgram H (dated February l, 1996) Real Pro~rty 3,755,CXXJ 2,325,CXXJ 11~m MI CLA Add'I Certificates of Partici pa.ti on, Prcgram T (dated February l, 1996) Real Pro~rty 5,990,CXXJ 450,CXXJ 2~/(6 MI CLA Certificates of Participation, Prcgram AA Series AA (dated Decem~r l, 19S6) Equiprrent an::l Real Pro~rty 88,770,000 27,025,000 12~~1 MI CLA Certificates of Participation, Prcgram AC (dated October l, 1997) Equiprrent an::l Real Pro~rty 83,240,000 24,485,000 lO~M MI CLA Certificates of Participation, Prcgram H (dated October l, 1997) Real Pro~rty 2,420,CXXJ 1,710,CXXJ ll~M LosAnJeles Cot111ention an::l Exhibition Center Auth:Jrity Taxable Lease RevenLe Bonds, 1998SeriesA (dated Aprill, 1998) Staples Arena 45,580,000 41,285,000 8/15/24 MICLA Sp:=<::ial Tax Lease RevenLe Bonds, Pol ice Errergency Comman:l Refun:linJ Series 1998--C (dated October l, l 998i2J Control Communications Systems 26,895,CXXJ 6,360,CXXJ 9Ml5 MI CLA Refun:linJ Certificates of Participation, Program K (dated November l, 1998) Rea Property 14,005,000 3,045,CXXJ 2~/(6 MI CLA Refun:linJ Certificates of Participation, Program Q Ge~ral Services Radio (dated November l, 1998) Communications System 18,535,CXXJ 1,430,CXXJ 2Ml5 MI CLA Certificates of Participation, Prcgram AE ( dated December l, 1998) Equiprrent an::l Real Pro~rty 74,555,000 27,320,000 12~M MI CLA Taxable Certificates of Participation, Prcgram AK (dated Aprill, 1999) Rea Property 43,210,000 41,410,000 4~/29 MICLA Sp:=<::ial Tax Lease RevenLe Bonds, Series 1999 D Pol ice Errergency Comman:l (dated Aprill, 1999)'" Control Communications Systems 70,285,CXXJ 50, 100,CXXJ l~/(6 MI CLA Sp:=<::ial Tax Lease RevenLe Bonds, Refun:linJ Pol ice Errergency Comman:l Series 1999-f (dated Aprill, 1999)(2! Control Communications Systems 65,040,000 47,095,000 9Ml0 MI CLA Certificates of Participation, Prcgram AL Equiprrent an::l Capital (dated November l, 1999) I mproverrents 72,600,CXXJ 40,21 O,CXXJ 11~~5 MI CLA Certificates of Participation, Prcgram AM Equiprrent an::l Capital ( dated October l, 2000) I mproverrents 56,085,CXXJ 34,730,CXXJ 8Ml0 MI CLA Sp:=<::ial Tax Lease RevenLe Bonds, Series 2002-f Pol ice Errergency Comman:l (dated Februaiy 14, 2002)(2J Control Communications Systems 52,325,000 52,325,000 9Ml3 MI CLA Certificates of Participation, Prcgram AN Equiprrent an::l Capital (dated February 20, 2002) I mproverrents 53,880,CXXJ 45,445,CXXJ 2Ml2 MI CLA Sp:=<::ial Tax Lease RevenLe Bonds, Refun:linJ Pol ice Errergency Comman:l Series 2002--G (dated FebruaJV 14, 2002i2J Control Communications Systems 16,320,CXXJ 16,320,CXXJ 9Ml3 MI CLA Refun:linJ Certificates of Participation, Program AT Refun:linJ of Central L ibraiy (dated Aprill, 2002) Bon:ls 30,305,CXXJ 30, 175,CXXJ 6~/20 MICLA Certificates of Participation, PrcgramAQ (dated April 2, 2002) Rea Property 28, 130,000 28, 130,000 4~/32 MI CLA Certificates of Participation, Prcgram AR (dated April 2, 2002) Real Property 62,105,000 59,230,000 4~/27

A-48 Table42 BONDED AND CERTIFICATED LEASE OBLIGATIONS As of January l, 2005

AtTDunt AtTDunt Final I sslffi Outstan:li nq Maturity

Table41 continued MI CLA Refun:li tl'J Cettificates of Partici pa.ti on, PrcgramAS (dated April 2, 2002)(1) Real Pro~rty, Pershitl'J Square 7,655,000 6,920,000 l0~/22 MI CLA Cettificates of Participation, Program AU Equiprrent an::l Real Pro~tty (dated October 31, 2002) Acquisition 70,700,000 61,285,000 l0~/27 MI CLA Additional Certificates of Participation, Prcgram T ( dated October 31, 2002) Real Pro~rty I mproverrent 42,410,000 41,395,000 2~/27 MI CLA Leaseh:Jld Refun:litl'J Re.;enue Bon:ls, Prcgram AV (dated April 2, 2003) Central Libraiy Project 43,330,000 40,395,000 6Ml5 LosAtl'Jeles Cot111ention an::l Exhibition Center Auth:Jrity, Refun:litl'J of Cot111ention Center Lease RevenLe Bon:ls 2003A Bon:ls 226,04 5,000 225,KJJ,OOO 8/15~ 5 LosAtl'Jeles Cot111ention an::l Exhibition Center Auth:Jrity, Refun:litl'J of Cot111ention Center Lease RevenLe Bon:ls 20038-f (Variable Rate) Bon:ls 235,520,000 235,520,000 8/15/21 MICLA Certificates of Participation, Program AW ( dated Jure 17, 2003) Real Property 36,220,000 35,535,000 6~/33 MI CLA Certificates of Participation, Program AX (dated April ZJ, 2004) Real Equi prrent 64, 170,000 64, 170,000 4Ml4 MI CLA Certificates of Participation, Prcgram AR (dated April ZJ, 2004) Real Property I mproverrent 16875000 16875000 4~/24

$2,597,145,000 $1,400,837,539

In Prima.JY source of repayrrent is an assessm::nt of pro~tties int~ vicinity of Pershitl'J Square throUJh t~ establ ishrrent of a Mel lo-Roos District, butt~ City remains contitl'Jently liable for makitl'J up any deficierry from its General Fun::l. '" Bonds payable from voter auth:Jrized parcel tax with no conti tl'Jent liability from t~ City's Ge~ral Fun::l.

Source City of LosAtl'Jeles, Office oft~ City Administrative Officer.

A-49 Judgment Obligation Bonds State law p-ovides for the issuance of bonds to finance an obligation imlX)sed O{ law. Pursuant to a p-ocedural ordinance, the City has issued several obligations to finance judgment obligations. TheJ udgment Obligation Bonds are secured b,t the General Fund of the City. Table 43 summarizes the City'sJ udgment Obligation bond issuance.

Table 43 JUDGMENT OBLIGATION BONDS As of January l, 2005

Dated Am:Junt Am:Junt Final Date I s5l£d Outstan:li m Maturity I udqrrent Fi nan:::ed with Proceeds

6Ml8 $25.CXXJ.CXXJ $10.CXXJ.CXXJ 4Ml8 Refun::l to certain taxpayers of busi~ss license taxes which t~ coutt in Ge~ral Motors v. City of Los Angeles ~Id to be discrimi natoty against interstate an::l intercity comrrerce l::ffause out-of-City manufacturers wh:Jlesalitl'J int~ City had to pay a busi~ss tax that i n--City manufa:::turers wh:Jlesalitl'J int~Citydid mt. 4;{)l;{X) $25.CXXJ.CXXJ $15.CXXJ.CXXJ 4~M To repay ju::lgrrents related to rx,lice officers makitl'J claims un:ler t~ Fair Lai:xJr Stan:lards Act. 8~;{X) $13,995,CXXJ $ 8,355,CXXJ B~M To repay ju::lgm::nts related to rx,lice officers maki tl'J claims un:ler t~ Fair Lai:xJr Stan:lards Act. Total $63.995.CXXJ $33.355.CXXJ

Source: City of Los Angeles, Office oft~ City Administrative Officer.

Revenue Bonds The City Charter and State lctN provide for the issuance of revenue bonds, and the execution of i nstal I ment purchase contracts that support revenue certificates of parti ci pati on, which are secured O{ and payable from the revenues generated b,t various enterprise and special fund operations. These revenue bonds do net represent obi i gati ons of the General Fund of the City, nor are they secured b,t taxes. Revenue bonds and certificates of participation have been issued that are secured O{ wastewater, refuse cdlection and parking revenues fund. In addition, three departments that are under the control of Boards aplX)i nted b,t the Mayor and confirmed O{ the Council, namely the Departments of Water and POvVer, Harbor and Airports, have also issued revenue bonds.

Conduit Debt Obligations The City has issued bonds or entered into i nstal I ment purchase contracts secured O{ and payable from loans and installment sale contracts, to prCNide conduit financing for single and multi-family housing, industrial development and 501(c)(3) nonprofit corlX)rations. These bonds and certificates of participation are not secured O{ any ether City general funds or revenues.

Cash-fl CM' B or r CM'i n gs The City annually issues tax and revenue anticipation netes ("TRAN") to help ease cash flCM' pressures arising from the mismatch of its revenues and expenditures. The follcwing table summarizes the City's TRAN issuance over the past five years.

A-50 Table 44 TAX AND REVENUE ANTICIPATION NOTES

Fiscal Year Endirp Principal A rmunt

2001-02 297,100,CXXJ 2002-03 332,600,CXXJ 2003-04 443,600,CXXJ 2004-05 6'D,500,CXXJ 2005-ffi (Estimated) 621,200,CXXJ

Source: City of LosAtl'Jeles, Office oft~ Treasurer.

A-51 Summary of Lmg-Term BorrOvVings

T aJj e 4 5 presents a pro--f orma statement of net debt of the City outstandi ng as of January 1, 2005, unless ctherwise noted. Tables 46 and 47 summarize the debt service to maturity of certain of these obi i gati ms.

Table 45 NET DEBT As of January l, 2oos"'

Outstan:lirp at 01 Dl DS

General Obligation Bon:ls $ 1.418.980.(X)O

Sp:=<::ial Tax Bonds Police Errergerry Comman:l Control Communications System 158.275.000 Lan:lscapitl'J an::l Lightitl'J District S6-l 35650000 Subtotal 193.925.000

2 Lease Obligations ( J Equiprrent 348.380.000 Real Property 880 257 539 Subtotal 1.228.637.539

J u::lgm::nt Obligation Bon:ls 33.355.000

Revenue Bon:ls Departrrent of Water an::l Pa,;ver 3l 5.158.698.982 3 Departrrent of Airrx,tt5 J 385.940.000 3 4 HarOOr Departrrent ( J ( J 725.870.000 3 Wast61Vater Systerrf J 2.121.745.000 Sanitation Equiprrent Charge 303.005.000 Parking System 114 515000 Subtotal 8.809.773.982

GROSS DIRECT DEBT 11.684.711.521 Less: Revenue Bon:ls (8,809,773,982) DIRECT NET DEBT 2.874.937.539 Plus Tax Allocation Debt (,i 526.327 Ot~r Overlappitl'J Debti6l 6 565 593 656 OVERALL NET DEBT $ 9934831195

rn As adJusted by mtes (2) throLJJh (6) belcw. I rr::I Wes only OOn:led an::l cettificated lease obi igati ans. Exel Wes lease revenue OOn::ls i rr::I Wed un:ler Parcel Tax Bon:ls. "'(,) DC€Smtirr::lu::leComrrercial P~r. ('I DC€s mt irr::lu::le California Boating an::l Waterways Notes outstan::litl'J. ISi Tax allocation OOn::ls of t~Community RedeveloprrentAgerry of t~City of LosAtl'Jeles, asofJuly 30, 2004. (Cl Overlapping debt information from California Municipal Stati sties, Irr::. as of July l, 2C04.

Source: City of LosAtl'Jeles, Office oft~ City Administrative Officer.

A-52 Table 46 DEBT SERVICE TO MATURITY ON DEBT PAYABLE FROM TAXES As of January l 2005"'

2 Ge~ral Obligation Bon:ls Sp:=<::ial Tax Bon:Js( J Fiscal Year Prirr::ipal Interest Total Prirr::ipal Interest Total G ran:l Total

2005 $33,336,441 $ 33,336,441 $ l ,4S\J,CXXJ $ 4,161,669 $ 5,651,669 38,988,110 2006 $100,535,CXXJ 62,885,450 163,420,450 18,64 5,CXXJ 7,935,948 26,580,948 lS\J,001,398 2007 97,945,CXXJ 58,973,126 156,918,126 17,140,CXXJ 7,259,571 24,399,571 181,317,698 2008 98, l 00,CXXJ 55,003,945 153,103,945 17,550,CXXJ 6,563,664 24,113,664 177,217,609 2009 96,005,CXXJ 50,953,879 146,958,879 18,275,CXXJ 5,822,486 24,097,486 171,056,365 2010 SQ, 135,CXXJ 46,897,019 137,032,019 18,995,CXXJ 5,057,474 24,052,474 161,084,493 2011 89,795,CXXJ 43,015,168 132,810, 168 19,725,CXXJ 4,245,518 23,970,518 156,780,685 2012 87,555,CXXJ 39,112,749 126,667,749 20,555,CXXJ 3,385,536 23,940,536 150,608,286 2013 85,225,CXXJ 35,197,558 120,422,558 21,220,CXXJ 2,462,019 23,682,019 144,104,576 2014 83,260,CXXJ 31,371,483 114,631,483 22, 150,CXXJ 1,466,094 23,616,094 138,247,576 2015 76,275,CXXJ 27,552,766 103,827,766 2, 155,CXXJ S\J2,045 3,057,045 106,884,811 2016 71, 14 5,CXXJ 23,883,550 95,028,550 2,255,CXXJ 801,689 3,056,689 98,085,239 2017 60,520,CXXJ 20,673,913 81,193,913 2,360,CXXJ 694,524 3,054,524 84,248,436 2018 60,520,CXXJ 17,685,825 78,205,825 2,480,CXXJ 579,979 3,059,979 81,265,804 2019 60,520,CXXJ 14,648,575 75,168,575 2,605,CXXJ 453,849 3,058,849 78,227,424 2020 60,520,CXXJ 11,599,713 72,119,713 2,740,CXXJ 320,833 3,060,833 75,180,545 2021 57,515,CXXJ 8,619,988 66,134,988 2,140,CXXJ 179,250 2,319,250 68,454,238 2022 52,870,CXXJ 5,848,750 58,718,750 1,445,CXXJ 72,250 1,517,250 60,236,CXXJ 2023 42,810,CXXJ 3,456,750 46,266,750 0 0 0 46,266,750 2024 29,700,CXXJ 1,644,CXXJ 31,344,CXXJ 0 0 0 31,344,CXXJ 2025 18,030,CXXJ 450 750 18 480 750 0 0 0 18 480 750 Total $1418980CXXJ $592811 395 $2 011 791 395 $193 925 CXXJ $52 364 396 $246 289 396 $2258 080 791

('I Totals may mt add due to i n::le~n::lent roun:li tl'J. '" I rr::lu::les Police Em::rgerry Comman:l Control Communication System and City-wide lan:lscapitl'J an::l lightitl'J assessrrent district debt.

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

A-53 Table 47 DEBT SERVICE TO MATURITY ON BONDED AND CERTIFICATED LEASE OBLIGATIONS ANDJUDGMENTOBLIGATION BONDS As of January l, 2005"'

Equipment Real Property Ju::lgmentObligation Bon:ls Fiscal Year Prirr::ipal Interest Total Prirr::ipal Interest Total Prirr::ipal Interest Total G ran:l Total

2005 $15,230,CXX: $8,166,536 $23,3%,536 $10,845,000 $34, 177,435 $45,022,435 $5,255,000 $749,492 $6,004,492 $ 74,423,463 2006 63,250,CXX: 14,906,071 78,156,071 20,827,539 52,492,528 73,320,067 6,655,000 1,230,121 7,885,121 159,361,259 2007 59,075,CXX: 12,060,164 71,135,164 32,330,000 36,302,926 68,632,926 6,145,000 943,834 7,088,834 146,856,924 2008 53,465,CXX: 9,447,350 62,912,350 35,415,000 35,049,156 70,464,156 6,145,000 676,699 6,821,699 140, 198,204 2009 44,640,CXX: 7,013,214 51,653,214 33,605,000 33,526,789 67,131,789 3,900,000 399,080 4,299,080 123,084,083 2010 45,210,CXX: 4,852,203 50,062,203 37,410,000 32,040,181 69,450,181 3,900,000 216,480 4,116,480 123,628,863 2011 23,910,CXX: 3,007,145 26,917,145 41,085,000 30,249,138 71,334,138 1,395,000 30,690 1,425,690 99,676,973 2012 16, 710,CXX: 1,912,251 18,622,251 43,750,000 27,952,356 71,702,356 0 0 0 90,324,607 2013 9,240,CXX: 1,201,030 10,441,030 45,705,000 25,934,291 71,639,291 0 0 0 82,080,321 2014 6,970,CXX: 782,159 7,752,159 47,030,000 24,201,746 71,231,746 0 0 0 78,983,905 2015 2,825,CXX: 467,765 3,292,765 48,820,000 22,324,381 71,144,381 0 0 0 74,437,146 2016 1,860,CXX: 346,215 2,206,215 50,570,000 20,282,923 70,852,923 0 0 0 73,059,138 2017 375,CXX: 287,858 662,858 52,810,000 18,184,706 70,994,706 0 0 0 71,657,563 2018 395,CXX: 270,335 665,335 54,805,000 16,067,182 70,872,182 0 0 0 71,537,517 2019 415,CXX: 250,875 665,875 56,875,000 13,858,090 70,733,090 0 0 0 71,398,%5 2020 435,CXX: 229,625 664,625 59,120,000 11,553,546 70,673,546 0 0 0 71,338,171 2021 455,CXX: 207,375 662,375 54,750,000 9,148,914 63,898,914 0 0 0 64,561,289 2022 480,CXX: 184,000 664,000 56,825,000 6,997,617 63,822,617 0 0 0 64,486,617 2023 505,CXX: 159,375 664,375 15,360,000 5,467,131 20,827,131 0 0 0 21,491,506 2024 530,CXX: 133,500 663,500 15,655,000 4,597,074 20,252,074 0 0 0 20,915,574 2025 555,CXX: 106,375 661,375 15,310,000 3,672,261 18,982,261 0 0 0 19,643,636 2026 585,CXX: 77,875 662,875 12,315,000 2,890,545 15,205,545 0 0 0 15,868,420 2027 615,CXX: 47,875 662,875 13,000,000 2,201,435 15,201,435 0 0 0 15,864,310 2028 650,CXX: 16,250 666,250 6,280,000 1,473,068 7,753,068 0 0 0 8,419,318 2029 c 0 0 6,670,000 1,083,978 7,753,978 0 0 0 7,753,978 2030 c 0 0 3,475,000 670,085 4,145,085 0 0 0 4,145,085 2031 c 0 0 3,655,000 491,400 4,146,400 0 0 0 4,146,400 2032 c 0 0 3,840,000 303,460 4,143,460 0 0 0 4,143,460 2033 c 0 0 2,120,000 106,000 2,226,000 0 0 0 2,226,000 2034 c 0 0 0 0 0 0 0 0 0 2035 c 0 0 0 0 0 0 0 0 0 $348,380,CXX: $66,133,419 $414,513,419 $880,257,539 $473,300,340 $1,353,557,879 $33,395,000 $4,246,3% $37,641,3% l 805712694

In Totals may mt add due to i n:lependent roun:li tl'J.

Source: City of LosAtl'Jeles, Office of the City Administrative Officer.

A-54 Debt Management Policies The City adopted a formal debt policy in August 1998, and has also adop:ed policies for Mel Io Roos financing, variable rate dett and swaps. These policies were consolidated into the City's Financial Policies in April, 2005 (see "Reserve Fund and Financial Management Policies," herein). The City's Debt Management Pd icy establishes guidelines for the structure and management of the City's debt obligations. These guidelines include target and ceiling levels for certain debt ratios to be used for planning purposes. The two most significant ratios are shavvn bel cw:

Table 48 DEBT MANAGEMENT POLICY RATIOS

Outstan:li tl'J of Ratio Ceilirp March l 2005 Total Direct Debt Service as Percent of General Fun::l Revenues 15.(1?6 8.48% Non-Voted Direct Debt Service as Percent of Ge~ral Fun::l RevenLes 6.0% (l) 4.24%

('I T~ 6% cei Ii tl'J may ~ exceeded only if t~re is a guaranteed rBiV revenLe stream for t~ debt payrrents an::l t~ additional debt wi 11 mt cause the ratio to exceed 7. 5% , or t~re is mt a guaranteed revenLe stream but t~ 6% cei Ii tl'J shal I only be exceeded for one year.

Source City of LosAnJeles, Office oft~ City Administrative Officer.

Table 49 prCNides a comparison of City dett ratios for its net direct debt outstanding for the past five fi seal years.

Table 49 FINANCIAL RATIOS

Net Debt as Percent Fiscal Year Direct Net Debt Net Debt Per Capita Of Assessed Valuation

1999-00 $1,998,237,449 $541 0.982% 20CQ-Ol 2,018, 175,CXXJ 539 0.928 2001-02 2,279,430,CXXJ 599 0.979 2002-03 2,524,542,012 653 0.977 2003-04 2,626,040,942 671 0.929

Source: City of LosAnJeles, Office oft~ City Administrative Officer.

A-55 Table 50 shcws direct debt service as a percent of adjusted General Fund revenues.

Table 50 GENERAL FUND DEBT SERVICE AS A PERCENTAGE OF GENERAL FUND REVENUES

Debt Setvice Payrrenr(ll Ge~ral Fun::! RevenLes Debt Service as Percentage of Fiscal Year ($CXXJ) ($CXXJ) Ge~ral Fund RevenLes

2000-01 $ 151.587 $ 3.()88.247 4.91% 2001-02 163,742 3,073,156 5.33 2002-03 131,712 3,254,875 4.05 2003-04 123,398 3,387,269 3.79 2004-05 (estimated) 159,607 3,696, 183 4.32

('I I rr::lu::les debt service payrrents on lease obi igations an::lj u::lgrrent obligation OOn::ls.

Source: City of Los AnJeles, Office oft~ City Administrative Officer.

Table 51 provides a schedule of debt retirement for direct net dett.

Table 51 RETIREMENT OF DIRECT NET DEBT AsofJanuary l,2005"'

General Jwgrrm Qljigation Borrls SJ:X=(ial Tax Borrls EquiJ:ffi:.'111: Leases Real Prop:rty Leases Qljigation Borrls Tctal Cu1TL1lative Cu1TL1lative Cu1TL1lative Curnllative Cu1TL1lative Cu1TL1lative Maturing Maturing % ct Del:t Maturing % ct Del:t Maturing % ct Del:t Maturing % ct Del:t Maturing % ct Del:t Maturing % ct Del:t Within Princiool RE.tired Princiool RE.tired Princiool RE.tired Princiool RE.tired Princiool RE.tired Princiool RE.tired

>Oto5 years $482, T20, 5 to lOyears 422,110,10tol5years 313,225,15 to20years 200,925,20 to 25 years c 100.0 0 1000 1,850,25 to?/Jyears c 100.0 0 1000 0 100.0 13,030,?IJ to 35 years c 100.0 0 100.0 0 100.0 0 100.0 ___o 100.0 c 100.0 $1 418,900

T ctal s rrn.y nct ad:l due to i mep:n:lent rourdi ng.

Source City ct Los Angeles, Office ct the City AdninistrativeOfficer.

Variable Rate Obligations and Swap Agreements I n connection with the refunding of certain I ease obi i gati ons relating to the Los Angel es Convention Center, the City issued approximately $235.5 million in variable rate oljigations. The City entered into swap agreements for a notional amount equal to all of these variable rate lease revenue bonds. Such agreements are intended to mitigate the City's variable interest rate risk. The swap agreements will provide that the respective swap counterparty is obligated to pay the City a variable interest rate equal to a variable index identified in the swap agreements and the City is obligated to pay to the respective swap counterparty a fixed interest rate. In certain circumstances, the City could be required to make an unanticipated termination payment and such terrrination payment could be substantial. The City has a formal swap policy apprCNed O)' the Mayor and City Council in April, 2003. These policies were consolidated into the City's

A-56 Financial Pdicies in Ap-il, 2005 (see "Reserve Fund and Financial Management Policies," herein). In conformance with this IX)licy, the City re!X)rts quarterly on its swap IX)Sition to the Mayor and Council. (See" Note 4.K. to the City's Comprehensive Annual Financial Report," herein.)

Operating and Other Financing Leases In addition to lease payments budgeted in connection with lease revenue bonds and certificates of participation, the City has entered into other lease arrangements for office equi prnent and other rri nor acquisitions.

Proposed Additional Financings The City currently anticipates the completion of some or all of the long-term financings summarized in Table 52 secured in whole or in part by the City's General Fund or other revenues and taxes. Refundi ngs, certificates of parti ci pati on or I ease revenue bonds in addition to those I i sted bel cw may be approved to fi nance real and personal property acqui si ti ons and improvements. The City may seek further general obligation bond voter authorization.

Table 52 POTENTIAL ADDITIONAL FINANCINGS DEBT CALENDAR

Estimated AnticipatedSaleDate Project Ty[E of Obligation Finan::::irp Am:Junt

2005 Sanitation Equipm::nt for refuse collection Sanitation Equiprrent Charge RevenLe Bon:ls $49 mill ion prcg ram

2005 Cash f1CM1 managerrent Tax an::l RevenLeAnticipation Notes $650 million

2005 Fire and animal s~lter faci Ii ties and storm General Obligation Bon:ls $127 ni Ilion water proJects

20C6 Police Departrrent Headquarters Lease RevenLe Obi igations $300 ni Ilion

Source: City of Los AnJeles, Office oft~ City Administrative Officer.

The City is undertaking a major mw capital program to mitigate storm water IX)llution. An initial capital program of app-oximately $500 million has been identified, and voters have authorized general obligation bonds in that amount. The total p-ogram could be substantially I arger due to ongoi ng operati ng and mai ntenance costs as wel I as additional cap tal projects.

Overlapping Bonded Debt Contained within the City are numerous overlappng local agencies providing public services. These local agencies have outstanding bonds issued in the form of general obligation, lease revenue, and special assessment bonds. A statement of the overlappng dett of the City, dated July 1, 2004, prepared by California Municipal Statistics Inc., is shewn in Table 53. The City makes no representations as to its competeness or accuracy. Self--suplX)rting revenue bonds, tax allocation bonds, and non-bonded capital lease obligations are excluded from the dett

A-57 staterrEnt. The City anticipates issuing additional bonded dett. (See" BONDED AND OTHER I NOE BTE ONE SS B Introduction" and" Proposed Additional Financings'' herein). The City al so anti ci pates that new speci al assessrrEnt and special tax di stri cts may be created wi thi n the City, and that debt supported b,' these special assessrrEnts and special taxes may be issued.

Table 53 STATEMENTOFOVERLAPPING DEBT Asof July l, 2004

2003-04 Assessed Valuation $266.146.366.720 Redeveloprrent lncrerrental Valuation 14 091 932 394 Adjusted Assessed Valuation $252.054.434.326

OVERLAPPING TAX AND ASSESSMENT DEBT % A1212licable Debt 07 i!)l /2004 Los AnJeles County 39.919,?6 $ 9.3613.989 LosArr:ieles County Flocd Control District 40.556 55.701.638 Metrorx,I itanWater District of Southern California 20.643 92.372.264 Los AnJeles Community College Di strict 70.952 477.943.315 Beverly Hills Unified Sch::x:JI District 0.200 221.439 ltl'Jl61Vocd Unified Sch::x:JI District l.272 960.487 Las Virge~sJ oint Unified Sch::x:JI Di strict l.326 1.125.690 LosAnJeles Unified Sch::x:JI District 86.978 3.723.976.117 Ot~r Sch::x:JI Districts Various 74.367 City of LosAnJeles Community Facilities District Nos. 3 an::l 4 100 14 5.710.000 City of Los A tl'Jel es A ssessrrent Di stri ct No. l 100 12.996.494 Mountains Recreation and ConsetvationAutITTrity Assessrrent Districts 99.976-100. 27.966.447 LosAnJeles County Regional Park an::l O~n SpaceAssessrrent District 39.919 111.210.000 LosAtl'Jeles County Metrorx,litan Transit District Be~fitAssessrrent Districts 100 150179270 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $4.815.806.511" OVERLAPPING GENERAL FUND OBLIGATION DEBT Los Atl'Jeles County Ge~ral Fund Obi igations 39.919,?6 $ 573.653.175 LosAtl'JelesCounty Pension Obligations 39.919 527.271.Cfil LosAtl'Jeles County Su~rinten:lent of Sch::x:Jls Cettificates of Participation 39.919 10.280.(i83 LosAtl'Jeles County Sanitation Di strict Nos. l, 3, 4, 5, 8 & 16 Auth:Jrities 0.00005-12.022 9.814.365 I tl'Jl61Vocd Unified Sch::x:JI Di strict Certificates of Participation l.272 39.559 LosAtl'Jeles Unified Sch::x:JI District Cettificates of Participation 86.978 650.556.300 Las Virge~sJ oint Unified Sch::x:JI District Cettificates of Participation l.326 265 200 TOTAL GROSS OVERLAPPING GENERAL FUND OBLIGATION DEBT $1.771.&3().350 Less LosAtl'Jeles County COPs (100% self--suprx,ttitl'J from leaseh:Jld revenLes on pro~tties in (22,093, 171) Marinade! Rey) TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT $1.749.787.179

NET COMBINED TOTAL OVERLAPPING DEBT $6.565.593.6561"

('I Exel Wes City of LosAtl'Jeles Lan:lscapi tl'J an:l Lightitl'J Be~fit Assessrrent District accounted for as direct debt on Table 44. '" Exel Wes tax an:l revenLe anticipation rotes, revenLe, ITTJttgage revenLe an:l tax allocation OOn:ls an:l non--OOn:led capital lease obligations.

Source: California Municipal Statistics, Irr:.

A-58 LITIGATION

The fol I cwi ng is a Ii st prepared b,' the Office of the City Attorney as of J une 14, 2005, of competed, pending or threatened litigation invdving the City, excluding personal injury cases and single plaintiff cases, in which the City has a financial exposure of $4 million or rnore which, either individually or in the aggregate, could materially affect the City's General Fund fi nanci al position. With regard to the other pending litigation, it is the opnion of the City Attorney that the final determination of such litigation, either individually or in the aggregate, would nct materially affect the City's General Fund financial position. 1. Air Transport Association v. City of Los Angeles and Aircraft Owners and PilctsAssn. v. City of Los Angeles are administrative proceedings before the U. 5. Secretary of Transportation challenging the legality of the transfer of approximately $58 million frorn the Airport Revenue Fund to the General Fund. The chal I enged transfer represents condemnation proceeds received for certain City OvVned property taken b,' the State of California for use in the construction of the Century Freeway. 2. Tipton-Whittingharnv. City of Los Angeles is an action for injunctive relief and damages in the United States District Court. The plaintiffs allege that there is discrimination against women in the Pd ice Department. Although the case was initially filed as a class action, the class allegation was abandoned b,' plaintiffs. Plaintiffs subsequently filed seven separate lawsuits on this matter. Five cases have settled, and two remain. An unfavorable ultimate result frorn these lawsuits could give rise to a liability of as rnuch as $2 rni 11 ion, which would be paid frorn the General Fund. 3. Rampart Division Litigation: Investigations have been made into alleged illegal activities of some police officers in the Los Angeles Pd ice Department's Rampart Division. As of June 14, 2005, 214 lawsuits have been served on the City. Of these, 206 cases have been resolved for approximately $66.2 rrillion. It is not anticipated that other lawsuits will arise frorn the investigations. The total I iab lity for al I Rampart Division cases may be as rnuch as $70.2 million. In 2000-01 the City established a special fund (Reserve for Extraordinary Liablity Claims Fund) to pay for an estimated $125 rrillion in settlements andjudgments forthe Rampart Division cases. The Mayor and City Council have already appropriated $75 rrillion of the originally estimated $125 million in liabilities. In 2004- 05 the City Attorney announced that no additional funds will be needed beginning in 2005--06 for Rampart Division cases. Any future Rampart litigation payments would be funded frorn appropriations frorn the City's Liability Claims fund as necessary (see, "Risk Retention Program," herein). 4. U.S. ex rel Giles v. City of Los Angeles is a Federal court case CNer allegedly false claims filed b,' the City with FEMA for costs to clean up post-earthquake debris. The allegation is that the City knew that sorne contractors were subrritting fraudulent invoices, and that therefore, sorne of the reimbursement claims the City filed with FE MA were false clai rns under the Federal False Claims Act. The City prevailed on its rnction for surnrnary judgment. Plaintiff appealed and the City prevailed. An unfavorable ultimate result

A-59 could give rise to a liability of as much as $10 million, which would te paid from the General Fund. 5. Clevelandv. City of Los Angeles is an action overthe alleged failure 0y the City to pay its firefighters-paramedics overtime compensation underthe Fair Labor Standards Act. The U. 5. District Court ruled in favor of paintiffs. The City is appealing the $5.1 million judgment. An unfavorable ultirrate result could give rise to a I iability of as much as $5.1 rri 11 ion, which would te paid from the General Fund. 6. AB Cellular-lA, et al. v. City of Los Angeles is an action forthe refund of Utility Users' Tax paid 0y the plaintiffs. Plaintiffs allege thatthe customer inforrration provided 0y the City and used 0y the paintiffs for ailing purposes and upon which the tax is based is faulty. The City prevailed on its demurrer motion, but the appellate court reversed. The case wi II proceed to trial. An unfavorable ulti rrate result could give rise to a liab lity of as much as $1 O mi 11 ion, which would te paid from the General Fund. 7. Gousse v. City of Los Angeles seeks darrages for physical injuries from police officers arresting the plaintiff for driving a stolen car; the car rental company had given him a car with stolen license plates. The jury verdict awarded the plaintiff, a surgeon, ajudgment of $34.3 million of which Budget Rent-A-Car is to pay $18.8 million and the City to pay the cther $15.5 million. The trial judge rejected the jury's darrages cM'ard as disproportionate to the injury and ordered a new trial on damages. An unfavorable ultirrate result could give rise to a liability of as much as $14 million, which would te paid from the General Fund. 8. Jacobs et al v. City of Los Angeles et al is a taxpayerst:lass action lawsuit seeking the return of approximately $800 million 0y alleging that the payments 0y the City's Department of Water and Pcwer (DWP) to the City were improper underthe City Charter and that the City General Fund should repay the money to DWP for refund to DWP's water and pcwer ratepayers. Sirrilar concerns were raised in 2 previous cases years earlier and the City prevailed in those cases. The City has filed a demurrer challenging the first amended complaint. The Court granted the demurrer and the plaintiffs have to decide whetherto appeal. An unfavorable ultirrate result could give rise to a liablity of over $800 mi 11 ion, which would te paid from the General Fund. 9. Estate ofWallacev. City of Los Angeles is a wrongful death lawsuit in U.S. District Court which al Ieges that a former police officer conspired to ki 11 rap star Biggie 5 mal Is and that the City is responsible for the police officer's actions. An unfavorable ultimate result could give rise to a liablity of substantially less than the $100,000,000 demanded in the lawsuit. The fol I avvi ng cases, which had teen identified in previous official statements of the City, have been either completely resolved, either 0y settlement or judicial action, or the potential liability has teen reduced telavv $4,000,000 each: J onesv. City of Los Angeles. Claim: A claim for $25,000,000 has teen filed against the City 0y Stanley Miller for alleged injuries sustained during an arrest for suspcion of car theft after a police pursuit 0y car and on foot, with the pursuit filmed 0y a television news helicopter.

A--60 APPENDIX B

EXCERPTS FROM THE CITY'S COMPREHENSIVE ANNUAL Fl NANCI AL REPORT FOR THE YEAR ENDE DJ UNE 30, 2004AND INDEPENDENT AUDITOR'S REPORT City of Los Angeles California

Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2004

Prepared by the Office of the Controller Laura N. Chick, City Controller City of Los Angeles California

COMPREHENSIVE ANNUAL FINANCIAL REPORT

Fiscal Year Ended June 30, 2004

Prepared by the City of Los Angeles Controller's Office

William Lamb Director of Financial Reporting

GAAP Compliance Section

Lyndon 0. Salvador Finance Specialist IV Elficer T. Garcia Fiscal Systems Specialist I AnneB. Papa Principal Accountant II Jose B. De Leon Principal Accountant I Dahlia T. Leonor Systems Analyst II Julieta A. Barba Senior Accountant II Imelda V. De Guzman Senior Accountant II Helen P. Lee Senior Accountant II Victoria M. Orellana Clerk Typist

Assistance Provided by General Accounting and Special Projects Sections CITY OF LOS ANGELES COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Year Ended June 30, 2004

TABLE OF CONTENTS

INTRODUCTORY SECTION

Letter of Transmittal Organizational Chart viii City Officials ix City Controller x GFOA Certificate of Achievement for Excellence in Financial Reporting xi

FINANCIAL SECTION

Independent Auditor's Report 1 Management's Discussion and Analysis (Required Supplementary Information) 3

BASIC FINANCIAL STATEMENTS

Government-wide Financial Statements Statement of Net Assets (Deficit) 31 Statement of Activities 32 Fund Financial Statements Balance Sheet - Governmental Funds 33 Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets 35 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds 36 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 38 Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual (Non-GAAP Budgetary Basis) - General Fund 39 Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual (Non-GAAP Budgetary Basis) - Proposition A Local Transit Assistance Fund 40 Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual (Non-GAAP Budgetary Basis) - Proposition C Anti-Gridlock Transit Improvement Fund 41 Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget and Actual (Non-GAAP Budgetary Basis) - Special Gas Tax Street Improvement Fund 42 Statement of Revenues, Expenditures, and Changes in Fund Balances (Deficit) - Budget and Actual (Non-GAAP Budgetary Basis) - Community Development Fund 43

Continued CITY OF LOS ANGELES COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Year Ended June 30, 2004

TABLE OF CONTENTS (Continued)

Fund Financial Statements (continued) Statement of Fund Net Assets - Proprietary Funds 44 Statement of Revenues, Expenses, and Changes in Fund Net Assets, Proprietary Funds 48 Statement of Cash Flows - Proprietary Funds 50 Statement of Fiduciary Net Assets - Fiduciary Funds 54 Statement of Changes in Fiduciary Net Assets - Fiduciary Funds 55

Notes to the Basic Financial Statements (Index Page 56) 57

REQUIRED SUPPLEMENTARY INFORMATION (OTHER THAN MD&A)

Schedule of Funding Progress - Benefit Pension Plans 157 Schedule of Funding Progress - Other Postemployment Benefits 157 Schedule of Funding Progress - CRA Employee Retirement System 157 Condition Rating for City Bridges 158

COMBINING AND INDIVIDUAL FUND FINANCIAL STATEMENTS AND SCHEDULES

Combining Balance Sheet - Other Governmental Funds 160 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances - Other Governmental Funds 161

General Fund Supplemental Schedule of Budget Appropriations, Expenditures, and Other Financing Uses By Function - Budget and Actual (Non-GAAP Budgetary Basis) 163 Supplemental Schedule of Budget Appropriations, Expenditures, and Other Financing Uses By Function and Object - Budget and Actual (Non-GAAP Budgetary Basis) 166

Special Revenue Funds Combining Balance Sheet - Nonmajor Special Revenue Funds 179 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances (Deficit) - Nonmajor Special Revenue Funds 186 Budgetary Comparison Schedule (Non-GAAP Budgetary Basis) -Annually Budgeted Nonmajor Special Revenue Funds 193 Reconciliation of Operations on Budgetary to the GAAP Basis - Nonmajor Special Revenue Funds 234

Continued CITY OF LOS ANGELES COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Year Ended June 30, 2004

TABLE OF CONTENTS (Continued)

Special Revenue Funds (continued) Supplemental Schedule of Budget Appropriations, Expenditures, and Other Financing Uses - Budget and Actual (Non-GAAP Budgetary Basis) - All Annually Budgeted Special Revenue Funds 235

Debt Service Funds Combining Balance Sheet - Nonmajor Debt Service Funds 241 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances - Nonmajor Debt Service Funds 246 Budgetary Comparison Schedule - (Non-GAAP Budgetary Basis) - Annually Budgeted Nonmajor Debt Service Funds 251 Reconciliation of Operations on Budgetary to the GAAP Basis - Nonmajor Debt Service Funds 266

Capital Projects Funds Combining Balance Sheet - Nonmajor Capital Projects Funds 268 Combining Statement of Revenues, Expenditures, and Changes in Fund Balances - Nonmajor Capital Projects Funds 272 Budgetary Comparison Schedule (Non-GAAP Budgetary Basis) - Annually Budgeted Nonmajor Capital Projects Funds 276 Reconciliation of Operations on Budgetary to the GAAP Basis - Nonmajor Capital Projects Funds 279 Supplemental Schedule of Budget Appropriations, Expenditures, and Other Financing Uses - Budget and Actual (Non-GAAP Budgetary Basis) - All Annually Budgeted Capital Projects Funds 280

Fiduciary Funds Combining Statement of Fiduciary Net Assets - Pension Trust Funds 282 Combining Statement of Changes in Fiduciary Net Assets - Pension Trust Funds 283 Combining Statement of Fiduciary Assets and Liabilities· Agency Funds 284 Combining Statement of Changes in Fiduciary Assets and Liabilities - Agency Funds 285

Continued CITY OF LOS ANGELES COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Year Ended June 30, 2004

TABLE OF CONTENTS (Continued)

STATISTICAL SECTION

General Governmental Expenditures By Function - Last Ten Fiscal Years 287 General Governmental Revenues By Source - Last Ten Fiscal Years 288 General Governmental Tax Revenues By Source - Last Ten Fiscal Years 289 Property Tax Levies and Collections - Last Ten Fiscal Years 290 Assessed and Estimated Actual Value of Property - Last Ten Fiscal Years 291 Property Tax Rates - Direct and Overlapping Debt - Tax Rate Area #4 Last Ten Fiscal Years 292 Ten Largest Property Taxpayers - 2003-04 Secured Assessed Valuation 293 Special Assessment Billings and Collections - Last Ten Fiscal Years 294 Statement of Legal Debt Margin 295 Ratio of Net General Bonded Debt to Assessed Value and Per Capita - Last Ten Fiscal Years 296 Ratio of Annual Debt Service for General Bonded Debt to Total General Governmental Expenditures - Last Ten Fiscal Years 297 Computation of Overlapping Debt 298 Revenue Bond Coverage for Airports, Harbor, Power, Water, and Wastewater Bonds - Last Ten Fiscal Years 299 Demographic Statistics - Last Ten Fiscal Years 300 Construction, Property Value and Bank Deposits - Last Ten Fiscal Years 301 Miscellaneous Statistics 302 I N T R 0 D u c T 0 R v

Section 1..fff',CE OF LAURAN. CHICK 200 N MAIN STR[.E.r. 1-c!COl Z ,213, 976·72()() vvvvv,l.l,,citv.orgict,

February 7, 2005

The Honorable Mayor and Members of the Council of the City of Los Angeles Los Angeles, California

In accordance with Section 216 of the Charter, I submit the Comprehensive Annual Financial Report (CAFR) of the City of Los Angeles (the City) for the fiscal year ended June 30, 2004. This report is prepared in conformity with generally accepted accounting principles (GAAP) for governmental units and audited in accordance with generally accepted auditing standards by a firm of licensed certified public accountants.

The CAFR is presented in three sections:

• The Introductory Section includes this Letter of Transmittal from the City Controller, the City's Organizational Chart, a Directory of City Officials and of the City Controller's Office, and a reproduction of the City's Certificate of Achievement for Excellence in Financial Reporting for the fiscal year ended June 30, 2003 from the Government Finance Officers Association of the United States and Canada (GFOA);

• The Financial Section includes the independent auditor's report on the basic financial statements, management's discussion and analysis (MD&A), basic financial statements, and combining and individual fund statements and schedules for the City's nonmajor and fiduciary funds and component units; and

• The Statistical Section includes selected financial and demographic data depicting the City's historical trends and other significant information.

Responsibility for the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with the City. The management of the City is responsible for establishing and maintaining an internal control structure. These controls are designed to provide reasonable assurance that the assets of the City are protected from loss, theft or misuse and to ensure that adequate financial information is compiled to allow for the preparation of reliable financial statements in accordance with generally accepted accounting principles. Because the concept of reasonable assurance recognizes that the cost of the control should not exceed the benefits likely to be derived, the comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatements, I believe that the data presented is complete and reliable in all material respects.

AN EQUAL EMPLOYMENT OPPORTUNITY - AFFIRMATIVE ACTlON EMPLOYER - i - The financial reporting format focuses on the City as a whole and on major individual funds of the governmental and business-type activities. Each presentation provides valuable information about the City's operation. Also, there are two General Fund perspectives included in the report: the non-GAAP budgetary basis General Fund and the GAAP basis General Fund that includes transactions of the Reserve Fund and other accounts that have General Fund type activity.

GAAP require that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of a MD&A. This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The MD&A can be found immediately following the report of the independent auditor.

INDEPENDENT AUDIT RESULTS

Simpson & Simpson, a firm of independent certified public accountants, has audited the City's basic financial statements. The goal of the independent audit was to provide reasonable assurance that the basic financial statements of the City of Los Angeles for the fiscal year ended June 30, 2004, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the City of Los Angeles' basic financial statements as of and for the fiscal year ended June 30, 2004 are fairly presented in conformity with GAAP. The independent auditor's report is presented on pages 1 and 2.

The City is required to undergo an annual single audit as provided by the Single Audit Act of 1984 and the Single Audit Act Amendments of 1996, and the U.S. Office of Management and Budget Circular A-133, "Audits of States, Local Governments, and Non-Profit Organizations." Information related to this single audit, including the Schedule of Expenditures of Federal Awards (SEFA), findings and recommendations and the independent auditor's reports on the SEFA, and compliance with requirements applicable to each major program and internal control over compliance in accordance with OMB Circular A-133, are issued in a separate report.

PROFILE OF THE GOVERNMENT

The City of Los Angeles (City) is the second most populous city in the nation with a 2004 population of 3,912,200. With an area of 470 square miles, Los Angeles is located in the southern part of the State of California and is the principal city of a metropolitan region that stretches from the City of San Buenaventura to the north, the City of San Clemente to the south, and the City of San Bernardino to the east. Founded in 1781, Los Angeles was for its first century a provincial outpost under a succession of Spanish, Mexican, and American rule. The City was incorporated in 1850 under the provisions of a City Charter. The current Charter was approved by the electorate on June 8, 1999 and became operative on July 1, 2000.

The City operates under a Mayor-Council form of government. As Executive Officer, the Mayor supervises the administrative process of the City and works with the Council in matters relating to legislation, budget and finance. As governing body of the City, the 15-member full-time Council enacts ordinances, levies taxes, authorizes contracts and public improvements, adopts zoning and other land use contracts, and provides necessary resources for the budgetary departments and offices of the City.

- ii - Council action is subject to the approval or veto of the Mayor, and Council may override a Mayoral veto by a two-thirds vote. The new Charter continued to provide for an independently elected City Attorney and independently elected City Controller.

As discussed in Note 1 B of the Notes to the Basic Financial Statements, the City's reporting entity consists of 45 departments, bureaus, commissions and offices, and three pension systems governed by the City Charter. Also included in the City's reporting entity as blended component units are: the Los Angeles Convention and Exhibition Center Authority, the Los Angeles Harbor Improvement Corporation, and the Municipal Improvement Corporation of the City of Los Angeles (MICLA). The Community Redevelopment Agency of the City of Los Angeles (CRA) is also part of the reporting entity, but is presented discretely as a component unit.

Public services provided by the City include police; fire and paramedics; residential refuse collection and disposal, wastewater collection and treatment, street maintenance and other public works functions; enforcement of ordinances and statutes relating to building safety; public libraries; recreation and parks; community development; housing and aging services; planning; airports; harbor; power and water services; and convention center.

BUDGETARY CONTROL

The annual budget serves as the foundation for the City's financial planning and control. The City maintains budgetary controls to ensure that legal provisions embodied in the budget are complied with and that expenditures do not exceed appropriated amounts. Expenditures and appropriations are controlled at the line item level within each object by department, consistent with the level set forth in the resolution adopting the annual operating budget. The City also maintains an encumbrance accounting system that controls spending based on the expenditure budget, appropriations, allotments, or a combination of them.

Annual appropriations unused and unencumbered lapse at year-end, except for non-capital related continuing appropriations for certain Special Revenue and Capital Projects Funds, which are carried forward to the next budget year. Capital related appropriations that are unused and unencumbered at year-end are reappropriated during the subsequent budget year. Additional information about the City's budget process can be found in Note 3A in the Notes to the Basic Financial Statements.

Budget-to-actual comparisons are provided in this report for each individual governmental fund for which an appropriated annual budget has been adopted. For the General Fund, Proposition A Local Transit Assistance Fund, Proposition C Anti-Gridlock Transit Improvement Fund, Special Gas Tax Street Improvement Fund, and Community Development Fund, the comparison is presented as part of the basic financial statements. For the other budgeted nonmajor funds, the comparison as well as other supplemental budget-to-actual schedules are presented in the combining and individual fund financial statements and schedules.

FACTORS AFFECTING FINANCIAL CONDITION

After the uncertainties affecting the economy that included fears of terrorist attack, SARS (severe acute respiratory syndrome), and the war in Iraq, the Los Angeles County Economic Development Corporation (LAEDC) has reported that the national economy is finally moving ahead. The report indicated that the U.S. real gross domestic product is projected to improve to 4.4% in 2004 from 3.1% in 2003 and will decline slightly to 3.7% in 2005.

- iii - Current reports about the weakening of the U.S. dollar against major international currencies could affect the growth projections. The weakened dollar is becoming a major concern of the nation's trading partners. The federal government is working on containing the massive federal deficit that is putting downward pressure on the dollar.

LAEDC has also predicted the California's economy to grow 0.8% in 2004, accelerating to 1.3% in 2005. The report indicated that while the state economy is expected to continue to gather momentum, the State's business environment continues to be challenged by issues such as workers' compensation, unemployment insurance, paid family leave, and nuisance lawsuits. Further aggravating the situation is the ongoing problems with the state budget and its trickle down effect on local governments.

The City is experiencing challenges to its budget that include rising workers' compensation, employee compensation, and healthcare and retirement costs. In addition, the effects of the state sponsored revenue adjustments, (the "triple flip", and VLF backfill), remain uncertain but will likely cause a reduction of City revenue. The City Administrative Officer (CAO) and the Chief Legislative Analyst {CLA) have reported that the City is facing a potential $300 million budget deficit in fiscal years 2005-06 and 2006-07 as a result of a structural deficit that was first identified in fiscal year 2001-02. The report indicated that expenditures have grown faster than revenues. As instructed by the City Council, the CAO and the CLA have developed and proposed overarching budgetary and fiscal policies needed to eliminate the structural deficit. The proposal was submitted to the Mayor and City Council for consideration on December 6, 2004.

CASH AND INVESTMENT MANAGEMENT

In October 2001, the City Council and Mayor adopted a revised Statement of Investment Policy for the City. The revisions were based on standards recommended by several professional organizations and permit the implementation of current industry best practices. The new policy is consistent with the provisions of the California Government Code, Section 53600, et. seq., as well as the specific provisions pertaining to the Government Code's "prudent investors" criterion.

Some of the specific changes in the new policy include the establishment of a defined cash flow horizon, portfolio segmentation into Core (to cover liquidity) and Reserve (for longer term growth) portfolios, and the establishment of target portfolio durations for both Core and Reserve portfolios. Under the policy, the Treasurer will also establish more specific internal controls, processes for periodic reviews, and Investment Guidelines to implement specific provisions of the City's revised Investment Policy.

Under this new Investment Policy, Standard & Poor's (S&P) rated the City's portfolio as "AAAf/S1 ." The "AAA" rating reflects the strong protection provided against losses in the investment pool as a result of credit defaults. This rating is also indicative of the high quality of the individual investments held in the general pool. S&P also evaluated the volatility of the pool and assigned a rating of "S1 (low sensitivity). S&P specifically noted that the pool has a low market risk profile and is based on "conservative investment policies." It is important to note that Los Angeles is the second city-managed pool to receive the highest safety ratings from S&P

- iv - Subject to the limitations under California Government Code Section 53601, the Treasurer may also enter into Repurchase Agreements and Reverse Repurchase Agreements. The maximum maturity of a reverse repurchase agreement shall be 92 days, the proceeds of which may not be invested beyond the expiration of the agreement. The reverse repurchase agreement must also be "matched to maturity" and meet all other requirements delineated in the State Code. The City's Administrative Code Division 20, Chapter 5, Article 2, Section 20.90 further requires prior City Council approval for reverse repurchase agreements. This section was further revised by City Council to exempt the Securities Lending Program from these provisions.

The City's general pool investment portfolio is as follows (dollar amounts in thousands):

Year Ended June 30, 2004 Year Ended June 30, 2003 Portfolio Market Rate of Market Rate of Segmentation Benchmark Value Return Value Return

Core $ 785,070 1.11% $ 369,458 1.55% 91-day Treasury Bill 0.98% 1.53%

Reserve 3,434,510 0.20% 3,263,248 7.53% Merrill Lynch 1-5 Year GovernmenUCorporate 0.17% 7.25%

Total $ 4,219,580 $ 3,632,706

Special Pool investments, cash collateral received on loaned securities, and guaranteed investment contract totaled $1,351.7 million and $1,354.5 million at June 30, 2004 and 2003, respectively. These amounts are not included in the total portfolio shown above.

RESERVE FUND POLICY

In August 1998, the Mayor and Council adopted a policy that established a targeted Reserve Fund balance of 2 percent of General Fund revenues and set aside a portion of the Reserve Fund for use in emergency situations. The 2 percent figure would be reevaluated annually during budget preparation to determine whether it is adequate. As a result of this policy, two accounts were established within the Reserve Fund.

• Emergency Reserve Account - in order to remove funds from the Emergency Reserve Account, a finding by the Mayor, with the confirmation by the Council, of "urgent economic necessity" must be made, as well as a determination that no other viable sources of funds are available. A finding of urgent economic necessity would be based on a significant economic downturn after the budget is completed, or an earthquake or other natural disaster.

• Contingency Reserve Account - to be used for unanticipated expenditures or revenue shortfalls impacting programs already approved in conjunction with the current year budget. It is not to be used to fund new programs or positions added outside of the current year budget.

- V- For fiscal year 2004-05, $61 million was designated for Emergency Reserve. The total of the Emergency Reserve of $61 million and Contingency Reserve of $51.7 million accounts for 3.1% of the General Fund's budgeted receipts of $3.7 billion. At June 30, 2004, the Reserve Fund's cash balance was $272.3 million.

For purposes of the budget, the Reserve Fund is separate and distinct from the General Fund; while for financial reporting purposes, the General Fund includes the Reserve Fund and other accounts/funds that have a general fund type activity.

RISK MANAGEMENT

The City is self-administered and self-funded for workers' compensation, most property damage and the majority of tort liability exposures. Commercial insurance is used where it is legally required, contractually required or judged to be the most cost-effective way to finance risk. Indemnity and insurance protection is also required from all City contractors, vendors and lessees, and permit holders. Claims and judgments are recorded when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The recorded estimated liability for claims and judgments includes a provision for Incurred But Not Reported (IBNR) liabilities for workers' compensation and tort cases including allocated expenses. Further discussion of the City's estimated claims and judgments payable is presented in Note 4P of the Notes to the Basic Financial Statements.

PENSION AND OTHER POSTEMPLOYMENT BENEFITS

All full-time employees of the City are covered by one of three defined benefit pension plans (the Plans) namely: City Employees' Retirement System (LAGERS); Fire and Police Pension System (Pensions): and Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan (DWP Retirement). Each year, independent actuaries engaged by the Plans calculate the amount of annual contribution that the City must make to the Plans to ensure that the Plans will be able to meet its obligations to plan members and beneficiaries. At June 30, 2004, the pension benefits funded ratios of the Plans are as follows: LAGERS- 82.5%, Pensions- 103%, and DWP Retirement- 97.3%.

The following table shows each plan's actuarial value of pension benefit plan net assets, actuarial accrued liability (AAL) and overfunded/(underfunded) AAL at June 30, 2004 (in millions):

Actuarial Actuarial Overfunded Value of Accrued (Underfunded) Plans Assets Liability AAL LAGERS $ 7,042 $ 8,534 $ (1,492) Pensions 11,736 11,390 346 DWP Retirement Plan 6,252 6,422 (170)

Members of LAGERS and Pensions are entitled to postretirement health subsidy benefits. LAGERS and Pensions are actuarially funding the health insurance benefits and there are no member contributions. The Department of Water and Power (DWP) also provides healthcare benefits to active and retired employees and their dependents and recognizes the cost of postretirement benefits as expense over employees' service periods.

The following table shows postemployment healthcare benefits net assets, actuarial accrued liability (AAL) and underfunded AAL at June 30, 2004 (in millions):

- Vi- The following table shows postemployment healthcare benefits net assets, actuarial accrued liability (AAL) and underfunded AAL at June 30, 2004 (in millions):

Actuarial Actuarial Value of Accrued Underfunded Plans Assets Liabilit)'.' AAL LAGERS $ 859 $ 1,420 $ (561) Pensions 606 1,009 (403) DWP Plan 187 1,730 (1,543)

Additional information on the City's pension and other postemployment benefits can be found in Note 5A of the Notes to the Basic Financial Statements and in the Required Supplementary Information Section.

As part of budget cuts to reduce the State's deficit, the Governor has proposed to replace defined benefit pension plans with defined contribution plans for new public workers in 2007. This proposal is subject to legislative and statewide voter approval. A defined benefit plan promises to pay retirees, usually monthly, certain amount of money calculated through a formula that considers such factors as age, annual salary and years of service. On the other hand, under a defined contribution plan, the employee or the employer or both contribute to the employee's individual investment account. The employee will ultimately receive the balance in his/her account based on contributions plus or minus investment gains or losses.

AWARDS AND ACKNOWLEDGMENTS

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City for its comprehensive annual financial report (CAFR) for the fiscal year ended June 30, 2003. This was the ninth consecutive year that the City has received this award. The Certificate of Achievement is a prestigious national award-recognizing conformance with the highest standards for preparation of state and local government financial reports. In order to be awarded a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized CAFR, whose contents conform to program standards. The CAFR must satisfy both generally accepted accounting principles and applicable legal requirements.

A Certificate of Achievement is valid for a period of one year only. I believe our current report continues to conform to the Certificate of Achievement program requirements, and I am submitting it to GFOA to determine its eligibility for another certificate.

The preparation of this report would not have been possible without the efficient and dedicated services of the entire staff of the Financial Reporting Division of the Controller's Office. I would like to express my appreciation to all members of the Office who assisted and contributed to the preparation of this report. Credit also must be given to other professional contributors Citywide.

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Alex Padilla Cindy l\liscikowski f£d P. Reyes \Vendy ('; rcu<'I Dl'unis P. Zinc 7th Di;;trkt 11 rh District l 1-t J)istricr 2nd Dhtrict 3rd Di\trict Cnuncil President

li:>n1 LaBonge Jack \Veiss Tony C3.rdenas Bernard Parks Jan Perry 4th [)istrict 5th Dlstrict 6th DistricL 8Lh District 9th District

\1artin tudJow GreigSmit.h .Ede Careetti Antonio Villaraigo1;a Janke Hahn 10th District I 2th District 13th Di~trict 14th District l .'lth Di~trict

NON-ELECTED FISCAL OFFICERS

Director of City Adn1inisLrative City Purcha~ing Agr:nt & Genera! \,igr. finance City T'reasurer ()fticer Departrnent of Gener.ii Servii.:es A.ntoineue IJ. Christo,,alc Joya C. J)e F'oor \VHliatn T .Fujioka AJ·rin Y. Blaiu - ix- LAURA CHICK CITY CONTROLLER

The City Charter establ.ishes the Controller as an elected official and gives the Controller the responsibility for serving as the auditor and chief accounting oflicer of the City. Tho Charter guarantees the independence of the Office, and provides for better accountability to the public and a more direct form of public control over the fiscal affairs of the City, in keeping with the established principle of checks and balances exercised for both the executive and !egtslatlve branches of municipal government. The Controller is required to exercise general supervision over the accounts of all offices and departments of the City. including the Independent departments of Airports, Water and Power, and Harbor (Port of Los Angeles).

Laura Chick was elected City Controller on April 10, 2001, for a four year term beginning July 1, 2001. She is the first woman erected to cltywlde office ln the history of Los Angeles.

The City Controller is also the Controller for the following governmental agencies: Community Redevelopment Agency of lhe City of Los Angeles Los Angeles Coliseum and Sports Arena Los Angeles Convention and Exhibition Center Authority Municipal Improvement Corpora1ron of Los Angeles (MICLA) Parking Authortty of the City of Los Angeles (Los Angeles Mall) El Pueblo de Los Angeles State Historical Park (Plaza) South Central Los Angeles Multiservice and Child Development Center

EXECUTIVE STAFF MARCUS ALLEN RUBEN GONZALEZ ROBERT WILCOX MIRIAM JAFFE SHIRLEY TAN FARID SAFFAR Chief Administrative Director of Director of Principal Director ot Deputy Controller Deputy COntrotfer Communications Government and Deputy Controller Auditing Community Affairs

EMY ARCENO Payrofl MICHAEL DE LA ROSA Disbursements FLORIDA DUBLIN Paymaster NAM HUYNH Director of Systems WILLIAM LAMB Financial Analysis and Reporting .JOVONNE LAVEND!cR Management Services

• X· Certificate of Achievement for Excellence in Financial Reporting Presented to City of Los Angeles, California

For its Compreheru;ive Annual Firumcial Report for !he Fiscal Year Ended Jooe 30, 2003

A Certitkate of >,.chievement for Excelkmcc in F::lnancial Reporiing is pmcnted by the Government Finance Officen Association of the Onitc:d Staiea and Canada to g~nt uniu #00 public employee rotiterneot sysremg wbose oomprehensive annual fin.wcial reP9rts (CAFR,) achieve the high,,! sW",dar

President ~/.~ Executive Director F I N A N c I A L

Section )i)1!iJ- \VlL'+JIKI. Gi'.'1.Lf.\.,\Kl), surn: 17ll' tC%'> ,'\;-..(~llt>~- (.i\

Sl'v\PSCJ" & SIMPSON C [f{i .HI ' ' l'.11\L,(. A Ct \:SU;..;!\ '411

L\.,'W,>;.lll::S'' !'ART'•Jfi'. hk A_;',..,\H.U { :-.1\.-if"-oCk r"I\\ ;. .\RI_ !' .,IV,i':c~)'-i. ,. ·.:'\

Honorable Members of the City Counci I City of Los Angeles, California

INDEPENDENT AUDJTOR'S REPORT

We have audited the accompanying financial statements of the governmental actlvllles, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund infonnation of the City of Los Angeles, California {City), as of and for the fiscal year ended June 30, 2004, which collectively comprise the City's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the City's management. Our responsibility is to express opinions on these financial statements based on our audit. Wc did not audit the financial statements of the following City departments, which are reported as enterprise and pension trust funds: Departments of Airports, Harbor, Water and Power, Fire and Police Pension System, and Los Angeles City Employees' Retirement System, which represent the following percentages of assets and revenues/additions as of and for the fiscal year ended June 30, 2004:

Opinion Unit Assets Revenues/ Additions "-Business-type Activities 80% 90% Each Major Enterprise Fund - Airports, Harbors, Power, and Water 100% 100% Aggregate Remaining Fund lnfonnation 73% 65%

Those financial statements were audited by other auditors whose reports thereon have been furnished to us, mid our opinion, insofar as it relates to the amounts included for the City funds described above, is based solely on the reports of the other auditors.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and pcrfonn the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting.the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management. as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of the other auditors provide a reasonable basis for our opinions.

- 1 • The CPA Never Unde1e,mmat& 'Tne 'Ja!"e:" Jn our opinion, based on our audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the goverrnnental acti,~ties, the b1rniness·type activities, the discretely presented component unit, each major Jund, and the aggregate remaining fund information of the City, as of June 30, 2004, and the respective changes in financial position and cash flows, where applicable, thereof and the respective budgetary comparisons for the General Fund, Proposition A Local Transit Assistance Fund, Proposition C Anti-Gridlock Transit Improvement Fund, Special Gas Tax Street lmprovement Fund, and Community Development Fund, for the fiscal year then ended m conformity with accounting principles generally accepted in the United States of America.

As discussed in Note lE to the basic financial statements, the City adopted Governmental Accounting Standards Board (GASB) Statements No. 39, "Determining Whether Certain Organizations are Component Units," and No. 42, "Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries." In addition, the Power and Water Enterprise f

In accordance with Government Auditing Standard,, we have also issued our report dated February 7, 2005, on our consideration of the City's internal control over financial reporting and our tests of its compliance with certain provisions of Jaws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

The Management's Discussion and Analysis (MD&A) and Required Supplementary Information [Other Than MD&A) on pages 3 through 30 and 157 through 158, respectively, are not required parts of the basic financial statements but are supplementary information required by accounting principles generally accepted in the United States of America. We and the other auditors have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we and the other auditors did not audit the information and express no opinion on it.

Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the City's basic financial statements. The combining and individual fund financial statements and schedules listed in the accompanying table of contents are presented for purposes of additional analysis and arc not a required part of the basic financial statements of the City. Such information has been subjected to the auditing procedures applied by us and the other auditors in the audit of the basic financial statements and, in our opinion, based on our audit and the reports of the other auditors, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory and statistical sections listed in the accompanying table of contents have not been subjected to the auditing procedures applied by us in the audit of the basic financial statements and, accordingly, we express no opinion on them. ,~~(·r1~~

Los Angeles, California Fcbrnary 7, 2005

. 2. Management's Discussion and Analysis Management's Discussion and Analysis

This section of the Comprehensive Annual Financial Report of the City of Los Angeles (the City) presents a narrative overview and discussion of the City's financial activities for the fiscal year ended June 30, 2004. We encourage readers to consider the information presented here in conjunction with additional information that we have presented in the letter of transmittal of this report. We hope that the information and the discussions will provide readers with a clear picture of the City's overall financial condition.

FINANCIAL HIGHLIGHTS

• The assets of the City exceeded liabilities at the close of the 2003-2004 fiscal year by $14 billion. The net assets of $14 billion consisted of: $9.4 billion investment in capital assets, net of related debt; $3.3 billion (restricted net assets) represents resources that are subject to certain restrictions on how they may be used; $2.4 billion (unrestricted net assets) may be used to meet the City's obligations for its business-type activities; and $1.1 billion deficit of governmental activities.

• The City's financial activities during the fiscal year resulted in a net change in total net assets of $142.9 million. Governmental activities posted a decrease of $144.7 million while the business type activities increased by $287.6 million.

• As of June 30, 2004, the aggregate ending fund balances of the City's governmental funds increased to $3.3 billion from $3.1 billion as of June 30, 2003. Of the combined fund balances of $3.3 billion, 60.3% or $2 billion is available to meet the City's current and future needs (unreserved fund balances).

• At the end of the fiscal year, the unreserved fund balance of the General Fund (which includes the Reserve Fund and other accounts that have General Fund type activity) was $466.2 million, or 14.3% of total expenditures.

• The City's bonded debt and long-term notes payable at June 30, 2004 totaled $11.7 billion, a net increase of $390.3 million from the prior year's balance of $11.3 billion.

OVERVIEW OF THE FINANCIAL STATEMENTS

This annual report consists of management's discussion and analysis (MD&A), basic financial statements, including the accompanying notes to the basic financial statements, required supplementary information, and combining statements and schedules for the nonmajor governmental and the fiduciary funds. The basic financial statements comprise three components: 1) government wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements.

Government-wide Financial Statements are designed to provide readers with a broad overview of the City's finances and are made up of the following two statements: the Statement of Net Assets and the Statement of Activities. Both of these statements were prepared using accounting methods similar to those used by private-sector businesses, which is the economic resources measurement focus and the accrual basis of accounting.

The statement of net assets presents information on all of the City's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the City is improving or deteriorating.

- 3 - Management's Discussion and Analysis (Continued)

The statement of activities presents information showing how the City's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods, such as revenues pertaining to uncollected taxes and expenses pertaining to earned but unused compensated absences, and incurred but unpaid workers' compensation claims.

Both of these government-wide financial statements distinguish functions of the City that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or in part a portion of their costs through user fees and charges (business-type activities). The governmental activities of the City include general government, protection of persons and property, public works, health and sanitation (other than sewer services), transportation, cultural and recreational services, and community development. The business-type activities of the City include airports, harbor, power, water, sewer and convention center services.

The government-wide financial statements reflect not only the activities of the City itself (known as the primary government), but also those of the legally separate Community Redevelopment Agency (CRA) presented discretely. The Los Angeles Convention and Exhibition Center Authority, the Los Angeles Harbor Improvement Corporation, and the Municipal Improvement Corporation of Los Angeles, although legally separate, have been included as an integral part of the primary government because their sole purpose is to provide services entirely to or exclusively for the City, or the City Council is their governing body.

Fund Financial Statements are designed to report information about groupings of related accounts that are used to maintain control over resources that have been segregated for specific activities or objectives. The City, like other state and local governments, uses fund accounting to ensure and demonstrate finance-related legal compliance. All of the funds of the City can be divided into three categories: governmental funds, proprietary funds and fiduciary funds.

Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental funds financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in determining what financial resources are available in the near future to finance the City's programs.

The governmental funds financial statements are made up of the following: the balance sheet and the statement of revenues, expenditures and changes in fund balances. Both of these statements were prepared using the current financial resources measurement focus and the modified accrual basis of accounting.

The budgetary basis statement of revenues, expenditures and changes in fund balances is prepared on a modified cash basis of accounting that is different from generally accepted accounting principles. (Please see Note 38 of the Notes to the Basic Financial Statements beginning on page 79 for additional information on the basis difference.)

-4- Management's Discussion and Analysis (Continued)

Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government's near-term financing decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities.

The City maintains several individual governmental funds organized according to their type (general, special revenue, debt service, and capital projects funds). Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures, and changes in fund balances for the General Fund, Proposition A Local Transit Assistance Fund, Proposition C Anti-Gridlock Transit Improvement Fund, Recreation and Parks Fund, Special Gas Tax Street Improvement Fund, Community Development Fund, and the Municipal Improvement Corporation Special Revenue and Debt Service Funds, which are considered to be major funds. Data from the remaining governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements and schedules elsewhere in this report.

Non-GAAP budgetary basis statements of revenues, expenditures and changes in fund balances have been provided for the General Fund and four other budgeted major funds to demonstrate compliance with the annually appropriated budget. The other budgeted major funds are: Proposition A Local Transit Assistance, Proposition C Anti-Gridlock Transit Improvement, Special Gas Tax Street Improvement, and Community Development.

Proprietary funds are generally used to account for services for which the City charges customers - either outside customers, or other departments/funds of the City. The proprietary funds financial statements provide the same type of information as shown in the government-wide financial statements, only in more detail. The City maintains the following type of proprietary funds:

• Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The City uses enterprise funds to account for the airports, harbor, power, water, sewer, and convention center operations. All of the City's enterprise funds, except the convention center, are considered major funds.

Fiduciary funds are used to account for resources held for the benefit of parties outside the City. The City's pension trust and agency funds are reported under the fiduciary funds. Since the resources of these funds are not available to support the City's own programs, they are not reflected in the government-wide financial statements. The accounting used for fiduciary funds is much like that used for proprietary funds.

Notes to the Basic Financial Statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements.

Required Supplementary Information, other than MD&A, is presented concerning the City's progress in funding its obligation to provide pension benefits to City employees and other postemployment benefits of DWP employees. Also included in this section is the condition assessment for City bridges. ·

- 5 - Management's Discussion and Analysis (Continued)

The combining and individual fund statements and schedules referred to earlier provide information for nonmajor governmental funds and fiduciary funds and are presented immediately following the required supplementary information.

GOVERNMENT-WIDE FINANCIAL ANALYSIS

Analysis of Net Assets: As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the City, assets exceeded liabilities by $14 billion at the close of fiscal year 2003-04.

The following table is a condensed summary of the City's government-wide net assets:

CITY OF LOS ANGELES Condensed Statement of Net Assets (amounts expressed in thousands)

Governmental Business-type Activities Activities Total

FY 2004 FY 2003 FY 2004 FY 2003 FY 2004 FY 2003

Current and other assets $4,449,627 $4,292,985 $ 6,029,799 $ 6,044,489 $ 10,479,426 $ 10,337,474 Caeital assets 3,292,320 2,749,600 16,701,782 16,149,984 19,994,102 18,899,584

Total assets 7,741,947 7,042,585 22,731,581 22,194,473 30,473,528 29,237,058

Current and other liabilities 924,734 840,526 1,696,669 1,897,454 2,621,403 2,737,980

Lon9-term liabilities 5,208,581 4,587,057 8,659,748 8,602,900 13,868,329 13,189,957

Total liabilities 6,133,315 5,427,583 10,356,417 10,500,354 16,489,732 15,927,937 Net assets:

Invested in caeital assets,

net of related debt 1,111,107 730,518 8,317,620 7,996,013 9,428,727 8,726,531 Restricted 1,558,994 1,547,616 1,677,141 1,933,772 3,236,135 3,481,388

Unrestricted (1,061,469) (663, 132) 2,380,403 1,764,334 1,318,934 1, 101,202

Total net assets $1,608,632 $1,615,002 $12,375,164 $ 11,694,119 $ 13,983,796 $ 13,309, 121

Note: Certain items for FY 2003 were reclassified to conform with the FY 2004 presentation. Rounding off difference may occur in the discussion.

By far, the largest portion of the City's net assets ($9.4 billion or 67.4%) reflects its investment in capital assets (e.g., land, infrastructure, buildings, facilities and equipment) less any related outstanding debt used to acquire those assets. The City has reported only a small portion of its investment in governmental activities infrastructure assets, the majority of which relate to additions during the fiscal years 2002 through 2004. The City is currently gathering information on infrastructure assets acquired prior to fiscal year 2002 and will report them in the subsequent years financial statements but no later than June 30, 2006. The City uses these capital assets to provide services to its citizens; consequently, these assets are not available for future spending. Although the City's investment in capital assets is reported net of related debt, it should be noted that the resources to repay this debt must be provided from other sources since the capital assets themselves cannot be used to liquidate the debt.

- 6 - Management's Discussion and Analysis (Continued)

An additional portion of the City's net assets ($3.3 billion or 23.1 %) represents resources that are subject to various restrictions on how they may be used. The remaining balance of $1.3 billion (9.5%) is the net amount of the governmental activities deficit of $1.1 billion and $2.4 billion unrestricted net assets that may be used to meet the City's obligations for its business-type activities. At the end of fiscal year 2003-04, the City reported positive balances in all three categories of net assets for the City as a whole. While the business-type activities reported a positive balance of $2.4 billion in unrestricted net assets, the governmental activities reported a deficit of $1.1 billion. The deficit balance shown for the governmental activities unrestricted net assets reflected an increase of $398.3 million (60.1 %) from the prior year's deficit balance. The increase in the deficit balance was primarily due to the increase in workers' compensation liability and the recognition of pension liability (the difference between required and actual annual pension contribution). However, the deficit should not be considered, of itself, evidence of economic or financial difficulties. The deficit reflects the extent to which the City has deferred to future periods the financing of certain liabilities (i.e. claims and judgments, workers' compensation, compensated absences). While accounting is primarily concerned with when a liability is incurred, financing focuses on when a liability will be paid. The City, like many other governments, raises and budgets resources needed to liquidate a liability during the year in which the liability is to be liquidated rather than during the year in which the liability is incurred. Key changes in the statement of net assets are as follows: Capital assets increased by $1.1 billion or 5.8%. The net increase for governmental activities was $542.7 million while for the business-type activities the net increase was $551.8 million. Construction work in progress at the airports and harbor as well as ongoing improvements to sewer facilities and power and water utility plants caused the increase for business-type activities. For the governmental activities, the increase was due to construction work in progress for bond funded projects for library, zoo, animal shelter and improvements to various City facilities, and the recording of the historical cost of bridges that were constructed through fiscal year 2002. Current and other assets had a net increase of $142 million or 1.4%. Governmental activities increased by $156.6 million, while business-type activities decreased by $14.7 million. The increase for governmental activities was mainly due to cash provided by growth in tax revenues, transfers from business-type activities, and from other financing sources such as bond issuances. Restricted assets of the business-type activities decreased by $446.7 million, offset by a net increase of $432 million in other current assets. Included in the net increase of $432 million is the $227 .1 million other postemployment benefits (OPEB) assets for DWP's healthcare plan. The DWP's change in accounting for its OPEB following recently issued reporting standards allowed an adjustment to zero out the OPEB liability recognized in the prior year. Long-term liabilities for bonded debts and notes payable increased to $11.7 billion from $11.3 billion in the prior year. The total issuances for the year were $596 million for governmental activities and $2.5 billion for business-type activities, while principal retirements totaled $268. 7 million for governmental activities and $2.4 billion for business-type activities. The City's other long-term liabilities increased by $288.1 million, while current and other liabilities increased by $116.6 million. Included in the increase of $288.1 million for other long-term liabilities is a net increase of $283.2 million for claims and judgments due mainly to the increase in the actuarially determined workers' compensation liability.

-7- Management's Discussion and Analysis (Continued)

Restricted net assets decreased $245.2 million composed of $11.4 million increase for governmental activities and $256.6 million decrease for business type activities. Net assets restricted for debt service for the business-type activities decreased by $155.3 million due to debt restructuring. Furthermore, the business-type activities' restrictions for capital projects decreased by $138.2 million, while restrictions for special purposes increased $36.9 million. As explained in more detail in the subsequent pages, the City's unrestricted net assets were up $217.7 million. Governmental activities unrestricted net assets declined by $398.4 million, while business-type activities net assets were up $616.1 million.

Analysis of Activities: The following table presents condensed information showing how the City's net assets changed during the most recent fiscal year. As previously stated, all changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows.

CITY OF LOS ANGELES Condensed Statement of Activities (amounts expressed in thousands)

Governmental Business-type Activities Activities Tota!

FY 2004 FY 2003 FY 2004 FY 2003 FY 2004 FY 2003 Revenues Program Revenues Charges for Services $ 1,068,320 $ 1,050,535 $ 4,486,459 $ 4,300,225 $ 5,554,779 $ 5,350,760 Operating Grants and Contributions 677,536 744,SHI 18,931 20,422 696,467 765,241 Capital Grants and Contributions 56,657 91,041 92,640 87,656 149,297 176,697 General Revenues Property Taxes 884,665 787,048 884,665 787,048 Utility Users Taxes 572,018 521,148 572,018 521,148 Business Taxes 372,376 356,937 372,376 356,937 Other Taxes 417,714 335,779 417.714 335,779 Unrestricted Grants and Contributions 557,943 590,655 557,943 590,655 Unrestricted Investment Earnings 667 49,173 667 49,173 Other Revenues 34,790 33 435 2 270 34,811 35,705 Total Revenues 4 642 686 4,560 570 4 598 051" 4 410 573 9 240 737 8,971, 143 Expenses General Government 1,362, 157 1,055,535 1,362,157 1,055,535 Protection of Persons and Property 1,965,205 1,781,748 1,965,205 1,761,748 Public Works 224,080 320,230 224,080 320,230 Health and Sanitation 334,229 293,573 334,229 293,573 Transportation 253,560 294,116 253,560 294,116 Culturat and Recreational Services 338,860 320,123 338,880 320.123 Community Development 404,800 336,611 404,600 336,611 Interest on Long.term Debt 142,758 142,946 142,758 142,946 Airports 564.131 508,649 564,131 508,649 Harbor 272,273 291,451 272,273 291,451 Power 2, 178.837 2,088,098 2,178,837 2,068,098 Water 575,941 553,916 575,941 553,916 Sewer 444,973 477,630 444,973 477 .630 Convention Center 36 031 35 823 36 031 35,823 Total Expenses 5,025,649 4,524,882 4 072, 186 3,935,567 9,097,835 8,460,449 Increase (Decrease) in Net Assets Before Transfers and Other Items {382,963) 35,688 525,865 475,006 142,902 510,694 Transfers 238 237 211,936 (2381237l !211.936} Increase (Decrease) in Net Assets (144,726) 247,824 287,628 263,070 142,902 510,694 Net Assets Beginning of Year 1,615,002 1,367 ,378 11,694,119 11,431,049 13,309,121 12,798,427 Historical Cost of Infrastructure Assets· Bridges 138,356 138,356 Cumulative Effect of Accounting Change 393 417 393 417 Net Assets End of Year $ 1,608,632 $ 1,615,002 $12,375,164 $11694,119 $13,983,796 $13,309,121

Note: Certain Statement of Activities items for FY 2003 were reclassified to conform with the FY 2004 eresentation.

- 8 - Management's Discussion and Analysis (Continued)

Governmental Activities

For the year ended June 30, 2004, the total expenses for governmental activities of $5 billion were $500.8 million (11. 1%) more than the prior year. Total revenues grew by $82. 1 million or 1.8% from $4.6 billion in fiscal year 2003. Program revenues funded 35.9% of the total expenses of $5 billion; taxes, other general revenues, transfers from business-type activities, and available fund balance financed the balance of 64. 1%. Program revenues are resources obtained from parties outside of the City. They include: (a) amounts received from those who purchase, use or directly benefit from a program; (b) grants and contributions that are restricted to specific programs; and (c) investment earnings that are legally restricted for a specific program.

The following charts show a graphical comparison of governmental revenues by source.

FY 2004 FY 2003 Total Revenues: $4.64 Billion Total Revenues: $4.56 Billion

Unrestricted Unrestricted Other Charges for Other Charges for Grants and Grants and 0.8% Services 1.8% Services Contributions 23.0% 23.0% OtherTaxes 12.0% Other Taxes 9.0% 7.4% Operating Grants Operating Grants Business Tax and Contribufons Business Tax and Contributions 8.0% 7.8% 14.6% 16.3%

Utiity Users Tax Capital Grants Utility Users Tax Capital Grants and Conlr1butions 12.3% Property Tax 11.4% and Contributions 1.2% Property Tax 1!1.1% 17.3% 2.0%

Revenues from charges for services, property tax and operating grants and contributions are the three largest revenue sources for governmental activities for both fiscal years 2004 and 2003. Together they posted a net increase of $48. 1 million mainly due to the strength of the real estate market (property tax). Revenues from utility users and other taxes also reflected a notable increase due to the rising use of cellular phones and the sharp increase in the price of natural gas (utility users tax), and increase in revenues from documentary transfer taxes (other taxes). Unrestricted grants and contributions include allocated sales tax revenue and motor vehicle in-lieu taxes. Sales tax revenues increased by $14 million, an indication of a growth in the local economy. The decrease in motor vehicle in-lieu taxes of $42.8 reflected the negative impact of State actions to resolve its budget problems. Unrestricted investment earnings and miscellaneous revenues, shown in the above charts as other, decreased by $47.2 million. The lackluster financial market has caused significant drop in the investment pool rate of return. At June 30, 2004, the allocated unrealized fair market value decline of investments for governmental activities was $17.8 million compared to a fair market appreciation of $61.6 million at June 30, 2003.

- 9 - Management's Discussion and Analysis (Continued)

The following chart shows a graphical comparison of the City's governmental expenses by function.

FY 2004 Total Expenses: $5.03 Billion FY 2003 Total Expenses: $4.52 Billion

$1,965 $2,000

$1,500 ..c: ~ $1,000 :ii .5 $500

ED General Government • Protectjon of Persons and Property D Publlc Works

O Health and Sanitation • Transportation El Cultural and RecreaUonal Sertlces II Community Development CJ Interest 011 Debt

Overall expenses for governmental activities increased from $4.5 billion to $5 billion. While the expenses for other governmental functions were relatively even, expenses for general government, and protection of persons and property posted an aggregate increase of $510.1 million. Rising costs for workers' compensation and pensions plans were the primary reasons for such an increase.

Business-type Activities

The City has six business-type activities: airports, harbor, power, water, sewer and convention center services. The combined operating revenues from their customers and ratepayers of $4.2 billion were 15.2% ($557.6 million) more than the $3.7 billion combined operating costs.

Since the proprietary funds provide the same type of information found in the government-wide statements, a more detailed discussion of the activities of the City's business-type activities is found in the financial analysis of the City's funds.

FINANCIAL ANALYSIS OF THE CITY'S FUNDS

As noted earlier, the City uses fund accounting 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 resources that are available for spending. Such information is useful in assessing the City's financial requirements. In particular, the unreserved fund balance may serve as a useful measure for the City's net resources available for spending at the end of the fiscal year.

- 10 - Management's Discussion and Analysis (Continued)

At June 30, 2004, the City's governmental funds reported a combined fund balances of $3.3 billion. Of the $3.3 billion, the amount available for spending at the City's discretion (unreserved fund balance) totaled $2 billion. The remaining fund balances are reserved to indicate that they are not available for new spending because they have been committed: (1) to pay debt service - $316.6 million; (2) to reflect loans, inventories, and the amount due from other funds that are long-term in nature and thus do not represent available spendable resources - $470.8 million; (3) to liquidate contractual commitments of the period - $478.2 million; and (4) for a variety of other restricted purposes - $32.4 million. Revenues for governmental functions overall totaled $4.8 billion, while expenditures totaled $5.3 billion. Although total revenues were $544.8 million less than total expenditures, other financing sources bridged the gap. Other financing sources include proceeds from issuance of debt, loans from the U.S. Department of Housing and Urban Development, and transfers from enterprise funds. The General Fund is the general operating fund of the City and it includes transactions of the Reserve Fund and other accounts that have General Fund type activity for GAAP reporting purposes. At June 30, 2004, the unreserved fund balance of the General Fund was $466.2 million while total fund balance was $629.6 million. The unreserved fund balance includes $61 million designated for emergencies and $10 million for capital improvements and other budget adjustments. As a measure of the General Fund's liquidity, it may be useful to compare both unreserved fund balance and total fund balance to total fund expenditures. Unreserved fund balance represents 14.3% of the total General Fund expenditures of $3.25 billion, while total fund balance represents 19.4% of that same amount. The City's General Fund benefited from the strong real estate market that increased property tax revenues by $58 million (8.7%) and property transfer taxes, a component of other taxes, by $42.8 million (25.9%). The increased revenues from sales and business taxes were reflective of the strength of the local economy. The enforcement of the Mobile Sourcing Telecommunications Act and the sharp increase in the price of natural gas were the key factors for the $50.9 million (9.8%) increase in tax revenues from utility users. Transient occupancy, also a component of other taxes, posted a $13.2 million (12.5%) increase, an indication that travel and tourism are on the rebound. General Fund reimbursements for services to the Airports for increased security measures as well as reimbursements from the Sewer Fund for direct labor and related costs were the primary causes for the $24.3 million (11.8%) increase in revenues from services to enterprise funds. The general pool investment portfolio, where the General Fund claims a majority stake, was negatively affected by the declining rate of return that resulted from a weak investment environment. This caused the drop in revenues from investment earnings. At June 30, 2004, the General Fund reported an unrealized decline in investment fair value of $7 million compared to fair value appreciation of $25.3 million at June 30, 2003. Total General Fund expenditures for fiscal year 2004 increased $223.3 million or 7.4% from fiscal year 2003. Over three quarters of the $223.3 million were increases in expenditures for protection of persons and property ($145.4 million), and health and sanitation ($27.6 million). Increased police protection and the corresponding civilian support, additional funding for firefighter and paramedic training for 911-emergency calls, the implementation of a pilot program to use City employees to canvass neighborhoods for unlicensed animals and delinquent licenses, and increased City contributions to the fire and police pension system were the major factors for the increase in expenditures for protection of persons and property. Efforts to divert waste from City landfills; enhanced compliance with recycling, air-quality, and water quality laws; and compliance with regulatory requirements for storm drains and catch basins were the key reasons for the increase in expenditures for health and sanitation.

- 11 - Management's Discussion and Analysis (Continued)

Overall, General Fund revenues exceeded expenditures by $136.5 million, down $90.9 million (40%) from fiscal year 2003 figure. Transfers in from other funds amounted to $221.8 million, while transfers out amounted to $396.9 million. The Power and Water Enterprise Fund transfers accounted for majority of the total transfers in (89.2%). The bulk of the transfers out were for debt service and lease payments to the City's financing authority, and General Fund support for the operations of City libraries, zoo, parks and recreational facilities. The above factors, including a $13.7 million decrease in reserve for inventory, decreased the General Fund's fund balance by $52.3 million from the prior year's fund balance of $681.9 million.

The following table and diagrams present the summary of revenues and expenditures of the General Fund:

City of Los Angeles Summary of Revenues, Expenditures and Other Financing Sources and Uses- General Fund (amounts expressed in thousands)

Revenues and Other Financing Sources Expenditures and Other Financing Uses FY04 FY03 % Change FY04 FY03 % Change Revenues Expenditures Property Taxes $ 724,930 $ 666,977 8.69% General Government $ 948,037 $ 931,710 1.75% Sales Taxes 381,090 367,112 3.81% Protection of Persons Utility Users Taxes 572,018 521,148 9.76% and Property 1,701,989 1,556,554 9.34% Business Taxes 372,376 356,937 4.33% Public Works 177,208 170,546 3.91% Other Taxes 382,615 311,004 23.03% Health and Sanitation 213,846 186,286 14.79% Licenses and Permits 37,014 38,345 -3.47% Transportation 111,919 103,113 8.54% Intergovernmental 183,933 225,968 -18.60% Cultural and Recreational Charges for Services 363,138 360,372 0.77% Services 38,290 30,502 25.53% Services to Enterprise Community Funds 230,712 206,412 11.n% Development 32,980 26,488 24.51°/c Fines 106,240 116, 115 -8.50% Capital Outlay 26,261 22,013 19.30% Special Assessments 3,509 1,397 151.18% Debt Service- Cost Investment Earnings 1,101 49,424 -97.77% of Issuance 196 223 -12.11% Other 28,593 33 664 -15.06%

Total Revenues 3,387,269 3,254,875 4.07°/c Tot.al Expenditures 3,250,726 3,027,435 7.38% Other Financing Other Financing Sources Uses Transfers In 221,793 227,227 -2.39% Transfers Out 396,872 375 740 5.62% Tot.al Revenues and Total Expenditures and Other Financing Other Financing Sources $36091062 $3,482,102 3.65% Uses $3,647 598 $3.403 175 7.18%

Excess of Revenues Over Expenditures $ 136,543 $ 227 440 -39.97'% Net Change In Fund Balance $ ~38 536l $ 78 927 -148.82%

· 12 - Management's Discussion and Analysis (Continued)

General Fund Revenues by Source: $3.39 Billion Fiscal Year Ended June 30, 2004

Ill Property Taxes (21.40%) II Sales Taxes {11.25°/o) D Utility Users Taxes (16.89%) D Business Taxes (11.00%} II Other Taxes (11.30%) Ell Licenses and Permits (1.09%) II Intergovernmental (5.43%) l!!I Charges for Se iv ices (10.72°/o) II Services to Enterprise Funds (6.81%) •Fines (3.14%) CJ Special Assessments (0.10%) Ell Investment Earnings (0.03%) II Other (0.84%)

General Fund Revenues by Source: $3.25 Billion Fiscal Year Ended June 30, 2003

11.28°/o

mProperty Taxes (20.49%} • Sales Taxes (11.28%) D Utility Users Taxes (16.01%) CJ Business Taxes (10.97%) II Other Taxes (9.56%} l!D Licenses and Permits (1.18%) II Intergovernmental (6.94%) G Charges for Services (11.07%) II Services to Enterprise Funds (6 .34 %) II Fines (3.57%) D Special Assessments (0.04%) ID Investment Earnings (1.52%) 110ther{1.03°/o)

- 13 - Management's Discussion and Analysis (Continued)

General Fund Expenditures by Function: $3.25 Billion Fiscal Year Ended June 30, 2004

52.36%

l!D General Government (29.16%) • Protection of Persons and Property {52.36%} D Public Works (5.45%) DHeallh and Sanitation {6.58%) • Transportation {3.44 %) ml Cultural and Recreational Services (1.18%) • Community Development (1.01 %) Cll Capital Outlay (0.81%) • Debt Service- Cost of Issuance (0.01%)

General Fund Expenditures by Function: $3.03 Billion Fiscal Year Ended June 30, 2003

mGeneral Government (30.78%) • Protection of Persons and Property (51.41°k) D Public Works {5.63°k) O Health and Sanitation (6.15%) •Transportation (3.41%) ml Cultural and Recreational Services (1.01 %} •community Development (0.87'%) Cll Capital Outlay (0.73%) • Debt Service- Cost of Issuance (0.01 %)

- 14 - Management's Discussion and Analysis (Continued)

The Proposition A Local Transit Assistance Fund accounts for the City's 25% share of the additional one-half cent sales tax within the County of Los Angeles for public transit programs. At June 30, 2004, the Fund's unreserved fund balance was $59.8 million, while the total fund balance was $78.9 million, which reflected an increase of $2.9 million from the previous fiscal year. The increase was primarily due to the increase in sales tax allocation.

The Proposition C Anti-Gridlock Transit Improvement Fund accounts for the City's 20% share of the additional one-half cent sales tax within the County of Los Angeles to improve transit service and operations. At June 30, 2004, the Fund's unreserved fund balance was $28.1 million, while the total fund balance was $92.4 million, which reflected an increase of $27.7 million from the previous fiscal year. The increase was due to the increase in sales tax allocation and decrease in capital expenditures for the purchase of commuter transit buses.

The Recreation and Parks Fund accounts for the City's recreation programs and park services. At June 30, 2004, the Fund's unreserved fund balance was $79.2 million, while the total fund balance was $87.1 million. The Fund's total expenditures exceeded its revenues by $99.8 million. As discussed earlier, transfers from the General Fund and available fund balance financed the deficiency of revenues.

The Special Gas Tax Street Improvement Fund accounts for gasoline tax and grant revenues to be used for the City's local streets and road system. At June 30, 2004, the Fund's unreserved fund balance was $35.4 million, while the total fund balance was $39.7 million. Revenues and expenditures posted decreases of $12.6 million and $24 million, respectively. Grants from transportation and Federal aid urban programs declined in fiscal year 2004 to fund direct costs and related cost reimbursements for various local streets and road systems projects.

The Community Development Fund accounts for federal grant funds for community and economic development within the City. At June 30, 2004, the Fund's unreserved fund balance reflected a deficit of $43.1 million, while the total fund balance was $170.6 million. Grant revenues were down $24.2 million and expenditures were down $9.5 million. Block grant drawdowns decreased vis-a-vis the recipients and subrecipients operating cash requirements

The Municipal Improvement Corporation Funds account for the activities of the City's public financing entity, Municipal Improvement Corporation of Los Angeles (MICLA). Acquisition of certain properties and equipment, and construction of buildings and other improvements are financed through the issuance of M ICLA certificates of participation and revenue bonds. The Debt Service Fund's aggregate principal and interest requirements for the year were $141.1 million, while lease payments from the General Fund and certain Special Revenue Funds were $135 million. Investment earnings and available fund balance of the MICLA Debt Service Fund, and transfers of available funds from the MICLA Special Revenue Fund funded the difference of $6. 1 million.

Proprietary Funds

The City's proprietary funds provide the same type of information in the business-type activities column ofthe government-wide financial statements. More detailed information is presented in the following pages.

- 15 · Management's Discussion and Analysis (Continued)

The following table summarizes the operating results of the City's six enterprise funds:

Business-type Activities Change in Net Assets For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands) Other Convention Airports Harbor Power Water Sewer Center Total Operating Revenues $ 545,567 $ 349,661 $ 2,288,096 $ 596,301 $ 422,972 $ 19,753 $ 4,222,350 Operating Expenses (535,620) (207,238) (2,035,356) (518,137) (332,347) (36,016) (3,664,714) Operating Income (Loss) 9,947 142,423 252,740 78,164 90,625 (16,263) 557,636 Net Nonoperating Revenues (Expenses) 104,985 (59,942) (30,566) (52,601) (86,404) 117 (124,411) Capital Contributions 7,593 867 38,514 20,696 24,970 92.640 Transfers In 2,144 2,144 Transfers Out (2,518) (210,214) (27,649) (240,381) Change in Net Assets $ 122,525 $ 80,830 $ 50,474 $ 18,610 =lla::=29;;., 1;,;:9,;,.1 $ (14,002) $ 287,628

Business-type Activities Change in Net Assets For the Fiscal Year Ended June 30, 2003 (amounts expressed in thousands) Other- Convention Airports Harbor Power Water Sewer Center Total Operating Revenues $ 504,349 $ 343,654 $ 2,145,913 $ 552,977 I 413,110 $ 22,042 I 3,982,045 Operating Expenses (480,317) (183,411) (1,923,852) (505,821) (366,225) (35,823) (3,495,449) Operating Income (Loss) 24,032 160,243 222,061 47,156 46,885 (13,781) 486,596 Net Nonoperating Revenues (Expenses) 95,286 (92,591) 5,198 (29,179) (78,142) 182 (99,246) Capital Contributions 23,292 1,386 25,818 14,044 23,116 87,656 Transfers !n 1,000 1,000 Transfers Out (185,358) (27,523) (55) (212,936) Change in Net Assets $ 142,610 $ 69,038 $ 67,719 $ 4,498 $ (8,141) $ (12,654) $ 263,070

Note: Certain items for FY 2003 were reclassified to conform with the FY 2004 presentation.

Airports Airports Enterprise Fund accounts for the operation, maintenance and development of City airports namely: Los Angeles International Airport, Ontario International Airport, Van Nuys Airport, and Palmdale Regional Airport.

For the fiscal year ended June 30, 2004, the Airports operating revenues grew $41.2 million or 8.2%. Landing fees, which posted 13.8% growth from the prior year, contributed $18. 1 million to the overall increase. Other aviation revenue increased by $9.6 million or 16.9% primarily due to the increase in land rentals and the amounts received from Transportation Security Administration for security related expenses. Negotiated agreements with building lessees resulted in revenue growth of $9.6 million. The increase in passenger traffic at the airports resulted to the increase in concession revenues of $6.7 million primarily from auto parking and rent-a-car services. These increases, however, were offset by a $4, 1 million decrease in airports sales and services particularly on duty free sales because of increased airport security restrictions.

- 16 - Management's Discussion and Analysis (Continued)

Operating and administrative expenses before depreciation increased $40.7 million or 9.7%. Of the $40.7 million, $28.2 million was for increased salaries and benefits due to increases in regular salaries, health subsidy, and retirement contributions. Contractual services expense increased $10.2 million mainly due to increased costs associated with the post-September 11th security measures. Depreciation charges increased by $14.6 million.

Net nonoperating revenues posted a $9.7 million increase or 10.2%. Key elements of this change are $42.4 million increase in passenger facilities charges (PFC) and $32.6 million decrease in investment income. The rebound in airport passenger traffic levels increased PFC collections. At June 30, 2004, the Airports' unrealized fair market value decline in investments was $18.2 million compared to a fair value appreciation of $8.1 million at June 30, 2003.

As a result of the above financial changes, including capital contributions of $7.6 million, the Airports Enterprise Fund's change in net assets for fiscal year 2004 amounted to $122.5 million, down $20.1 million (14.1 %) from fiscal year 2003.

Harbor

The Harbor Enterprise Fund accounts for the operations of the Port of Los Angeles, including operations of a pilotage service, lease of land and facilities, and production of oil in the Harbor District.

For the fiscal year ended June 30, 2004, operating revenues of the Port of Los Angeles (the Port) rose to $349.7 million, reflecting a 1.7% increase from prior year revenues of $343.7 million principally attributable to cargo volume growth. A record 7.4 million twenty-foot equivalent units (TEUs) in container volume moved through the Port facilities during fiscal year 2004, a 9.7% increase from the 6.7 million TEUs recorded in fiscal year 2003. Revenue tons billed grew 9.8% over the comparative period to 162.1 million tons.

The increased cargo volumes were reflective of the market share gained from other U.S. West Coast ports as well as the continuing increase of imports from China. On-going development of improved intermodal facilities, the addition of Pier 400 container terminal and increasing strength of shipping alliances based in the Port all contributed to the growth in market share. Shipping lines also continued to place larger vessels in service.

Operating expenses before depreciation rose $15.3 million to $139.3 million, a 12.3% increase from the prior fiscal year. Categories of expense reflecting more significant increases include salaries and benefits, and outside services. Offsetting these increases were reductions in other operating expense attributable to reduced provisions for bad debt. Changes in other categories were less significant. Salaries and benefits expense rose $8. 7 million due to scheduled pay increases, expansion of the Port's workforce, and a one-time retro-pay adjustment to certain union members. The $10.1 million increase in outside services was due to increased facility maintenance costs, professional services for security projects, and environmental assessment expenses.

Net nonoperating expenses for fiscal year 2004 decreased $32.6 million primarily due to the decrease in the provision for litigation, claims and settlement as a result of a major lawsuit settled in fiscal year 2003.

- 17 - Management's Discussion and Analysis (Continued)

As of June 30, 2004, the change in net assets for the Harbor Enterprise Fund increased 17.1% to $80.8 million from $69 million in fiscal year 2003.

Power and Water

The Power and Water Enterprise Funds account for the operations of the Department of Water and Power in supplying the City and its inhabitants with water and electric power by constructing, operating, and maintaining facilities located throughout the City and in Inyo and Mono counties.

Power

During fiscal year 2004, operating revenues increased by $142.2 million (6.6%) from fiscal year 2003 levels due to an increase in consumption. The increased consumption, especially during the months of April and May 2004, was due to warmer than expected weather. Revenues from residential customers, which represent the largest customer class, grew $74.3 million (11.5%); while revenues from commercial and industrial customers, which consume the most electricity, grew $57.4 million (4.1%).

Fiscal year 2004 operating expenses were $111.5 million higher as compared to the prior year. Fuel for generation expense had the largest increase of $160.2 million due to increased natural gas costs. These costs were offset by lower purchased power costs and reductions in the annual healthcare costs caused by the adoption of GASB Statement 45. Depreciation expense decreased slightly during fiscal year 2004 as compared to fiscal year 2003, mainly due to the implementation of the 2003 Depreciation Study. The depreciation study was adopted in the fourth quarter of 2004 and resulted in an $11 million reduction to depreciation expense. The decrease was offset by additional depreciation in the current year as a result of additions to utility plant.

The major nonoperating activities of the Power Fund for fiscal year 2004 included the transfer of $210.2 million to the City's General Fund; interest income earned on investments of $91.8 million; and $133.9 million in debt expenses. Furthermore, the Power Fund recognized a $5.6 million extraordinary loss during fiscal year 2004 related to the refunding of portions of certain bonds. Investment income declined following the general trend by $40.6 million. Interest on debt declined due to lower rates on variable rate debt and the effects of the debt restructuring program that lowered average interest rates on fixed rate debt.

As a result of the above financial changes, including capital contributions of $38.5 million, the Power Enterprise Fund's increase in net assets for fiscal year 2004 amounted to $50.5 million, down $17.2 million (25.5%) from fiscal year 2003.

Water

During fiscal year 2004, operating revenues increased by $43.3 million (7.8%) from fiscal year 2003 levels due to increases in consumption, recoverable purchased water costs, and other operating revenues.

- 18 - Management's Discussion and Analysis (Continued)

The operating expenses for fiscal year 2004 were $12.3 million higher as compared to the prior year. This increase was mostly due to a $17 million increase in maintenance and other operating expenses and an increase of $1.5 million for depreciation expenses. These increase were offset by a $6.2 million decrease in purchase water costs. Maintenance and other operating expenses increased primarily as a result of continued increase in environmental costs associated with ongoing operations and maintenance phases of Owens Valley remediation. The Fund purchased 1,452 million fewer gallons of water during fiscal year 2004.

The major nonoperating activities of the Water Fund for fiscal year 2004 include the transfer of $27.6 million to the City's General Fund; $49.8 million in debt expenses, net of allowance for funds used during construction; and earned contributions in aid of construction of $20.7 million. Interest income decreased $10.3 million due to a reduction in cash available for investment. A grant of $6 million received from the Metropolitan Water District was the key factor for the increase in capital contributions.

As a result of the above financial changes, the Water Enterprise Fund's increase in net assets for fiscal year 2004 amounted to $18.6 million, up $14.1 million (313.7%) from fiscal year 2003.

The Sewer Enterprise Fund accounts for the construction, operations and maintenance of the City's wastewater collection and treatment system.

The total operating revenues of the Sewer Fund for fiscal year 2004 amounted to $423 million, a 2.4% or $9.9 million increase from the prior year. This was due to the combination of a $13.7 million increase in sewer service charges as a result of a 3% rate increase effective October 2003, a $2.8 million increase in sewerage facilities charges because of increased property development, and a $7.2 million decrease in other operating revenues because of higher reimbursements in the prior year from other City funds.

Total operating expenses amounted to $332.3 million, a 9.3% or $33.9 million decrease from the prior year's $366.2 million. This was due primarily to the reduction in depreciation expense of $38.6 million as a result of certain capital assets that became fully depreciated and an adjustment to the prior year's depreciation charges. Operation and maintenance expenses increased by $4. 7 million (2.4%) from the previous year's $197.5 million.

The increase in net nonoperating expenses of $8.3 million, or 10.6%, was mainly due to the following: $7.2 million decrease in investment income which reflected the general trend; $8.3 million increase in interest expense as a result of refunding significant portions of revenue bonds and commercial paper notes; $4.1 million decrease in loss on asset abandonment; and $3.4 million decrease in earthquake related repair costs.

As a result of the above financial changes, including capital contributions of $25 million, the Sewer Enterprise Fund's change in net assets for fiscal year 2004 amounted to $29.2 million, a $37.3 million improvement from the prior year's decrease of $8.1 million.

- 19 - Management's Discussion and Analysis (Continued)

The following charts show graphical comparison of the enterprise funds/business-type activities operating revenues.

FY 2004 FY 2003 Operating Revenues: $4.22 Billion Operating Revenues: $3.98 Billion

Convention ConvenUon Sewer Center Airports Sewer Center Airports 10.02% 0.47% 12.92% 10.37% 0.55% 12.67% Harbor Harbor Water a.28% Water 8.63% 14.12% 13.89%

Power Power 54.19% 53.89%

The following chart shows graphical comparison of the enterprise funds/business-type activities operating expenses.

FY 2004 Operating Expenses: $3.66 Billion FY 2003: Operating Expenses: $3.50 Billion

$2,500 .. $2,000 ,:: $1,500 ~ iii! $1,000 .E $500 $36 $0

II Airports II Harbor Cl Power l!llWater II Sewer •convenHon Center

- 20 - Management's Discussion and Analysis (Continued)

GENERAL FUND BUDGETARY HIGHLIGHTS

For purposes of the budget, the General Fund is a legal entity that is separate and distinct from the Reserve Fund and other accounts that are classified by the City as having General Fund type activity for GAAP reporting purposes. At fiscal year end, the unreserved and undesignated fund balance in the General Fund is transferred to the Reserve Fund and reported as "Reversion to Reserve Fund. "

The General Fund ended the year spending less than budgeted while actual revenues ended higher than anticipated. The following table summarizes the operating results on a budgetary basis of the City's General Fund:

City of Los Angeles Budgetary Operating Results· General Fund Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Variance With Budgeted Amounts Actual Final Budget Original Final Amounts Positive (Negative) Revenues and Other Financing Sources Taxes $ 2.293.145 $ 2.293.145 $ 2.413,498 $ 120.353 Licenses, Permits, Fees and Fines 559.844 558.173 569.888 11.715 Intergovernmental 274.298 274.298 219.828 (54,470) Charges for Services 3.663 3.663 2.813 (850) Interest 20.500 20,500 26.284 5.784 Other 10.199 10.199 10.549 350 Total Revenues 3.161,649 3,159,978 3,242.860 82.882 Power and Water Transfers 181.300 181.300 177.863 (3.437) ReseNe Fund Transfers 149,577 149.577 149.577 Transfers from Other Funds 523.733 760.385 685,226 (75.159) Loans from Other Funds 2.851 18.017 15.166 Total Revenues and Other Financing Sources 4.016.259 4.254.091 4.273.543 19.452 Expenditures and Other Financing Uses General Government 1.220.055 1.236,437 1.171.904 64.533 Protection of Persons and Property 1.498,580 1.570.785 1.552.316 18,469 Public Works 267.963 309.225 288.778 20.447 Health and Sanitation 214.364 224.985 216.509 8.476 Transportation 115.615 129,323 126.043 3.280 Cultural and Recreational Services 66.405 67.733 65.966 1.767 Community Development 84.555 108.687 101,841 6.646 Pension and Retirement Contributions 27.214 27,734 27.134 600 Capital Outlay 19.400 36,767 20.986 15,781 Tota! Expenditures 3,514.151 3.711.676 3.571.477 140.199 Transfers to Other Funds 502,108 542,947 537.679 5.268 Payment of Loans to other Funds 14,025 (14.025) Total Expenditures and Other Financing Uses 4.016.259 4.254.623 4,123.181 131.442 Excess {Deficiency) of Revenues and Other Financing Sources Over Expenditures and Other Financing Uses (532) 150.362 150.894 Carryforward and Fund Balance Appropriations 532 (532) Encumbrances lapsed 22.246 22,246 Reversion to Reserve Fund $ $ $ 172.608 $ 172,608

- 21 - Management's Discussion and Analysis (Continued)

Revenue receipts from all tax categories posted favorable results when compared against the budgeted amounts. In total, tax revenues were $120.4 million (5.2%) above budget. Of the $120.4 million, property tax and documentary transfer tax contributed $16.3 million and $32.2 million, respectively. These two tax categories benefited from a relatively robust real estate market. In addition, utility users tax brought in a positive variance of $56.1 million (10.8%) as a result of the following key reasons: the surge in cellular telephone users' tax receipts primarily due to the Mobile Sourcing Telecommunications Act; the settlement of a claim for back taxes from a major telecommunications provider; and the sharp increase in the price of natural gas. Actions by the State to address its budget crisis have negatively impacted the City's intergovernmental receipts. Revenues from motor vehicle license fees were $57.7 million (24.9%) below budget. The remainder of the revenue sources recorded a total net positive variance of $20.2 million. Total expenditures and budgetary transfers from other funds to support departmental operations were less than the budgeted amounts due to budget reduction measures exercised by the Mayor, City Council and departments that included a hiring freeze. Overall, fiscal prudence and better than expected revenue receipts ended fiscal year 2003-04 with a $172.6 million reversion to the reserve fund that was $18.8 million (12.2%) more that the previous fiscal year's reversion of $153.8 million.

LONG-TERM DEBT

At June 30, 2004, the City's bonded indebtedness and long-term notes payable totaled $11.7 billion as follows:

City of Los Angeles Summary of Bonded Debts and Long-Term Notes Payable {amounts expressed in thousands)

Governmental Activities Business-!lee Activities Total FY 2004 FY 2003 FY 2004 FY 2003 FY 2004 FY 2003 Debt backed by the City General Obligation Bonds $ 1,158,862 $ 984,848 $ $ $ 1, 158,862 $ 984,848 Judgment Obligation Bonds 34,795 41,450 34,795 41,450 Special Assessment Debt 35,650 38,380 35,650 38,380 Debt Secured by Specified Revenue Sources Certificates of Participation and Lease Revenue Bonds 1,532,436 1,549,456 1,532.436 1,549,456 Revenue Bonds and Notes Payable 414,689 156,627 8,389,107 8,326,035 8,803,796 8,582,662 Loans Payable to U.S. Department of Housing and Urban Development 126,079 104,501 126,079 104,501 Total $ 3,302,511 $ 2,975,262 $ 8,389,107 $ 8,326,035 $ 11,691,618 $ 11,301,297

Sig nificant new issuances during the year are the following:

• $233.4 million general obligation bonds for fire/paramedic, emergency helicopter, animal shelter, and 9-1-1 police/fire safety equipment and facilities.

• $117.5 million MICLA certificates of participation and commercial paper notes for the acquisition of certain equipment and improvements to certain City facilities.

• $117.4 million sanitation equipment charge revenue bonds for the acquisition and construction of certain capital equipment and facilities for the collection and disposal of City refuse.

- 22 - Management's Discussion and Analysis (Continued)

• $956 million Power Enterprise Fund revenue bonds to refund portions of certain prior issues.

• $164 million Water Enterprise Fund revenue bonds to refund portions of a prior issue.

• $495 million Wastewater System revenue bonds to refund certain outstanding bonds and commercial paper notes.

A more detailed information on the City's bonds and other long-term debt can be found in Note 41 of the Notes to the Basic Financial Statements beginning on page 101.

There were no changes in the ratings of the City's outstanding bonds

In August 1998, the City adopted a formal Debt Management Policy that established guidelines for the structure and management of the City's governmental activities debt obligations. These guidelines include target and ceiling levels for certain debt ratios to be used for financial planning purposes. The policy places certain restrictions on the types of items that can be financed, limiting financing only to those items with a useful life of six years or more. In accordance with this policy, the ratio of annual debt payments cannot exceed 15% of General Fund revenues for voter-approved and non-voter approved debt overall, and cannot exceed 6% of General Fund revenues for non-voter approved debt alone. The 6% ceiling for non-voter approved debt may be exceeded, only if there is a guaranteed new revenue stream for the debt payments and the additional debt will not cause the ratio to exceed 7.5%, or there is no guaranteed revenue stream but the 6% ceiling shall not be exceeded for more than one year.

In addition, the policy specifies that the City's debt shall not exceed certain other ratios as defined by Moody's Investors Service, which are listed in the City Debt Policy Statement section of the City Budget.

In April 2003, the City adopted a Variable Rate Debt Policy and Interest Rate Risk Mitigation Policy. The Variable Rate Debt sets forth the purposes and the criteria for using variable rate debt, and the factors to be considered in determining the appropriate amount of the variable rate debt. It also requires diversification of remarketing agents and counterparties. Budgeting, monitoring and reporting requirements are also included in the policy.

The Interest Rate Risk Mitigation Policy was developed to provide guidelines for the use of interest rate mitigation products such as swaps, caps, floors, collars and options in connection with the incurrence of debt. While the use of these financing products can reduce the City's exposures to risks inherent to certain types of debts, careful monitoring is required to preserve the City's credit strength and budget flexibility.

As of June 30, 2004, the City is in compliance with the aforementioned policies.

In May 2003, in order to protect against potential rising of interest rates, the City entered into two separate pay-fixed, receive-variable interest rate swap agreements on the $235.5 million Convention Center variable rate lease revenue refunding bonds. The costs associated with the swaps are less than what the City would have paid to issue fixed rate debt. Terms, fair values, and credit risks associated with the swap agreements are discussed in Note 4K of the Notes to the Basic Financial Statements beginning on page 113.

- 23 - Management's Discussion and Analysis (Continued)

The City's statement of legal debt margin is found on page 295. The revenue bond coverage for the City's business-type activities is found on page 299.

CAPITAL ASSETS

The City's investment in capital assets for its governmental and business-type activities as of June 30, 2004, amounted to $20 billion (net of accumulated depreciation). This investment in capital assets, which accounts for 65.6% of the City's total assets, includes land, buildings, facilities, equipment, infrastructure, and construction in progress. The following table presents the City's capital assets (in thousands):

City of Los Angeles Sunvnary of capital Assets Used in Operations (amounts expressed in Uiousands)

Governmental Activities Business-~~ Activities Total 2C04 2003 2004 2003 2C04 2003 Not Depreciated land $ 523,603 $ 385,370 $ 1,890,555 $ 1,749,509 $ 2,414,158 $ 2, 134,879 Infrastructure 160,186 57,377 160,186 57,377 Construction in Progress 726,758 540,410 2,644,279 2,783,034 3,371,037 3,323,444 1,410,547 983,157 4,534,834 4,532,543 5,945,381 5,515,700

Depreciated, Net Buildings, Facilities and Equipment 1,707,673 1,652,576 12, 154,395 11,604,010 13,862,068 13,256,586 Infrastructure 174,100 113,867 174, 100 113,867 1,881,m 1,766,443 12,154,395 11,604,010 14,036,168 13,370,453

Nudear Fuel at Amortized Cost 12,553 13,431 12,553 13,431

Total $3,292,320 $2,749,600 $16,701,782 $16,149,984 $19,994,102 $ 18,899,584

The City has elected to use the modified reporting method for the following four infrastructure systems: bridges, stormwater (other than sewer), streets, and traffic signals. However, the capital assets provisions of GASB Statement No. 34 was fully implemented just on the bridges network, while only the prospective provisions were implemented for the three remaining infrastructure categories whose net costs reflected in the above schedule pertain to additions during fiscal years 2002 through 2004. Beginning fiscal year 2004 through such time that all modified approach reporting requirements are met, the depreciation method will be used for stormwater, streets and traffic signals networks. Consequently, capitalized costs for these three systems were depreciated. The City will continue to implement the retroactive provisions as information becomes available. The retroactive reporting is subject to an extended implementation period and final implementation is required for the City by fiscal year ending June 30, 2006.

As of June 30, 2004, the condition of City bridges is compliant with the City's policy. Seventy three percent of all City bridges are rated B or better and no bridge is rated less than "D." Of the planned costs for preservation and maintenance of $12.5 million, $10.6 million was actually spent. The required supplementary information for bridges is presented on page 158.

- 24 - Management's Discussion and Analysis (Continued)

Major capital assets activities during the year are as follows:

Governmental Activities

• Completed building constructions and various improvements amounted to $133.2 million that included $82.8 million for various recreation and parks facilities.

• Charges for various projects under construction totaled $320.1 million. These projects are for police, library, recreational, zoo, storm water, streets, traffic and various other City facilities and infrastructure projects.

• Capitalized expenses for infrastructure assets totaled $35 million. The historical cost of City bridges constructed through fiscal year 2002 of $138.4 million was determined and recorded during the year.

• Acquisition for machinery and equipment that were capitalized totaled $69.1 million, while those retired, salvaged, deleted or sold amounted to $49.8 million.

Business-type Activities

• The Airports Enterprise Fund capitalized $104 million in fiscal year 2004 that included security capital projects of $12.3 million, the Flyaway Bus Terminal of $19.1 million, and noise mitigation capital projects of $13.5 million.

• The Harbor Enterprise Fund capitalized $125.3 million in fiscal year 2004. Majority of the capitalized expenses were for terminal development, particularly for Pier 400 and Berth 100. Other significant increase in capital spending was related to dredging projects. Although capital assets posted an increase over the prior year, capital spending fell short of original plans due to projects that have been put on hold pending completion of additional environmental impact assessments.

• The Power Enterprise Fund capitalized $642 million of additions to utility plant in service. Of this $642 million, $377.8 million related to generation plant assets. The majority of these additions were incurred as part of the Fund's Integrated Resource Plan. Furthermore, the Fund had capital improvements to its transmission and distribution utility plant assets to maintain and support normal load growth of the distribution and transmission systems. Construction work in progress decreased by $110.6 million primarily as a result of ongoing local generation projects under the Integrated Resource Plan being placed in commercial service.

• The Water Enterprise Fund capitalized $206.5 million additions to utility plant in service. Of the $206.5 million, $140.8 million related to distribution utility plant assets and $21 million was added to purification assets. Additions to distribution utility plant assets comprised the completion of various major reservoir and trunk line projects. Additions to purification assets were incurred for normal capital activities to maintain and support general plant, pumping, and purification systems.

• The Sewer Enterprise Fund's recorded a net increase in capital assets, before accumulated depreciation, of $247 million. The largest ongoing project of the Sewer Fund is the $280 million North Outfall Sewer - East Central Interceptor Sewer project, and the $180 million North East Interceptor Sewer project. These projects, as well as several others, are driven by regulatory requirements.

- 25 - Management's Discussion and Analysis (Continued)

The Power and Water Enterprise Funds have budgeted approximately $643 million and $427 million, respectively, for capital expenditures for fiscal year 2005. Other significant commitments that include construction contracts are discussed in Note 58 of the Notes to the Basic Financial Statements on page 139.

The City's policy affecting capital assets can be found in Note1 E of the Notes to the Basic Financial Statements on pages 66-68. Additional information can be found in Note 4F on pages 95-97.

ECONOMIC FACTORS AFFECTING NEXT YEAR'S BUDGET

The City's 2004-05 adopted budget is $5.4 billion. Of this amount, $3.1 billion, or 56.6%, is appropriated for departmental expenditures. The remainder of $2.3 billion is appropriated for non departmental expenditures. Estimated general receipts of $3.7 billion and special receipts of $1.4 billion, and available balances of $0.3 billion fund the budget.

The budgeted General Fund receipts of $3.7 billion were $95 million or a 2.7% increase from fiscal year 2003-04 actual receipts. Economy-sensitive revenues (property, utility users, sales, business, transient occupancy, documentary transfer, and motor vehicle in-lieu taxes) accounted for $78.1 million of the increase, while transfers from the Reserve Fund reflected a $26. 7 million decrease. Budgeted receipts from other categories, including transfers from Power and Water of $248.8 million (increase of $70.9 million), accounted a net increase of $43.6 million.

The General Fund's budgeted property tax receipts of $711.2 million is net of the estimated $38.8 million property tax shift to the State's Educational Revenue Augmentation Fund (ERAF). The anticipated modest increase in property tax before the ERAF shift is in line with the County Assessor's growth projections for the next fiscal year. Because of the anticipated leveling of real estate values, documentary transfer taxes are projected to decline 13.3%. The $62 million (35.6%) increase in the estimated motor vehicle license fees over actual receipts in fiscal year 2003-04 assumes that the State will honor its commitment not to impinge on this traditional local revenue. Included in the Power Revenue transfer of $219.4 million is a one-time supplemental transfer of $60 million. Since the revenue change is directly tied to the local economy, a review of recent economic performance and forecasts by leading economists provides important insight into the region's economic outlook and of the City's revenue base.

• Employment in Los Angeles County grew by nearly 2% annually between 1997 and 2000 but it declined by an average of 0.5% annually between 2001 and 2003. The Los Angeles County Economic Development Corporation (LAEDC) projects 0.8% growth in 2004 and 1.6% growth in 2005. The UCLA Andersen forecast (UCLA) for 2004 is about the same.

• The local unemployment rate provides another perspective. This rate dropped to the 5.5% range during calendar years 2000 and 2001 - the lowest level in a decade. The unemployment rate then climbed to nearly 7% in 2002 and remained at that level in 2003. LAEDC expects it to decline only slightly in 2004 to 6.3% and slide to 6% in 2005. Although this is still relatively high, it is below the average 8.9% rate experienced during the prolonged recession from 1991 through 1996.

• Another good indicator of the local economy is the change in personal income. Los Angeles County personal income grew by 7% in 2000 after averaging 6% growth during the 1995 to 2000 period. The rate of growth slowed to 5% in 2001 and 2.5% in 2002 but it grew by 4% in 2003. LAEDC forecasts growth of more than 5% range in 2004 and 2005.

- 26 - Management's Discussion and Analysis (Continued)

• LAEDC anticipates that inflation, as measured by the consumer price index, will be below 3% range during fiscal year 2004-05, about the same level experienced since 2002. • Since employment is the primary determining factor of income and income determines the ability of consumers to make purchases, a major constraint on the potential growth in local taxable sales is the ability of the local economy to add jobs. Reflecting the slow recovery, most of the gain in income is driven by inflation. City sales tax revenue grew by 8.3% in fiscal year 2000 and 7.7% in fiscal year 2001 as a result of strong local job growth, but the recession caused the fiscal year 2002 decline of 1.7%. The sales tax budget estimate of $394 million is slightly above the 3.9% gain in fiscal year 2004 and is consistent with the consensus of local economic experts of 4.6% growth.

• Property tax is still the City's largest General Fund revenue source. It accounted for 20.1 % of the total fiscal year 2004 receipts. The amount of property tax received is determined by complex Proposition 13 related factors including inflation, the real estate market, new construction activity, assessment appeals and restorations to the tax rolls. Assessed values in the City have been growing between 6% and 7% in the last four years and the County Assessor is projecting a 7% growth in secured values in 2004-05 budget year. The documentary transfer tax, which is based on the dollar value of transactions instead of assessed value, increased 30. 7% in fiscal year 2004. While a slow down is anticipated, properties tax revenue in fiscal year 2005 is expected to increase 6.6% from fiscal year 2004. Subsequent to the adoption of the City budget, actions by the State shifted (and replaced) certain General Fund revenues to the State. The net impact appears to be offsetting in the total General Fund budget as shown below (amounts expressed in thousands):

Effect on Total Property Sales Motor Vehicle Bud~et Tax Tax License Fee Original budgeted General Fund receipts $3,671,107 $ 711,158 $ 394,000 $ 236,200 Add (deduct) impact of revenue shifts in State budget on City General Fund budget: Revised property tax shift to State ERAF (48,327) (48,327) Original estimated property tax shift to State ERAF 38,800 38,800 Sales tax shift to the State (80,661) (80,661) Sales tax shift replaced by property tax 90,695 90,695 Motor vehicle license fees shift to State (208,932) (208,932) Motor vehicle license fees shift replaced by property tax 208,932 208,932 Miscellaneous minor budget revisions 186 186 Adjusted General Fund receipts $3,671,800 $1,001,258 $ 313,339 $ 27,454

In March 2004, the voters approved the State's Economic Recovery Bond (ERB) measure. Repayment of the bond will come from increasing the State's share of the sales tax by 0.25% and reducing local government's share by the same amount. The sales tax reduction will be offset by increased local property tax revenue allocation by the same amount. The increase in property tax allocation will come from education's share of property tax that will be back-filled by the Educational Revenue Augmentation Fund (ERAF). This scheme is familiarly known as "triple flip." Since the sales tax and property tax cover different periods, the triple flip appears to provide cash flow gain to the City.

- 27 - Management's Discussion and Analysis (Continued)

Vehicle license fees (VLF) are traditional local revenue, and, in the past, were collected as unsecured property tax. In the 1930s the State began collecting the VLF and distributing receipts to local governments in lieu of property taxes. The total amount distributed to local governments consists of VLF paid by the public (about 35% of total) and the amount paid by the State general fund (about 65% of total) through an offset.

Under the prior Governor, the State Department of Finance determined that insufficient monies were available to be transferred from the State to pay the offset. This resulted in the suspension of the offset as of October 1, 2003. The current Governor rescinded this action in November 2003, and $2. 7 billion was made available for the offset in fiscal year 2003-04. However, approximately $1.3 billion in offset due in fiscal year 2003-04 was deferred through a gap loan and is to be allocated to local governments in fiscal year 2006-07. This gap loan and a one-time change to the VLF allocation formula reduced the City's receipts in fiscal year 2003-04 by $49.4 million compared to the prior year's receipts.

Other matters that are affecting and will affect the City's current and future operations are as follows:

• Expenditures for workers' compensation claims are continuing to escalate. The fiscal year 2004-05 appropriation is of $155 million is $13 million more that the prior fiscal year.

• Contract negotiations for unions representing police officers and firefighters have been approved and both groups will receive salary increases of approximately $47 million in fiscal year 2004-05. Most civilian units are yet to enter contract negotiations but each one percent granted to all civilian employees is worth approximately $12 million.

• City contributions to the civilian retirement, and fire and police pension systems continue to increase. It increased by $80.3 million in fiscal year 2003-04 and will increase by approximately $102.6 million in fiscal year 2004-05. The increased contributions are attributable to prior losses in investment earnings and decline in value of pension plan assets. The City realized a net pension obligation (NPO) of $58.7 million, of which the General Fund's share is approximately $52.5 million. Amortization of the NPO will be added to the increased pension contributions.

• In the past two years and including the current fiscal year, supplemental transfers from the Power Fund to support General Fund operations amounted to $25 million, $29 million, and $60 million, respectively. Total transfers in the current fiscal year will amount to $219.4 million. The Power Fund may not be able to continue supplemental transfers in future years.

• The City Administrative Officer prepares a five-year budget forecast that is submitted to the Mayor and City Council in various reports during the year. The forecast is subject to change as revenue and expenditure data are updated throughout the year. The most recent report projects deficits for each of the next five fiscal years with a $224.4 million short fall for 2005- 06. The City has dealt with shortfalls in prior years by reducing appropriations, increasing revenues, and controlling expenditures. In the 2004-05 fiscal year, the Mayor and City Council are balancing shortages in some accounts with surplus in others without relying on additional revenue, even though revenue growth is above the budget estimate. Growth in the current year will be used to help balance next year's budget.

- 28 - Management's Discussion and Analysis (Continued)

COMMUNITY REDEVELOPMENT AGENCY OF THE CITY OF LOS ANGELES

The Community Redevelopment Agency is a component unit that is legally separate from the City. It is discretely presented because its governing board is not substantially the same as the City's governing body and it provides services directly to the citizenry rather than to the City government.

At June 30, 2004, the CRA's total liabilities exceeded its total assets by $206.1 million. Although the CRA's net assets reflected a deficit, it was an improvement over the previous year's deficit of $224.8 million. The deficit is primarily due to the issuance of debt, secured and to be paid for by future incremental property taxes. Debt proceeds are used to finance redevelopment activities that benefit the community and increase the project areas' taxable base. The redevelopment activities do not necessarily result in CRA assets; if they do, such assets are carried in the CRA's books at substantially below cost. The CRA also provides gap financing on certain redevelopment activities and any equity assumed in these projects is significantly less than the financing provided.

The following schedule provides condensed data from the CRA's statement of net assets:

Community Redevelopment Agency Condensed Statement of Net Assets (amounts expressed in thousands)

FY 2004 FY 2003

Current and other assets $ 400,694 $ 338,927

Caeital assets 106,092 106,526

Total assets 506,786 445,453

Current and other liabilities 46, 125 44,113

Lona-term liabilities 666,717 626,188

Total liabilities 712,842 670,301 Net assets;

Invested in caeital assets,

net of related debt 60,317 63,701

Restricted 274,700 219,781

Unrestricted (541,0731 1508,330)

Total net assets $ (206,0561 $ 1224,848)

At June 30, 2004, the CRA's long-term debt posted a net increase of $40.5 million, or 6.5%. Of the $666. 7 million total long-term debt, $524.3 million (78.6%) are tax allocation bonds. The CRA issues tax allocation bonds to finance certain redevelopment programs. Receipts from incremental property tax are used to pay debt service on the tax allocation bonds. Incremental property taxes are collected from the excess of property taxes levied and collected each year on a redevelopment project over the amount that is levied and collected on the base year property tax assessment.

- 29 - Management's Discussion and Analysis (Continued)

For the fiscal year ended June 30, 2004, the CRA's revenues totaled $147.2 million, an $18.8 million (14.7%) improvement from the prior fiscal year. Incremental property taxes contributed $13.1 million to the overall revenue growth. The CRA benefited from the relatively strong real estate market that spurred the growth in assessed valuation. Total expenses posted an increase of $11.1 million (9.4%).

The following table presents the operating results of the CRA:

Community Redevelopment Agency Condensed Statement Activities (amounts expressed in thousands)

FY 2004 FY 2003

Program Revenues Charges for Services $ 6,622 s 5,963 Capltal Grants and Contributions 39,057 19,328 General Revenues Incremental Property Truces 91,026 77,960 Interest Income 9,502 6,203 Other 1,026 18,945 Total Revenues 147,233 128,399 Program Expenses Housing 30,013 27,826 Community and Economic Development 23,078 15,566 Public Improvement 10,659 13,134 Project General 26,712 18,903 Parking facilities 4,584 4,433 Interest on Long-term Debt 33,395 37,521 Total Expenses 128,441 117,383 Change in Net Assets $ 18,792 $ 11,016

For the year ended June 30, 2004, the CRA's change in net assets of $18.8 million was up $7.8 million or 70.6% from the prior year.

Among the measures that the State of California has adopted to alleviate its budget deficit is to require redevelopment agencies to shift tax increment revenues to the State Educational Revenue Augmentation Fund. The CRA's share was $3.95 million for fiscal year 2004, and for fiscal year 2005, CRA's share will total $8.35 million.

REQUEST FOR INFORMATION

This financial report is designed to provide our citizens, taxpayers, customers, creditors, and other users with a general overview of the City's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Office of the City Controller, 200 North Main Street, City Hall East Room 300, Los Angeles, CA 90012.

- 30 - Basic Financial Statements CITY OF LOS ANGELES

Statement of Net Assets (Deficit) June 30, 2004 (amounts expressed In thousands)

Component Unit- Primary Government Community Governmental Business-type Redevelopment Activities Activities Total Agenct ASSETS Cash and Pooled Investments $ 3,356,681 $ 1,363,264 $ 4,719,945 $ 123,201 Other Investments 64,751 35 64,786 70,482 Receivables, Net 880, 140 1,947,967 2,828,107 67, 163 Loans Receivable from Component Unit 90,050 90,050 Inventories 16,615 140,003 156,618 40,746 Prepaid Items and Other Assets 19,332 204,558 223,890 22,279 Internal Balances 5,915 (5,915) Restricted Assets 16,143 1,965,324 1,981,467 76,823 Investment in Joint Ventures 5,295 5,295 Net Pension Assets 182,184 182,184 Net Other Postemployment Benefit Assets 227,084 227,084 Capital Assets Not Depreciated 1,410,547 4,534,834 5,945,381 72,555 Depreciated, Net 1,881,773 12,154,395 14,036, 168 33,537 Nuclear Fuel, at Amortized Cost 12,553 12,553 TOTAL ASSETS 7,741,947 22,731,581 30,473,528 506,786 LIABILITIES Accounts Payable and Accrued Expenses 279,428 514,249 793,677 9.856 Obligations Under Securities Lending Transactions 502,405 433,292 935,697 Matured Bonds and Interest Payable 1,555 1,555 Accrued Interest Payable 42,923 108,172 151,095 16,200 Deposits and Advances 14,447 49,904 64,351 15,317 Other Liabilities 18,800 584,918 603,718 4,752 Net Pension Liability 52,540 6,134 58,674 Advances from Fiduciary Funds 12,636 12,636 Non-current Liabilities Due Within One Year 534,517 381,315 915,832 22,038 Due In More Than One Year 4,674,064 8,278,433 12,952,497 554,629 Loans Payable to Primary Government (includes amount due within one year of $3,071) 90,050 TOTAL LIABILITIES 6,133,315 10,356,417 16,489,732 712,842 NET ASSETS Invested In Capital Assets, Net of Related Debt 1,111,107 8,317,620 9,428,727 60,317 Restricted for: Capital Projects 152,433 44,080 196,513 129,877 Debt Service 176,584 952,557 1,129,141 62,237 Special Purposes 1,229,977 680,504 1,910,481 82,586 Unrestricted (Deficit) (1,061,469) 2,380,403 1,318,934 (541,073) TOTAL NET ASSETS (DEFICIT) $ 1,608,632 $ 12,375, 164 $ 13,983,796 $ (206,056)

The notes to the financial statements are an integral part of this statement.

- 31 - CITY OF LOS ANGELES

Statement of Activities For the Fiscal Vear Ended June 30, 2004 (amounts expressed in thousands)

Net (Expense) Ravenua and Changes in Net Assets Component Program Revenues Prima!l: Government Unit- Operating Capital Community Charges for Grants and Grants and Governmental Business- type Redevelopment Functions/Programs Expanses Services Contribulions Contributions Activities Activities Total Agancz: Primary Government Go11emmental Acti'lities: General Government 1,362,157 244,329 12,022 (1, 105.806) (1,105,806) Protection of Persons and Prop&rty 1,965,205 226,009 86,133 4,856 {1,648.207) (1,646,207) Public Works 224.080 146,771 106,960 3,844 33,495 33,495 Health and Sanitation 334,229 211,961 19,793 (102,455) (102,455) Transportation 253.560 71,028 140,791 1,926 (39,815) (39,815) Cuitural and Recreational S&rvicss 338.860 93,965 24,003 46.031 (174,861) (174,861) Community Development 404.800 74.237 287,634 (42.729) (42,729) Interest on Leng-Term Debt 142.756 (142,758) (142,758) Total Governmental Activities 5,025,649 1.068,320 677,536 56,657 (3,223, 136) (3,223, 136) Business-type Acii11ities: Airports 584, 131 679.063 7,593 122,525 122,525 Harbor 272,273 354,754 867 83,348 83,348 Power 2, 176,837 2,401,011 38,514 260,686 260,688 Water 575,941 601.483 20,696 46,236 46,238 Sewer 444,973 430,263 18.931 24,970 29,191 29,191 Olher- Conven~on Cenler 36,031 19,885 (10,148) {18,148) Total Business-type Aciivities 4,072,186 4,486,459 18,931 92,640 525,844 525,844 Total Primary Government $ 9,097,835 5,554,779 696.467 149,297 {3,223,138) 525.844 (2,697,292) Component Unit- Community Red&velopment Agency $ 128,441 6,622 39,057 (82,762)

General Revenues: Property Taxes 884,665 884,865 91,026 Utility Users Taxes 572,018 572,018 Business Taxes 372,376 372,376 OlherTaxes 417,714 417,714 Grants and Contributions Not Restricted to Specific Programs Sales Taxes 381,090 381,090 Motor Vehicle In-Lieu Taxes 176,653 176,853 Unrestricted Investment Earnings 667 667 9.502 Gain on Sale of Capilal Assets 21 21 Other 34,790 34,790 1 026 Transfers 238,237 \238,2371 Total General Revenues and Other Items 3.078.410 (238,2161 2,840,194 101,554 Change In Net As~ts (144,728) 287,828 142,902 18 792 N&t Assets (Deficit) - July 1 1,815,002 11.694,119 13,309,121 (224,848) Historical Cost of Infrastructure Assets - Bridges 138,356 138,356 Cumulatlve Ertect or Change in Accounting Principia 393.417 393,417 NGI Assets (Deficit) - June 30 1,608,632 12.375,164 13.983.796 (206,056)

The noles to lhe financial Statements are an integral part of this slatement CITY OF LOS ANGELES

Balance Sheet Governmental Funds June 30, 2004 (amounts expressed in thousands)

Proposition C Proposition A Anti-Gridlock Recreation Special Gas Local Transit Transit and Tax Street General Assistance lmerovement Parks lmerovement ASSETS Cash and Pooled Investments $ 776,978 $ 93,054 $ 27,467 $ 119,661 s 30,222 Other Investments Taxes Receivable (Net of Allowance for Uncollectibles of $27,355) 253,548 Accounts Receivable (Net of Allowance for Uncollectibles of $405,448) 150,764 39 5 Special Assessments Receivable (Net of Allowance for Uncollectibles of $1,345) 7,319 Investment Income Receivable 12,172 709 305 914 220 Intergovernmental Receivable (Net of Allowance for Uncollectibles of $55,617) 23,311 14,638 9,099 6,676 Loans Receivable (Net of Allowance for UncoJJectibles of $575,302) Due from Other Funds 87,582 296 180 2,207 7,701 Loans Receivable from Component Unit (Net of Allowance for Uncollectibles of $500) Inventories 16,615 Prepaid Items and Other Assets Advances to Other Funds 19,795 899 61,821 1,825 Restricted Assets

TOTAL ASSETS $1,348,084 $ 109,635 $ 98,877 $ 124,608 s 44,819 LIABILITIES AND FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ 39,551 $ 7,093 $ 117 $ 3,484 $ 417 Obligations Under Securities Lending Transactions 196,720 13,653 3,303 17,533 4,435 Accrued Salaries and Overtime Payable 124,079 8,175 Accrued Compensated Absences Payable 2,100 43 Estimated Claims and Judgments Payable 14,495 Intergovernmental Payable 81 5 Due to Other Funds 24,739 904 568 240 136 Deferred Revenue and Other Credits 240,854 9,051 2,452 530 121 Deposits and Advances 3,724 19 309 Matured Bonds and Interest Payable Advances from Other Funds 59,780 7,230 Other Liabilrties 12,356

TOTAL LIABILITIES 718,479 30,720 6,440 37,549 5,109 FUND BALANCES Reserved for: Encumbrances 110,727 18,226 2,470 6,063 4,280 Assets Not Available for Appropriation 36,410 899 61,821 1,825 Debt Service Special Purposes 16,283 Unreserved: Designated for Special Purposes 71,000 Undesignated: General Fund 395,185 Special Revenue Funds 59,790 28,146 79,171 35,430 Capital Projects Funds

TOTAL FU ND BALANCES 629,605 78,915 92,437 87,059 39,710 TOTAL LIABILITIES AND FUND BALANCES $1,348,084 $ 109,635 $ 98,877 $ 124,608 $ 44,819 Continued ..

- 33 - CITY OF LOS ANGELES

Balance Sheet· (Continued) Governmental Funds June 30, 2004 (amounts expressed in thousands)

Municipal Improvement Coreoration Other Community Special Debt Governmental Develoement Revenue Service Funds Total ASSETS Cash and Pooled Investments $ 4,281 $220,203 $ 82,513 $ 2,002,302 $ 3,356,681 Other Investments 48,745 16,006 64,751 Taxes Receivable (Net of Allowance for Uncollectibles of $27 .355) 16,960 270,508 Accounts Receivable (Net of Allowance for Uncollectibles of $405,448) 6,390 157,199 Special Assessments Receivable (Net of Allowance for Uncollectibles of $1,345) 10,305 17,624 Investment Income Receivable 18 1,158 14,635 30,131 Intergovernmental Receivable (Net of Allowance for Uncollectibles of $55,617) 4,173 74,105 132,002 Loans Receivable (Net of Allowance for Uncollectibles of $575,302) 95,573 177,103 272,676 Due from Other Funds 731 18,575 117,272 Loans Receivable from Component Unit (Net of Allowance for Uncollectibles of $500) 76,050 14,000 90,050 Inventories 16,615 Prepaid Items and Other Assets 116 822 938 Advances to Other Funds 7,012 91,352 Restricted Assets 16,143 16,143 TOTAL ASSETS $ 180,826 $221,477 $132,080 $ 2,373,536 $ 4,633,942

LIABILITIES AND FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ 8,208 $ 3,125 $ $ 59,122 $ 121,117 Obligations Under Securities Lending Transactions 628 8,489 257,644 502,405 Accrued Salaries and Overtime Payable 2,869 135,123 Accrued Compensated Absences Payable 46 2,189 Estimated Claims and Judgments Payable 14,495 Intergovernmental Payable 4 1,951 21, 147 23,188 Due to Other Funds 1,383 32,524 60,494 Deferred Revenue and Other Credits 10 825 65,560 319,403 Deposits and Advances 34 10,361 14,447 Matured Bonds and Interest Payable 1,555 1,555 Advances from Other Funds 87,841 154,851 Other Liabilities 9 4,639 17 ,004 TOTAL LIABILITIES 10,276 14,390 543,308 1,366,271 FUND BALANCES Reserved for: Encumbrances 42,075 294,341 478, 182 Assets Not Available for Appropriation 171,623 116 198,115 470,809 Debt Service 132,080 184,543 316,623 Special Purposes 16,143 32,426 Unreserved: Designated for Special Purposes 71,000 Undesignated: General Fund 395,185 Special Revenue Funds (43,148) 206,971 537,485 903,845 Capital Projects Funds 599,601 599,601 TOTAL FUND BALANCES 170,550 207,087 132,080 1,830,228 3,267,671 TOTAL LIABILITIES AND FUND BALANCES $ 180,826 $221,477 $132,080 $ 2,373,536 $4,633,942

The notes to the financial statements are an integral part of this statement.

- 34 - CITY OF LOS ANGELES

Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets June 30, 2004 (amounts expressed in thousands)

Total Fund Balances - Governmental Funds $ 3,267,671

Amounts reported for Governmental Activities in the Statement of Net Assets are different because:

Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the funds. 3,292,320

Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred in the funds. 317,607

Long-term liabilities, including bonds payable, are not due and payable in the current period and, therefore, are not reported in the funds. (5,268,966)

Net Assets of Governmental Activities $ 1,608,632

The notes to the financial statements are an integral part of this statement.

- 35 - CITY OF LOS ANGELES

Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Proposition C Proposition A Anti-Grid lock Recreation Special Gas Local Transit Transit and Tax Street General Assistance lmerovement Parks lmerovement REVENUES Property Taxes $ 724,930 $ $ $ $ Sales Taxes 381,090 Utility Users Taxes 572,018 Business Taxes 372,376 Other Taxes 382,615 Licenses and Permits 37,014 988 Intergovernmental 183,933 74,171 48,999 3,228 77,700 Charges for Services 363, 138 6,555 277 70, 153 Services to Enterprise Funds 230,712 Fines 106,240 Special Assessments 3,509 Investment Earnings (Losses) 1, 101 (1) 448 (185) 43 Program Income Other 28,593 1,418 27 419 76 TOTAL REVENUES 3,387,269 82, 143 49,751 74,603 77,819 EXPENDITURES Current: General Government 948,037 Protection of Persons and Property 1,701,989 Public Works 177,208 61,793 Health and Sanitation 213,846 Transportation 111,919 65,235 24,234 Cultural and Recreational Services 38,290 161,871 Community Development 32,980 Capital Outlay 26,261 10,885 1,288 12,487 3,138 Debt Service: Principal Interest Cost of Issuance 196 Advance Refunding Escrow

TOTAL EXPENDITURES 3,250,726 76, 120 25,522 174,358 64,931 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES 136,543 6,023 24,229 (99,755! 12,888 OTHER FINANCING SOURCES (USES) Transfers In 221,793 28 11,415 107,019 35 Transfers Out (396,872) (3,169) (7,910) Issuance of Long-term Debt Premium on Issuance of Long-term Debt Discount on Issuance of Long-term Debt Issuance of Refunding Bonds Premium on Issuance of Refunding Bonds Payment to Refunded Bond Escrow Agen! Loans from HUD TOTAL OTHER FINANCING SOURCES (USES) (175,079) (3,141) 3,505 107,019 35 NET CHANGE IN FUND BALANCES (38,536) 2,882 27,734 7,264 12,923 FUND BALANCES, JULY 1 681,871 76,033 64,703 79,795 26,787 DECREASE IN RESERVE FOR INVENTORIES (13,730) FUND BALANCES, JUNE 30 $ 629,605 $ 78,915 $ 92,437 $ 87,059 $ 39,710 Continued

- 36 - CITY OF LOS ANGELES

Statement of Revenues, Expenditures and Changes in Fund Balances - (Continued) Governmental Funds For the Fiscal Year Ended June 30, 2004 {amounts expressed in thousands)

Municipal Improvement Coreoration Other Community Special Debt Governmental Develo~ment Revenue Service Funds Total REVENUES Property Taxes $ $ s $ 157,601 $ 882,531 Sales Taxes 381,090 Utility Users Taxes 572,018 Business Taxes 372,376 Other Taxes 34,859 417,474 Licenses and Permits 1,625 39,627 Intergovernmental 84,075 412,598 884,704 Charges for Services 219,829 659,952 Services to Enterprise Funds 1,837 232,549 Fines 16,986 123,226 Special Assessments 93,920 97,429 Investment Earnings (Losses) (97) 4,178 2,829 5,188 13,504 Program Income 5,689 9,879 15,568 Other 180 45,407 76, 121 TOTAL REVENUES 89,847 4,179 2,829 999,729 4,768,169 EXPENDITURES Current General Government 2 216 37,541 985,796 Protection of Persons and Property 149,500 1,851,489 Public Works 69,972 308,973 Health and Sanitation 114,561 328,407 Transportation 58,277 259,665 Cultural and Recreational Services 94,433 294,594 Community Development 99,781 298,007 430,768 Capital Outlay 85,477 382,720 522,256 Debt Service: Principal 96,750 89,274 186,024 Interest 44,370 92,281 136,651 Cost of Issuance 1,019 59 3,783 5,057 Advance Refunding Escrow 3,253 3,253 TOTAL EXPENDITURES 99,781 86,498 141,395 1,393,602 5,312,933 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES (9,934) (82,319) (138,566) (393,873) (544,764) OTHER FINANCING SOURCES (USES) Transfers In 8,505 290 146,011 250,437 745,533 Transfers Out (3,123) (25,309) (22) (110,891) (547,296) Issuance of Long-term Debt 117,415 3 350,715 468, 133 Premium on Issuance of Long-term Debt 6,028 19,555 25,583 Discount on Issuance of Long-term Debt (59) (59) Issuance of Refunding Bonds 77,345 77,345 Premium on Issuance of Refunding Bonds 4,736 4,736 Payment to Refunded Bond Escrow Agen1 (81,660) (81,660) Loans from HUD 23,895 23,895 TOTAL OTHER FINANCING SOURCES (USES) 5,382 98,365 145,992 534, 132 716,210 NET CHANGE IN FUND BALANCES (4,552) 16,046 7,426 140,259 171,446 FUND BALANCES, JULY 1 175,102 191,041 124,654 1,689,969 3,109,955 DECREASE IN RESERVE FOR INVENTORIES (13,730) FUND BALANCES, JUNE 30 $ 170,550 $ 207,087 $ 132,080 $ 1,830,228 $ 3,267,671

The notes to the financial statements are an integral part of this statement.

• 37 - CITY OF LOS ANGELES

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, 2004 (amounts expressed in thousands)

Net Change in Fund Balances- Total Governmental Funds $ 171.446

Amounts reported for Governmental Activities in the Statement of Activities are different because:

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 in the current period. 404,364

Revenues and transfers in the statement of activities that do not provide current financial resources are not reported as revenues and other financing sources in the funds. (24.143)

The issuance of long-term debt (e.g. bonds) provides current financial resources to the governmental funds, while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also, governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas, these amounts are deferred and amortized in the statement of activities. This amount is the net effect of these differences in the treatment of long-term debt and related items. (323.835)

Some expenses reported in the statement of activities do not require the use of current financial resources and, therefore, are not reported as expenditures in the governmental funds. (358,828)

Decrease in reserve for inventory (13.730)

Change in Net Assets of Governmental Activities $ (144,726)

The notes to the financial statements are an integral part of this statement.

- 38 - CITY OF LOS ANGELES

Statement of Revenues, Expenditures, and Changes in Fund Balances Budget and Actual (Non-GAAP Budgetary Basis) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Actual Variance With Amounts Final Budget Bud9eted Amounts (Budgetary Positive Ori'1inal Final Basis) (Ne9ative) Revenues Taxes $ 2,293, 145 $ 2,293,145 $ 2,413,498 $ 120,353 Licenses, Permits, Fees and Fines 559,844 558, 173 569,888 11, 715 Intergovernmental 274,298 274,298 219,828 (54,470) Charges for Services 3,663 3,663 2,813 (850) Interest 20,500 20,500 26,284 5,784 Other 10, 199 10,199 10,549 350 Total Revenues 3, 161,649 3, 159,978 3,242,860 82,882

Expenditures Current General Government 1,220,055 1,236,437 1,171,904 64,533 Protection of Persons and Property 1,498,580 1,570,785 1,552,316 18,469 Public Works 267,963 309,225 288,778 20,447 Health and Sanitation 214,364 224,985 216,509 8,476 Transportation 115,615 129,323 126,043 3,280 Cultural and Recreational Services 66,405 67,733 65,966 1,767 Community Development 84,555 108,687 101,841 6,846 Pension and Retirement Contributions 27,214 27,734 27, 134 600 Capital Outlay 19,400 36,767 20,986 15,781 Total Expenditures 3,514,151 3,711,676 3,571,477 140,199

Excess (Deficiency) of Revenues Over Expenditures (352,502) (551,698) (328,617) 223,081

Other Financing Sources (Uses) Transfers from Other Funds 854,61 o 1,091,262 1,012,666 (78,596) Loans from Other Funds 2,851 18,017 15, 166 Transfers to Other Funds (502,108) (542,947) (537,679) 5,268 Payment of Loans to Other Funds (14,025) (14,025)

Total Other Financing Sources 352,502 551,166 478,979 (72, 187) Excess (Deficiency) of Revenues and Other Financing Sources Over Expenditures and Other Financing Uses (532) 150,362 150,894 Fund Balance, July 1 Appropriation of Fund Balance and Carryforward Appropriations 532 (532) Encumbrances Lapsed 22,246 22,246 Reversion to Reserve Fund (172,608) !172,608) Fund Balance, June 30 $ $ $ $

The notes to the financial statements are an integral part of this statement.

• 39 • Notes to the Basic Financial Statements

The Notes to the Basic Financial Statements include disclosures considered necessary for a better understanding of the accompanying financial statements. An index to the Notes follows:

Note 1 - Summary of Significant Accounting Policies A. General 57 B. Reporting Entity 57 C. Government-wide and Fund Financial Statements 61 D. Measurement Focus, Basis of Accounting and Financial Statement Presentation 62 E. Assets, Liabilities and Net Assets or Equity 65

Note 2 - Reconciliation of Government-wide and Fund Financial Statements A. Explanation of Certain Difference Between the Governmental Funds Balance Sheet and the Government-wide Statement of Net Assets 75 B. Explanation of Certain Differences Between the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances and the Government-wide Statement of Activities 76

Note 3 - Stewardship, Compliance, and Accountability A. Budgets and Budgetary Basis of Accounting 77 B. Reconciliation of Operations on Budgetary Basis to the GAAP Basis 79 C. Fund Balances - Reserves, Designations and Deficit 81

Note 4 - Detailed Notes on All Funds A. Cash, Deposits and Investments 82 B. Receivables 91 C. Loans Receivable from Component Unit 92 D. Restricted Assets 93 E. Joint Ventures 94 F. Capital Assets 95 G. lnterfund Receivables, Payables and Transfers 98 H. Accounts Payable and Accrued Expenses 100 I. Long-term Liabilities 101 J. Tax and Revenue Anticipation Notes 113 K. Interest Rate Swaps 113 L. Power Enterprise Fund Derivative Instruments 115 M. Current and Advance Refunding of Debt 117 N. Prior Years Defeasance of Debt 119 0. Leases 120 p Risk Management - Estimated Claims and Judgments Payable 124 Q. Accrued Landfill Liability 125

Note 5 - Other Information A. Pension and Postemployment Healthcare Plans 126 B. Commitments and Contingencies 133 C. Conduit Debt Obligations 146 D. Other Matters 147 E. Subsequent Events 155

- 56 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. General

The City of Los Angeles (City) was incorporated in 1850 under the provisions of a City Charter. The current Charter was approved by the electorate on June 8, 1999 and became operative on July 1, 2000. Under the new Charter, the authority of the Mayor over the administration of City departments was increased, while the authority of the Council particularly over decisions by boards and commissions was decreased. The Controller was given more responsibilities including conducting performance audits of departments. The new Charter also required the creation of a system of self-selected advisory neighborhood councils and a Department of Neighborhood Empowerment, and a new Office of Finance. The new Charter modified a Mayor-Council form of City government and continued to provide for an independently elected City Attorney and independently elected Controller.

As Executive Officer, the Mayor supervises the administrative process of the City and works with the Council in matters relating to legislation, budget, and finance. As governing body of the City, the 15-member full-time Council enacts ordinances, levies taxes, approves utility rates, authorizes contracts and public improvements, adopts zoning and other land use controls. and provides the necessary resources for the budgetary departments and offices of the City. Council action is subject to the approval or veto of the Mayor, and Council may override a Mayoral veto by a two-thirds vote.

Public services provided by the City include: police; fire and paramedics; residential refuse collection and disposal, wastewater collection and treatment, street maintenance, and other public works functions; enforcement of ordinances and statutes relating to building safety; public libraries; recreation and parks; community development; housing and aging services; planning; airports; harbor; power and water services; and convention center.

B. Reporting Entity

The City (the primary government), for financial reporting purposes, consists of the funds, departments, agencies, boards, and commissions for which the City is financially accountable.

- 57 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Criteria indicating financial accountability include, but are not limited to, the following:

• Appointment by the City of a majority of voting members of the governing body of an organization, and ability of the City to impose its will on the daily operations of an organization, such as power to remove appointed members at will; to modify or approve budgets, rates or fees; or to make other substantive decisions; or provision by the organization of specific financial benefits to the City; or imposition by an organization of specific financial burdens on the City, such as assumption of deficits or provision of support; or

• Fiscal dependency by the organization on the City such as lack of authority to determine a budget, approve rates or issue its own bonded debt without City approval.

Based on the foregoing criteria, the City's financial statements prepared in accordance with generally accepted accounting principles include 45 departments, bureaus, commissions and offices, and 3 pension systems governed by the City Charter. The financial statements of the departments of Airports, Harbor, and Water and Power, which are independent proprietary departments, are reported in the Business-type Activities - Enterprise Funds. In addition, joint power authorities and public benefit corporations meet the requirements for inclusion in the City's reporting entity.

Blended Component Units - Although the following are legally separate from the City, they are reported as if they are part of the City because their sole purpose is to provide services entirely to or exclusively for the City or the City Council is the governing body.

Los Angeles Convention and Exhibition Center Authority

The Authority was formed under a joint powers agreement between the City and the County of Los Angeles for the purpose of constructing and operating a convention and exhibition hall and related facilities within the City's boundary. The Authority is composed of 15 members, 10 of whom are appointed by the City Mayor and 5 are appointed by the County Board of Supervisors. Certificates of participation debt was issued by the Authority in 1990 to provide funding for the expansion of the existing Los Angeles Convention Center which is owned and operated by the City. The expansion activities are included in the Other Governmental Funds. Completed capital assets have been contributed to the Convention Center Enterprise Fund. In April 1998, the Authority issued taxable lease revenue bonds to partially finance the City's share of acquiring certain real property adjacent to the Convention Center, by the Community Redevelopment Agency of the City of Los Angeles, for the development of the Staples Center. These financing activities are also included in the Other Governmental Funds.

- 58 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Los Angeles Harbor Improvement Corporation

The Corporation is a nonprofit, public benefit corporation organized for the sole purpose of assisting the City, acting through the Board of Harbor Commissioners, in providing financing for the acquisition, construction, replacement, or expansion of improvements to the facilities within the area controlled by the Port of Los Angeles (Port). The Corporation is a component unit of the Port and is included in the Harbor Enterprise Fund.

Municipal Improvement Corporation of Los Angeles (The MICLA)

The MICLA was formed for the purpose of rendering assistance to the City for financing the acquisition of properties and equipment, and the construction of buildings and other improvements, for the benefit of City residents, through the issuance of certificates of participation and revenue bonds. The MICLA is reported as a major special revenue and debt service fund.

Parking Authority of the City of Los Angeles

The Authority is a public agency created by a resolution of the City Council in September 1968, under the provisions of the Parking Law of 1949. Its purpose is to provide parking facilities for the City. The City Council is the governing board of the Authority. In May 1996, the City Council approved the dissolution of the Authority and the transfer of all of its properties to the City. The dissolution of the Authority and the transfer of its remaining assets to the City will be completed after all obligations of the Authority to its bondholders are paid. The Authority is included in the Other Governmental Funds.

Discretely Presented Component Unit - The Community Redevelopment Agency of the City of Los Angeles (the CRA) is a governmental entity that is legally separate from the City. It was created by the City to remove blight in accordance with Section 33000 of the California Health and Safety Code that authorized municipal agencies to form redevelopment areas and agencies. Under the Code, the local legislative body is required to approve the annual budgets and their amendments of such redevelopment agencies, when the local legislative body is not the governing body of the redevelopment agency. The Council as the governing body of the City reviews certain actions of the CRA that have significant policy or fiscal effect on the Agency, other City departments, policies, programs, or the public. A Board consisting of seven members appointed by the Mayor and confirmed by a majority vote of the City Council governs the CRA. Either the Mayor or the City Council, as joint appointing officers, may remove members pursuant to Section 33115 of the California Health and Safety Code. The CRA is discretely presented because its governing body is not substantially the same as the City's governing body and it does not provide services entirely or exclusively to the City government.

- 59 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Community Redevelopment Financing Authority of the City of Los Angeles (CRFA) is included as a blended component unit in the CRA financial statements. The financial statements of the CRA reflect the aggregated amounts of financial data for the CRA governmental and business-type activities, presented discretely on the statement of net assets and statement of activities.

Separate audited financial statements may be obtained through the Office of the City Controller, 200 North Main Street, Room 300, Los Angeles, California 90012, for the following City departments and component units:

Department of Airports Department of Harbor Department of Water and Power (DWP) Sewer Construction and Maintenance Fund Los Angeles City Employees' Retirement System Fire and Police Pension System Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan Municipal Improvement Corporation of Los Angeles Community Redevelopment Agency of the City of Los Angeles

Investment in Joint Venture

The following entities are joint ventures of the Department of Harbor:

lntermodal Container Transfer Facility Joint Powers Authority (ICTF) Alameda Corridor Transportation Authority (ACTA) Los Angeles Export Terminal, Inc. (LAXT)

Excluded Organizations

Joint Venture

The Los Angeles Memorial Coliseum Commission (Commission) was created by a joint powers agreement between the City, Los Angeles County, and the California Museum of Science and Industry, an institution of the State of California. Its purpose is to provide for the operation and maintenance of the Coliseum and Sports Arena. The Commission is not a City function and operates independent of City oversight and financial accountability. The City appointees comprise 33% of the Commission.

- 60 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Related Organization

The Housing Authority of the City of Los Angeles is an organization for which the City has appointed the voting majority of the members of the governing body but for which the City is not financially accountable.

The City retains and exercises its authority over the entity only as provided by the municipal code and Federal laws. The entity is fiscally independent from the City. The City is unable to impose its will on the daily operations of the entity. The City's accountability to this entity is limited to removal of a commissioner by the Mayor or the entire board by the City Council for cause and under due process.

C. Government-wide and Fund Financial Statements

The government-wide financial statements (i.e., the statement of net assets and the statement of activities) report information on all of the nonfiduciary activities of the primary government and its component units. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely, to a significant extent on fees and charges for support. Likewise, the primary government is reported separately from its legally separate component unit, which is presented discretely.

The statement of activities demonstrates the degree to which the direct expenses of a given function or program are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or program. Included in the direct expenses are indirect costs, such as fringe benefits, administrative overhead, and liability claims, which were automatically allocated to the specific function or program. Charges for workers' compensation, information technology services, telephone, postage, and fleet services are not allocated and are included as part of the general government functional activity. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting operational or capital requirements of a particular function or segment. Taxes and other items not included among program revenues are reported instead as general revenues.

Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds and individual enterprise funds are reported as separate columns in the fund financial statements.

- 61 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

D. Measurement Focus, Basis of Accounting, and Financial Statement Presentation

The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and fiduciary fund financial statements. Revenues are recognized when earned and expenses are recognized when a liability is incurred, regardless of the timing of related cash flows.

The governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the City considers revenues to be available if they are collected within 60 days of the end of the current fiscal year. Expenditures generally are recorded when liability is incurred, as under accrual accounting. However, debt service expenditures are recorded only when payment is due, while expenditures related to compensated absences, claims and judgments, and landfill closure and postclosure care costs are recognized to the extent that they are normally expected to be liquidated with expendable available resources and are due and payable at year-end.

Revenues susceptible to accrual are property taxes, business taxes, sales taxes, utility users taxes, transient occupancy tax, charges for services, special assessments, franchise income, licenses and permits, and interest income. In applying the susceptible to accrual concept to Federal and State grants and subventions, revenues are recognized when applicable eligibility requirements, including time requirements, are met and the resources are available.

The City reports the following major governmental funds:

The General Fund is the primary operating fund of the City. It is used to account for all financial resources of the general government, except those required to be accounted for in other funds.

The Proposition A Local Transit Assistance Fund accounts for the City's 25% share of the additional one-half cent sales tax within the County of Los Angeles to (a) improve and expand existing public transit Countywide, including reduction of transit fares, (b) construct and operate a rail rapid transit system, and (c) more effectively use State and Federal funds, benefit assessments, and fares.

• 62 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Proposition C Anti-Gridlock Transit Improvement Fund accounts for the City's 20% share of the additional one-half cent sales tax within the County of Los Angeles to improve transit service and operations, reduce traffic congestion, improve air quality and the condition of streets and freeways utilized by public transit, and reduce foreign fuel dependence.

The Recreation and Parks Fund accounts for the revenues and expenditures of the Department of Recreation and Parks in operating and maintaining parks, playgrounds, swimming pools, public golf courses, recreation centers, recreation camps and educational facilities, and structures of historical significance.

The Special Gas Tax Street Improvement Fund accounts for the revenues received from the State for the City's share of the gasoline tax and Traffic Congestion Relief Fund to be used for preservation, maintenance, and rehabilitation of local street and road system. The fund also accounts for federal grants from the Surface Transportation Program to finance the upgrade of the most heavily traveled highways.

The Community Development Fund accounts for the Block Grant funds allocated by the United States Department of Housing and Urban Development (HUD) for the development of viable urban communities, including: decent housing and suitable living environment; expanding economic opportunities, principally for persons of low and moderate income; and physical improvements to communities accompanied by supportive social services.

The Municipal Improvement Corporation Funds account for the activity of the City's public financing entity component unit which finances the acquisition of properties and equipment, the construction of buildings, and other improvements for the benefit of City residents. The assets acquired or constructed by the Corporation are leased to the City under long-term capital lease agreements and become property of the City at the termination of the lease. The effects of the capital lease arrangements have been eliminated from the basic financial statements.

The City reports the following major proprietary funds:

The Airports Fund accounts for the operation, maintenance and development of City airports, namely: Los Angeles International Airport, Ontario International Airport, Van Nuys Airport and Palmdale Regional Airport.

The Harbor Fund accounts for the operations of the Port of Los Angeles, including operations of a pilotage service, lease of land and facilities and production of oil in the Harbor District.

- 63 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Power and Water Funds account for the operations of the Department of Water and Power in supplying the City and its inhabitants with water and electric power by constructing, operating, and maintaining facilities located throughout the City and Inyo and Mono Counties.

The Sewer Fund accounts for the construction, operations and maintenance of the City's wastewater collection and treatment system.

Additionally, the City reports the following fund types:

The Pension Trust Funds account for the activities of the City's three contributory defined benefit pension plans namely: Los Angeles City Employees' Retirement System (LAGERS); Fire and Police Pension System (Pensions); and Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan (DWP Retirement Plan).

The Agency Funds account for assets held by the City as an agent for others, for example: Federal and State income taxes withheld from employees; and assessments for payments of certain conduit debt.

Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed in both the government-wide and proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board (GASB). Governments also have the option of following subsequent private-sector guidance for their business-type activities and enterprise funds subject to this same limitation. The City has elected not to follow subsequent private-sector guidance.

As a general rule, the effect of interfund activity has been eliminated from the government wide financial statements. Exceptions to this general rule are charges between the City's business-type activities and certain other governmental functions. Elimination of these charges would distort the direct costs and program revenues reported for the various functions concerned.

Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions, including special assessments. Internally dedicated resources are reported as general revenues rather than as program revenues. Likewise, general revenues include all taxes.

- 64 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services in connection with a proprietary fund's principal ongoing concern operations. The principal operating revenues of the City's enterprise funds are charges to customers for sales and services while operating expenses include cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

When both restricted and unrestricted resources are available for use, ii is the City's policy to use restricted resources first, and then unrestricted resources, as they are needed.

E. Assets, Liabilities and Net Assets or Equity

Cash and Cash Equivalents

For purposes of the statement of cash flows, all Proprietary Fund cash and pooled investments with the City Treasurer, cash deposits and other short-term investments that are both readily convertible to known amounts of cash and have maturities of three months or less at the time of purchase, are considered to be cash and cash equivalents. Al June 30, 2004, the Proprietary Funds' investments held by escrow and fiscal agents of $846.9 million and restricted investments of $8. 7 million have maturities beyond three months and therefore are not considered cash and cash equivalents.

Inventories

Inventories for materials and supplies, valued at average cost for the governmental activities and governmental funds, consist of expendable supplies held for consumption and are recorded as expenditures when purchased in the fund financial statements, but are recorded as expenses when consumed in the governmental activities statement of activities.

For the business-type activities and proprietary funds, inventories for materials and supplies are stated at average cost. Fuel is recorded al lower of cost or market on average cost basis.

The CRA land inventory, which is reported al cost, is acquired for eventual disposition for housing and commercial redevelopment projects.

- 65 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restricted Assets

The restricted assets for governmental activities and governmental funds are related to the State mandated deposit with a trustee bank to finance solid waste landfill closure and postclosure care costs, and donated resources for the renovation of the Griffith Observatory. For the business-type activities and proprietary funds, amounts are reserved for accumulated resources for debt service payments, nuclear decommissioning trust funds, collected but unexpended passenger facility charges and accrued interest thereon, a self-insurance reserve, deposits from service users, and retention guarantees from contractors.

For the CRA, included in this account are investments maintained with fiscal agents for payment of principal and interest on tax allocation bonds, and securities pledged as collateral on loans for which ii is directly or contingently liable.

Capital Assets

Capital assets, which include property, plant, equipment, and infrastructure assets (e.g. streets and bridges) are reported in the applicable governmental or business-type activities columns in the government-wide statement of net assets. Generally, assets with an individual cost of at least $5,000 and an estimated useful life of more than one year are capitalized. Purchased or constructed capital assets are valued at historical cost or estimated historical cost if actual historical cost is not available. Assets acquired by donation are recorded at estimated fair value on the date received.

The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed.

The business-type activities and proprietary funds capitalize interest costs, or in the case of the Power and Water Enterprise Funds, provide an "allowance for funds used during construction (AFUDC)." Interest and AFUDC capitalized during the year ended June 30, 2004 were $3.8 million and $3.5 million, respectively.

Depreciation, which includes amortization of assets under capital leases, is computed using the straight-line method over the estimated useful or service lives of the related assets, except as noted below.

Depreciation for the Power Enterprise Fund facilities completed prior to July 1, 1973 is computed by the 5% sinking fund method based on estimated service lives. Decommissioning of a nuclear power plant, in which the City has an ownership interest, is expected to commence subsequent to the year 2024. The total cost to decommission the City's interest in the nuclear plant is estimated to be $112 million in 2001 dollars. During fiscal year 2000, DWP suspended contributing additional amounts to the trust funds, as management believes that contribution to date combined with reinvested earnings, will be sufficient to fully fund DWP's share of decommissioning costs. As of June 30, 2004, Power Enterprise Fund has recorded $110.9 million to accumulated depreciation to provide for the decommissioning liability.

- 66 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Power Enterprise Fund's nuclear fuel is amortized and charged to operating expenses fuel for generation on the basis of actual thermal energy produced relative to total thermal energy expected to be produced over the life of the fuel.

The estimated useful lives of the primary government's capital assets are as follows:

Useful Life Governmental Business-type Category Activities Activities Infrastructure 20 - 60 years Buildings and facilities 40 - 50 years 10 -75 years Equipment and vehicles 3 - 30 years 3 - 20 years Wastewater collection system 80 years Landplane ports 10 - 35 years Treatment and pumping plants 5 - 50 years Wharves and sheds 10-15years

The City's collection of artwork, certain scientific equipment, and zoo animals are not capitalized or depreciated. These capital assets are maintained for public exhibition, education or research and are being preserved for future generations. The proceeds from sales of any pieces of the collection are used to purchase other items for collection.

The City is required to report new infrastructure assets beginning fiscal year ended June 30, 2002. The City's infrastructure assets and the reporting methods the City has elected are as follows:

Infrastructure Reporting Method Bridges Modified Stormwater system Modified Streets Modified Traffic signals Modified Automated traffic signal and control Depreciation Bikepaths Depreciation Fiber optic telecommunication system Depreciation Street lighting system Depreciation Street pavement markings Depreciation Traffic signs Depreciation

The City has fully implemented the provisions of GASB Statement No. 34 on its bridges and fiber optic telecommunication system infrastructure while only the prospective provisions were implemented on the other infrastructure categories. Beginning fiscal year 2004 through such time that all of the modified approach reporting requirements are met, the City shall report the stormwater system, streets, and traffic signals infrastructure assets using the depreciation method. The retroactive reporting is subject to an extended implementation period and final implementation is required by fiscal year ending June 30, 2006.

- 67 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Pension Trust Funds capital assets consist primarily of office furniture and equipment of the City Employees' Retirement System. Capital assets acquisitions of at least $5,000 are capitalized and depreciated over five years.

The CRA capital assets are stated at cost. Capital assets acquisitions of at least $100 are capitalized. Additions and improvements that extend the useful lives of capital assets are capitalized. Depreciation is provided over the estimated useful lives ranging from 3 to 40 years using the straight-line method.

Compensated Absences

Vacation Pay

Eligible employees accumulate annual vacation leave up to a maximum of 50 days depending on the length of service. Sworn employees of the Police and Fire Departments accumulate from 28 to 42 days. All employees are paid the accumulated leave upon termination or retirement.

All vacation pay is accrued when incurred in the government-wide, proprietary and fiduciary fund financial statements. For the Governmental Funds, earned vacation is recorded as expenditures to the extent that they are normally expected to be liquidated with expendable available resources and are due and payable at year-end. Also, for governmental activities, earned vacation is generally liquidated by the General Fund.

Sick Pay

Beginning January 1, 1998, all City employees (except those of the DWP) are entitled to 12 days of sick leave at full pay and 5 days at 75% of full pay for each calendar year of employment. Employees may accumulate sick leave up to 100 days at full pay and 100 days at 75% of full pay. The City pays 50% of the excess over the maximum accumulated 100 days at full pay in the subsequent calendar year. Upon retirement, the City pays 50% of the accumulated sick time at full pay. There is no provision for the payment of the accumulated sick time at 75% of full pay. Firefighters under Memorandums of Understanding (MOU) 22 and 23 may accumulate 896 hours at full pay.

Starting January 1, 1998, accrued and accumulated sick leave at 50% of full pay was frozen for any credits or withdrawals. However, the City will pay 25% of the balance upon retirement.

DWP employees accumulate 40 hours of sick leave per year to a maximum of 80 hours. Any excess over the maximum is paid to the employee at 100% of their current salary rate. The employee goes on disability after taking 80 consecutive hours of sick leave.

- 68 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Governmental activities accrue the estimated value of sick leave (vested and probable of being vested), which may be used in subsequent years, or paid upon termination or retirement up to a set maximum accumulated balance. The Proprietary and Pension Trust Funds accrue sick leave in the fiscal year earned. For the Governmental Funds, earned sick leave is recorded as expenditures to the extent that they are normally expected to be liquidated with expendable available resources and are due and payable at year-end. Also, for governmental activities, accrued sick leave is generally liquidated by the General Fund.

Employees of the CRA accumulate 96 hours per fiscal year to a maximum of 800 hours. The CRA pays 50% of the accumulated sick leave hours to any employee who retires or has a balance in excess of 800 hours.

Accumulated Compensated Time-Oii

The MOU with the union representing police officers at the rank of Lieutenant and below provides that officers will accrue compensated time-off for accumulated overtime to certain limits. Whenever an employee resigns, retires or is discharged from the Police Department, the employee shall be paid in cash for all compensated time-off due. In case of death, payment will be made to the estate.

Accrued compensated time-off is reported in the government-wide financial statements. For the Governmental Funds, expenditures are recognized to the extent that they are normally expected to be liquidated with expendable available resources and are due and payable at year-end. Also, for governmental activities, accrued compensated time-off is generally liquidated by the General Fund.

Risk Management

The City is self-administered and self-funded for workers' compensation, most property damage and the majority of tort liability exposures. Commercial insurance is used where it is legally required, contractually required or judged to be the most effective way to finance risk. Indemnity and insurance protection is also required from all City contractors, vendors, lessees and permit holders. Claims and judgments are recorded when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The recorded estimated liability for claims and judgments includes a provision for Incurred But Not Reported (IBNR) liabilities for workers' compensation, tort cases and liabilities for allocated expenses. For the Governmental Funds, only the portion of the liability is recognized to the extent that they are normally expected to be liquidated with expendable available resources and are due and payable at year-end. Also, for governmental activities, liability for claims and judgments is generally liquidated by the General Fund.

- 69 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Deferred Revenue

Deferred revenue in the governmental funds arises when potential revenue does not meet both the "measurable" and "available" criteria for recognition. Deferred revenue also arises when the City receives resources before it has a legal claim to them. In subsequent periods, when both the revenue criteria are met, or when the City has a legal claim to the resources, the deferred revenue is removed from the balance sheet/statement of net assets and revenue is recognized.

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 assets. Bond premiums, discounts and deferred losses on refundings as well as issuance costs are deferred and amortized over the life of the bonds. Bonds payable are reported net of the applicable bond premium or discount and deferred losses on refundings. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt.

In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of the debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures.

Property Taxes

Secured property taxes are levied on or before the first business day of September of each year. They become a lien on real property on January 1 preceding the fiscal year for which taxes are levied. These tax payments can be made in two equal installments; the first is due November 1 and delinquent with penalties after December 1O; the second is due February 1 and delinquent with penalties after April 10. Secured property taxes that are delinquent and unpaid as of June 30 are declared to be tax defaulted and are subject to redemption penalties, costs, and interest when paid. If the delinquent taxes are not paid at the end of five (5) years, the property can be sold at public auction. The proceeds are used to pay the delinquent amounts due, and any excess is remitted, if claimed, to the taxpayer.

Additional tax liens are created when there is a change in ownership of property or upon completion of new construction. Tax bills for these new tax liens are issued throughout the fiscal year and contain various payments and delinquent dates but are generally due within one year. Unsecured personal property taxes are not a lien against real property. These taxes are due on January 1 and become delinquent, if unpaid, on August 31.

- 70 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The County of Los Angeles assesses, bills and collects property taxes for all jurisdictions within its borders and remits the applicable portion less an administrative fee to the City 1 throughout the year. Payments are normally remitted on the 20 h day of the month.

lnterfund Transactions

lnterfund transactions are reflected as either loans, services provided, reimbursements or transfers. Loans are reported as receivables and payables as appropriate and are subject to elimination upon consolidation. Services provided are treated as revenues and expenditures/expenses. Reimbursements are when one fund incurs a cost, charges the appropriate benefiting fund and reduces its related cost as a reimbursement. All other interfund transactions are treated as transfers. Transfers between governmental or proprietary funds are netted as part of the reconciliation to the government-wide columnar presentation.

Fund Equity

In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change.

Net Assets

The government-wide financial statements utilize net assets presentation. Net assets are categorized as follows:

• Invested in capital assets, net of related debt - This category groups all capital assets into one component of net assets. Accumulated depreciation and the outstanding balances of debt that are attributable to the acquisition, construction, or improvement of these assets reduce the balance in this category.

• Restricted net assets - This category consists of net assets with constraints placed on their use, either externally or internally. Constraints include those imposed by creditors (such as through bond covenants), grants or laws and regulations of other governments, or by law through constitutional provisions or enabling legislation.

• Unrestricted net assets - This category represents net assets of the City that are not restricted for any project or other purposes.

- 71 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts in the financial statements and accompanying notes. Actual results could differ from the estimates.

Reclassifications

Certain reclassifications have been made to amounts reported in the separately audited financial statements of certain Enterprise Funds, Pension Trust Funds and other component units to conform to the City reporting entity's report format and to account for transactions between the City's reporting entity and such entities in accordance with GAAP.

Adoption of New GASB Pronouncements

The City adopted the following:

GASB Statement No. 39, "Determining Whether Certain Organizations are Component Units." Issued in May 2002, the objective of GASB 39 is to provide criteria for determining whether certain organizations should be reported as component units based on the nature and significance of their relationship with a primary government and to clarify reporting requirements for those organizations. There was no material impact to the City's financial statements as a result of adopting GASB 39.

GASB Statement No. 42, "Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries." Issued in November 2004, this statement establishes accounting and financial reporting standards for impairment of capital assets. This statement also clarifies and establishes accounting requirements for insurance recoveries. The City elected early implementation of GASB 42 beginning fiscal year 2004. Retroactive application of GASB 42 is not required.

Recent GASB Pronouncements

GASB Statement No. 40, "Deposit and Investment Risk Disclosures, An Amendment of GASB Statement No. 3." Issued in March 2004, this statement establishes and modifies disclosure requirements related to investments and deposits risks: credit risk (including custodial credit risk and concentration of credit risk), interest rate risk, and foreign currency risk. This statement supersedes certain provisions of GASB Statement Nos. 3, 16, and 25 and will be effective for the City beginning fiscal year 2005.

- 72 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

GASB Statement No. 43, "Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans." Issued in April 2004, this statement establishes uniform financial reporting standards for other postemployment benefits and supersedes the interim guidance included in Statement No. 26, "Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans. " GASB 43 will be effective for the City beginning fiscal year 2007.

GASB Statement No. 44, "Economic Condition Reporting: The Statistical Section, an amendment of NCGA Statement 1." Issued in May 2004, this statement amends portions of NCGA Statement 1, "Governmental Accounting and Financial Reporting Principles, " to improve the understandability and usefulness of the information that state and local governments present as supplementary information in the statistical section. GASB 44 will be effective for the City beginning fiscal year 2006.

GASB Statement No. 45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions." Issued in June 2004, this statement addresses how state and local governments should account for and report their costs and obligations related to postemployment healthcare and other nonpension benefits, collectively referred to as other postemployment benefits (OPEB). The statement generally requires that state and local governmental employers account for and report the annual cost of OPEB and the outstanding obligations and commitments related to OPEB in essentially the same manner as they currently do for pensions. This statement will be effective for the City beginning fiscal year 2008 except for the Power and Water Enterprise Funds that opted for an early implementation as discussed below.

In fiscal year 2003, the Power and Water Enterprise Funds changed their election under the guidance of GASB Statement No. 20, "Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that Use Proprietary Fund Accounting, " and no longer apply Financial Accounting Standards Board (FASB) statements and interpretations issued after November 30, 1989. However, the Funds continued to apply the provisions of FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106) pending the finalization of GASB 45. The Power and Water Enterprise Funds discontinued using FAS 106 and implemented GASB 45 effective fiscal year 2004. The Funds' postemployment benefits other than pensions (healthcare benefits) are not administered as a trust or equivalent arrangement. Therefore, separate financial statements are not prepared for the plan.

The following amounts were recorded in the Funds' books as of June 30, 2003 as accrued postemployment liability under FAS 106 (in thousands):

Power Water Total Postemployment liability $ (361,940) $ (152,664) $ (514,604) Postemployment assets 131,247 53,478 184,725 Net postemployment liability $ (230,693) $ (99,186) $ (329,879)

- 73 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The adoption of GASB 45 allowed the Funds to set the beginning OPEB obligation to zero and reverse the previously reported obligation computed under FAS 106. To reverse the Funds' previously reported obligation, DWP management reviewed the charges for healthcare costs created by FAS 106 and reversed the costs as of July 1, 2003. Costs were reversed from previously capitalized labor charges included in capital assets and other operating expenses recorded in prior fiscal years.

The change from FAS 106 to GASB 45 had no change to the heath plan benefits of active or retired employees. The change also did not affect the assets designated for postemployment benefits. The change from FAS 106 to GASS 45 changed the postemployment liability as of July 1, 2003, the annual required funding contribution for subsequent fiscal years, and the actuarial accrued liability calculations.

As a result of the adoption of GASB 45, the following adjustments were recorded on previously reported net assets items (in thousands):

Business-type Power Water Activities Decrease in prepayments and other current assets $ (3,370) $ (1,123) $ (4,493) Decrease in capital assets (70,040) (46,654) (116,694) Decrease (increase) in due to (from) other funds 18,867 (18,867) Decrease in postemployment liability 361,940 152,664 514,604 Increase in net assets (307,397) (86,020) (393,417)

With the adoption of GASS 45, the Power and Water Enterprise Funds' annual OPEB cost decreased from $119.7 million in fiscal year 2003 under FAS 106 to $107.4 million under GASB 45. The difference is due to an increase in the discount rate from 5. 75% to 6.5%, a change in the actuarial cost method from the Projected Unit Credit Cost Method to the Entry Age Normal Method, and a change in the amortization period for prior service costs from 20 years to 30 years. See Note 5A for additional information.

The OPEB cost for fiscal year 2004 amounted to $107.4 million. The Funds made contributions totaling $149.8 million. As a result, the allocated net postemployment assets of the Funds as of June 30, 2004 under GASB 45 are as follows (in thousands):

Power Water Total Postemployment liability $ (38,487) $ (19,992) $ (58,479) Postemployment assets 197,670 87,893 285,563 Net postemployment asset $ 159,183 $ 67,901 $ 227,084

- 74 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

GASB Statement No. 46, "Net Assets Restricted by Enabling Legislation, an amendment of GASB Statement No. 34." Issued in December 2004, the purpose of this statement is to help governments determine when net assets have been restricted to a particular use by the passage of enabling legislation and to specify how those net assets be reported in the financial statements when there are changes in the circumstances surrounding such legislation. GASS 46 will be effective for the City beginning fiscal year 2006.

GASB Technical Bulletin 2004-2, "Recognition of Pension and Other Postemployment Benefit {OPEBJ Expenditures/Expenses and Liabilities by Cost Sharing Employers." Issued in December 2004, the Technical Bulletin clarifies the application of requirements regarding accounting for employers' contractually required contributions to cost-sharing pension and OPES plans issued in GASS Statement No. 27, "Accounting for Pensions by State and Local Government Employers, " and GASS Statement No. 45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions," respectively. The Technical Bulletin does not apply to the City.

NOTE 2- RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS

A. Explanation of certain difference between the governmental funds balance sheet and the government-wide statement of net assets

The governmental funds balance sheet includes a reconciliation between total fund balances governmental funds and net assets of governmental activities as reported in the government wide statement of net assets. One element of that reconciliation explains that long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. The details of this $5,268,966 difference are as follows (in thousands):

Bonds, Certificates of Participation, and Notes $ 3,145,179 Add: Issuance Premium (to be amortized as interest income) 65,451 Less: Deferred Charge on Refunding (to be amortized as interest expense) (34,198) Less: Deferred Charge for Issuance Costs (to be amortized over the life of the debt) (18,394) HUD Loans 126,079 Accrued Interest Payable 42,923 Net pension liability 52,540 Accrued Landfill Liability 46,661 Accrued Compensated Absences 304,246 Estimated Claims and Judgments Payable 1,538,479 Net adjustments to reduce governmental fund balance to arrive at governmental activities net assets $ 5,268,966

- 75 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 2- RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS

B. Explanation of certain differences between the governmental funds statement of revenues, expenditures, and changes in fund balances and the government-wide statement of activities

The governmental funds statement of revenues, expenditures, and changes in fund balances includes a reconciliation between net change in fond balances-total governmental funds and change in net assets of governmental activities as reported in the government-wide statement of activities. One element of that reconciliation explains that 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. The details of this $404,364 difference are as follows (in thousands):

Total additions $ 700,303 Less: Historical cost of infrastructure assets (bridges) recorded during the year (138,356) Capital outlay 561,947 Less: Depreciation expense (157,583) Net adjustments to increase net change in fund balances of governmental funds to arrive at change in net assets of governmental activities $ 404,364

Another element of that reconciliation states that some expenses reported in the statement of activities do not require the use of current financial resources and therefore are not reported as expenditures in governmental funds. The details of this $358,828 difference are as follows (in thousands):

Increase in Accrued Landfill Liability $ 648 Increase in Accrued Interest 2,993 Increase in Net Pension Liabiiity 52,540 Increase in Accrued Compensated Absences 9,329 Increase in Estimated Claims and Judgments 288,451 Amortization of Deferred Charge on Refunding 3, 114 Amortization of Deferred Charge for Cost of Issuance 1,753 Net adjustments to decrease net change in fund balances of governmental funds to arrive at change in net assets of governmental activities $ 358,828

• 76 • CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 2- RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS

Another element of that reconciliation states that the issuance of long-term debt provides current financial resources to the governmental funds while the repayment of the principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction, however, has any effect on net assets. Also governmental funds report the effect of issuance costs, premiums, discounts, and similar items when debt is first issued, whereas, these amounts are deferred and amortized in the statement of activities. The details of this $323,835 difference are as follows (in thousands):

Debt issued or incurred: General Obligation Bonds $ 310,710 Add: Issuance Premium 15,741 Less: Deferred Charge on Refunding (3,662) Less: Deferred Charge for Issuance Costs (2,361) Certificates of Participation, Revenue Bonds, and Notes 234,768 Add: Issuance Premium 14,578 Less: Issuance Discount (59) Less: Deferred Charge for Issuance Costs (2,500) HUD Loans 23,895

Principal repayments and bond refunding: General and Judgment Obligation Bonds (154,635) Certificates of Participation and Revenue Bonds (110,323) HUD Loans (2,317) Net adjustments to decrease net change in fund balances of governmental funds to arrive at change in net assets of governmental activities $ 323,835

NOTE 3 - STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY

A. Budgets and Budgetary Basis of Accounting

Under the City Charter, the Mayor is required each year to submit to the Council a Proposed Budget by April 20 for the forthcoming fiscal year commencing July 1. The Proposed Budget is based on the Mayor's budget priorities, the responses of the City Administrative Officer and City Departments to the Mayor's budget policy letter, which is distributed early in the fiscal year, and estimates of receipts from the City's various revenue sources. The Council's Budget and Finance Committee reviews the Mayor's Proposed Budget and reports its recommendations to the full Council. The Council must legally adopt the Mayor's Proposed Budget, as modified by the Council, by June 1. The Mayor has five working days after adoption to approve or veto any items modified by the Council. The Council then has five working days to override by a two-thirds vote any items changed by the Mayor.

- 77 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 3 - STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY

The City Council adopts an annual operating budget for 39 City departments, bureaus, commissions and offices. The annual budget is essentially prepared on a departmental basis, with budgeted receipts and appropriations provided for the General Fund and certain Special Revenue, Debt Service, and Capital Projects Funds. Budgets are generally limited to funds, which in addition to the General Fund finance the operations of the City departments. Furthermore, the budgeted receipts and appropriations for the Allocations from Other Governmental Agencies Special Revenue Fund (which includes Bicycle License, Bus Bench Advertising, Business Improvement, Community Based Services Program AB2800, City Planning Systems Development, Cultural Affairs Trust, Curbside Recycling Trust, Environmental Affairs Trust, Fire Hydrant Installation and Main Replacement, First and Broadway Childcare, Integrated Solid Waste Management, Pershing Square Project, Street Banners, Targeted-Destination Ambulance Services, Urban Development Action Grant, Used Oil Collection, Warner Center Transportation Improvement, and Youth Opportunities Grant Special Revenue Funds) is not all-inclusive because the budget provides for only the portion of fund receipts that are expended to finance City department operations.

The City does not budget for the financial activities of all its Governmental Funds. The following Major Governmental Funds are not included in the City's legally adopted annual operating budget and therefore are not included in the budget to actual comparisons:

General Fund Reserve and other accounts component

Special Revenue Recreation and Parks Municipal Improvement Corporation

Debt Service Municipal Improvement Corporation

The City's original adopted budget is subject to revision to reflect the changes in revenue projections and to make necessary adjustments to appropriations. Transfers of appropriations are approved by the Mayor subject to the following limitations and conditions. Funds appropriated in the general City budget or thereafter by the Council may be transferred to the Reserve Fund or Unappropriated Balance of the General Fund, or appropriated for the same or other purposes amending the budget and other spending authority, upon approval of the Mayor provided the amounts do not exceed $50,000 and required notices are made by the City Clerk to the President of the Council, Controller and City Administrative Officer. Intra Department transfers from one appropriated item to another may be approved by the Mayor provided the amount does not exceed the greater of $35,000 or 1% of the budget for the account receiving the transfer but not exceeding $100,000. The $35,000 limit is subject to adjustment based on the consumer price index. For fiscal year ended June 30, 2004, the adjusted amount was $39,328. Transfers that exceed the amount limits require the approval of the City Council.

- 78 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 3 - STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY (Continued)

During the fiscal year, additional appropriations of $419.3 million and capital related appropriations of $90 million that were reappropriated from prior budget years were included in the current annual operating budget. Transfers from the Reserve Fund (a nonbudgeted General Fund component), unanticipated receipts, and available fund balances that carried forward from the prior budget year financed these additional appropriations. In addition, non capital related appropriations of $695.4 million were automatically carried forward from the prior budget year.

Unused and unencumbered appropriations lapse at year-end except for non-capital related continuing appropriations for certain Special Revenue and Capital Projects Funds that are carried forward to the next budget year. Capital related appropriations that are unused and unencumbered at year-end are re-appropriated in the subsequent budget year.

The legal level of budgetary control (the level at which expenditures may not legally exceed appropriations) is as follows: The General Fund is by line item within each object by department, except for capital improvement program expenditures which are controlled by projects. Object levels of expenditures are salaries, expenses, equipment, special, capital outlay, and transfers.

For the Special Revenue Funds, Debt Service Funds and Capital Projects Funds, the line items consist of departments, projects, debt service, equipment and programs. Because of the large volume of detail, the budget and actual schedules on a budgetary basis have been aggregated by fund, function and object level. A separate budget and actual report by line item has been prepared. The budgetary documents are available to the general public in the Office of the City Controller.

The City's annual budget is prepared on a modified cash basis of accounting, which is different from GAAP. Revenues are recognized when cash is received, and expenditures include both cash disbursements and current year encumbered appropriations that had not been paid at the end of the budget year.

Encumbrance accounting, under which purchase orders, contracts and other commitments for the expenditure of monies are recorded in order to reserve that portion of the applicable appropriation, is used in the Governmental Funds, except for certain Special Revenue and Capital Projects Funds whose assets are managed by a third party trustee. Encumbrances outstanding at year-end are reported as reservations of fund balances since they do not constitute expenditures or liabilities. These commitments will be honored in subsequent year carryforward appropriations.

B. Reconciliation of Operations on Budgetary Basis to the GAAP Basis

The actual results of operations on a budgetary basis compared to the appropriations adopted by the City Council for budgeted major governmental funds are included in the fund financial statements. The comparisons of actual results with the budget for non-major funds are presented as supplemental information in the combining schedules.

- 79 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 3- STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY (Continued)

Because accounting principles applied for purposes of developing data on a budgetary basis differ from those used to present financial information in accordance with GAAP, a reconciliation of the resultant basis and perspective differences on operations for the year ended June 30, 2004 is presented in the following pages for the City's budgeted major funds. The dollar amounts are expressed in thousands.

Proposition A Local Transit General Assistance Fund Fund Excess (Deficiency) of Revenues and Other Sources Over Expenditures and Other Uses - Budgetary Basis $ 150,362 $ {4,770)

Basis Differences

Adjustments for net changes to accrued assets and liabilities. The GAAP basis operating statement recognizes revenues as soon as they are both measurable and available, and expenditures generally are recorded when liability is incurred and is due and payable; whereas, the budgetary basis operating statement reflects revenues when received and expenditures when paid. (2,624) (3,714)

lnterfund borrowings are recorded in the debtor fund as an other financing source "Loans from Other Funds" and in the creditor fund as an other financing use "Loans to Other Funds" {budgetary) as opposed to "Due to Other Funds" in the debtor fund and "Due from Other Funds" in the creditor fund {GAAP). (3,992)

Encumbrances, which represent commitments to acquire goods and services, are recorded as the equivalent of expenditures in the budget year incurred (budgetary), as opposed to a reservation of fund balance {GAAP). Encumbrances reported as budgetary expenditures 240,271 18,330 Prior year encumbrances expended in current year (189,355) (6,964)

Perspective Difference

For purposes of the budget, the General fund is a legal entity that is separate and distinct from the Reserve Fund and other accounts that are classified to have General fund activity for GAAP purposes. (233, 198)

Excess {Deficiency) of Revenues and Other Financing Sources Over Expenditures and Other Financing Uses/Net Change in Fund Balance - GAAP Basis $ (38, 536) =$======2=,8=82=

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 3 - STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY (Continued)

Proposition C Anti-Gridlock Special Gas Transit Tax Street Community Improvement Improvement Development Fund Fund Fund Excess (Deficiency) of Revenues and Other Sources Over Expenditures and Other Uses - Budgetary Basis $ 24,018 $ 6,708 $ (14,092)

Basis Differences

Adjustments for net changes to accrued assets and liabilities. The GMP basis operating statement recognizes revenues as soon as they are both measurable and available, and expenditures generally are recorded when liability is incurred and is due and payable; whereas, the budgetary basis operating statement reflects revenues when received and exoenditures when oaid. 3, 163 3,907 454

Encumbrances, which represent commitments to acquire goods and services, are recorded as the equivalent of expenditures in the budget year incurred (budgetary), as opposed to a reservation of fund balance (GAAP). Encumbrances reported as budgetary expenditures 1,479 3,039 36,279 Prior year encumbrances expended in current year (926) (731) (20,404)

Grant funded loans are recorded as expenditures when disbursed and as program income when repaid (budgetary), as opposed to adjustments to the Loans Receivable account balance (GAAP\. (6,789)

Excess (Deficiency) of Revenues and Other Financing Sources Over Expenditures and Other Financing Uses/Net Change in Fund Balance - GAAP Basis $ 27 734 $ 12,923 $ (4,552) c. Fund Balances- Reserves, Designations and Deficit

Reserves of fund balances represent those amounts which are not available for appropriation in future periods or which are legally segregated for specific future uses.

Fund designations indicate tentative plans for future utilization of financial resources. The City's designated fund balance in the General Fund of $71 million consists of advances and technical adjustments totaling $1 O million, and an emergency reserve of $61 million.

The Workforce Investment Act Special Revenue Fund has a deficit fund balance of $0.9 million because eligible government expenditures were incurred with amounts recorded as deferred revenue that will be recognized as future revenues when available.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS

A. Cash, Deposits and Investments

As provided for by the California Government Code, the cash balances of substantially all funds on deposit in the City Treasury are pooled and invested by the City Treasurer for the purpose of maximizing interest earnings through pooled investment activities but safety and liquidity still take precedence over yield. Interest earned on pooled investments is allocated to certain participating funds, as authorized by the City Council and permitted by the City's Charter and California Government Code, based on each fund's average daily deposit balance during the allocation period with all remaining interest allocated to the General Fund. Investments in the City Treasury are stated at fair value based on quoted market prices except for money market investments that have remaining maturities of one year or less at time of purchase, which are reported at amortized cost.

Pursuant to California Government Code Section 53607 and the Los Angeles City Council File No. 94-2160, the City Treasury provides an Annual Statement of Investment Policy (the Policy) to the City Council. The Policy governs the City's investment practices. The Policy addresses soundness of financial institutions in which the City will deposit funds, and types of investment instruments permitted by California Government Code Sections 53601 and 16429.1. Investments permitted by the City's investment policy include obligations of the U.S. Treasury and government agencies, commercial paper notes, negotiable certificates of deposit, guaranteed investment contracts, bankers acceptances, medium term corporate notes, money market accounts, and the State of California Local Agency Investment Fund.

Oversight responsibility for conformance with the Policy is placed with the Investment Advisory Committee (IAC) composed of the City Treasurer as chairperson, the Office of the Mayor, City Controller, Chief Legislative Analyst, City Administrative Officer, Director of Office of Finance, and an external investment advisor.

Other deposits and investments maintained outside the City Treasury are invested pursuant to policies adopted by the boards of commissioners of the City's pension systems, and Water and Power, governing bond covenants or California Government Code provisions. Investments made under these provisions are reported as follows. Investments are stated at fair value, and pension investments are reported in accordance with GASB Statement No. 25. Real estate investments are recorded in the financial statements under the equity method, and are carried at lower of cost or market value. Investments denominated in foreign currencies are translated to the U.S. dollar at the rate of exchange in effect at the statement of net assets date, with resulting gains and losses recorded in the statement of changes in fiduciary net assets.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The stated fair value of securities investments are generally based on published market prices or quotations from major investment dealers. Real estate values are taken from recent appraisals, purchase prices and reports of investment advisors. The fair values of venture capital and alternative investments are estimated based on audited financial statements provided by the individual fund managers.

The CRA cash deposits are maintained with different banks within the various redevelopment project areas. Its investments, carried at fair value, consist of U.S. government securities that are deposited into CRA safekeeping accounts to ensure segregation of CRA owned securities.

Summary of Cash and Investments

A summary of cash, pooled and other investments for all City funds and the CRA at June 30, 2004, is presented below (in thousands):

All Cit Funds Business- Governmental type Fiduciary Activities Activities Funds Total CRA Cash and Pooled Investments $ 3,356,681 $ 1,363,264 $ 100,358 $ 4,820,303 $123,201 Other Investments 64,751 35 28,388,296 28,453,082 70,482 Restricted Assets (Note 4D page 93) 16,143 1,930,950 1,947,093 76,823 Total $ 3,437,575 $ 3,294,249 $28,488,654 $35,220,478 $270,506

Cash and Other Cash Investments and Investments With City Pension Treasurer Trust Other Total CRA Cash and Pooled Investments $ 4,466,783 $ $ 353,520 $ 4,820,303 $123,201 Other Investments 28,387,392 65,690 28,453,082 70,482 Restricted Assets 1,089,097 857,996 1,947,093 76 823 Total $ 5,555,880 $28,387,392 $ 1,277,206 $35,220 478 $270,506

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Summary of Deposits and Investments

A summary of the carrying amount of cash on hand, deposits and investments at June 30, 2004, is as follows (in thousands):

All City Funds CRA Cash on Hand $ 742 $ Deposits 34,502 6,922 Investments Pooled 5,571,306 Other 29,613,928 263,584 Total $ 35,220,478 $ 270,506

Deposits

At June 30, 2004, the book balance of the City's deposits was approximately $34.5 million and the balance per various financial institutions was approximately $125.1 million. The difference of $90.6 million represents primarily outstanding checks and other reconciling items. Of the bank balance, $2.4 million was covered by Federal depository insurance and $122.7 million was uninsured. The uninsured deposits of $122.7 million are held by financial institutions which are legally required by the California Government Code to collateralize the City's deposits by pledging government securities or first trust deed mortgage notes. The market value of the pledged government securities and first trust deed mortgage notes must be at least 110% and 150% of the City's deposits, respectively. The collateral is held by the pledging financial institution's trust department and is considered held in the City's name.

The CRA cash deposits had a book balance of $6.9 million at June 30, 2004, while the bank balance totaled $9.3 million. The difference of $2.4 million represents primarily outstanding checks and other reconciling items. Of the bank balance, $1 million was covered by Federal depository insurance and $8.3 million was fully collateralized in accordance with State law as described above.

The investments held by the City are categorized separately below to give an indication of the level of custodial credit risk assumed by the City at year-end. Category 1 includes investments that are insured or registered, or are held by the City or its agents in the City's name. Category 2 includes uninsured and unregistered investments held by the counterparty's trust department or agent in the City's name. Category 3 includes uninsured and unregistered investments held by the counterparty, or by its trust department or agent, but not in the City's name.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The three categories do not apply to certain types of investments, such as mutual funds, real estate, investments held by broker-dealers under securities loans with cash collateral, venture capital investments, investments in a securities lending short-term investment pool, guaranteed investment contract, and State of California Local Agency Investment Fund (LAIF), a State Treasurer's investment pool.

At June 30, 2004, the investments held in the City Treasury's General and Special Investment Pool Programs are as follows (in thousands):

Type of Investments Category 1 Category 2 Total Categorized Investments Bonds $ 680,991 $ $ 680,991 Commercial Paper 596,494 596,494 Negotiable Certificates of Deposits 42, 110 42, 110 Repurchase Agreements 746,111 746,111 Short-Term Investment Funds 17,187 17,187 U.S. Government Securities not on Securities Loan 2,602,363 2,602,363 Total Categorized Investments $ 3,939, 145 $ 746, 111 4,685,256 Investments Not Categorized Investments Held by Broker-Dealer Under Securities Loans with Cash Collateral - U.S. Government Securities 726,050 State of California LAIF 160,000 Total General and Special Investment Pool Programs in City Treasury $ 5,571,306

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The City's other investments are categorized as follows at June 30, 2004 (in thousands):

Category Type of Investments 2 3 Total Categorized Investments U.S. Government Securities $ 1,585,792 $ 43,438 $ $ 1,629,230 Bonds 2,856,971 2,856,971 Stocks 14,996,593 14,996,593 Commercial paper 24,874 24,874 Repurchase Agreements 192,848 192,848 Short-Term Investment Funds 1,081,454 398,987 1,480,441 Negotiable Certificates of Deposits 14,365 14,365 Futures Initial Margin 1,894 1,894 Mortgage-backed Securities 227,802 227,802 Investments Under Securities Loans with Securities Collateral: U.S. Government Securities 208,343 208,343 Bonds 8,338 8,338 Stocks 286,911 286,911 Total Categorized Other Investments $ 21,293,337 $ 236,286 $ 398,987 21,928,610 Investments Not Categorized Investments Held by Brokers-Dealers Under Securities Loans with Cash Collateral: U.S. Government Securities 1,043,995 Bonds 572, 194 Stocks 916,469 Mutual Funds 25,209 Securities Lending Short-term Investment Pool 3,036,342 Mutual Funds 147,628 Real Estate 1,255,472 Venture Capital 645,870 Guaranteed Investment Contract 42, 139 Total Other Investments $ 29,613,928

The CRA investments are categorized as follows at June 30, 2004 (in thousands):

Category 1 Investments:

U.S. Government Securities $ 178, 131 Negotiable Certificates of Deposit 110 Commercial Paper 29,984 Total Categorized Investments 208,225 Investment Not Categorized - State of California LAIF 55 359 Total $ 263,584

- 86 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

As of June 30, 2004, the City and the CRA's investments in the State of California Local Agency Investment Fund (LAIF) are $160 million and $55.4 million, respectively. The total amount invested by all public agencies in LAIF at that date is $22.2 billion. The LAIF is part of the Pooled Money Investment Account (PMIA). As of June 30, 2004, the investments in the PMIA totaled $57.6 billion, of which 98.4% is invested in non-derivative financial products and 1.6% in asset-backed securities. The Local Investment Advisory Board (the Board) has oversight responsibility for LAIF. The Board consists of five members as designated by State statute. The Pooled Money Investment Board whose members are the State Treasurer, Director of Finance, and State Controller, has oversight responsibility for PMIA. The value of the pool shares in LAIF, which may be withdrawn at any time, is determined on a historical cost basis, which is different than the fair value of the City's and CRA's position in the pool.

Securities Lending Transactions

City General Investment Pool

Securities lending is permitted and limited under provisions of California Government Code Section 53601. The City Council approved the Securities Lending Program (the SLP) on October 22, 1991 under Council File No. 91-1860, which complies with the California Government Code. The objectives of the SLP in priority order are: safety of loaned securities; and prudent investment of cash collateral to enhance revenue from the investment program. The SLP is governed by a separate policy and guidelines, with oversight responsibility of the Investment Advisory Committee composed of the City Treasurer (as Chairperson), City Controller, Chief Legislative Analyst, City Administrative Officer, and a contracted financial advisor.

The City's custodial bank acts as the securities lending agent. In the event a counterparty defaults by reason of an act of insolvency, the bank shall take all actions which it deems necessary or appropriate to liquidate permitted investment and collateral in connection with such transaction and shall make a reasonable effort for two business days (Replacement Period) to apply the proceeds thereof to the purchase of securities identical to the loaned securities not returned. If during the Replacement Period the collateral liquidation proceeds are insufficient to replace any of the loaned securities not returned, the bank shall, subject to payment by the City of the amount of any losses on any permitted investments, pay such additional amounts as necessary to make such replacement.

Under the provisions of the SLP, and in accordance with the California Government Code, no more than 20% of the market value of the General Investment Pool (the Pool) shall be available for lending. The City receives cash as collateral on loaned securities, which is reinvested in securities permitted under the Policy. In accordance with the California Government Code, the securities lending agent marks to market the value of both the collateral and the reinvestments daily. Except for open loans where either party can terminate a lending contract on demand, term loans shall have a maximum life of 90 days. Earnings from securities lending shall accrue to the Pool and shall be allocated on a pro-rata basis to all Pool participants.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

At June 30, 2004, the assets and liabilities arising from the reinvested cash collateral were recognized in the respective participants financial statements. Investments made with cash collateral were categorized in accordance with GASS Statement No. 3. Securities on loan that were collateralized with cash are not subject to custodial credit risk categorization. During the fiscal year, collateralizations on all loaned securities were within the required 102% of market value. The City can sell collateral securities only in the event of borrower default. The lending agent provides indemnification for borrower default. There were no violations of legal or contractual provisions and no borrower or lending agent default losses during the year. There was no credit risk exposure to the City because the amounts owed to the borrowers exceeded the amounts borrowed.

Water and Power Enterprise Funds

In December 1999, DWP initiated a securities lending program for its power and water systems, which is managed by its custodial bank. The bank lends up to 20% of the investments held in the debt reduction trust funds, decommissioning trust funds, and plan assets held in the postemployment benefits funds for securities, cash collateral or letters of credit equal to 102% of the market value of the loaned securities and interest, if any. DWP can sell collateral securities only in the event of borrower default. The lending agent provides indemnification for borrower default. There were no violations of legal or contractual provisions and no borrower or lending agent default losses during the year. There was no credit risk exposure to DWP because the amounts owed to the borrowers exceeded the amounts borrowed.

Pension Plans

The City Charter and the investment policies adopted by their respective boards authorize the securities lending transactions of the three City pension systems. The securities lending transactions of the systems are described below:

Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan

The Plan's custodial bank manages its securities lending. The Plan or the borrowers can terminate the contract with advance notice. The lending arrangements are collateralized by cash and marketable securities (guaranteed by the full faith and credit of the U.S. Government) at 102% of the underlying securities market value.

These arrangements provide for the return of the investments and a share of the interest earned on the collateral. The securities on loan to brokers remain the property of the Plan and continue to be included in their respective accounts on the statement of fiduciary net assets. Securities lent at year-end for cash collateral are presented as unclassified in the schedule of custodial credit risk; securities lent for securities collateral are classified according to the category for the collateral. At year-end, the Plan had no credit risk exposure to borrowers because the amounts the Plan owed the borrowers exceeded the amounts the borrowers owed the Plan. During the year, the Plan did not incur losses due to borrowers' default.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The Plan's custodian is the authorized agent to handle the Plan's securities lending activity. The custodian may invest the cash collateral received in connection with loaned securities in investments permitted by the Plan. The Plan bears sole risk of all losses of the invested collateral, including losses incurred in the event of liquidation of the permitted investments. The custodial bank is responsible for the return of loaned securities from the borrowers. The Plan does not have the ability to pledge or sell collateral assets unless the borrower is in default of its obligation.

Los Angeles City Employees' Retirement System (LAGERS)

The LAGERS has entered into various short-term arrangements with its custodian whereby securities are loaned to various brokers. The custodian determines which lenders' accounts to lend securities from, by using an impartial sequential system that matches loan requests with various lenders' accounts. All lenders are deemed to have relatively equal opportunity to profit from the lending of securities. Therefore, should a collateral deficiency occur beyond the custodian's responsibilities, the deficiency is allocated pro rata among all lenders.

Minimum required collateralization is 102% of fair value of the borrowed U.S. securities and 105% for international securities. Collateral consists of cash, government securities and irrevocable bank letters of credit. The cash collateral may be invested separately or pooled in a separate fund for investing in money market or cash equivalent investments. LAGERS cannot pledge or sell non-cash collateral unless the borrower defaults. The cash collateral values of securities on loan to brokers are shown at fair value in the statement of fiduciary net assets. Securities collateral and investments made with the cash collateral were categorized in accordance with GASB Statement No. 3. During the fiscal year, LAGERS had no losses due to borrower default. There was no credit risk exposure at year-end because the amounts owed the borrowers exceeded the amounts the borrowers owed LAGERS.

Fire and Police Pension System (Pensions)

The Pensions also has entered into various short-term lending arrangements with its custodian whereby investments selected by the custodian are loaned to various brokers. The lending arrangements are collateralized by cash that can be reinvested, letters of credit and marketable securities, held on behalf of Pensions by the custodian. Pensions cannot pledge or sell non-cash collateral unless the borrower defaults. The minimum required collateralization is 102% of market value plus any accrued interest of the borrowed U.S. securities and 105% of market value plus any accrued interest for non-U.S. securities.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The cash collateral received is included in the statement of fiduciary net assets at June 30, 2004. Investments made with the cash collateral were uncategorized in accordance with GASB Statement No. 3. During the year, Pensions had no losses due to borrowers default. There was no credit risk exposure because the amounts owed the borrowers exceeded the amounts the borrowers owed Pensions.

Borrowers of LAGERS and Pensions securities have all incidents of ownership with respect to borrowed securities and collateral, including the right to vote and transfer or loan borrowed securities to others. LAGERS and Pensions are entitled to receive all distributions made by the issuer of the borrowed securities directly from the borrower. Under the securities lending agreements, the custodians will indemnify LAGERS and Pensions as a result of the custodian's failure to: 1) make a reasoned determination of the credit worthiness of a potential borrower before lending, and during the term of the loans, if the borrower files a petition of bankruptcy or similar action, 2) demand adequate collateral, or 3) otherwise maintain the securities lending program in compliance with the Federal Financial Institutions Examination Council Supervisory Policy on Securities Lending.

Futures and Forward Contracts

LAGERS uses derivative financial instruments primarily to manage portfolio risk. Futures contracts are used to provide equity exposure for uninvested cash, and forward contracts are used to hedge against fluctuations in foreign currency denominated assets primarily in trade settlements. Futures and forward contracts are marked to market and are recorded in the statement of plan net assets at fair value.

At June 30, 2004, LAGERS had outstanding futures contracts for foreign currencies and the Standard and Poor's 500 Index with an aggregate notional amount of $52.3 million. In addition, at June 30, 2004, LAGERS had outstanding forward purchase commitments with a notional amount of $58.9 million and offsetting forward sales commitments with notional amounts of $58.9 million that expire through September 2004. LAGERS maintains margin collateral on the positions with brokers, consisting of cash and U.S. Treasury Bills. The total collateral margin was $1.9 million as of June 30, 2004. The realized gain on foreign currency translation was $56.3 million for the year ended June 30, 2004

Futures contracts have little credit risk, as organized exchanges are the guarantors. Forward agreements are subject to the creditworthiness of the counterparties, which are principally large financial institutions.

Overdraft Limit and Line of Credit

The City has $100 million "Authorized Overdraft Limit" with a bank that maintains the City's operating account. At its sole discretion, the bank may allow an overdraft to occur in the City's account. Such overdraft, including any charges, must be repaid immediately without demand, except when the City and the bank agree otherwise or when the bank advises otherwise in writing.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The M ICLA has a $5.6 million open line of credit related to a project. As of June 30, 2004, no amounts were drawn on this credit line.

B. Receivables

The primary government's net receivables at June 30, 2004 are as follows (in thousands):

Governmental Business-type Activities Activities Gross Receivables Taxes $ 297,863 $ Accounts 562,647 782,546 Special Assessments 18,969 Investment Income 30,131 11,926 Intergovernmental 187,619 59,376 Loans 847,978 1,173,183 Total 1,945,207 2,027,031 Allowance for Uncollectibles Taxes (27,355) Accounts (405,448) (77,064) Special Assessments (1,345) Intergovernmental (55,617) Loans (575,302) (2,000) Total p,065,067) (79,064) Net Receivables $ 880, 140 $ 1,947,967 Net Receivables not schedules for collection during the subsequent year: Loans $ 266,276 $ 1,122,086 Accounts 116,486

The majority of the governmental activities loans consist of grant funded loans provided as follows: a) to property owners for the upgrading and rehabilitation of residential or rental properties to eliminate the spread of slums and blight and repair earthquake damage; b) to businesses to carry out economic development projects; and c) to community based organizations to acquire, construct or improve existing public facilities. Interest rates ranged from 3% to 10% for interest bearing loans. The principal and interest are paid either monthly, quarterly, annually (amortizing loans), or when residual receipts are generated in accordance with the loan agreements (residual receipts loans), or deferred until maturity, transfer of title or sale of property occurs (deferred loans).

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The governmental activities loans include a receivable of $45 million from the Los Angeles Community Development Bank (see Note 5D on page 147).

Governmental funds report deferred revenue in connection with receivables for revenues and other financing sources that are not considered to be available to liquidate liabilities of the current period. At June 30, 2004, the various components of deferred revenue reported in the governmental funds were as follows (in thousands):

Taxes $ 74,665 Accounts 130,176 Intergovernmental 44,972 Special Assessments 13,067 Investment Income 14,727 Transfers from Other Funds 40,000 Total Deferred Revenue for Governmental Funds $ 317,607

The business-type activities loans include the Power Enterprise Fund's long-term notes of $1.17 billion from lntermountain Power Agency (see Note 58 on page 140), and $3 million long-term Harbor notes receivable.

The $67.2 million net receivables of the CRA at June 30, 2004 consisted of $3.5 million property taxes, $25.4 million intergovernmental, $0.6 million investment income, $35.2 million loans, and $2.5 million other.

The CRA net loans receivable of $35.2 million reflected an allowance for market value write down and uncollectibles of $466.3 million. To enhance the redevelopment process, the CRA grants "below-market" interest rate loans primarily for the rehabilitation and development of low and moderate-income housing and the development of commercial properties. Since these loans are generated to assist various redevelopment areas, repayment terms are structured to meet requirements established by the CRA and the specific project areas.

C. Loans Receivable from Component Unit

The City has recorded non-interest bearing, no-fixed term loans of $50.7 million, and 20-year loans totaling $17.2 million. These loans are to be repaid by the CRA from certain sources such as tax increment revenues of the respective redevelopment projects as defined in the contracts, and applicable program income. The $17.2 million loans bear 5% interest with final maturity date of June 2021.

Additionally, the City has recorded loans of $0.9 million with a 3% interest rate and $3 million with a 4% interest rate that will mature in March 2012 and April 2005, respectively. The $0.9 million loan is secured by site-specific tax increments that are subordinate to project area's bond and tax increment commitments. The $3 million loan is secured by a pledge of the project's area-wide tax increments that are subordinate to existing and future senior-lien bonds.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

A $4.3 million promissory note bearing 5.5% interest was also signed by the CRA to be repaid by making City approved block grant qualifying expenditures in the redevelopment project. The note will mature in December 2022.

During fiscal year 2004, a $14 million HUD Section 108 loan was extended to the CRA to partially fund the acquisition and relocation costs of a redevelopment project. The loan agreement allows CRA to assign the loan to the project developer. In September 2004, the assignment was effected. Although the loan was assigned to the developer, the CRA will maintain its pledge to the City of area-wide tax increment as security of the loan. However, the area-wide tax increment pledge is subordinate to existing and future lien bonds of the project area. The loan is further secured by an unconditional guaranty of payment not to exceed $12.3 million. A company that is a party related to the project developer issued the guaranty.

D. Restricted Assets

The primary government's restricted assets of $1,981.5 million are composed of the following at June 30, 2004 (in thousands):

Governmental Business-type Activities Activities Total Cash and Investments Cash and Pooled Investments With City Treasurer $ 8,054 $ 1,081,043 $ 1,089,097 Other Investments 8,089 849,907 857,996 Subtotal 16, 143 1,930,950 1,947,093 Other Restricted Assets Investment Income Receivable 13,924 13,924 Other Receivables 20,450 20,450 Total $ 16,143 $ 1,965,324 $ 1,981,467

The restricted assets for governmental activities are related to the State mandated deposit with a trustee bank to finance solid waste landfill closure and postclosure care costs, and donated resources for the renovation of the Griffith Observatory. For the business-type activities, the restricted amounts are for accumulated resources for debt service payments, nuclear decommissioning trust funds, collected but unexpended passenger facility charges and accrued interest thereon, a self-insurance reserve, deposits from service users, and retention guarantees from contractors. The restricted cash and investments are included in the discussion in Note 4A.

The CRA's restricted assets totaling $76.8 million include investments maintained with fiscal agents that are pledged as collateral for the payment of principal and interest on tax allocation and parking revenue bonds.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

E. Joint Ventures

lntermodal Container Transfer Facility Joint Powers Authority (ICTFl and Alameda Corridor Transportation Authority (ACT Al

The harbor departments of the City of Los Angeles (The Harbor) and the City of Long Beach, California (Port of Long Beach) entered into two separate joint exercise of powers agreements that formed the authorities.

The ICTF was formed for the purpose of financing and constructing a facility to transfer cargo containers between truck and railroad cars. The Southern Pacific Transportation Company (a wholly owned subsidiary of Union Pacific Corporation) operates the facility under a long-term lease agreement. The Harbor and the Port of Long Beach each have a 50% interest in the venture, with the Harbor having an investment of $5.3 million at June 30, 2004. The Harbor's investment, which is accounted for using the equity method, is included in the government wide and proprietary funds statement of net assets. Separate financial statements for the ICTF may be obtained from the Executive Director, Port of Long Beach, 925 Harbor Plaza, Long Beach, California 90802.

The ACTA was formed for the purpose of establishing a comprehensive transportation corridor and related facilities consisting of street and railroad rights-of-way, and an improved highway and railroad network along Alameda Street between the Santa Monica Freeway and the Ports of Los Angeles and Long Beach in San Pedro Bay linking the two ports to the central Los Angeles area. The Harbor and the Port of Long Beach share income and equity distributions equally. During fiscal year 1995, the Harbor and the Port of Long Beach purchased railroad rights-of-way and other assets along the proposed corridor route for approximately $370 million.

At June 30, 1998, the Harbor had advanced a total of $13.3 million to the ACTA to fund its share of planning and other costs incurred to date. During fiscal year 1999, the ACTA reimbursed the Harbor for all amounts advanced plus approximately $3.2 million of interest on the advances out of debt or grant financing proceeds. The ACTA also reimbursed the Harbor for approximately $81.7 million of capital assets directly related to the ACTA's mission, which the Harbor had previously included in construction in progress. Of the capital assets transferred, approximately $22.2 million had been funded by capital grants. The Harbor's share of the ACTA's operations and assets, liabilities and equity at June 30, 2004, is immaterial to the accompanying financial statements. Separate financial statements for ACTA may be obtained from the Controller, Alameda Corridor Transportation Authority, One Civic Plaza Drive, Suite 650, Carson, California 90745.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Los Angeles Export Terminal, Inc. {LAXT)

The Harbor entered into a shareholders' agreement which formed the LAXT for the purpose of financing, constructing and managing a dry bulk handling facility for the export of coal, petroleum coke and related products on land leased by permit from the Harbor. It contributed $19 million to the LAXT as part of the agreement, which represents a 13.2% equity participation of the total committed capital of $143.2 million. This capital was raised from the shareholders through the purchase of stock in the corporation. The Harbor's investment totaled $19 million at June 30, 2004, which is accounted for using the equity method. The Harbor has a right to nominate two directors to a 19-member board of directors. In fiscal year 1998, the terminal began operating under a long-term lease agreement with a terminal manager/operator.

In 2003, LAXT ceased its coal operations. Due to these circumstances, the Harbor has set aside $19 million as 100% investment loss reserve for its share of equity participation in the LAXT. The Harbor has also fully reserved for all outstanding notes ($2 million) and accounts receivable ($30.1 million) due from LAXT. Separate financial statements for LAXT may be obtained from the General Manager of LAXT, P.0. Box 1769, San Pedro, California 90733.

F. Capital Assets

Capital asset activity for Governmental Activities for the year ended June 30, 2004 is as follows (in thousands):

Balance Additions/ Deductions/ Balance Governmental Activities June 30, 2003 Transfers Transfers June 30, 2004 Capital Assets Not Depreciated Land $ 385,370 $ 138,233 $ $ 523,603 Infrastructure 57,377 146,751 (43,942) 160,186 Construction in Progress 540 410 320, 122 (133,774) 726,758 Total Capital Assets Not Depreciated 983, 157 605,106 (177,716) 1,410547 Capital Assets Depreciated Buildings and Improvements 1,766,357 133,242 (9,387) 1,890,212 Machinery, Furniture and Equipment 920,064 69,117 (49,843) 939,338 Infrastructure 139 661 70,554 210215 Total Capital Assets Depreciated 2,826,082 272,913 (59,230! 3,039,765 Less: Accumulated Depreciation Buildings and Improvements (501,599) (63,065) 9,387 (555,277) Machinery, Furniture and Equipment (532,246) (84, 197) 49,843 (566,600) Infrastructure (25,794) p0,321) (36,115) Total Accumulated Depreciation (1,059,639) (157,583) 59,230 (1,157,992) Total Capital Assets Depreciated, Net 1,766,443 115,330 1,881 773 Governmental Activities Capital Assets, Net $ 2,749,600 $ 720,436 $ (177,716! $ 3,292,320

- 95 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The additions during the year included historical cost of $138.4 million for City bridges that were constructed through fiscal year 2002. This change required a corresponding adjustment to the governmental activities beginning net assets in the government-wide financial statements. Beginning fiscal year 2002, the City has implemented the prospective provisions of GASB 34 on infrastructure assets and as information becomes available, the retroactive provisions are implemented. The final implementation is required for the City by fiscal year ending June 30, 2006.

Depreciation expense was charged to functions/programs of the governmental activities as follows (in thousands):

Function/Pro51ram Amount General Government $ 27,482 Protection of Persons and Property 43,553 Public Works 18,892 Health and Sanitation 15,406 Transportation 16, 120 Cultural and Recreational Services 34,748 Community Development 1,382 Total Depreciation Expense - Governmental Activities $ 157,583

Capital asset activity for Business-type Activities for the year ended June 30, 2004 is as follows (in thousands):

Balance Additions/ Deductions/ Balance Business-~ee Activities June 30, 2003 Transfers Transfers June 30, 2004 Capital Assets Not Depreciated Land $ 1,749,509 $ 165,344 $ (24,298) $ 1,890,555 Construction in Progress 2,783,034 1,151,332 (1,290,087) 2,644,279 Total Capital Assets Not Depreciated 4,532,543 1,316676 (1,314,385) 4,534,834 Capital Assets Depreciated Buildings, Facilities and Equipment 20,335,091 1,384,605 (275,451) 21,444,245 Leased Property and Improvements 194 024 194 024 Total Capital Assets Depreciated 20,529,115 1,384,605 (275,451) 21,638,269 Less: Accumulated Depreciation Buildings, Facilities and Equipment (8,852,020) (674, 130) 118,186 (9,407,964) Leased Property and Improvements (73,085) (2,825) (75,910) Total Accumulated Depreciation (8,925,105) (676,955) 118,186 (9,483,874)

Capital Assets Depreciated, Net 11,604,010 707,650 (157,265) 12,154,395 Nuclear Fuel at Amortized Cost 13 431 5 709 (6,587) 12 553 Business-type Activities Capital Assets, Net $16,149,984 $2,030,035 $(1,478,237) $16, 701, 782

- 96 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Additions to accumulated depreciation are accounted for as follows (in thousands):

Depreciation expense charged to functions of business-type activities: Airports $ 75,973 Harbor 67,934 Power 264, 126 Water 93,029 Sewer 130,068 Other Enterprise Fund 12,297 Capitalized depreciation expense: Power 24,869 Water 8,659 Total $676,955

The Power Enterprise Fund has direct interests in several electrical generating stations and transmission systems that are jointly owned with other utilities. Each project participant is responsible for financing its proportionate share of construction and operating costs. The following schedule shows the investment in each jointly owned utility plant as included in capital assets in the statement of net assets at June 30, 2004 (dollar amounts in thousands):

Share of Plant in Service Ownership Capacity Accumulated Interest (megawatts) Cost Deereciation Palo Verde Nuclear Generating Station 5.7°/o 217 $ 529,063 $ 256,458 Navajo Generating Station 21.2o/o 477 210,467 216,120 Mohave Generating Station 10.0% 158 68, 163 67,459 Pacific lnterties DC Transmission Line 40.0% 1,240 195,712 56,047 Other Transmission Systems various various 76,336 37 827 $ 1,079,741 $ 633,911

Capital assets activity for the CRA for the year ended June 30, 2004 is as follows (in thousands):

Balance Additions/ Deductions/ Balance June 30, 2003 Transfers Transfers June 30, 2004 Capital Assets Not Depreciated Land $ 72,080 $ 1, 194 $ (719) $ 72,555 Capita I Assets Depreciated Buildings and Improvements 41,360 41,360 Equipment 11,034 655 11,689 Total Capital Assets Depreciated 52,394 655 53,049 Less - Accumulated Depreciation [17,948) [1,564) [19,512)

Capital Assets Depreciated, Net 34446 (909) 33,537

Total Capital Assets, Net $ 106 526 $ 285 $ (719) $ 106,092

The CRA allocated the depreciation expense of $1.6 million to its various projects.

- 97 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

G. lnterfund Receivables, Payables, and Transfers

The following tables are summaries of the City's interfund balances at June 30, 2004 (in thousands):

Due To/From Other Funds

Receivable Fund Payable Fund Amount General Proposition A Local Transit Assistance $ 904 Proposition C Anti-Gridlock Transit Improvement 568 Recreation and Parks 216 Special Gas Tax Street Improvement 136 Community Development 1,301 Other Governmental Funds 24,056 Power 60,000 Other Enterprise Fund 401 87,582

Proposition A Local Transit Assistance General 296

Proposition C Anti-Gridlock Transit Improvement General 180

Recreation and Parks General 2 Other Governmental Funds 2 205 2 207

Special Gas Tax Street Improvement General 7 701

Community Development General 731

Other Governmental Funds General 12,206 Recreation and Parks 24 Community Development 82 Other Governmental Funds 6 263 18 575

Harbor General 3,623

Power Water 20,007 Total $ 140,902

The receivable balance of the General Fund from the various governmental funds resulted from transfers from the Reserve Account as short-term loan to cover tardy receipts of revenues, while the payable balance is composed primarily of encumbered and unexpended budgetary transfers for certain costs allocated to the various funds. The receivable from the Power Enterprise Fund is related to transfers in accordance with budgetary authorizations. The Power Enterprise Fund's receivable from the Water Enterprise Fund is related to outstanding costs of certain administrative functions shared by the funds.

The payable balance of the General Fund to the Harbor Enterprise Fund is related to the current portion of a litigation settlement.

- 98 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Advances To/From Other Funds

Receivable Fund Payable Fund Amount General Recreation and Parks $ 3,230 Other Governmental Funds 16,558 Other Enterprise Fund 7 19,795

Proposition A Local Transit Assistance Other Governmental Funds 899

Proposition C Anti-Gridlock Transit Improvement Other Governmental Funds 61,821

Recreation and Parks Other Governmental Funds 1 825

Other Governmental Funds General 6,763 Other Governmental Funds 249 7,012

Harbor General 47,888

Sewer Other Governmental Funds 2,982

Agency Funds General 5,129 Recreation and Parks 4,000 Other Governmental Funds 3,507 12,636

Total $ 154,858

The above balances represent interfund borrowings payable beyond one year. The payable balance of the General Fund to the Harbor Enterprise Fund is related to the non current portion of a litigation settlement.

lnterfund Transfers

Transfers in Transfers Out Amount General MICLA Special Revenue $ 14,245 MICLA Debt Service 22 Other Governmental Funds 7,145 Harbor 2,518 Power 170,214 Water 27,649 221,793

Proposition A Local Transit Assistance General 28 Proposition C Anti-Gridlock Transit Improvement Other Governmental Funds 11 415

Recreation and Parks General 106,994 Other Governmental Funds 25 107019

- 99 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Transfers in Transfers Out Amount Special Gas Tax Street Improvement Other Governmental Funds $ 35

Community Development Other Governmental Funds 8,505

MICLA Special Revenue General 290

MICLA Debt Service General 96,004 MICLA Special Revenue 11,021 Other Governmental Funds 38,986 146 011

Other Governmental Funds General 191,412 Proposition A Local Transit Assistance 3,169 Proposition C Anti-Gridlock Transit Improvement 7,910 Community Development 3,123 MICLA Special Revenue 43 Other Governmental Funds 44,780 250,437

Other Enterprise Fund General 2,144 Total $ 747,677

The General Fund has deferred transfers from the Power Enterprise Fund totaling $40 million that were received beyond 60 days of the end of the fiscal year.

Transfers are used to (a) move revenues from the fund that statute or budget requires to collect them to the fund that statute or budget requires to expend them, (b) move receipts restricted to debt service from the funds collecting the receipts to the debt service fund as debt service payments become due, (c) use unrestricted revenues collected in the General Fund to finance various programs accounted for in other funds in accordance with budgetary authorizations, and (d) move unrestricted revenues collected in certain enterprise funds to partially finance various programs in the General Fund in accordance with budgetary authorizations.

H. Accounts Payable and Accrued Expenses

The primary government's accounts payable and accrued expenses at June 30, 2004 is broken down as follows (in thousands):

Governmental Business-type Activities Activities Accounts, Contracts and Retainage Payable $ 121,117 $ 418,177 Accrued Salaries and Overtime Payable 135,123 42, 175 Intergovernmental Payable 23, 188 Other Current Liabilities 53,897 Total $ 279,428 $ 514,249

- 100 · CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

I. Long-term Liabilities

Governmental Activities

Changes in Long-term Liabilities

The changes in the governmental activities long-term liabilities for the year ended June 30, 2004 are as follows (in thousands):

Balance Balance Due Within June 30, 2003 Additions Deductions June 30, 2004 One Year General Obligation Bonds $ 978, 120 $ 310,710 $ (147,980) $ 1, 140,850 $ 82,410 Judgment Obligation Bonds 41,450 (6,655) 34,795 6,655 Certificates of Participation and Lease Revenue Bonds 1,554,624 81,045 (103,888) 1,531,781 120,198 Commercial Paper Notes 36,373 36,373 Special Assessment and Revenue Bonds 290465 117,350 (6,435l 401 380 5 305 Subtotal Bonds and Notes 2,864,659 545,478 (264,958) 3,145,179 214,568 Add: Unamortized Net Premium and Deferred Charges 6,102 26,600 (1,449l 31,253 Total Bonds and Notes 2,870,761 572,078 (266,407) 3, 176,432 214,568 Loans Payable to HUD 104,501 23,895 (2,317) 126,079 4,576 Compensated Absences 296,530 13,188 (3,283) 306,435 33,636 Claims and Judgments 1,269,252 481,317 (197,595) 1,552,974 281,450 Landfill Liability 46 013 648 46,661 287 Governmental Activities Long-temn Liabilities $ 4,587,057 $1,091,126 $ (469,602) $ 5,208 581 $ 534,517 Gen eral Obligation Bonds (GO Bonds)

The voter authorizations for general obligation bonds are summarized as follows (in thousands):

Amount Amount Election Amount Issued as of Authorized Date Pro·ect Authorized June 30, 2004 But Unissued April 1989 Branch Library Facilities $ 53,400 $ 53,400 $ April 1989 Police Facilities 176,000 176,000 April 1989 Fire Safety Facilities 60,000 60,000 June 1990 Seismic Safety Projects 376,000 376,000 November 1998 Library Facilities 178,300 178,300 November 1998 Zoo Facilities 47,600 47,600 November 2000 Fire, Paramedic, Helicopter and Animal Shelter Projects 532,648 396, 120 136,528 March 2002 Emergency Operations, Fire, Dispatch and Police Facilities 600 000 223 165 376,835 Total $2,023,948 $ 1,510,585 $ 513,363

- 101 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The GO bonds outstanding as of June 30, 2004 and the original amounts issued are as follows (in thousands):

Final Original Outstanding Maturitl Interest Rates Amount Balance Series 1994-A 9/01 /14 4.75% - 7.50°/o $ 110,700 $ 5,535 Series 1998-A, Refunding 9/01/15 4.00% - 5.25% 119,990 102,105 Series 1999-A, Refunding 9/01 /14 3.00% - 4.70% 97,320 91,770 Series 1999-B 9/01/19 4.75o/o - 6.00% 60,000 33,000 Series 2000-A 9/01/20 4.125% - 5.50% 88,330 60,430 Series 2000-B, Refunding 9/01/06 4.00% - 5.00o/o 49,440 48,690 Series 2001-A 9/01/21 4.QQ% · 5.QQO/o 201,290 161,030 Series 2002-A 9/01/22 2.50o/o - 5.25% 262,200 249,090 Series 2002-B, Refunding 9/01/14 2.00% - 5.00% 79,055 78,490 Series 2003-A 9/01/23 3.00% - 6.00% 233,365 233,365 Series 2003-B, Refunding 9/01/13 3.625% - 6.00% 77,345 77,345 Total $1,379,035 $1, 140,850

Judgment Obligation Bonds (JOBs)

In June 1998, the City issued JOBs to refund taxes that were previously collected but were adjudicated as discriminatory against interstate and intercity commerce. The City issued two more JOBs in April 2000 and August 2000 to pay judgments related to claims under the Fair Labor Standards Act.

The judgment obligation bonds outstanding at June 30, 2004, and the original amounts issued are as follows (in thousands):

Final Original Outstanding Maturi!J: Interest Rates Amount Balance Series 1998-A 4/01/08 4.25% - 4.75% $ 25,000 $ 10,000 Series 2000-A 4/01/10 4.25o/o - 5.25% 25,000 15,000 Series 2000-B 8/01/10 4.00% - 5.00o/o 13 995 9 795 Total $ 63,995 $ 34,795

- 102 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Certificates of Participation and Lease Revenue Bonds

In 1984, the Mayor and the City Council directed that a lease-purchase program for equipment be established. This program was subsequently expanded to include real property projects. A nonprofit corporation, the Municipal Improvement Corporation of Los Angeles (MICLA) was created to serve as the lessor. The City and MICLA have entered into a number of lease purchase programs funded through the sale of certificates of participation and lease revenue bonds. The City also entered into a lease-purchase agreement with the Los Angeles Convention and Exhibition Center Authority, a joint powers authority between the City and the County, for the construction and expansion of the Los Angeles Convention Center.

During fiscal year 2004, MICLA issuances are as follows: (a) Program AX for $64.2 million- to finance the acquisition of certain equipment; and (b) Program AR2 for $16.9 million- to finance improvements to certain real property owned by the City.

The aggregate outstanding balance at June 30, 2004 and the aggregate original amount issued for M ICLA's certificates of participation and lease revenue bonds are as follows (in thousands):

Final Original Outstanding Maturity Interest Rates Amount Balance MICLA Various Projects Various dates 2.00% - 7.25% $1,472,060 $ 965,625 through 2033

The Convention Center lease revenue bonds outstanding at June 30, 2004, and the original amounts issued are as follows (in thousands):

Final Original Outstanding Maturi!): Interest Rates Amount Balance 1990 Series 8115/21 6.200% - 7.100% $ 202,030 $ 11,156 1993 Series A, Refunding 8115/21 4.600% - 6.125% 503,870 51,180 1998 Series A 8/15124 6.500% - 7.125% 45,580 42,255 2003 Series A. Refunding 8/15115 2.000% - 5.000% 226,045 226,045 2003 Series B through F, Refunding 8/15121 variable 235,520 235,520 Total $1,213,045 $ 566,156

- 103 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The variable rate refunding bonds of $235.5 million accrue interest at the Initial Interest Rate of 0.97% from the date of delivery to and including June 15, 2004. There is no optional right to tender the bonds during the Initial Interest Rate period. On June 16, 2004, the bonds were presented for mandatory tender and started to accrue interest based on the Weekly Rate Mode (1.01% to 1.08% as of June 30, 2004). Under the indenture agreement, the bonds may be converted to a Daily Rate Mode, a Weekly Rate Mode, an Auction Rate Mode, a Commercial Paper Mode, a Term Rate, or a Fixed Rate Mode. The remarketing agent determines the applicable interest rates. Bonds in the Daily Rate Mode or the Weekly Rate Mode will be subject to optional tender for purchase. The bonds are also subject to mandatory tender for purchase upon the occurrence of certain events.

The purchase price of tendered bonds are payable from the proceeds of remarketing the bonds. To the extent that the re marketing proceeds are insufficient or not available therefore to pay the tendered bonds, payment shall be drawn from a liquidity facility provided under a Standby Bond Purchase Agreement entered into by the City, the Tender Agent and certain financial institutions on June 4, 2003. The liquidity facility agreement expires on June 4, 2008, unless extended or terminated.

Commercial Paper Notes

In April 2004, the Mayor and City Council approved a $200 million MICLA Commercial Paper Lease Financing Program. This program supplements the MICLA equipment and real property lease program, and allows M ICLA to access financial markets quickly; to obtain flexible, short term maturities; to borrow only those amounts needed as invoices are received; and to borrow at more favorable rates. The notes issued mature at a specific time between one and 270 days of issuance. Upon maturity, they are either re-sold in the open market or refinanced with longer-term bonds. As a security to the notes, the City and MICLA entered into an asset transfer lease agreement on certain capital assets with a carrying net book value as of June 30, 2004 of $120.3 million and estimated fair value of $211.5 million. The payment of principal and interest on the notes is further supported by an irrevocable direct letter of credit issued by a commercial bank pursuant to the terms of a reimbursement agreement among MICLA, the City, and the commercial bank. At June 30, 2004, outstanding commercial paper notes amounted to $36.4 million with interest rates ranging from 1.05% to 1.35%.

- 104 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Special Assessment and Revenue Bonds

The special assessment and revenue bonds outstanding at June 30, 2004, and the original amounts issued are as follows (in thousands):

Final Original Outstanding Maturit~ Interest Rates Amount Balance Special Assessment Bonds 2000 Series 3/01/20 4.700% - 5.650% $ 14,355 $ 8,055 2001 Series 3/01/21 4.000% - 7.000% 10,305 9,310 2002 Series 3/01/22 3.750% - 5.000% 19,630 18 285 Subtotal 44,290 35,650 Parking System Revenue Bonds 1999-A Series 5/01/29 4.000% - 5.250% 80,975 76,395 2003-A Series 5/01/22 2.000% - 5.250% 39,630 38 120 Subtotal 120,605 114515 Sanitation Equipment Charge Revenue Bonds 2001-A Series 2/01/20 3.625% - 5.250% 86,640 86,040 2003-A Series 2/01/16 4.500% - 5.000% 47,825 47,825 2003-B Series 2/01/18 4.000% - 5.000% 61,120 61,120 2004-A Series 2/01/29 5.000% 56 230 56,230 Subtotal 251 815 251,215 Total $ 416,710 $ 401,380

The special assessment bonds were issued to finance the acquisition and construction of, and improvements to certain park, recreation and community facilities owned by the City. The City levies annual assessments on the parcels localed within the City in an amount sufficient to provide for the debt service of the bonds. The assessments, which constitute fixed liens on the parcels, are pledged to the payment of the bonds. The City has covenanted to take all steps necessary to assure the timely collection of the assessments, including without limitation, the enforcement of delinquent assessments.

The parking revenue bonds were issued to finance the acquisition and construction of, and improvements to certain City parking facilities. The bonds are payable from and secured by a pledge of the parking revenues generated from parking facilities owned by the City.

The sanitation equipment charge revenue bonds were issued to finance the acquisition of certain equipment and construction of certain facilities for the refuse collection and disposal system of the City. The bonds are payable from and secured by a pledge of revenues received by the Sanitation Equipment Charge Fund. The two issuances during the year amounted to $61.1 million and $56.2 million.

- 105 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Debt Service Requirement

The debt service requirement to maturity for the governmental activities general and judgment obligation bonds, certificates of participation and revenue bonds are as follows (in thousands):

Fiscal Year Princiea1 Interest Total 2005 $ 214,568 $ 140,289 $ 354,857 2006 218,863 132,475 351,338 2007 222,570 113,377 335,947 2008 238,650 103,679 342,329 2009 199,360 93,594 292,954 2010-2014 876,990 340,523 1,217,513 2015-2019 633,640 173,273 806,913 2020 - 2024 405,340 63,065 468,405 2025 - 2029 85,735 16,363 102,098 2030 - 2033 13,090 1 571 14 661 3, 108,806 1, 178,209 4,287,015 Net Unamortized Premium/(Discount) and Deferred Charges 31 253 31,253 Total $ 3, 140,059 $ 1,178,209 $ 4,318,268

The above schedule includes interest requirements for the $235.5 million Convention Center variable rate refunding bonds using the 1.01 % - 1.08% weekly rate mode in effect as of June 30, 2004. The above schedule does not include debt service requirements for the $36.4 million commercial paper notes since the City intends to refinance the notes on a long-term basis by issuing certificates of participation and/or revenue bonds.

Loans Payable to HUD

The Loans Payable to HUD will be repaid from program income generated by HOME and Community Development Block Grant entitlements and the Section 108 Loan Program Funds. The debt service requirements to maturity are as follows (in thousands):

Fiscal Year Principal Interest Total 2005 $ 4,576 $ 6, 134 $ 10,710 2006 2,706 5,969 8,675 2007 3,309 5,794 9,103 2008 10,392 5,408 15,800 2009 10,432 4,817 15,249 2010 - 2014 43, 108 16,017 59, 125 2015 - 2019 46, 139 3,718 49,857 2020 - 2024 5,417 47 5,464 Total $ 126,079 $ 47,904 $ 173,983

The interest rates on the fixed-rate loans of $112.1 million range from 2.92% to 7.21 % and have maturity dates through 2024.

- 106 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The variable rate loan of $14 million bears interest payable quarterly at 20 basis points (0.2%) above the applicable London Interbank Offered Rate (LIBOR). The loan matures on various dates through 2024. Interest starts to accrue on September 8, 2004 and the applicable interest rate at date of 2.06% was used in the debt service requirement schedule.

Business-type Activities

Changes in Long-term Liabilities

The changes in the business-type activities long-term liabilities for the year ended June 30, 2004 are as follows (in thousands):

Balance Balance Due Within June 30, 2003 Additions Deductions June 30, 2004 One Year Airports Revenue Bonds and Notes $ 426.966 $ $ (25,525) $ 401,441 $ 24,885 Harbor Revenue Bonds and Notes 860, 104 495,069 (489,633) 865.540 22,081 Power Services Revenue Bonds and Notes 3,452,280 1,169,260 (1,093,804) 3,527,736 146,838 Water Services Revenue Bonds and Notes 1,391,405 168,919 (251, 111) 1,309,213 58,891 Wastewater System Revenue Bonds and Notes 2,348,865 624, 126 (579,120l 2,393,871 31,190 Subtotal Revenue Bonds and Notes 8.479,620 2,457,374 (2,439,193) 8,497,801 283,885 Less: Unamortized Net Discount and Deferred Charges (153,585l 33,434 11,457 (108,694l Net Revenue Bonds and Notes 8,326,035 2,490,808 (2.427,736) 8,389,107 283,885 Capital Lease Obligations 55.446 (798) 54,648 855 Compensated Absences 100.630 82,189 (87,077) 95,742 83,567 Claims and Judgments 120,789 6,202 (6,740l 120,251 13,008 Business-type Activities Long-term Liabilities $ 8,602,900 $ 2.579,199 $ (2,522,351) $ 8,659,748 $ 381,315

New Issuances

In November 2001, the Harbor obtained a credit agreement to provide liquidity support for the issuance of commercial paper notes not to exceed $375 million as a means of interim financing primarily for the construction, maintenance, and replacement of the Harbor's structures, facilities, and equipment. The Harbor intends to refinance the commercial paper on a long-term basis by uninterrupted renewal of the commercial paper and future issuance of revenue bonds. Rates varied on the commercial paper from 0.85% to 1.17% during the fiscal year ended June 30, 2004. Due dates also vary but normally less than 270 days from the issue dates. As of June 30, 2004, the Harbor's commercial paper outstanding was $113.1 million.

- 107 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

In July 2003, the Power Enterprise Fund issued $956 million revenue bonds for the purpose of refunding portions of certain prior issues. The proceeds of the refunding bonds plus $93 million in cash were used to defease bonds with a par value of $1.06 billion. (See Note 4M on page 118 for additional information.) In August 2003, the Fund issued $200 million revenue bonds to be used for distribution system capital improvements. Also, in April 2004, the Fund issued $10 million fixed rate bonds as part of the Mini-Bond Program for employees and retirees. The net proceeds were deposited into the construction fund to be used for distribution system capital improvements.

In April 2004, the Water Enterprise Fund issued $164 million revenue bonds for the purpose of refunding portions of a prior issue. The proceeds of the refunding bonds plus $70 million in cash were used to defease bonds with a par value of $236 million. (See Note 4M on page 118 for additional information.) In September 2003, the Fund received the remaining $4.5 million of a $17 million loan agreement with the California Department of Water Resources. The proceeds of the loan are being used to fund water quality capital improvement.

Wastewater revenue bonds in the aggregate amount of $495 million were issued during the year to refund certain outstanding bonds and commercial paper notes. The proceeds of the refunding bonds plus $55.4 million in cash were used to defease bonds and commercial paper notes with par values totaling $388.4 million and $162.3 million, respectively. (See Note 4M on page 118 for additional information.) In addition, the Sewer Enterprise Fund obtained a 20- year, $129.2 million loan from the State Water Resources Control Board that reimbursed unrestricted funds used in the construction of a project.

- 108 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Outstanding Balances

The business-type activities outstanding revenue bonds and notes at June 30, 2004, and the original amounts issued are as follows (in thousands):

Final Original Outstanding Maturity Interest Rates Amount Balance Airports Fixed rate revenue bonds 2026 3.500% - 8.380% $ 706, 105 $ 385,941 Commercial paper notes variable 15,500 15,500 Subtotal 721,605 401,441 Harbor Fixed rate revenue bonds 2027 4.875% - 6.625% 784,625 742,730 Commercial paper notes 0.850% - 1.170% 113,095 113,095 Notes payable 2015 4.500% - 5.500% 9,715 9,715 Subtotal 907,435 865,540 Power Fixed rate revenue bonds 2036 3.410%- 5.109% 2,548,970 2,518,636 Variable rate revenue bonds 2036 variable 1,009,100 1,009, 100 Subtotal 3,558,070 3,527,736 Water Fixed rate revenue bonds 2044 4.014% - 5.202% 870,905 852,744 Variable rate revenue bonds 2036 variable 439,420 439,420 Loans payable 2022 2.320% 17,049 17,049 Subtotal 1,327,374 1,309,213 Sewer Fixed rate revenue bonds 2032 1.250% - 8.700% 2, 190,620 1,820,905 Variable rate revenue bonds 2031 variable 308,600 306,300 Commercial paper notes 0.940% - 1.080% 300,000 137,500 State loan 2025 1.80% 129, 166 129, 166 Subtotal 2,928,386 2,393,871 Total $ 9,442,870 8,497,801 Less: Unamortized deferred charges and discounts/ premiums (108,694) Net Revenue Bonds and Notes $ 8,389, 107

- 109 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The Airports variable rate commercial paper notes of $15.5 million currently bear interest at a market rate not to exceed 12% per annum. During the year the actual average interest rate was 1.04%. The Airports implemented a commercial paper program to finance a portion of the Airports' short-term borrowing needs as well as pay all of the principal of and interest on the notes when due. The program authorization is $300 million. The commercial paper notes are secured by an irrevocable direct pay letter of credit in the amount of $163.5 million from a consortium of certain financial institutions.

The Power and Water Enterprise Funds' variable rate bonds currently bear interest at daily and weekly rates ranging from 1.06% to 1.13%, and 1.00% to 1.34%, respectively, as of June 30, 2004. DWP can elect to change the interest rate period of the bonds, with certain limitations. The bondholders have the right to tender the bonds to the tender agent on any business day with seven days prior notice. DWP has entered into Standby Agreements with a syndicate of commercial banks in an initial amount of $620.6 million and $388.5 million for Power, and $325 million for Water to provide liquidity for these bonds. The extended Standby Agreements expire in February 2007 (for the $620.6 million) and August 2005 (for the $388.5 million) for Power, and in March 2007 and November 2004 for Water.

Bonds purchased under the agreements will bear interest that is payable quarterly at the greater of the Federal Funds Rate plus 0.50% or the bank's announced base rate, as defined. The unpaid principal of bonds purchased is payable in ten equal semi-annual installments, commencing after the termination of the agreements. At its discretion, DWP has the ability to convert the outstanding bonds to fixed rate obligations, which cannot be tendered by the bondholders. These bonds have been classified as long-term in the financial statements as the liquidity facilities give DWP the ability to refinance on a long term basis and DWP intends to either renew the facility or exercise its right to tender the debt as long term financing. That portion which would be due in the next fiscal year in the event that the outstanding variable rate bonds were tendered and purchased by the commercial banks under the Standby Agreements has been included in the current portion of long-term debt and was $100.9 million for Power and $43.9 million for Water as of June 30, 2004.

The Wastewater System variable rate revenue bonds initially carried interest in the Long Mode at the Long Rate, which was 1.88%, and was paid on October 31, 2002, the final date of the initial Long Mode. The interest rate thereafter automatically converted to the Weekly Mode for four weeks and was then again converted to a Long Mode at 1.25% through December 5, 2003 and 1.15% through December 9, 2004. The bonds are subject to mandatory tender at the expiration of each mode. Long Mode and Weekly Mode are defined as the mode in which the interest rate payable is adjusted at the intervals determined by the applicable remarketing agent.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The debt service requirements to maturity for the business-type activities revenue bonds and notes to be paid from operating revenues of the respective Enterprise Funds are as follows (in thousands):

Fiscal Year Princieal Interest Total 2005 $ 139,033 $ 329,281 $ 468,314 2006 165,542 333, 117 498,659 2007 188,434 325,466 513,900 2008 168,408 318,438 486,846 2009 151,789 311,722 463,511 2010 - 2014 1,211,128 1,398,887 2,610,015 2015 - 2019 1,259,599 1,097,914 2,357,513 2020 - 2024 1,616,967 750,806 2,367,773 2025 - 2029 1,471,182 393,128 1,864,310 2030 - 2034 1,048,005 198,023 1,246,028 2035 - 2039 458,044 117,640 575,684 2040 - 2044 353,575 37 435 391,010 8,231,706 5,611,857 13,843,563 Net Unamortized Premiums/(Discounts) and Deferred Charges (108,694) (108,694) Total $ 8,123,012 $ 5,611,857 $13,734,869

The above schedule does not include the debt service requirements for the Airports' $15.5 million, the Harbor's $113.1 million and the Sewer's $137.5 million commercial paper notes. The Airports, Harbor and Sewer intend to refinance their notes on a long-term basis by uninterrupted renewal of the commercial paper and/or issuance of revenue bonds.

The schedule of maturities for fiscal year 2005 exclude $100.9 million and $43.9 million in variable rate bonds for the Power and Water Funds, respectively, that were classified as short term for reporting purposes as described earlier.

Interest requirements include those of the variable rate debt using the average variable debt interest rate in effect as of June 30, 2004 as follows: Power Services Variable Rate Bonds- 1.07%, Water Services Variable Rate Bonds- 1.15%, and Wastewater System Variable Rate Refunding Bonds- 1.15%.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Fiduciary Funds

The notes payable of the Fire and Police Pension System are secured by real estate. Interest rates range from 2.53% to 8.26%. The debt service payments to maturity for these notes are as follows (in thousands):

Fiscal Year Princieal Interest Total 2005 $ 58,375 $ 12,302 $ 70,677 2006 12,082 11,776 23,858 2007 15, 110 10,168 25,278 2008 16,582 9,591 26, 173 2009 77,664 6,012 83,676 2010 - 2014 52,600 18,295 70,895 2015 - 2019 11,810 15, 101 26,911 2020 - 2024 15,647 11,254 26,901 2025 - 2029 18,804 5,968 24,772 2030 - 2034 8,788 1,052 9,840 Total $ 287,462 $ 101,519 $ 388,981

Component Unit

At June 30, 2004 balances and the original amounts of the CRA's long-term liabilities are as follows (in thousands):

Final Interest Original Outstanding Maturit:z'. Rates Amount Balance Tax Allocation Bonds Fixed Rate 2033 1.490%-9.750% $557,761 $ 526,237 Project Notes Fixed Rate 2009 8.000% - 8.750% 1,098 742 Variable Rate 2005 variable 10,000 5,778 No fixed term 118 50 Parking System Revenue Bonds and Notes 2032 4.60% - 10.000% 47,771 47,136 Total $616,748 579,943 Unamortized Discount (3,276) Amount due within one year (22,0381 Amount due in more than one year $ 554,629 Loans Payable to Primary Government Community Development Block Grant Loans $ 50,671 $ 50,671 CDBG 20-year and Float Loans 2021 3.000% - 5.000% 22,395 21, 129 UDAG Loan 2022 5.500% 4,250 4,250 Section 108 Loan 2023 variable 14 000 14,000 Total $ 91 316 90,050 Amount due within one year (3,071) Amount due in more than one year $ 86,979

The interest rate on the outstanding variable rate project note of $5.8 million is determined by using the bank's prime rate plus 100 basis points or the LIBOR rate plus 250 basis points pursuant to the revolving loan agreement (4% as of June 30, 2004).

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The debt service requirements to maturity for the CRA's long-term liabilities to be paid from incremental property taxes and certain special revenues are as follows (in thousands):

Fiscal Year Princie;al Interest Total 2005 $ 25, 109 $ 32,053 $ 57,162 2006 23,225 31,354 54,579 2007 17,835 30,370 48,205 2008 18,151 29,619 47,770 2009 19,026 28,809 47,835 2010-2014 112,976 128, 183 241,159 2015 - 2019 124,513 96, 182 220,695 2020 - 2024 120,788 60,606 181,394 2025 - 2029 115,518 27,764 143,282 2030 - 2034 78,852 5,108 83,960 Total 655,993 470,048 1,126,041 Unamortized Discount (3,276) (3,276) Net $ 652 717 $ 470,048 $ 1,122,765

Interest requirements include those of the variable rate project notes using interest rate in effect as of June 30, 2004 of 4%. The above schedule does not include debt service requirements for the $14 million Section 108 loan that was subsequently assigned to a project developer as described in Note 4C on page 93.

J. Tax and Revenue Anticipation Notes

At the beginning of the fiscal year, the City issued tax and revenue anticipation notes in advance of property tax and other revenue collections, depositing the proceeds in a General Fund account. The notes are issued to pay the City's annual contributions to the Fire and Police Pension System and the Los Angeles City Employees' Retirement System at the beginning of the fiscal year and to provide effective cash flow management of the General Fund. The additional interest earned by the pension funds from these early payments is used to discount the required City contribution without reducing the pension funds' annual receipts.

Short-term debt activity for the fiscal year ended June 30, 2004 was as follows (in thousands):

Beginning Ending Balance Issued Redeemed Balance Tax and Revenue Anticipation Notes $ $ 443,600 $ (443,600) =$k=== K. Interest Rate Swaps

Objective of the swaps. In May 2003, in order to protect against the potential rising of interest rates, the City entered into two separate pay-fixed, receive-variable interest rate swap agreements on the $235.5 million Convention Center variable-rate lease revenue refunding bonds. The costs associated with the swaps are less than what the City would have paid to issue fixed-rate debt.

- 113 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Terms, fair values, and credit risks. The terms, including the fair values and credit ratings of the outstanding swaps as of June 30, 2004 are as follows (dollar amounts in thousands):

Notional Effective Fixed Rate Variable Rate Termination Counterparty Amount Date Paid Received Fair Value Date Credit Rating (1J

$117,760 06101/04 2.9030% 65% of LIBOR (2) $ 7,039 August 2021 Aaa/AANAAA 117,760 06101/04 2.9075% 65% of LIBOR (2) 6,984 August 2021 Aa3/AA-/AA- $235,520 $14,023

(1l Moody's Investors Service, Standard & Peer's, and Fitch Ratings, respectively. (2l One-month LIBOR reset monthly. One-month LIBOR as of July 1, 2004 is 1.36125%.

The notional amounts of the swaps match the principal amount of the associated debt. The swap agreements contain scheduled reductions to outstanding notional amounts that follow scheduled reductions in the associated debt.

Fair Values. Because interest rates have risen since the date the swaps were entered into, the swaps have a positive fair value as of June 30, 2004. The fair values were estimated using the zero-coupon method. This method calculates the future net settlement payments required by the swap agreements, 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 swaps.

Credit risk. The fair values of the swaps represented the City's credit exposure to the swap counterparties as of June 30, 2004. Should the counterparties to these transactions fail to perform according to the terms of the swap contracts, the City faced a maximum possible loss equivalent to the swaps' aggregate fair value of $14 million. To mitigate credit risk, a counterparty must fully collateralize the fair value of the swap with U.S. government securities if two of its credit ratings fall below Moody's Investors Service Aa3, or AA- of Standard & Poor's or Fitch Ratings. Collateral would be posted with a third-party custodian.

Basis risk. The City is exposed to basis risk on the swaps when the relationship between 65% of LIBOR and the actual rates on the associated variable rate bonds diverge. In this situation the expected savings may not be realized. As of July 1, 2004, the weighted average rate on the variable bonds was 1.03708% while 65 percent of the LIBOR was 0.88481 %.

Termination risk. The City or the counterparties may terminate the swap if the other party fails to perform under the terms of the contract. If at the time of the termination the swap has a negative fair value, the City would be liable to the counterparty for that payment.

- 114 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Swap payments and associated debt. Using rates as of July 1, 2004, net swap payments and debt service requirements of the associated variable-rate debt are as follows (in thousands):

Variable-Rate Bonds Interest Rate Fiscal Year Princieal Interest Swaes, Net Total 2005 $ $ 2,380 $ 4,776 $ 7, 156 2006 2,443 7,022 9,465 2007 2,443 7,022 9,465 2008 2,443 7,022 9,465 2009 2,443 7,022 9,465 2010-2014 12,213 35, 110 47,323 2015-2019 112,430 11,069 31,823 155,322 2020-2022 123,090 2,358 6,799 132,247 Total $ 235,520 $ 37,792 $ 106,596 $ 379,908

As rates vary, variable-rate bond interest payments and net swap payments will vary.

L. Power Enterprise Fund Derivative Instruments

The Power Enterprise Fund has three main types of derivative instruments as of June 30, 2004: electricity swaps, gas forward contracts, and financial natural gas hedges.

Objective of electricity swaps and options. In order to obtain the highest market value on energy that is sold into the wholesale market, DWP monitors the sales price of energy which varies based on which hub the energy is to be delivered. There are three primary hubs within DWP's transmission region: Palo Verde, California-Oregon Border and Mead. DWP enters into various locational swap transactions with other electric utilities in order to effectively utilize its transmission capacity and to achieve the most economical exchange of energy purchased and sold.

A call option is the right, but not the obligation, to buy energy at a fixed price on or before a specific date. Because the DWP has excess electric generation available at certain times during the year, it sells call options for a premium to other utilities. If the buyer calls the option, DWP is obligated to sell the energy for a specified dollar amount and deliver it to a specific delivery point. If the buyer does not call the option, DWP has no obligation to deliver energy, but does retain the premium paid. Premiums received are deferred and amortized to income over the period the option is outstanding and are recorded as part of sales for resale revenue. As of June 30, 2004, the Power Enterprise Fund has recorded zero deferred option revenue relating to options entered into prior to the fiscal year end.

Objective of gas forward contracts. DWP enters into gas forward contracts in order to supply its gas requirements to produce electricity to serve its customers.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Objective of financial natural gas hedges. DWP enters into natural gas hedging contracts in order to stabilize the cost of gas needed to produce electricity to serve its customers.

Certain of the derivatives described above qualify as an exception provided under GASB Technical Bulletin 2003-1 (GTB 2003-1) for activities that are considered normal purchases and normal sales. These transactions are excluded from the scope of GTB 2003-1.

Terms, fair value, and credit risks. As of June 30, 2004, the Power Enterprise Fund had the following derivatives which were not recorded at fair value in the statement of net assets:

Cash Received at First Last Fair Derivative Total Contract Contract Price Effective Termination Value Inception Descrietion Quantities Ran9e $ Per Unit Date Date {in thousands} {in thousands)

Electricity Swaps Purchases 44,048 MW $ 52.00 -$ 69.77 611/04 9/30/04 $ (220) $ Sales 44,048 MW 54.00 - 71.48 611/04 9130104 300

Gas Contract * 26,307,310 MMBtu 5.0725 - 6.0730 3115191 3115106 (2,268)

Financial Natural Gas Hedges** 39,707,000 MMBtu 3.82 - 5.65 811103 6130/06 27,023

• The gas contract quantities represent the contract maximum of 50,000 MMBtu (Million British Thermal Units) per day. Contract prices are based in part on Gas Price Indices, including Henry Hub and Kern River Prices.

•• Financial hedges were variable to fixed rate swaps that serve to lock in a fixed cost of natural gas.

Fair value. All fair values were estimated using forward market prices available from broker quotes or exchange prices in the case of the gas contract.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Credit Risk. The Power Enterprise Fund is exposed to credit risk related to nonperformance by its wholesale counterparties under the terms of these contractual agreements. In order to limit the risk of counterparty default, DWP has implemented a Wholesale Marketing Counterparty Evaluation Policy (the Policy). The Policy includes provisions to limit risk including: the assignment of internal credit ratings to all counterparties based on counterparty and/or debt ratings; the requirement for credit enhancements (including irrevocable letters of credit, escrow trust accounts and parent company guarantees) for counterparties that do not meet an acceptable level of risk; and the use of standardized agreements which allow for the netting of positive and negative exposures associated with a single counterparty. During fiscal year 2001, the Power Enterprise Fund experienced nonperformance and material counterparty default with the California Independent System Operator (CISO) and the California Power Exchange (CPX). The Power Enterprise Fund does not anticipate nonperformance by any other of its counterparties and has no reserves related to nonperformance at June 30, 2004. The Power Enterprise Fund did not experience any material counterparty default during fiscal year 2004.

Termination Risk. The Power Enterprise Fund or its counterparties may terminate the contractual agreements if the other party fails to perform under the terms of the contract.

M. Current and Advance Refunding of Debt

Governmental Activities

The following debt advance refunding activities occurred during the fiscal year that resulted in the defeasance of certain outstanding obligations. The proceeds from the refunding issues and amounts available from the debt service funds of the refunded bonds were deposited into irrevocable trusts with escrow agents. (Amounts in thousands.)

Cash Flow Economic Refunding Debt Refunded Debt Savings Gain GOB Refunding GOB Series 1993-A $ 6,420 $ 5,272 Series 2003-B $14,700 $77,345 5.25% 3.625% • 6.00% GOB Refunding Series 1993-B $28,835 5.00o/o - 5.25o/o

GOB Refunding Series 1993-C $37,715 4.75% - 5.20%

The above debt refunding resulted in a net loss for accounting purposes of $0.4 million, which is deferred and amortized through 2013. The refunding also represent in-substance defeasance such that the refunded debts were removed from the accompanying financial statements.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Business-type Activities

Power Enterprise Fund

In July 2003, the Fund issued $956 million Power System Revenue Bonds for the purpose of refunding portions of the Refunding Issue of 1993, the Second Issue of 1993 and the Issue of 2000. The net proceeds along with $93 million in cash were used to defease bonds with a par value of $1.06 billion. The defeasance is expected to reduce total debt payments over the life of the new issues by $186 million and is expected to result in present value savings of approximately $71 million. This transaction resulted in a net loss for accounting purposes of $59.1 million, of which $53.5 million was deferred and is being amortized the shorter of life of the bonds retired or the life of the new bonds, and $5.6 million which was recognized in fiscal year 2004 as an extraordinary loss.

Water Enterprise Fund

In April 2004, DWP issued $50 million fixed rate and $114 million variable rate Water System Revenue Bonds for the purpose of refunding portions of the Refunding Issue of 1998. The net proceeds along with $70 million in cash were used to defease bonds with a par value of $236 million. Assuming that the variable rate debt remains outstanding through the maturity date of July 2025 with an effective interest rate of 4.83%, the defeasance will reduce total debt payments over the life of the new issues by $83.4 million and will result in a present value savings of approximately $1 million. This transaction resulted in a net loss for accounting purposes of $9 million, of which $6 million was deferred and is being amortized the shorter of life of the bonds retired or the life of the new bonds, and $3 million which was recognized in fiscal year 2004 as an extraordinary loss.

Sewer Enterprise Fund

During the year, the Sewer Enterprise Fund issued $495 million fixed rate bonds to current and advance refund outstanding bonds with a par value of $388.4 million and commercial paper revenue notes of $162.3 million. The Fund deposited the $516 million net proceeds of the refunding bonds plus an additional $55.4 million in an irrevocable escrow account to be used solely for satisfying scheduled principal, interest and call premiums on the refunded bonds and notes. The refundings represents an in-substance defeasance such that the refunded debts were removed from the accompanying financial statements. These transactions resulted in a net loss for accounting purposes of $20. 7 million, which is deferred and amortized through 2024. The refundings attributable to the revenue bonds reduced aggregate future debt service payments by $156.9 million and resulted in an economic gain of $36.1 million.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Community Redevelopment Agency

During the year, the CRA refunded certain outstanding bonds as follows: Bunker Hill Project $301.9 million, Hollywood Redevelopment Project- $5.8 million, Laurel Canyon Redevelopment Project- $0.6 million, and Little Tokyo Redevelopment Project- $10.9 million. These refundings resulted in a net cash flow savings of $23 million and economic gain of $2.6 million.

N. Prior Years Defeasance of Debt

In prior years, the City and CRA defeased certain bonds and loans by placing the proceeds of the new bonds in irrevocable trusts to provide for all future debt service payments on the old bonds and loans. Accordingly, the trust account assets and the liability for the defeased bonds and loans are not included in the City's financial statements.

At June 30, 2004, the following bonds and certificates of participation are considered defeased (in thousands):

Outstanding Balance June 30, 2004 Governmental Activities General Obligation Bonds $ 109,080 Los Angeles Convention and Exhibition Authority Certificates of Participation 260,870 Public Facilities Corporation Leasehold Mortgage Bonds 17,560 Total $ 387.510

Business-type Activities Harbor Revenue Bonds $ 102,160 Power Revenue Bonds 432,235 Water Revenue Bonds 427,280 Total $ 961.675

Component Unit Community Redevelopment Agency $ 68,205

- 119 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

0. Leases

The City leases a significant amount of property and equipment under operating leases. Total rental expenditures, incurred primarily in the General Fund, on the operating leases for the fiscal year ended June 30, 2004 were approximately $30.8 million. The future lease payments under noncancelable operating lease agreements are as follows (in thousands):

Fiscal Year Ending June 30 2005 $ 16,386 2006 16,695 2007 15,134 2008 10,392 2009 8,203 2010 - 2014 13,780 2015 - 2019 294 2020 - 2023 171 Total $ 81,055

The City also leases certain property and equipment under capital leases with the following component units/funds.

Municipal Improvement Corporation

The MICLA was formed to finance certain capital improvement projects of the City and enter into long-term capital lease agreements with the City. Under the lease agreements, title transfers to the City at the end of the lease term. If the City defaults under the Lease and Trust Agreements, the Trustee may terminate the lease and re-let the properties. Since MICLA is included in the City's reporting entity, the lease payments by the City are accounted for in the fund financial statements as transfers from the General Fund and certain Special Revenue Funds to the MICLA Debt Service Fund. The leases have been eliminated in the government wide financial statements.

Los Angeles Convention and Exhibition Center Authority

Pursuant to a Facility Lease between the City and the Los Angeles Convention and Exhibition Center Authority (Authority), the Authority issued certificates of participation to provide financing for the acquisition and construction of certain improvements for the Los Angeles Convention Center, and taxable lease revenue bonds to finance the City's share of the development of the Staples Center. Under the lease, the City is obligated to make rental payments sufficient to pay the debt service requirements on the certificates and bonds. The City's General Fund has made rental payments during fiscal year ended June 30, 2004. Since the Authority is included within the City's reporting entity, the lease payments by the City are accounted for in the fund financial statements as transfers from the General Fund to the Convention Center Debt Service Fund. The leases were eliminated in the government-wide financial statements.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Enterprise Funds

Airports

Airports has entered into various lease agreements with certain airlines. These agreements are classified as capital leases and are for certain public areas at the Los Angeles International Airport. The agreements generally provide for the payment of amounts over various terms between 27 and 35 years, with interest at the rate incurred by the lessor on their related borrowings, which include improvement bonds. The property capitalized under these lease agreements at June 30, 2004, was $184.4 million. Accumulated depreciation with respect to such property at June 30, 2004, was $75.9 million.

Estimated future minimum lease payments under these agreements are as follows (in thousands):

Fiscal Year Ending June 30 2005 $ 2,880 2006 2,905 2007 2,985 2008 3,061 2009 3,076 2010 - 2014 16,725 2015 - 2019 19,535 2020 - 2024 24,093 2025 - 2027 9112 Total mimimum lease payments 84,372 Less - Portion representing interest (29,724) Present value of minimum lease payments $ 54,648

The Airports currently uses rental credits to finance its obligations on capital leases with certain airlines. These rental credits are applied as an offset of amounts owed to the Airports by such airlines for terminal leases and landing fees.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Harbor

A substantial portion of the Harbor Department's land and facilities is leased to others. The majority of these leases provide for cancellation on a 30-day notice by either party and for retention of ownership by the Harbor or restoration of the property at the expiration of the agreement. Accordingly, no leases are considered capital leases for purposes of financial reporting.

These lease agreements are intended to be long-term in nature (up to 30 years) and to provide the Harbor with a firm tenant commitment for a minimum fixed income stream. Many agreements also provide for additional payment beyond the fixed portion based upon tenant usage, revenues or volume. These agreements are also generally subject to periodic inflationary escalation of base amounts due to the Harbor. For the year ended June 30, 2004, revenues from such agreements aggregated approximately $208.4 million.

The property on lease at June 30, 2004 consists of the following (in thousands):

Wharves and sheds $ 570,347 Cranes/bulk facilities 63,818 Municipal warehouses 10,448 Port pilot facilities and equipment 5,147 Buildings and other facilities 596,700 Cabrillo Marina 35,457 Total 1,281,917 Less - Accumulated depreciation (512,311) Net $769,606

Assuming that current agreements are carried to contractual termination, minimum tenant commitments due to the Harbor over the next five years are as follows (in thousands):

Fiscal Year Ending June 30: 2005 $ 209,339 2006 210,017 2007 210, 150 2008 210,296 2009 211 016 Total $1,050,818

- 122 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

The Water Enterprise Fund leases an advanced wastewater treatment facility operated by a separate City department. The use of this facility is accounted for as an operating lease. Estimated expenditures for fiscal year 2005 are approximately $2 million to operate and maintain this asset. There are no minimum rental payments that the Water Enterprise Fund has to make. However, the Water Enterprise Fund is obligated to reimburse the other City department for that department's operating and maintenance costs to operate the facility, estimated to be about $2 million per year, for a term of 25 years. The Water Enterprise Fund will also pay additional monies to the other City department, if revenues generated by the Water Enterprise Fund exceed the costs of operation and maintenance as defined by the agreement. The Water Enterprise Fund does not expect to pay such additional amounts as it does not expect that a net operating profit will be achieved based on current demand of recycled water.

Pension Trust Fund

The Fire and Police Pension System leases an office space under an operating lease agreement that expires on December 31, 2011. Lease payments for the fiscal year ended June 30, 2004 were $0.8 million. Future minimum lease payments under the agreement are as follows (in thousands):

Fiscal Year Ending June 30: 2005 $ 820 2006 834 2007 956 2008 976 2009 1,001 2010-2011 2 101 Total $ 6,688

Community Redevelopment Agency

The CRA leases office spaces under operating lease agreements that expire through 2019. Lease payments for the fiscal year ended June 30, 2004 were $1.6 million. Future minimum lease payments under the agreements are as follows (in thousands):

Fiscal Year Ending June 30: 2005 $ 1,630 2006 1,380 2007 1,283 2008 1,219 2009 1,219 2010 - 2014 1,761 2015-2019 676 Total $ 9 168

- 123 • CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

P. Risk Management - Estimated Claims and Judgments Payable

Government Activities

As discussed in the summary of significant accounting policies (Note 1 E), the City recognizes a liability for claims and judgments when it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Included in the account are amounts for tort liability and workers' compensation, which include Incurred But Not Reported (IBNR) liabilities, and provision for allocated expenses.

As of June 30, 2004, a number of lawsuits and claims were pending against the City that arose in the normal course of the City's general governmental operations. The City estimates the amount of liability to be probable of occurring as of June 30, 2004 at approximately $386.4 million. Of this amount, approximately $95.4 million is estimated to be payable in the next fiscal year. The City Attorney also estimates that certain pending lawsuits and claims have a reasonable possibility of resulting in additional General Fund liability totaling $146.1 million of which $58 million would be payable to other City Funds. However, no amount has been accrued in the accompanying financial statements because it is not probable that a loss has been incurred as of June 30, 2004.

The City's liability for tort cases was actuarially estimated. The total of the present value of the estimated outstanding losses and loss adjustment expenses was used to record the City's liability for tort cases. The present value of the estimated outstanding losses and loss adjustment expenses was calculated based on a 5% yield on investments.

The liability for workers' compensation was recorded using the present value of the actuarially estimated outstanding losses. which were based on an analysis of the City's historical loss and allocated loss adjustment expenses (ALAE) development for all fiscal years since July 1, 1984. The present value of the estimated outstanding losses was calculated based on a 5% yield on investments. At June 30, 2004, the City estimates its workers' compensation liability at $1, 166.6 million. Of this amount, $186 million is estimated to be payable in the next fiscal year.

The City has never purchased excess insurance over specific retention and therefore is responsible for the full amount of every claim. The City does not anticipate purchasing excess insurance for the 2004-05 fiscal accident year. During the last three fiscal years insurance claims have not exceeded commercial insurance coverages.

Business-type Activities

The Enterprise Funds estimated claims and judgments payable of $120.3 million consists of $42.3 million long-term litigation-type claims and $78 million workers' compensation liability. The amount estimated to be payable in the next fiscal year is approximately $13 million.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 4 - DETAILED NOTES ON ALL FUNDS (Continued)

Claim Changes

The changes in the City's total estimated claims and judgments liability are as follows (in thousands):

2004 2003 Unpaid Claims, July 1 $ 1,390,041 $ 1,359,210 Provisions for current year's events and changes in provision for prior years' events 487,519 239,807 Claims payments (204,335) (208,976) Unpaid Claims, June 30 $ 1,673,225 $ 1,390,041

Q. Accrued Landfill Liability

Until July 1996, the City operated the Lopez Canyon Sanitary Landfill under a Conditional Use Permit (CUP), which expired on July 1, 1996. State and Federal laws required the City to close the landfill upon expiration of the CUP, and to monitor and maintain the site for thirty years after closure. The City recognized a portion of the estimated closure and postclosure care costs in each fiscal year based on landfill capacity used. As of June 30, 2004, the City's liability of $46.7 million represents 100% of the estimated closure and postclosure care costs of the landfill. The estimated costs of closure and postclosure care are subject to changes due to inflation, changes in laws and regulations, or changes in technology.

As required by the California Integrated Waste Management Board (CIWMB), the City makes annual contributions to a trust fund to finance closure construction. The City is in compliance with the State requirements, and, at June 30, 2004, investments of $8.1 million are held for these purposes and are reported as Restricted Assets. The City is not currently required to advance fund postclosure care costs.

The City owns or operated other landfills that were already closed before the State and Federal requirements became enforceable. Therefore, no liability was included in the financial statements for these landfills (Toyon Canyon, Gaffey, Branford, Bishops Canyon and Sheldon Arleta).

The Landfill Closure and Post-closure Maintenance Special Revenue Fund was set up to defray the closure and postclosure maintenance costs of City landfills.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5- OTHER INFORMATION

A. Pension and Postemployment Healthcare Plans

Plan Description

The City of Los Angeles contributes to three single-employer defined benefit pension plans: Los Angeles City Employees' Retirement System (LAGERS), Fire and Police Pension System (Pensions), and Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan (DWP Retirement Plan). LAGERS and Pensions provide retirement and postemployment healthcare benefits to civilian (other than DWP) and sworn employees, respectively. The DWP Retirement Plan provides retirement, disability and death benefits to DWP employees. Postemployment healthcare benefits of DWP employees are accounted for in the Power and Water Enterprise Funds as discussed in the following pages. The City Charter assigns the administration of the plans to the Board of Administration/Commissioners of each plan. Subject to Council approval, the Boards adopt and amend benefit provisions. Each plan issues a publicly available financial report that includes financial statements and required supplementary information for that plan.

Those reports may be obtained by writing or calling the plans.

Los Angeles City Employees' Retirement System 360 E. Second Street Los Angeles, CA 90012 (213) 473-7200 Fire and Police Pension System 360 E. Second Street Los Angeles, CA 90012 (213) 978-4545

Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan 111 N. Hope Street Los Angeles, CA 90012 (213) 367-1689

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

Benefit Pension Plans

Funding Policy and Annual Pension Cost

The Board of Administration/Commissioners of each plan establishes and may amend the contribution requirements of plan members and the City. The City's annual pension cost for the current year and related information for each plan is as follows (dollar amounts in thousands):

LAGERS Pensions DWP Retirement Plan Contribution rates: Citt 6.4o/o of covered eayroll 9.7% of covered eatroll 8.45% of covered eatroll

Plan members 8.22% to 13.33 % of 6°/o - Tier 1 6°/o of salaries upon salaries at entry age 7°/o - Tier 2 becoming a member with subsidy from the 8% - Tiers 3, 4, & 5 on or after June 1, City for members prior 1984; prior to June 1, to February 1983, 6% 1984 amount is based for entry date after on entry age January 1983 percentage rate

Annual eension cost $159,084 $97,466 $51,259

Contributions made $120,057 (including City $97,466 $55,694 subsidy of $19,437 and death insurance cost of 211

Actuarial valuation date June 30, 2004 June 30, 2002 June 30, 2003

Actuarial cost method Projected unit credit Ent')' age normal Ent')' age normal

Amortization method Level percent Level dollar - Tiers 1 & 2 Rolling 15-year periods supplemental cost Level percent of payroll - effective July 1, 2000 Tiers 3, 4, & 5

Remaining amortization Varies 15 - 30 years, 33 years, closed Varies 15 years, closed period closed

Asset valuation method 5-year market related 5-year market related 4-1'.ear smoothing

Actuarial assumptions: Investment rate of return 8o/o 8.5°/o ao1o

Projected salary 5°/o, higher for members 5.5°/o -10°/o 5.5% increases with less than five ears of service

Inflation rate 4o/o 5% 3°/o

Cost-of-living 3% 5% - Tiers 1 & 2 3°/o adjustments 3%-Tiers 3, 4, & 5

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NOTE 5 - OTHER INFORMATION (Continued)

Three -Year Trend Information (dollar amounts in thousands}

Net Pension Annual Pension Percentage of Assets Year Ended Cost (APC) APC Contributed (Obli9ation) LACE RS 6130102 $ 32,296 100% $ 6130103 51,604 100% 6130/04 159,084 63% (58,674)

Pensions 6130102 73, 121 100% 6130103 64, 134 100% 6130104 97,466 100%

DWP Retirement Plan 6130102 6,830 400% 185,503 6130103 48,331 84% 177,749 6130104 51,259 109% 182,184

The DWP Power and Water Systems' combined annual pension cost (APC) and interest on net pension obligation (NPO) (asset) consists of the following (in thousands):

Annual required contribution $ 44,614 Interest on net pension asset (13,558) Adjustment to annual required contribution 20,203 APC (including $16.1 million capitalized in fiscal year 2004) 51,259 Department contributions (55,694) Change in NPO (asset) (4,435) NPO (asset) at beginning of year (177,749) NPO (asset) at end of year $ (182,184)

Postemployment Healthcare Benefits

The LAGERS and Pensions are currently actuarially funding retiree health insurance benefits for current retirees and active eligible members for retired health insurance benefits. The City Charter, the Administrative Code and related ordinance define the postemployment health subsidy benefits for members of both the LAGERS and Pensions. There are no member contributions for health subsidy benefits.

Retired members of the LAGERS are paid monthly medical and dental insurance subsidies that are applied to the cost of the City health insurance plan they selected. In general, members are eligible for subsidy at retirement after age 55 with 10 years of service or retirement at age 70 (if it was compulsory). The medical benefits are available to an eligible spouse or domestic partner after the death of the eligible member.

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NOTE 5 - OTHER INFORMATION (Continued)

The maximum medical subsidy is the rate currently paid for active City employees. For retired members under age 65, or 65 and over with only Medicare Part B coverage, the subsidy is 4% (of the maximum subsidy or the actual premium paid to a City approved health carrier, if less) for each year of service up to a maximum of 100% after 25 years. As of June 30, 2004, the maximum monthly healthcare subsidy is $883. For retired members age 65 and over with Medicare Parts A and B coverage, the subsidy is a percentage of the premium paid to a City approved health carrier based on years of service: 75% for 10-14 years; 90% for 15-19 years; and 100% for 20 years or more. Medicare Part B premiums are also paid. For eligible surviving spouse or domestic partners, the subsidy is the same as the subsidy provided to the member, except that this benefit is limited to the Kaiser single party premium for members without Medicare Parts A and B. Surviving spouses do not receive subsidy for Medicare Part B premiums or for dental. Dental subsidy is 4% per year of service to certain maximum amounts paid to City approved dental carriers. As of June 30, 2004, the maximum monthly dental subsidy is $39.86. The City's actuarially required and actual contribution for medical and dental subsidies for fiscal year ended June 30, 2004 was $20.1 million (1.3% of covered payroll).

Members of the Fire and Police Pension System who retire from the System with ten years of service are eligible for health subsidy benefits. Regular benefits begin at age fifty-five for retirement effective dates after June 30, 1998 and at age sixty for retirement effective dates prior to June 30, 1998. Temporary subsidies are available to certain groups at earlier stages. The benefit paid is a percentage of a maximum subsidy for healthcare based on the lesser of the amount used by the LACERS and active Safety Members. Effective July 1, 2003, the maximum monthly subsidy is $618. The City also pays Medicare Part B premiums for any pensioner receiving a subsidy and Medicare Parts A and B coverage. Health benefits are available to members and their spouses/domestic partners on disability and service retirement. Effective January 1, 2000, surviving spouses/domestic partners are eligible for health subsidy benefits but not for dental subsidy. Dental subsidy is based on the lesser of the amount used by the LACERS and active Safety Members. In determining the dental subsidy, members receive 4% for each year of service, up to 100% of the subsidy. Effective January 1, 2004, the maximum monthly dental subsidy is $39.86. The City's actuarially required and actual contribution for fiscal year ended June 30, 2004 was $38. 7 million (3.9% of covered payroll).

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

At June 30, 2004 the total active plan participants were 27,092 for LAGERS and 24,431 for Pensions. As of June 30, 2004, the unfunded healthcare benefits liability of LAGERS and Pensions based on the actuarial cost method and assumptions used for the related pension plans are as follows (in thousands):

LACE RS Pensions Healthcare benefits liability Retired members S 703,483 $ 705,072 Active members 716,330 303 990 Total healthcare benefits liability 1,419,813 1,009,062 Less - Reserve for healthcare benefits at actuarial value (market value of $839, 135 and $570,069, respectively) (858,997) (605,999) Unfunded healthcare benefits liability $ 560,816 $ 403,063

DWP provides certain healthcare benefits to active and retired employees and their dependents. The health plan is administered by DWP. The Retirement Board and the Board of Water and Power Commissioners have the authority to approve provisions and obligations. Eligibility for benefits is dependent on a combination of age and service of the participants pursuant to a predetermined formula. The Boards must approve any changes to these provisions. The total number of active and retired participants entitled to receive benefits was approximately 16, 760 at June 30, 2004.

Effective July 1, 2003, DWP adopted GASB 45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, " and discontinued following Financial Accounting Standards Board Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions. " DWP's postemployment health benefit plan is a single employee plan that is not administered as a trust or equivalent arrangement and therefore, does not have separate financial statements.

The adoption of GASB 45 did not impact the benefits provided by the health plan, the amount of the postemployment fund assets, or the fair value of assets. The adoption of GASB 45 changed the accounting for the healthcare costs, the actuarial cost method, and the assumptions required by the independent third party actuary to value DWP's obligation related to postemployment healthcare coverage.

DWP pays a monthly maximum subsidy of health plan premiums. Participants choosing plans with a cost in excess of the subsidy are required to pay the difference. No funding policy has been established for the future benefits to be provided under this plan. However, in fiscal year 2004, DWP made an employer contribution of $100 million in addition to the $49 million it paid for current retiree premiums.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

The other postemployment benefit (OPEB) cost and related information for the DWP health plan are as follows (dollar amounts in thousands):

DWP contribution rate 18.8% of covered payroll Annual OPEB cost $107,435 Contributions made (139.4% of annual OPEB cost) $149,794 Actuarial valuation date July 1, 2003 Actuarial cost method Entry age normal Amortization method Level percent of payroll Remaining amortization period 30 years, open Asset valuation method 5-year smoothing Actuarial assumptions: Investment rate of return 6.5o/o Healthcare inflation rate - medical 16% initial, 5.75°/o ultimate Healthcare inflation rate - dental 5o/o Inflation assumption 3.5°/o Projected salary increases nla Cost-of-living adjustment nla

The changes in DWP's OPEB obligation (asset) for the year are as follows (in thousands):

Annual OPEB cost $ 107,435 Contributions made (149,794) Increase in net OPEB obligation (42,359) Net OPEB obligation - beginning of year 329,879 Adjustments to beginning of year net OPEB obligation due to change in accounting (514,604) Net OPEB obligation (asset) - end of year $ (227,084)

In December 2003, the President signed into law the "Medicare Prescription Drug, Improvement and Modernization Act of 2003 effective in 2006. Two important aspects of the law may affect employers' financial statements before 2006. First, the opportunity for retirees to obtain prescription drug benefits under Medicare Part D will tend to shift benefits and related costs out of employers plans. Second, employers that provide prescription drug benefits that are at least as valuable as (actuarially equivalent) those under Medicare Part D will be entitled to annual subsidy from Medicare equal to 28% of prescription drug costs between $250 and $5,000 for each Medicare-eligible retiree who does not join Medicare Part D. The City has not yet determined the financial impact of adopting the new law.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

Deferred Retirement Option Plan

Effective May 1, 2002 and through April 30, 2007, members of the Fire and Police Pension System have the option to enroll in a Deferred Retirement Option Plan (DROP). Members of Tiers 2 and 4 who have at least 25 years of service, and members of Tiers 3 and 5 who have at least 25 years of service and who are at least 50 years old are eligible for the DROP. Members who enroll continue to work and receive their active salary for a period of time not to exceed five years. Enrolled members continue to make contributions to the System until they have completed the number of years required for their specific tiers but cease to earn retirement service and pay credits. Monthly pension benefits that would have been paid to enrolled members are credited to their DROP accounts which will earn 5% annual interest, credited semi-annually. Once the DROP participation period ends, enrolled members must terminate active employment. They then receive a monthly benefit based on their service and salary at the beginning date of the DROP, as well as proceeds from their DROP account. At June 30, 2004, 1,220 pensioners were enrolled in the program and the total estimated value of the DROP accounts was $131 million.

Community Redevelopment Agency Employees Retirement System

The CRA participates in the California Public Employees Retirement System (PERS), an agent multiple-employer defined benefit retirement system. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. The PERS serves as the CRA's investment and administrative agent with respect to the pension plan. A separate report for the CRA Plan within the PERS is not available, however, copies of PERS' annual financial report may be obtained from its Executive Office at 400 P Street, Sacramento, California 95814.

The pension plan covers all full-time employees of the CRA. Under the provisions of PERS, pension benefits fully vest after five years of service. An employee may retire at age 50 and receive annual pension benefits equal to a predetermined percentage of the employee's highest salary during the highest 12 consecutive months of employment multiplied by the number of service years. Effective July 1, 1997, the CRA amended its contract with PERS changing retirement formulation from 2% at age 60 to 2% at age 55 in order to provide a retirement incentive to the employees. As a result of this amendment, the service requirement benefits now vary from 1.426% at age 50 to 2.418% at age 63 and over multiplied by the number of years of service.

Participants are required to contribute 7% of their annual covered salary. As a benefit to the employee, the CRA pays the employee contribution to the plan. The CRA is required to contribute at an actuarially determined rate; the current rate is 0% of annual payroll. The contribution requirements of plan members and the CRA are established and may be amended by PERS.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

For fiscal year 2004, the actuarial value of the assets exceeds the present value of the projected actuarial value of future benefits. As a result, the CRA's annual pension costs and required contribution is zero. The required contribution was determined as part of the June 30, 2001 actuarial valuation using the entry age normal actuarial cost method. The actuarial assumptions included (a) 8.25% investment rate of return, net of administrative expenses, (b) projected annual salary increases that vary by duration of service, and (c) 2% per year cost-of living adjustments. Both assumption (a) and (b) included an inflation component of 3.5%. The actuarial value of PERS assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a three-year period (smoothed market value). PERS unfunded actuarial liability/(surplus) is being amortized as a level percentage of projected payroll over a closed 20-year period. The annual pension cost for the current year and related information for the CRA PERS are as follows:

Annual Pension Percentage of Net Pension Year Ended Cost (APC) APC Contributed Obligation 6/30/02 $ $ 6/30/03 6/30/04

In addition to the pension benefits, the CRA provides postemployment healthcare benefits to all employees who retired on or after January 1, 1993 with at least 10 years of service prior to retirement. The CRA subsidizes healthcare benefits starting at 40% of the maximum current subsidy to its employees for the first 10 years of service and the rate increases at 4% for each additional year of service. Expenditures for postemployment healthcare benefits are recognized in the year incurred. During the fiscal year the CRA recognized $0.4 million postemployment healthcare costs for 93 eligible retirees.

B. Commitments and Contingencies

Pending Lawsuits and Claims

As mentioned in Note 4P, certain pending lawsuits and claims have a reasonable possibility of resulting in additional General Fund liability totaling approximately $146.1 million. However, no amount has been accrued in the accompanying financial statements because it is not probable that a loss has been incurred as of June 30, 2004.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5- OTHER INFORMATION (Continued)

Rampart Division Litigation

Investigations are continuing into alleged illegal activities of some police officers at the Los Angeles Police Department's Rampart Division. As of February 7, 2005, two hundred forty four lawsuits have been served on the City so far. One hundred ninety six cases have been resolved for a total of approximately $68 million. The total estimated cases may range from 250 to 275. The City estimates the total liability for all Rampart Division cases at $125 million. The Los Angeles Police Department has announced an expansion of the corruption investigation into additional police divisions. It is possible that additional incidents of wrongdoing could be uncovered and that the potential liability of the City in connection with the investigations could increase beyond the $125 million currently estimated by the City Attorney.

Federal Consent Decree

On June 15, 2001, the City entered into a consent decree with the U.S. Department of Justice as a result of a lawsuit alleging a pattern and practice of police misconduct. It is a five-year agreement that the City is required to implement in order to avoid litigation with the Federal government. To the extent that the Court determines that the terms and conditions have not been met after the five-year term, the term may be extended. Under the agreement, the City is required to build a database to track officer performance as well as undertake additional risk management and integrity assurance measures.

Expenses associated with implementing the agreement include the design and implementation of the officer tracking system, staff to implement and audit reforms, and an independent monitor to oversee implementation of the provisions of the agreement. The City expects to absorb the costs of implementing the agreement through the regular budget process.

Contracting Practices of Airports, DWP, and Harbor

After the City Controller raised concerns regarding existing contracting practices, certain Federal and local agencies are conducting a joint investigation that focuses on whether firms doing businesses with the City Departments of Airports, Harbor, and Water and Power were forced to make political contributions in return for contracts. The financial impact of the investigation, if any, on the basic financial statements is not determinable at this time.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

Airports Enterprise Fund

City Services Reimbursements

Two nearly identical administrative proceedings involving formal complaints were filed in March and June 1995, concerning a transfer to the City General Fund in the amount of $58 million. The complaints challenge the transfer of funds related to a condemnation award received from the State of California in connection with real estate acquired by the State for the Century Freeway Project. The complainants, the Air Transport Association of America (ATA) and Aircraft Owners and Pilots Association alleged that the transfer was in violation of the Airport and Airways Improvement Act of 1982 (AAIA) governing the use of airport revenues, and certain grant assurances executed pursuant to AAIA.

The complainants seek an order barring the City from expending the funds for non-airport uses, directing the City General Fund to repay to the Airports amounts already transferred, suspending Airports eligibility for grant funds pending compliance with its grant assurances and imposing a civil penalty of $50,000. The Federal Aviation Administration (FAA) failed to act on the complainants' request for a preliminary ruling that the City be barred from using the funds while proceedings are pending. Answers to both complaints have been filed. In December 1995, the FAA denied respondents' motion to dismiss the complaints. There has been no decision by the FAA as to whether or not to institute an investigation on the complaints or to hold full hearings.

Environmental Issues

Through the normal course of operations, Airports and its facilities are subject to potential problems with environmental contamination and other environmental concerns. Accordingly, Airports has established a comprehensive hazardous materials management plan for all its facilities under its control. This plan calls for the evaluation of all property utilized by Airports and the environmental cleanup at any sites found to be contaminated. This evaluation has not been completed to date.

Airports bears the responsibility for the cleanup of environmental contamination on property owned by it. However, Airports believes that if the contamination originated based on contractual arrangements, the primary responsibility for any such cleanup would be borne by the tenants, even if they declare bankruptcy. Airports, as property owner, however, assumes the ultimate responsibility for cleanup of such contamination in the event that the tenant is unable to make restitution. As a result of the hazardous materials management plan noted above, Airports has already begun cleanup of several sites, is in the process of implementing additional safeguards to prevent additional hazardous substance contamination and is completing the environmental evaluation of Airports facilities. However, the extent of the cleanup and/or the ability of the original tenants to reimburse Airports for such cleanup cannot be determined at the present time. Therefore, under the circumstances, it is reasonably possible that losses could be incurred; however, until such matters are resolved, the range of loss, if any, cannot be reasonably estimated.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

Power and Water Enterprise Funds

The State and a number of local government agencies that are electric customers of DWP claim that DWP has violated the State's False Claim Act by charging such governmental customers the standard rates applicable to both public and private customers in their respective customer rate categories. The plaintiffs allege that such rates include a capital facilities charge in violation of the State's statute. The plaintiffs are seeking unspecified amounts for treble damages, civil penalties, and injunctive relief. DWP intends to vigorously defend the claim.

A number of claims and suits are also pending against DWP for alleged damages to persons and property and for other alleged liabilities arising out of DWP's operations. In the opinion of DWP management, any ultimate liability, which may arise from these actions, are not expected to materially impact the Power and Water Enterprise Funds' financial statements.

Harbor Enterprise Fund

Alameda Corridor Transportation Authority Agreement

The City of Los Angeles and the City of Long Beach, acting by and through their respective Boards of Harbor Commissioners, created the Alameda Corridor Transportation Authority (ACTA) to construct and operate a rail transportation corridor between the Port of Los Angeles and Port of Long Beach (the Ports) and downtown Los Angeles. The Alameda Corridor was constructed to expedite the movement of containers imported and exported from the Ports. The Alameda Corridor began operating in April 2002. Cargo handled at the Ports is distributed throughout Southern California and the rest of the nation.

The Alameda Corridor Use and Operating Agreement (ACTA Operating Agreement) entered into in October 1998 by the Ports, ACTA, and two railroad companies (Union Pacific, and Burlington Northern and Santa Fe) governs the administration, operation and maintenance of the Alameda Corridor, along with the collection and application of use fees, container charges, maintenance and operation charges, and shortfall advances. Financing for the Alameda Corridor is payable from the use fees and container charges of the railroad companies, and shortfall advances. The ACTA Operating Agreement requires the Ports, severally and not jointly, to make payments (shortfall advances) in the event the amount of use fees and container charges collected from the railroad companies are not sufficient to make the debt service payments on financing for the Alameda Corridor. It has been estimated by ACTA that the Ports will be required to make shortfall advances totaling approximately $20.5 million through 2027. Each Port is liable for its one-half share of $10.25 million. Pursuant to the ACTA Operating Agreement, the Harbor is obligated to include any projected shortfall advances in its budget each fiscal year. The Harbor has not funded a reserve account to pay shortfall advances. No shortfall advances were payable by the Harbor in fiscal year 2004. For fiscal year 2005, ACTA has estimated that Harbor will not be required to fund any shortfall advances.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

Any shortfall advance made by the Harbor is reimbursable with interest subject to the priority payments ordered in the Corridor Agreement. The agreement subordinates repayment of shortfall advances to principal and interest payment on debt issued and loans received for construction of the Corridor, operating and maintenance reserve account funding, subordinate lien revenue bonds, ACTA administrative expenses, and property assembly reimbursements.

Natural Resources Defense Council Settlement Judgment

In March 2003, the Harbor settled a lawsuit entitled "Natural Resources Defense Council, Inc. vs. City of Los Angeles, " regarding the environmental review of a project. The settlement calls for a total of $50 million mitigation measures to be undertaken by the Harbor. The $50 million settlement liability was charged as an expense of the Harbor Enterprise Fund in fiscal year 2003.

The terms of the settlement require that the Harbor fund various mitigation activities in the amount of $1 O million each year over a five-year term ending fiscal year 2007. As of June 30, 2004, $20 million has been placed in the mitigation fund and $5 million has been disbursed in accordance with the provisions of the settlement agreement.

The Harbor is also obligated to expend up to $5 million to retrofit customer vessels to receive shore-side power as an alternative to using on-board diesel fueled generators. Through the end of fiscal year 2004, the Harbor has spent $1.2 million for this program.

In June 2004, the Harbor agreed to amend the original settlement agreement to include an additional $3.5 million for the creation of parks and open space in San Pedro.

Settlement of Dispute on Nexus Study

In January 2001, the City, Harbor, and the State Lands Commission, entered into a settlement and mutual release agreement to amicably resolve their disputes concerning the General Fund's entitlement to historic and future reimbursements for costs incurred and would incur in providing services to the Harbor. Such entitlement resulted from a series of studies, collectively referred to as the Nexus Study, conducted under the auspices of the City Attorney. The settlement agreement provides that the City's General Fund, as reimbursement for payments made by the Harbor to the City General Fund for retroactive billings for City General Fund services during the period July 1, 1977 through June 30, 1994, inclusive, pay the Harbor $53.4 million in principal plus 3% simple interest over 15 years. The settlement agreement also provides that the City General Fund reimburse Harbor for the payment differential, that amount representing the difference between the actual payments and the amount to which the City General Fund would have been entitled to reimbursement during fiscal year 1994-95 and fiscal year 2002-03, inclusive, had the reimbursement been computed during those fiscal years using the settlement formula. This amount is estimated at $8.4 million. Payment for this period is to be reimbursed to the Harbor over 15 years including 3% simple interest.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

The agreement also provides that at any time after five years from January 19, 2001, the City, the Harbor and State Lands Commission may negotiate to amend their agreement to account for new or changed circumstances. The three parties have agreed to mutually release and discharge the other from any and all claims, demands, obligations and causes of action, of whatever nature pertaining in any way to the use, payment, transfer or expenditure for any of the services or facilities identified in the Nexus Study or the 1997 MOU and provided for during the period July 1, 1977 through June 30, 2002. Accordingly, the Harbor had recorded the amount due from the City General Fund as Advances From Other Funds of $47.9 million and the current portion as Due From Other Funds of $3.6 million as of June 30, 2004.

Sewer Enterprise Fund

Claims and lawsuits related to several construction projects seek compensation and/or payment of damages stemming from allegations of defective construction specifications, delayed early completion, concealed conditions, issues of interpretation of contract language, and other doctrines of construction and contract law which are asserted to support a claim for monies above the contract price. Additionally, certain employees have filed claims involving personnel matters against the Fund. The City Attorney estimates $19.7 million liability to be probable of occurring, of which $18 million is payable in the long-term.

In November 1998, the Santa Monica Baykeeper filed an action under the Federal Clean Water Act (Act) Citizen Suit Provisions for alleged violations of the Act. The suit sought injunctive relief and $549 million in damages. The Environmental Protection Agency, the Los Angeles Regional Water Quality Control Board, and a number of community groups joined the Baykeeper lawsuit. On October 29, 2004, a settlement agreement was signed by all parties and approved by the court. The settlement agreement builds on the Fund's existing 10-year, $2 billion plan to maintain and enhance the City's sewer system. The enhancements required by the settlement agreement will cost the Fund $300 million over ten years. Fines and attorney fees related to this case in the amount of $2.9 million are included as liabilities.

Community Redevelopment Agency

Angels Flight

On February 1, 2001, an accident occurred at the Angels Flight Funicular Railway when two cars collided. In its report, the National Transportation Safety Board cited improper design and construction of the drive system that caused the collision. The report also cited the failure of the CRA and the California Public Utilities Commission to ensure that the railway system conformed to safety design specifications and known funicular safety standards.

The CRA is a co-defendant in lawsuits resulting from the funicular accident. In addition, there are a number of cross-complaints among the defendants and their insurance carriers.

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NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

As of October 1, 2004, all cases have been settled. The CRA was advised by its counsel that settlement amounts and attorneys' fees are covered by insurance except in one case. The CRA filed a complaint to recover an equitable amount from all co-defendants of the $850,000 settlement paid to a plaintiff.

Central Business District (CBD) Tax Increment Revenues and Related Litigation

A 1977 judgment resulting from litigation challenging the CBD redevelopment plan provided that during the life of the CBD Redevelopment Project (Project), the CRA could not receive more than $750 million tax increment revenues (lifetime cap) for use in connection with the Project, or more than $75 million in any one fiscal year. Since the Project reached its lifetime cap in fiscal year 2000, redevelopment activities will be funded by non-tax increment sources through the Project's end date of July 2010.

The Project was amended in May 2002 and detached certain areas. Some of the detached areas were incorporated in the May 2002 City Center Redevelopment Project and in the November 2002 City Industrial Redevelopment Project. The County of Los Angeles and another party filed separate lawsuits challenging the amendment of the Project and the adoption of the City Center and City Industrial Redevelopment Projects. In July 2004, the Superior Court ruled that the Project amendment and the adoption of the two new redevelopment projects violated the 1977 judgment. The CRA and the City have filed with the California Court of Appeal a notice to appeal the Superior Court ruling.

Hollywood Redevelopment Project

A lawsuit was filed against the CRA with respect to the amendment of the Hollywood Redevelopment Plan. The amendment restored the CRA's power of eminent domain and eliminated the deadline for incurring new debt. The lawsuit alleges that the CRA failed to form a project area committee and that various findings made by the City Council were not supported by substantial evidence. A trial was held on August 8, 2004 and the Superior Court has not issued its decision.

Commitments

As of June 30, 2004, the following Enterprise Funds have commitments for construction contracts and open purchase orders in the following amounts (in thousands):

Airports $ 37,096 Harbor 699,000 Sewer 244,749

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Other Enterprise Fund Commitments

Power Enterprise Fund

Long-term Purchased Energy and Transmission Contracts

The DWP has entered into a number of energy and transmission service contracts that involve substantial commitments scheduled to expire from 2027 to 2030 (dollars in thousands): DWP's Interest in Agency Share Agency Capacity Outstanding Agency Share Interest (Megawatts) Principal lntermountain Power Project IPA 100.0% 66.8% 1,068 $1,650,634 Palo Verde Nuclear Generating Station SCPPA 5.9% 67.0% 151 477,218 Mead-Adelanto Project SCPPA 67.9% 35.7% 291 81,826 Mead-Phoenix Project SCPPA 17.8% - 22.4% 24.8% 148 17,881 Southern Transmission System SCPPA 100.0% 59.5% 1,142 570,109 IPA: The Intermountain PoM•er Agency is a Utah State Agency established to Olvn, acquire, construct, operate. maintain, and repair the Intermountain Po1rer Project (!PP). DH'P Polt1er System serves as the Project Afanager and Operating Agent of!PP.

SCP PA: The Southern California Public Polver Authority, a California Joint Pott•ers Agency. :Vote: SCPPA's interest in the Mead-Phoenix Project includes three components.

All these agreements require the Power Enterprise Fund to make certain mm1mum payments that are based mainly upon debt service requirements. In addition to average annual fixed charges of approximately $258 million in each of the next five years, the Power Enterprise Fund is required to pay for operating and maintenance costs related to actual deliveries of energy under these agreements (averaging approximately $239 million annually during each of the next five years). Total payments under these contracts were approximately $551 million in fiscal year 2004.

The Power Enterprise Fund earned fees under the IPP Project Manager and Operating agreements totaling $18.2 million in fiscal year 2004.

Long-term Notes Receivable

Under the terms of its purchase power agreement with IPA, DWP is charged for its output entitlements based on its share of IPA's costs, including debt service. During fiscal year 2000, DWP restructured a portion of this obligation by transferring $1.12 billion to IPA in exchange for long-term notes receivable. The funds transferred were obtained from the debt reduction trust funds and through the issuance of new variable rate debentures. IPA used the proceeds from these transactions to defease and to tender for bonds with par values of approximately $615 million and $611 million, respectively.

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On September 7, 2000, DWP transferred another $187 million to IPA in exchange for additional long-term notes receivable. IPA used the proceeds to defease bonds with a face value of $198 million.

The IPA notes are subordinate to all of IPA's publicly held debt obligation. DWP's future payments to IPA will be partially offset by interest payments and principal maturities from the subordinated notes receivable. The net IPA notes receivable balance totaled $1.17 billion as of June 30, 2004.

Energy Entitlement

DWP has a contract through 2017 with the U.S. Department of Energy (DOE) for the purchase of available energy generated at the Hoover Power Plant. Its share of capacity at Hoover is approximately 500 megawatts. The cost of power purchased under this contract was $12 million in fiscal year 2004.

Palo Verde Nuclear Generating Station (PVNGS)

As a joint project participant in Palo Verde Nuclear Generating Station, DWP has certain commitments with respect to nuclear spent fuel and waste disposal. Under the Nuclear Policy Act, the Department of Energy (DOE) was to develop the facilities necessary for the storage and disposal of spent fuel and to have the first such facility and operation by 1998; however, the DOE has announced that such a repository cannot be completed before 2010. There is ongoing litigation with respect to the DOE's ability to accept spent nuclear fuel; however, no permanent resolution has been reached.

In July 2002, a measure was signed into law designating the Yucca Mountain in the State of Nevada, as the nation's high-level nuclear waste repository. This means the DOE can now file a construction and operation plan for Yucca Mountain with the Nuclear Regulatory Commission (the NRC). The DOE expects that the Yucca Mountain site would be open by 2010, a date which many believe is highly optimistic. The State of Nevada and its congressional delegation have vowed to prevent the launch of the project through the NRC process or through legal challenges.

Disagreement over funding of the repository is ongoing. The Administration and Congressional leaders continue to push for full and adequate funding, in order for the DOE to meet the application deadline of 2004. The Nevada delegation has been working diligently to try to delay the DOE's work on the license application for the Yucca site in hopes of halting the transfer of nuclear waste to the Nevada facility.

Capacity in existing fuel storage pools at PVNGS were exhausted in 2003. A Dry Cask Storage Facility (also called the Independent Spent Fuel Storage Facility) was built and completed in 2003 at a total cost of $33.9 million (about $3.3 million for Power Enterprise Fund). In addition to the facility, the costs also account for heavy lift equipment inside the units and at the yard, railroad track, tractors, transporter, transport canister, and surveillance equipment.

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The facility has the capacity to store all the spent fuel generated by the plant until 2026, the end of its lifetime. To date, five casks, each containing 24 fuel assemblies, from Unit 2 were placed in the Storage Facility. Moving of the spent fuel from Unit 1 to the Storage Facility is in progress. The current plan calls for the removal of between 240 and 288 fuel assemblies from the units to the Storage Facility every year. The costs incurred by the procurement, packing, preparation and transportation of the casks are included as part of the fuel expenses, and would cost approximately $12 million a year (about $1.2 million for Power Enterprise Fund). If the permanent repository in Yucca Mountain is opened as scheduled in 2010, the spent fuel from PVNGS will be shipped to the repository starting in 2031. The Power Enterprise Fund accrues for current nuclear fuel storage costs as a component of fuel expense as the fuel is burned. DWP's share of spent nuclear fuel costs related to its indirect interest in PVNGS is included in the Power Enterprise Fund's purchased power expense.

The Price-Anderson Act (the Act) requires that all utilities with nuclear generating facilities share in the payment of claims resulting from a nuclear incident. The Act limits liability from third-party claims to over $9.5 billion per incident. Participants in the PVNGS currently insure potential claims and liability through commercial insurance with a $300 million limit; the industry-wide retrospective assessment program provided under the Act covers the remainder of the potential liability. This program limits assessments to a maximum of $100.6 million for each licensee for each nuclear incident occurring at any nuclear ieactor in the United States. Payments under the program are limited to $10 million per incident, per year. Based on DWP's 5.7% direct interest and its 3.95% indirect investment interest through SCPPA, DWP would be responsible for a maximum assessment of $9 million per incident, limited to payments of $1 million per incident annually.

Environmental Matters

Numerous environmental laws and regulations affect the Power System's facilities and operations. DWP monitors its compliance with laws and regulations, and reviews its remediation obligations on an ongoing basis.

DWP's generating station facilities are subject to the Regional Clean Air Incentives Market (RECLAIM) nitrogen oxide (NOx) emission reduction program adopted by the South Coast Air Quality Management District (SCAQMD). In accordance with this program, SCAQMD established annual NOx allocations for NOx RECLAIM facilities based on historical emissions and type of emissions sources operated. These allocations are in the form of RECLAIM trading emission credits (RTCs). Facilities that exceed their allocations may buy RTCs from other companies that have emissions below their allocations. DWP has a program of installing emission controls and purchasing RTCs, as necessary, to meet its emission requirements.

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In May 2001, SCAQMD adopted amendments to RECLAIM with the intent of lowering and stabilizing RTC prices. One key element of the amendments is that existing power plants were bifurcated from the rest of the RECLAIM market until 2004 and were required to install Best Available Retrofit Control Technology (BARCT). As required under SCAQMD rules, DWP met the BARCT compliance date of January 1, 2003. In January 2005, SCAQMD extended the date from the fall of 2004 until January 1, 2007, when power producers could reenter the RECLAIM market. However, as a result of the installation of NOx control equipment and the repowering of existing units, DWP has sufficient RTCs to meet its native load requirements for normal operations. Overall NOx emissions will be reduced by over 65 percent from 1999 levels.

Water Enterprise Fund

Surface Water Treatment Rule

The State of California Surface Water Treatment Rule (SWTR) imposes increased filtration requirements at open distribution reservoirs exposed to surface water runoff. The Water System has four major reservoirs that are subject to SWTR: Upper and Lower Hollywood, Lower Stone Canyon and Encino. To comply with SWTR, DWP has designed projects to remove these reservoirs from regular service through construction of larger pipelines and storage facilities. These changes will improve water quality while maintaining flexibility in the water system.

The Hollywood Water Quality Improvement Project was completed in July 2002. Upper and Lower Hollywood Reservoirs were removed from service and functionally replaced by two 30 million gallon tanks and additional pipelines. Construction began on the Encino project in December 2002 and the Stone Canyon Water Quality Improvement Project in December 2003. As of June 30, 2004, the cost of the SWTR compliance related to engineering studies and construction activities at the four reservoirs and for the additional key pipelines in the San Fernando Valley totaled $378 million and are expected to reach $632 million at completion in 2008.

Owens Valley

During 1997, the Great Basin Unified Air Pollution Control District (the District) adopted an initial State Implementation Plan (SIP), as amended, and an implementing order requiring DWP to initiate pollution control measures to control particulate matters emitting from the Owens Dry Lake bed. DWP disputed the remediation measures imposed by the original order; however, in July 1998, the District and the City Council approved a Memorandum of Agreement (MOA) to mitigate the dust problem. The MOA delineated the dust producing areas on the lakebed that needed to be controlled, specified what measures must be used to control the dust, and specified a timetable for the phased implementation of the control measures.

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The District incorporated the MOA into a formal air quality State Implementation Plan (SIP) that was approved by the United States Environmental Protection Agency in October 1999. The District revised and adopted the SIP in November 2003. The revised SIP defines the additional boundaries and areas required to be controlled on the lakebed. DWP was allowed to examine the District's methodology to determine the additional areas to be controlled. As a result of these efforts, the District ordered in the revised SIP 29.8 square miles that will be required to be controlled, which include the areas the City agreed to and completed. The revised SIP demonstrates that upon completion of the City's work, emissions from Owens Lake bed will have been reduced so that the Owens Valley Planning Area will attain and maintain the Federal Clean Air Act (Act) ambient air quality standards for particulate matter. The Act requires that Owens Lake meet ambient air quality standards by the end of 2006.

To date, the City has completed construction and is operating dust control measures covering an area of approximately 19.5 square miles. Planning and design are underway for the additional area specified in the District's revised SIP. The control measures that the District has certified as Best Available Control Measures for Owens Lake are: shallow flooding, managed vegetation, and gravel.

As of June 30, 2004, DWP has incurred capital costs of approximately $270 million associated with the Owens Dry Lake project. Based on the 2003 SIP, DWP management estimates that the total capital related costs of implementing the pollution control measures through 2006 will be approximately $415 million.

Fire and Police Pension System

The System has commitments to contribute capital for real estate and venture capital investments in the aggregate amount of approximately $230.5 million at June 30, 2004.

All members of the System, except Tier 4 members, who were active on or after July 1, 1982 have vested rights to their past contributions and accrued interest in the event of termination prior to retirement. At June 30, 2004, the total amount is $1,057.6 million.

Los Angeles City Employees Retirement System

At June 30, 2004, the LACERS was committed to future purchases of real estate and alternative investments at an aggregate cost of approximately $349.8 million.

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Community Redevelopment Agency

Hollywood, Highland and Marketplace Projects

The CRA helped to facilitate public improvement financing for the Hollywood and Highland commercial development by the TrizecHahn Corporation (the Developer). Public financing consisted of taxable certificates of participation issued by MICLA for the live broadcast theater and tax-exempt parking revenues bonds issued by the City for a subterranean parking structure.

The debt service requirements for the theater certificates of participation are paid from the annual lease rental payments from the City's General Fund. To the extent that the transient occupancy tax generated by the hotel project at the site is less than the annual debt service requirement, the Developer (or its successor) has guaranteed up to 74% of the shortfall. Under certain conditions, the Developer may be released from the guarantee after the eleventh year (year 2010). In a cooperation agreement executed in February 2004, the CRA has agreed to guarantee the remaining 26%, net of certain exclusions, payable from tax increment revenues or other legally available funds from the Hollywood Redevelopment Project Area (Project Area). The CRA will be released from this guaranty when the developer is released from its guaranty as described above. Unless subordination is approved by the City Council, the pledge of tax increment is senior to all future pledges of tax increment from the Project Area.

The parking revenue bonds are payable from and secured by a pledge of the parking revenues deposited into the City's Special Parking Revenue Fund. The February 2004 cooperation agreement does not require the CRA to provide a back-up reimbursement mechanism should parking revenues be insufficient to pay for the debt service on the parking bonds.

The obligation to pay Hollywood Project tax increment revenues to the City, under certain conditions, is subject to prior and senior obligations to pay tax allocation bond debt service, housing set-asides as required by State law, and pass-through payments arising from agreements with the County of Los Angeles, the Los Angeles Unified School District, and the Los Angeles Community College District.

Others

At June 30, 2004, the CRA had approximately $128.8 million in outstanding commitments under various agreements, including construction, public improvements, housing loans, professional services and other costs related to redevelopment plans.

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NOTE 5 - OTHER INFORMATION (Continued)

C. Conduit Debt Obligations

The City participated in the issuance of the following indebtedness to provide financing to private-sector entities for the acquisition, construction and improvements of housing, commercial, educational, medical and other facilities deemed to be in the public interest (in thousands):

Outstanding Issue June 30, 2004 Multifamily Housing Bonds - 78 Issues $ 615,035 Home Mortgage Revenue Bonds - 10 Issues 109,092 Bond proceeds were used to provide mortgage loans for the construction and financing of multifamily rental and single-family residences in the City. The indebtedness is secured solely by the property financed by the respeciive bond issues and bv credit ouarantees bv reinvestment-arade financial institutions.

Industrial Development Bonds - 13 Issues 80,265 The proceeds were used to provide manufacturers low cost financing to expand industrial capacity and stimulate job creation in the City. The City has no financial obliQation as each bond is secured throuQh a letter of credit.

Limited Obligation Medium-Term Improvement Notes - 1 Issue 12,996 The proceeds were used to provide financing for fire safety improvements in prtvately owned buildings in the City. The notes are supported solely through annual assessments on the properties and the value of the underlying properties themselves.

Community Facilities Distrtct No. 3 Special Tax Bonds 10,665 The proceeds were used to fund acquisition and construction of certain public improvements for the Cascade Business Park and Golf Course. The City's obligation is limited to collecting the special taxes annually levied and collected from the District for the debt service payments.

Community Facilities Distrtct No. 4 Special Tax Bonds 135,000 The proceeds were used to fund acquisition and construction of certain public improvements for the Playa Vista Development Project. The City's obligation is limited to collecting the special taxes annually levied and collected from the District for the debt service oavments.

Street Improvement 1911/1913 Act Bonds 2,441 The proceeds were used to finance certain public improvements for the Westwood Village Streetscape Assessment Disbict. The City's obligation is limited to collectinQ the assessments annually levied for debt service payments.

Total $ 965,494

The City is not obligated in any manner for repayment of the indebtedness. Accordingly, the liabilities are not reported in the accompanying financial statements.

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NOTE 5 - OTHER INFORMATION (Continued)

Community Redevelopment Agency

In order to encourage redevelopment activities by the private sector, the CRA has authorized the issuance of tax-exempt revenue bonds and certificates of participation. The private sector assets and revenues generated by the respective projects are the collateral for the indebtedness. As of June 30, 2004, the outstanding balance of such issues was $518.5 million. The CRA is not obligated for the repayment of such debt; therefore, the liabilities are not included in the accompanying financial statements.

D. Other Matters

Northridge Earthquake Damage

As of June 30, 2004, the Federal and State governments have obligated approximately $770 million to fund repairs to City buildings, streets and bridges, sewer and related facilities, and recreation and parks facilities damaged in the January 1994 Northridge Earthquake. The total amount reimbursed by the Federal and State governments to the City as of June 30, 2004 was $698 million.

Loans Receivable from Los Angeles Community Development Bank

The City's loans receivable includes $45 million from the Los Angeles Community Development Bank (LACDB), a nonprofit corporation and not a commercial bank. This amount represents the outstanding portion of the City's participation in the U.S. Department of Housing and Urban Development Section 108 Government Guaranteed Participation Certificates, Series HUD 1999-A (Section 108 Certificates). The Section 108 Certificates represent a fractional undivided interest in a portion of a trust sponsored by the Secretary of HUD and administered by a trustee.

The City recognizes a long-term debt equivalent to its participation in the Section 108 Certificates. As required by law to assure the repayment of the certificates, the City's participation is secured by a pledge of Community Development Block Grants that the City may become eligible.

The independent auditor's report on the LACDB's financial statements for the year ended December 31, 2002 identified circumstances that raise substantial doubt about LACDB's ability to continue as a going concern. On March 17, 2004, the Board of Directors approved a resolution authorizing management to seek the appointment of a receiver to administer the orderly dissolution of LACDB. This action constitutes an event of default under the comprehensive agreement between the City and LACDB. An event of default allows the City to accelerate collection of all debt owed by LAC DB and exercise certain additional remedies. The City notified LACDB of this default on March 31, 2004. On April 8, 2004, the court appointed Receiver of LACDB filed for a Chapter 11 Bankruptcy petition. On April 21, 2004, the City Council adopted a motion, concurred in by the Mayor, authorizing the City Attorney to take all necessary steps including the filing of appropriate legal action to protect the City's interests.

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NOTE 5 - OTHER INFORMATION (Continued)

Because of the aforementioned uncertainties, the City has fully reserved for its outstanding loans due from LACDB.

Intergovernmental Receivable for State Mandated Peace Officers Procedural Bill of Rights Program

Included in the City's intergovernmental receivables is a $55 million receivable for State mandated Peace Officers Procedural Bill of Rights Program. The State Controller's Office audit of the claims filed by the Los Angeles Police Department disclosed that none of the claimed costs are allowable. The claims, according to the audit, were not supported and were based on estimated time rather than actual time and included ineligible costs. Additionally, the State is ordering the return of $19 million that the City received during the period July 1994 through June 2002. Accordingly, the City has fully reserved for its $55 million outstanding receivable.

Airports Enterprise Fund

Terrorist Activities

The Airports like the rest of North American transport system, has been adversely affected by the terrorist attacks that occurred in the United States on September 11, 2002 (the September 11 Events). As a result of the September 11 Events, there was a temporary suspension of air carrier operations in the United States, including operations at the Airports. Since the September 11 Events, due in part to the September 11 Events and in part to the slowdown in the national economy, significant declines have been experienced in aviation activity and enplaned passenger traffic, as well as in activity-based revenues consisting primarily of landing fees, passenger facility charges, concession revenues and parking revenue. For the fiscal year ended June 30, 2004, Airports experienced a 9.9% reduction in passenger levels and a 19.2% reduction in air traffic movements. Aviation activity was also affected by the hostilities in Iraq and the outbreak of severe acute respiratory syndrome (SARS).

As part of its program of proactively addressing heightened security concerns and requirements, Airports has engaged in a review of its rates and charges, and has implemented revenue enhancements and expenditure controls that affect a variety of operating expenses. Capital expenditures were reevaluated and much of such expenditures were suspended except where the affected projects were near completion or essential from a security or safety standpoint.

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NOTE 5 - OTHER INFORMATION (Continued)

Reductions in operating levels at the Airports from those that existed prior to the September 11 Events may continue for a period of lime and to a degree that is uncertain. The future level of aviation activity and enplaned passenger traffic at the Airports will depend upon several factors directly and indirectly related to the September 11 Events, including, among others, the financial condition of individual airlines and the viability of continued services. A number of airlines were experiencing economic difficulties prior to the September 11 Events.

The financial situation for all airlines has improved in FY 2004 due to a modest increase in passenger volume. However, certain airlines filed for bankruptcy during the year, including Atlas Air and Polar Air Cargo. The bankruptcy protection filed for by United Airlines (UA) is still pending with the court. UA is the largest revenue provider for the Airports contributing 9.3% and 5.4% of revenues at the Los Angeles International and Ontario International Airports, respectively.

Airports is unable to predict (i) the duration of current reduced air traffic volume, (ii) the long term impact of the above-mentioned events on costs and revenues of Airports, (iii) the future financial condition of the airlines using Airports facilities, or (iv) the likelihood of future incidents of terrorism or other air transport disruptions.

Passenger Facility Charges

The Aviation Safety and Capacity Act authorized domestic airports to impose a passenger facility charge (PFC) on enplaning passengers. The Federal Aviation Authority (FAA) issued the regulations for the use of PFC's for airport projects that must meet at least one of the following criteria: (a) preserve or enhance safety, security or capacity of the national air transportation system; (b) reduce noise or mitigate noise impacts resulting from an airport; or (c) furnish opportunities for enhanced competition between or among airlines.

The FAA has approved the Airports' applications to impose $3 per passenger PFC's at the Los Angeles International (LAX) and Ontario International Airports to fund certain approved projects. Through June 30, 2004, the cumulative PFC collections and the related interest earned as reported to the FAA were $722.8 million and $91.1 million, respectively. The increased rate of $4.50 effective August 1, 2003 at LAX was approved by the FAA.

Power and Water Enterprise Funds

Fair Value of Power and Water Enterprise Funds Bonds and Notes Payable

The fair value of bonds payable are based on estimates that represent the present value of interest and principal payments on the long-term debt and refunding bonds discounted using current interest rates obtainable by DWP for debt of similar quality and maturities. The fair value of both current and long-term bonds and notes payable is $3 billion for Power and $1.1 billion for Water.

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NOTE 5 - OTHER INFORMATION (Continued)

Mohave Generating Station

During the year, the Power Enterprise Fund recorded a loss on the Mohave Generating Station (Mohave) totaling $8.1 million. The loss was recorded using the service units approach under GASB 42. DWP believes that Mohave will close in December 2005 due to environmental, water, and coal issues. As of June 2004, DWP management did not have a plan to remedy the issues to keep Mohave operating after December 2005.

Regulatory Matters Affecting the Power System

Effective April 1, 1998, customers of California's investor-owned utilities (IOU) became eligible for direct access. The introduction of direct access resulted in significant structural changes to the electric power industry, including plant divestitures and management of IOU transmission assets through the California Independent System Operator (CISO). In 2001, legislation was enacted to suspend direct access to retail customers in California.

As a government-owned utility, DWP was not compelled to participate in direct access or divest its generation assets. Management continues to evaluate DWP's alternatives in response to deregulation, the introduction of direct access and participation in the CISO. In addition, management has implemented debt and cost reduction programs and restructured certain purchase power commitments in response to the changes in the electric utility market. Furthermore, in August 2000, the City Council approved a $1.7 billion, ten-year plan to upgrade DWP's local power plants and to implement a program that includes demand side management, alternative energy sources and distributed generation. This plan has been amended to allow for a total budget of $2 billion. Through June 30, 2004, DWP has incurred $1.2 billion related to such upgrades.

No definitive plan for allowing direct access to customers in the DWP service area has been adopted. However, if DWP implements direct access in the future, it is likely that its generation business will no longer qualify for accounting under SFAS No. 71, which requires that the effects of the rate making process be recorded in the financial statements.

Federal Energy Regulatory Commission (FERC) Price Mitigation Plan

In June 2001, the Federal Energy Regulatory Commission issued a price mitigation plan on spot market electricity sales in the Western Electric Coordinating Council (WECC). The plan imposes price limits on the sale of electricity in WECC based on a calculation that estimates the cost of production of the least efficient gas-fired generation plant in California and a fixed factor to account for other variable costs. The Power Enterprise Fund's purchases and sales of electricity occur entirely within the WECC and as such are subject to these measures. These measures have in part contributed to stabilizing the market and resulted in overall lower wholesale prices.

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California Receivables and FERG Refund Hearings

During fiscal year 2001, Power Enterprise Fund made sales to two California agencies that were formed by Assembly Bill 1890 to facilitate the purchase and sale of energy and ancillary services in the State of California. Through June 30, 2004, these agencies, the CISO and the California Power Exchange (CPX), have made minimal payments since April 2001 on amounts outstanding to counterparties, including the Power Enterprise Fund, for certain energy purchases in fiscal years 2000 and 2001. The CPX filed for protection under Chapter 11 of the Federal Bankruptcy Statute in January 2001. Two utility companies that owe significant amounts to these agencies, the Southern California Edison Company and the Pacific Gas & Electric, have stated in public disclosure documents that they may not be able to pay all the power they consumed in 2001. Both Pacific Gas & Electric and Southern California Edison Company have paid all amounts due by them to the CPX, however, the amounts remain in escrow accounts pending the resolution of disbursement of the funds.

As of June 30, 2004, a total of $166.5 million was due to the Power Enterprise Fund from CISO and CPX. The FERG has questioned whether amounts charged for energy sold to the CISO and CPX during 2000 and 2001 represent "unlawful profits" that should be subject to refund. The FERG has considered various options for determination of a refund amount but has not issued definitive guidance on what represents unlawful profits for sales during the period. If the FERG issues an order requiring a refund under defined conditions, the Power Enterprise Fund may be liable to refund a portion of amounts recorded as sales. However, it has not been established that the FERG has any jurisdictions over municipal utilities, including the DWP.

The Power Enterprise Fund has recorded a $50 million reserve against the $166.5 million receivable, for potential refunds pertaining to its wholesale sales during 2000 and 2001. DWP management believes that this is the most probable amount that will be paid and is based on the most recent formula disclosed by FERG. While DWP management has recorded its estimate of the most probable amounts that will be paid, DWP management believes that it is entitled to all amounts due from sales to counterparties in California, including those mentioned above. Furthermore, DWP management believes that interest may be due to ii on those amounts but any potential receivable cannot be estimated at this time. In addition, DWP management does not believe that the Power System's exposure to additional losses with respect to these receivable balances can be currently estimated. If final settlement of these receivables results in an amount less than the recorded balance, net of the $50 million reserve, DWP will be required to record a loss in the Power Enterprise Fund's operating statement.

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Public Benefits

In accordance with State Assembly Bill 1890, as amended by Assembly Bill 995, and pursuant to direction from the Board, a percentage of the Power Enterprise Fund's retail revenue is designated for use for qualifying public benefits programs. Qualifying programs include cost effective demand side management services to promote energy efficiency and energy conservation, new investment in renewable energy resources and technologies, development and demonstration programs to advance science and technology, and services provided for low-income customers. The program is currently expected to cease on January 1, 2012.

DWP defers public benefits revenue from customers in excess of costs incurred under qualifying programs and defers qualifying expenses in excess of collection pursuant to approval received from the Board. During fiscal year 2003, the Power Enterprise Fund changed its public benefits deferral estimate. The change in estimate was the result of an updated interpretation of Assembly Bill 1890. As a result, Power Enterprise Fund recorded an increase in its public benefits deferred credit balance of $27 million. During fiscal year 2004, $64.2 million was spent on public benefits programs that include investments in electric buses and vehicles, photovoltaics or solar power and other alternative energy sources, and support for low-income and life support customers. As of June 30, 2004, the Power Enterprise Fund recorded deferred debit of $9.7 million due to public benefit expenses incurred in excess of revenues. The regulatory asset will be recorded when the corresponding revenue is earned.

The Impact of the Right to Vote on Taxes Act- Proposition 218

On November 5, 1996, California voters approved Proposition 218 (the Proposition) that adds Articles XIIIC and XIIID to the California Constitution. The Proposition requires majority voter approval before the imposition, extension or increase of general taxes, and 213-voter approval before imposition, extension or increase of special taxes by a local government, which is defined in the Proposition to include charter cities such as the City. Such voter requirements would apply to all general and special taxes that were newly created or increased after January 1, 1995.

The Proposition also extends the initiative power to reducing or repealing local taxes, assessments, and property related fees and charges, regardless of the date such taxes, assessments, fees and charges were imposed. In addition, the Proposition limits the application of assessments, fees and charges and requires them to be submitted to property owners for approval or rejection, after notice and public hearing.

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The Proposition will restrict the City's ability to impose or increase certain taxes and assessments, and land-based user fees and charges. It would subject existing sources of City revenue to reduction or repeal. Existing taxes at existing levels such as Utility Users Tax, Documentary Transfer Tax, Parking User Tax, Sales Tax, Vehicle License Fees, Municipal Court Fines, Transient Occupancy Tax, and Licenses, Permits, Fees and Fines would not be affected by the Proposition. Fees and charges of the Power System and its transfers to the General Fund are exempted from Proposition 218. The City's Sanitation Equipment Charge is subject to the Proposition, however, fee increases for refuse collection services are exempted from the voter approval requirement in the Proposition.

The Proposition will require a vote of the electorate to either increase an existing tax or levy any new tax. The impact on future revenues will depend on the willingness of the electorate to support new taxes and cannot be determined at this time.

Recent Litigation Involving Assessment Practices

Properties which have been subject to downward valuation by county assessors as a result of natural disasters, economic downturns or other factors, have often had that value restored by the assessors at rates higher than 2% annually depending on the success of repairs following a disaster or the speed of a recovery from an economic downturn. All fifty-eight county assessors have followed this procedure that was codified in the State of California Revenue and Taxation Code. An Orange County Superior Court ruled that such decreases create a new "base year value" for purposes of Proposition 13 and that subsequent increases in the assessed value of a homeowner's property by more than 2% in a single year violated Article XIIIA of the California Constitution. The Court's ruling only applies to the particular assessment involved in the "County of Orange v. Orange County Assessment Appeals Board No. 3 case.

The same attorneys pursuing the Orange County case subsequently filed similar cases in the Superior Courts of Los Angeles and San Diego Counties. In both instances, the cases were dismissed on demurrer and the attorneys have not appealed.

An appeal was filed on the Orange County Superior Court's ruling and in March 2004, the 4th District Court of Appeal upheld the methods used by all county assessors of the State. The plaintiff petitioned the State Supreme Court to review the lower court's decision. The State Supreme Court declined to review the decision of the Court of Appeal.

- 153 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5- OTHER INFORMATION (Continued)

The South Coast Air Quality Management District (SCAQMO) Fleet Rules

The SCAQMD has adopted new rules with which the City must comply related to clean air requirements for government fleets (Fleet Rules). It has been estimated that implementing the Fleet Rules will cost the City $100 million over a seven-year period starting in fiscal year 2002. In April 2004, the U.S. Supreme Court ruled that the SCAQMD overstepped its authority with the fleet rules. However, in January 2005, the City Council adopted a resolution, subject to the concurrence of the Mayor, to support the fleet rules. Funding this program will be considered as part of the annual budget process of the City.

Community Redevelopment Agency

Bunker Hill Project

The bond insurance covering the $50 million Bunker Hill 1977 Subordinate Series A tax allocation refunding bonds required the pledge of all tax increment revenues derived from the project area. Tax increment revenues will be released to the CRA after fully retiring the subordinate bonds and after certain debt service coverage tests imposed by the insurer are met. In May 2004, the subordinate bonds were refunded and the tax increment revenues were released from restrictive bonds covenants.

Cinerama Dome Public Parking

The parking revenue generated by the facility is the primary source for debt service payments of the $44.2 million Parking System Revenue Bonds. Under circumstances where net revenues are insufficient to service the debt, the shortfall will be covered by a $9.3 million letter of credit provided by the developer and the CRA's pledge of the project area's incremental tax revenues of up to $1 million annually. However, the pledge of incremental tax revenues is subordinate to the project area's tax allocation bonds, project notes, and pass through payments. Such pledge will be released when net revenues during two consecutive twelve-month periods equal 1.35 times the maximum annual debt service on the bonds.

On two instances during the fiscal year, the CRA directed the bond trustee to draw a total of $1.5 million from the letter of credit to cover debt service requirement shortfalls. The CRA is obligated to reimburse the developer for the drawings at 10% interest from available cash from the parking garage operations and/or any property tax increment generated by the project. The drawdowns that totaled $3.5 million as of June 30, 2004 are due in July 2032.

- 154 - CITY OF LOS ANGELES

NOTES TO THE BASIC FINANCIAL STATEMENTS Fiscal Year Ended June 30, 2004

NOTE 5 - OTHER INFORMATION (Continued)

E. Subsequent Events

Indebtedness

Subsequent to June 30, 2004, the City issued the following indebtedness (in millions):

Issue Date Bond Description Amount Interest Rate City July 13, 2004 2004 Tax and Revenue Anticipation Notes $ 650.5 3.000% - 6.000% July 27, 2004 General Obligation Bonds Series 2004-A 360.5 3.000% - 5.000% July 14, 2004 Water System Revenue Bonds 200.0 4.902% September 15, 2004 Power System Revenue Commercial Paper Notes 200.0 variable Business Tax Reform

On November 17, 2004, the City Council adopted a package of changes to the City's business tax system. The reforms include: (a) elimination of the tax for businesses with gross receipts of $100,000 or less, (b) gradual reduction of the business tax by 15% for all businesses, (c) reduction of the tax burden on small and medium-sized film production companies, (d) exempt film industry workers earning up to $300,000, (e) reduce the categories used to calculate the tax from 75 to 7, (f) allow businesses to choose between cash or accrual bases in determining their tax dues, and (g) stop collecting the tax on bad debts. It is expected that the tax reforms would exempt 61% of firms from City business taxes and the cumulative effect would reduce business tax receipts by $92 million annually. The City ordinance related to the business tax changes will be effective January 16, 2005.

LAXT Versus City of Los Angeles

On December 27, 2004, a lawsuit was filed and served on the City. The lawsuit, "Los Angeles Export Terminal, Inc. (LAXT) v. City of Los Angeles", arises out of LAXT occupancy on Terminal Island at the Harbor and alleges causes of action for breach of fiduciary duty, breach of contract and declaratory relief, and seeks damages in excess of $600 million. Since the action was just recently filed and the discovery phase of the lawsuit is yet to commence, the impact on the accompanying financial statements, if any, cannot be determined at this time.

January 2005 Storm

Certain City facilities and infrastructure were damaged during the storms that took place in late December 2004 through early January 2005. The total cost for emergency protective measures, debris removal and damage repair is currently estimated at $75 million. The Governor has requested a Federal Declaration of Disaster, and on February 4, 2005, the President made the declaration. With the declaration, the Federal Emergency Management Agency (FEMA) will cover 75% of the total repair costs. FEMA will also reimburse overtime costs paid to paramedics, firefighters and police officers because of the storm. The State will cover 18% of the costs and the remaining 7% will be the local share.

- 155 - This page intentionally left blank

- 156 - Required Supplementary Information CITY OF LOS ANGELES

REQUIRED SUPPLEMENTARY INFORMATION Fiscal Year Ended June 30, 2004

CITY OF LOS ANGELES Schedule of Funding Progress Benefit Pension Plans (amounts expressed in thousands)

Overfunded (Unfunded) Actuarial AAL as a Actuarial Actuarial Accrued Overfunded Percentage Valuation Value of Liability (Underfunded) Funded Covered of Covered Date Assets (AAL) AAL Ratio Payroll Payroll Los Angeles City Employees' Retirement System 6/30/02 $ 7,060,188 $ 7,252,118 $ (191,930) 97.4o/o $ 1,334,335 -14.4o/o 6/30/03 6,999,647 7,659,846 (660,199) 91.4°/o 1,405,058 -4 7 .Oo/o 6/30/04 7,042,108 8,533,864 (1,491,756) 82 .5o/o 1,575,285 -94.7o/o Fire and Police Pension System

6130102 $ 11,491,922 $10,606,825 $ 885,097 108.3°/o $ 946,037 93.6o/o 6130/03 11,690,751 11,203,559 487,192 104.3% 970,727 50.2o/o 6130/04 11,735,696 11,389,981 345,715 103.0o/o 1,001,004 34.5% Water and Power Employees' Retirement and Death Benefit Insurance Plan 6130102 $ 5,790,263 $ 5,714,525 $ 75,738 101.3°/o $ 430,398 17 .6°/o 6130103 6,128,376 6.042,087 86,289 101.4°/o 527,787 16.3o/o 6/30104 6,251,421 6,421,814 (170,393) 97 .3o/o 581,039 -29.3°/o

POWER AND WATER ENTERPRISE FUNDS Schedule of Funding Progress Other Postemployment Benefits (amounts expressed in thousands)

Unfunded Actuarial AAL as a Actuarial Actuarial Accrued Overfunded Percentage Valuation Value of Liability (Underfunded) Funded Covered of Covered Date Assets (ML) ML Ratio Pai roll Pairoll 7101/03 $ 186,904 $ 1,729,706 $ (1,542,802) 1 O.Bo/o $ 571,725 -269.9%

COMMUNITY REDEVELOPMENT AGENCY Schedule of Funding Progress Employee Retirement System (amounts expressed in thousands)

Overfunded Actuarial AAL as a Actuarial Actuarial Accrued Overfunded Percentage Valuation Value of Liability (Underfunded) Funded Covered of Covered Date Assets (ML) AAL Ratio Pa~roll Pal'.roll 6130/00 $ 104,616 $ 80,994 $ 23,622 129.2%1 $ 12,733 185.5%1 6130101 106,876 88,427 18,449 120.9%1 14,124 130.6o/o 6130102 100,716 99,757 959 101.0o/o 15,761 6.1°/o

- 157 - CITY OF LOS ANGELES

REQUIRED SUPPLEMENTARY INFORMATION Fiscal Year Ended June 30, 2004

Condition Rating for City Bridges

Ratin No. of A = 90o/o - 1OOo/o B - 80°/o - 89% c = 70°/o - 79°/o D = 50% - 69°/o F - below 50%1 Brid9e T~ee Bridges (ve~ 9ood) (9ood to fair) (fair to eoor) (ve~ eoor1 (failure) Vehicular 424 217 69 115 23 Pedestrian 65 17 48 Railroad 19 12 6 1 Tunnel 18 9 7 2 Miscellaneous 7 4 2 1 Total 533 259 126 124 24 Percentage 100% 49°/o 24o/o 23o/o 401o Oo/o

Comparison of Needed-to-Actual Maintenance/Preservation Costs (amounts expressed in thousands)

Fiscal Year Ended June 30 2003 2004 2005 Needed $ 10,926 $ 12,505 $ 26,826 Actual 11,518 10,602 Difference (592) 1,903

The Computer File of Structures is a comprehensive bridge database system that enables the City to track the entire bridge inventory, inspection data, repair records, structural condition of various bridge elements, bridge sufficiency rating, cost data, traffic data, and geometric data. The Sufficiency Rating given each bridge is in accordance with national standards developed by the Federal Highway Administration. The Sufficiency Rating ranges from 0% to 100% and is composed of three elements: Structural Safety and Adequacy (55%), Serviceability and Functional Obsolescence (30%), and Essentiality for Public Use (15%). It is the City's policy that bridges shall be maintained so that at least 70% of the bridges are rated "B" or better, and no bridge shall be rated less than "D." Condition assessments are determined every two years.

- 158 - Combining and Individual Fund Financial Statements and Schedules CITY OF LOS ANGELES

COMBINING AND INDIVIDUAL FUND FINANCIAL STATEMENTS AND SCHEDULES

The other governmental funds combining balance sheet; and other governmental funds combining statement of revenues, expenditures and changes in fund balances provide the detail for the combined amounts presented in the basic financial statements (pages 34 and 37, respectively). Subcombining statements are presented to provide the detail for the nonmajor special revenue funds, nonmajor debt service funds, and nonmajor capital projects funds. In addition, budgetary comparison schedules are presented for each of the non major budgeted funds.

The combining statements for the fiduciary funds are also presented for the pension trust funds and agency funds to provide the detail for the combined amounts presented in the basic financial statements (pages on 54 and 55).

- 159 - CITY OF LOS ANGELES

Combining Balance Sheet Other Governmental Funds June 30, 2004 (amounts expressed in thousands)

Nonmajor Non major Non major Total Special Debt Capital Other Revenue Service Projects Governmental Funds Funds Funds Funds ASSETS Cash and Pooled Investments $ 994,399 $ 191,669 $ 816,234 $ 2,002,302 Other Investments 1,196 13, 169 1,641 16,006 Taxes Receivable (Net of Allowance for Uncollectibles of $3,732) 3,622 13,338 16,960 Accounts Receivable (Net of Allowance for Uncollectibles of $2,351) 6,314 76 6,390 Special Assessments Receivable (Net of Allowance for Uncollectibles of $1,220) 8,431 1,874 10,305 Investment Income Receivable 6,634 1,023 6,978 14,635 Intergovernmental Receivable 72,617 1,488 74,105 Loans Receivable (Net of Allowance for Uncollectibles of $391,241) 177,103 177, 103 Due from Other Funds 18, 124 451 18,575 Loans Receivable from Component Unit 14,000 14,000 Advances to Other Funds 7,012 7,012 Restricted Assets 16, 143 16,143

TOTAL ASSETS $ 1,325,595 $ 219, 199 $ 828,742 $ 2,373,536

LIABILITIES AND FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ 46,687 $ 23 $ 12,412 $ 59, 122 Obligations Under Securities Lending Transactions 118,712 22, 140 116,792 257,644 Accrued Salaries and Overtime Payable 2,869 2,869 Accrued Compensated Absences Payable 46 46 Intergovernmental Payable 21, 143 4 21,147 Due to Other Funds 27,131 5,393 32,524 Deferred Revenue and Other Credits 49,271 10,914 5,375 65,560 Deposits and Advances 10,357 4 10,361 Matured Bonds and Interest Payable 1,555 1,555 Advances from Other Funds 86,015 1,826 87,841 Other Liabilities 4,615 24 4,639

TOTAL LIABILITIES 366,846 34,656 141,806 543,308 FUND BALANCES Reserved for: Encumbrances 207,006 87,335 294,341 Assets Not Available for Appropriation 198,115 198,115 Debt Service 184,543 184,543 Special Purposes 16, 143 16,143 Unreserved and Undesignated 537,485 599,601 1, 137,086

TOTAL FUND BALANCES 958,749 184,543 686,936 1,830,228

TOTAL LIABILITIES AND FUND BALANCES $ 1,325,595 $ 219,199 $ 828,742 $ 2,373,536

- 160 • CITY OF LOS ANGELES

Combining Statement of Revenues, Expenditures and Changes in Fund Balances Other Governmental Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Nonmajor Nonmajor Nonmajor Total Special Debt Capital Other Revenue Service Projects Governmental Funds Funds Funds Funds REVENUES Property Taxes $ 17,657 $ 139,944 $ $ 157,601 Other Taxes 33,055 1,804 34,859 Licenses and Permits 1,605 20 1,625 Intergovernmental 390,549 22,049 412,598 Charges for Services 215,899 3,920 10 219,829 Services to Enterprise Funds 1,837 1,837 Fines 16,986 16,986 Special Assessments 68,679 25,241 93,920 Investment Earnings 1,862 672 2,654 5,188 Program Income 9,879 9,879 Other 40,321 4,657 429 45,407 TOTAL REVENUES 798,329 149,193 52,207 999,729 EXPENDITURES Current: General Government 30,525 7,016 37,541 Protection of Persons and Property 149,500 149,500 Public Works 69,972 69,972 Health and Sanitation 114,561 114,561 Transportation 58,277 58,277 Cultural and Recreational Services 93,081 1,352 94,433 Community Development 298,007 298,007 Capital Outlay 164,663 218,057 382,720 Debt Service: Principal 2,317 86,957 89,274 Interest 3,165 89,116 92,281 Cost of Issuance 1,422 420 1,941 3,783 Advance Refunding Escrow 3,253 3,253 TOTAL EXPENDITURES 985,490 188,114 219,998 1,393,602

DEFICIENCY OF REVENUES OVER EXPENDITURES (187,161) (38,921) (167,791) (393,873) OTHER FINANCING SOURCES (USES) Transfers In 183,606 64,989 1,842 250,437 Transfers Out (103,994) (538) (6,359) (110,891) Issuance of Long.term Debt 117,350 233,365 350,715 Premium on Issuance of Long·term Debt 8,550 11,005 19,555 Issuance of Refunding Bonds 77,345 77,345 Premium on Issuance of Refunding Bonds 4,736 4,736 Payment to Refunded Bond Escrow Agent (81,660) (81,660) Loans from HUD 23,895 23,895 TOTAL OTHER FINANCING SOURCES 229,407 64,872 239,853 534,132 NET CHANGE IN FUND BALANCES 42,246 25,951 72,062 140,259 FUND BALANCES, JULY 1 916,503 158,592 614,874 1,689,969 FUND BALANCES, JUNE 30 $ 958,749 $ 184,543 $ 686,936 $ 1,830,228

• 161 - This page intentionally left blank

- 162 • General Fund

The General Fund is the general operating fund of the City. It is used to account for all financial resources except those required to be accounted for in other funds. General Fund revenues are derived from such sources as Taxes, Licenses and Permits, Intergovernmental Revenues, Charges for Services, Fines, Special Assessments, Interest, and Other. Expenditures are expended for functions of General Government, Protection of Persons and Property, Public Works, Health and Sanitation, Transportation, Cultural and Recreational Services, Community Development, Capital Outlay, and Debt Service. CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function Budget and Actual (Non-GAAP Budgetary Basis) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Variance With Original Addltlonal Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Budget Expenditures June 30, 2004 Actual (Under) GENERAL GOVERNMENT City Administrative Officer $ 12,009 $ 273 $ 12,282 $ 10,905 $ 1, 144 $ 12,049 $ (233) City Attorney 86.412 11,720 98, 132 91,747 6,029 97,776 (356) City Clerk 9,446 348 9,794 9,092 633 9,725 (69) Commission on the Status of Women 628 56 684 640 44 684 Controller 14,553 836 15,389 13,560 1,753 15.313 (76) Council 20,947 4,889 25,836 21,286 1,396 22,682 (3,154) Employee Relations Board 338 (4) 334 281 16 297 (37) Ethics Commission 2,077 (28) 2,049 1,816 145 1,961 (88) Finance 22,528 5,262 27,790 23,084 4,217 27,301 (489) General Services 189,578 69,459 259,037 213,705 20,911 234,616 (24.421) Human Relations Commission 1,073 (84) 989 814 93 907 (82) Information Technology Agency 100,393 3,349 103,742 93, 116 9, 106 102,222 (1,520) Mayor 7,477 3,609 11,086 9,589 530 10,119 (967) Neighborhood Empowerment 4,930 (101) 4,829 4,044 337 4,381 (448) Personnel 50,535 336 50,871 44,770 5,457 50,227 (644) Treasurer 4,764 439 5,203 2,955 1,908 4,863 (340) Non*Departmental Capital Finance Administration 107,147 (6,415) 100,732 94,609 94,609 (6,123) General City Purposes 57,381 (13,549) 43,832 35,350 6,031 41,381 (2,451) Human Resources Benefits 374,042 5,481 379,523 372,903 6,568 379,471 (52) Liability Claims 50,000 (3,666) 46,334 42,595 1,750 44,345 (1,989) Unappropriated Balance 86,558 (65,564) 20,994 (20,994) Water and Electricity 17,239 (264l 16,975 12,952 4,023 16,975

TOTAL GENERAL GOVERNMENT 1,220,055 16,382 1.236,437 1,099,813 72,091 1,171,904 (64,533l

PROTECTION OF PERSONS AND PROPERTY Animal Services 14,710 (118) 14,592 13,518 943 14,461 (131) Building and Safety 61,818 5,516 67,334 63,276 3.613 66.889 (445) Emergency Preparedness 1,286 205 1,491 1,390 67 1.457 (34) Fire 435,767 1,610 437,377 403,151 29,169 432.320 (5,057) Police 984,999 64,992 1,049,991 977,060 60.129 1,037, 189 (12,802) TOTAL PROTECTION OF PERSONS AND PROPERTY 1,498,580 72,205 1,570,785 1,458,395 93,921 1,552,316 (18,469)

Continued

- 163 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function Budget and Actual {Non-GAAP Budgetary Basis) - (Continued) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Variance With Original AddlUonal Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Budget Expenditures June 30, 2004 Actual (Under) PUBLIC WORKS Public Works Bureaus Board of Public Works $ 12,769 $ 3,390 $ 16,159 $ 14,098 $ 1,924 $ 16,022 $ (137) Bureau of Contract Administration 26,349 3,874 30,223 25,848 1,405 27,253 (2,970) Engineering 71,379 17, 111 88,490 77,297 4,846 82,143 (6,347) Financial Management and Personnel Services 7,273 964 8,237 7,598 435 8,033 (204) Street Lighting 17,778 3,653 21,431 18,225 1,504 19,729 (1,702) Street Services 130,588 12,270 142,858 122,801 10,974 133,775 (9,083) Non-Departmental Water and Electricity 1,827 1.827 1,545 278 1,823 (4)

TOTAL PUBLIC WORKS 267,963 41,262 309,225 267,412 21,366 288,778 (20,4471

HEALTH AND SANITATION Environmental Affairs 3,053 146 3,199 2,812 292 3,104 (95) Public Works- Bureau of Sanitation 210,744 10,475 221,219 198, 184 14,654 212,838 (8,381) Non-Departmental Water and Electricity 567 567 476 91 567

TOTAL HEALTH AND SANITATION 214,364 10,621 224,985 201,472 15,037 216,509 (8,476)

TRANSPORTATION 115,615 13,708 129,323 116,702 9,341 126,043 (3,280)

CULTURAL AND RECREATIONAL SERVICES Convention Center 21,720 38 21,758 19,907 1,725 21,632 (126) Cultural Affairs 11,798 865 12,663 10,646 1,893 12,539 (124) Zoo 17,026 425 17,451 14,490 1,444 15,934 (1,517) Non-Departmental Water and Electricity 15,861 15,861 11,793 4,068 15,861 TOTAL CULTURAL AND RECREATIONAL SERVICES 66,405 1,328 67,733 56,836 9,130 65,966 (1,767) COMMUNITY DEVELOPMENT Aging 3,497 1,006 4,503 3,727 299 4,026 (477) Commission for Children, Youth and Their Families 1,809 (146) 1,663 1,356 218 1,574 (89) Community Development 20,706 17,693 38,399 30,321 3,228 33,549 (4,850) Disability 2,047 (14) 2,033 1,645 202 1,847 (186) Los Angeles Housing 35,748 4,442 40,190 35,887 3,281 39,168 (1,022) Planning 20,748 1, 151 21,899 20,082 1,595 21,677 12221

TOTAL COMMUNITY DEVELOPMENT 84,555 24.132 108,687 93,018 8,823 101,841 (6,846)

Continued

- 164 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function Budget and Actual (Non-GAAP Budgetary Basis)· (Continued) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Variance With Original Additional Final Budget Adopted Appropriations Fin al Encumbrances Total Over Budget and Transfers Budget Expenditures June 30, 2004 Actual (Under) PENSION AND RETIREMENT CONTRIBUTIONS Non-Departmental General City Purposes $ 26,714 $ 520 $ 27,234 s 25,282 $ 1,352 $ 26,634 $ (600) General 500 500 500 500 TOTAL PENSION AND RETIREMENT CONTRIBUTIONS 27,214 520 27,734 25,782 1,352 27,134 (6001 CAPITAL OUTLAY Non-Departmental Capital Improvement Projects 19,400 17.367 36,767 11,776 9,210 20,986 (15,781) TRANSFERS TO OTHER FUNDS Non-Departmental Capital Finance Administration 25,579 36 25,615 25,407 25,407 (208) General City 476,529 40,803 517,332 512,272 512,272 (5,060) TOTAL TRANSFERS TO OTHER FUNDS 502,108 40,839 542,947 537,679 537,679 (5,268)

GRAND TOTAL $ 4,016,259 $ 238,364 $ 4,254,623 $ 3,868,885 $ 240,271 $ 4,109,156 $ (145,467)

- 165 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function and Object Budget and Actual (Non-GAAP Budgetary Basis) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed In thousands)

Variance With Original Additional Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Bud~et Expenditures June 30, 2004 Actual (Under) GENERAL GOVERNMENT CITY ADMINISTRATIVE OFFICER Salaries $ 11,260 $ (182) $ 11,078 $ 10,336 $ 512 $ 10,848 $ (230) Expenses 749 95 844 569 272 841 (3) Equipment 360 360 360 360 Subtotal 12,009 273 12,282 10,905 1,144 12,049 (233) CITY ATTORNEY Salaries 80,093 6,390 86.483 81,997 4,254 86,251 (232) Expenses 6,300 5,316 11,616 9,725 1,767 11,492 (124) Equipment 19 14 33 25 8 33 Subtotal 86,412 11,720 98,132 91,747 6,029 97,776 (356) CITY CLERK Salaries 8,700 403 9,103 8,607 428 9,035 (68) Expenses 713 (49) 664 458 205 663 (1) Equipment 33 (6) 27 27 27 Subtotal 9,446 348 9,794 9,092 633 9.725 (69) COMMISSION ON THE STATUS OF WOMEN Salaries 570 62 632 597 35 632 Expenses 58 (6) 52 43 9 52 Subtotal 628 56 684 640 44 684 CONTROLLER Salaries 12,686 768 13.454 12,773 647 13,420 (34) Expenses 1,829 68 1,897 779 1,076 1,855 (42) Equipment 38 38 8 30 38 Subtotal 14,553 836 15,389 13,560 1,753 15,313 (76) COUNCIL Salaries 19,347 4.452 23,799 19,851 1,009 20,860 (2,939) Expenses 1,425 417 1,842 1,283 382 1,665 (177) Equipment 175 20 195 152 5 157 (38) Subtotal 20,947 4,889 25,836 21,286 1,396 22,682 (3.154) EMPLOYEE RELATIONS BOARD Salaries 248 (23) 225 194 12 206 (19) Expenses 90 19 109 87 4 91 (18) Subtotal 338 4 334 281 16 297 (37)

Continued

- 166 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function and Object Budget and Actual (Non-GAAP Budgetary Basis) - (Continued) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed In thousands)

Variance With Original Additional Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Bud2et Expenditures June 30, 2004 Actual (Under) ETHICS COMMISSION Salaries $ 1,699 $ 185 $ 1,884 $ 1,767 $ 105 $ 1,872 $ (12) Expenses 375 (213) 162 49 40 89 (73) Equipment 3 3 !31 Subtotal 2,077 (28) 2,049 1,816 145 1,961 (88) FINANCE Salaries 19,203 1,515 20,718 19,535 1,023 20,558 (160) Expenses 3,249 3,605 6,854 3,549 2,994 6,543 (311) Equipment 76 142 218 200 200 (18) Subtotal 22,528 5,262 27,790 23,084 4,217 27,301 (489) GENERAL SERVICES Salaries 103,193 36,399 139,592 120, 155 5,921 126,076 (13,516) Expenses 80,975 31,409 112,384 88,385 13,509 101,894 (10,490) Equipment 1,195 701 1,896 92 1,392 1,484 (412) Special 4,215 950 5,165 5,073 89 5,162 (3) Subtotal 189,578 69,459 259,037 213,705 20,911 234,616 (24,421) HUMAN RELATIONS COMMISSION Salaries 941 (81) 860 750 38 788 (72) Expenses 132 3 129 64 55 119 (10) Subtotal 1,073 (84) 989 814 93 907 (82) INFORMATION TECHNOLOGY AGENCY Salaries 57,362 4,322 61,684 58,345 2,878 61,223 (461) Expenses 18,630 (425) 18,205 15,671 2,028 17,699 (506) Equipment 877 (59) 818 429 270 699 (119) Special 23,524 (489) 23,035 18,671 3,930 22,601 (434) Subtotal 100,393 3,349 103,742 93,116 9,106 102,222 (1,520) MAYOR Salaries 6,884 3,273 10, 157 8,893 451 9,344 (813) Expenses 565 332 897 677 79 756 (141) Equipment 28 4 32 19 19 (13) Subtotal 7,477 3,609 11,086 9,589 530 10, 119 (967)

Continued

- 167 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function and Object Budget and Actual (Non-GAAP Budgetary Basis). (Continued) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Variance With Original Additional Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Budset Expenditures June 30, 2004 Actual (Under) NEIGHBORHOOD EMPOWERMENT Salaries $ 3,589 $ (58) $ 3,531 $ 3,094 $ 167 $ 3,261 $ (270) Expenses 1,328 (41) 1,287 948 170 1, 118 (169) Equipment 2 2 2 2 Special 13 4 9 (91 Subtotal 4,930 (1011 4,829 4,044 337 4,381 (4481 PERSONNEL Salaries 27.563 1,257 28,820 27,261 1,415 28,676 (144) Expenses 21,431 (1,067) 20,364 16,333 3,763 20.096 (268) Equipment 31 31 11 19 30 (1 I Special 1,541 115 1,656 1,165 260 1.425 (2311 Subtotal 50,535 336 50,871 44,770 5,457 50,227 (6441 TREASURER Salaries 2,581 (412) 2,169 1,779 101 1,880 (289) Expenses 2,174 780 2,954 1,144 1,760 2,904 (50) Equipment 9 71 80 32 47 79 1 Subtotal 4,764 439 5,203 2,955 1,908 4,863 (3401 NON-DEPARTMENTAL Capital Finanance Administration 107,147 (6,415) 100,732 94,609 94,609 (6,123) General City Purposes 57,381 (13,549) 43,832 35,350 6,031 41,381 (2,451 I Human Resources Benefits 374,042 5,481 379,523 372,903 6,568 379,471 (52) Liability Claims 50,000 (3,666) 46,334 42,595 1,750 44,345 (1,989) Unappropriated Balance 86,558 (65,564) 20,994 (20,994) Water and Electricity 17,239 (2641 16,975 12,952 4,023 16,975 Subtotal 692,367 183,9771 608,390 558,409 18,372 576,781 131,6091 TOTAL GENERAL GOVERNMENT 1,220,055 16,382 1,236,437 1,099,813 72,091 1,171,904 (64,533)

PROTECTION OF PERSONS AND PROPERTY ANIMAL SERVICES Salaries 13,730 (75) 13,655 12,792 791 13,583 (72) Expenses 956 (43) 913 726 152 878 (35) Equipment 24 24 (241 Subtotal 14,710 11181 14,592 13,518 943 14,461 (1311

Continued

- 168 - CITY OF LOS ANGELES

Variance With Origlnal Additional Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Budget Expenditures June 30, 2004 Actual (Under) BUILDING AND SAFETY Salaries $ 58,270 $ 5,524 $ 63,794 $ 60,195 $ 3,215 $ 63,410 $ (384) Expenses 3,456 (8) 3,448 3,004 385 3,389 (59) Equipment 92 92 77 13 90 121 Subtotal 61,818 5,516 67,334 63,276 3,613 66,889 (4451 EMERGENCY PREPAREDNESS Salaries 1,244 215 1,459 1,371 66 1,437 (22) Expenses 42 (101 32 19 20 (121 Subtotal 1,286 205 1,491 1,390 67 1,457 (341 FIRE Salaries 418,513 (457) 418,056 389,003 24,690 413,693 (4,363) Expenses 17,072 1,811 18,883 14.078 4,213 18,291 (592) Equipment 182 256 438 70 266 336 po21 Subtotal 435,767 1,610 437,377 403,151 29,169 432,320 (5,057) POLICE Salaries 946,965 52,761 999,726 949,206 4 7 ,611 996,817 (2,909) Expenses 37,175 (340) 36,835 27,141 9,048 36,189 (646) Equipment 859 12,571 13,430 713 3,470 4,183 19,2471 Subtotal 984,999 64,992 1,049,991 977,060 60,129 1,037,189 (12,802) TOTAL PROTECTION OF PERSONS AND PROPERTY 1,498,580 72,205 1,570,785 1,458,395 93,921 1,552,316 (18,4691

PUBLIC WORKS BOARD OF PUBLIC WORKS Salaries 3,705 71 3,776 3,559 173 3,732 (44) Expenses 8,367 3,304 11,671 9,909 1,669 11,578 (93) Equipment 62 62 62 62 Special 697 (471 650 630 20 650 Subtotal 12,769 3,390 16,159 14,098 1,924 16,022 (1371 PUBLIC WORKS - BUREAU OF CONTRACT ADMINISTRATION Salaries 24,859 3,763 28,622 24,694 1,232 25,926 (2,696) Expenses 1,490 111 1,601 1,154 173 1,327 (2741 Subtotal 26,349 3,874 30,223 25,848 1.405 27,253 (2,970)

Continued

- 169 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function and Object Budget and Actual (Non-GAAP Budgetary Basis) • (Continued) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed In thousands)

Variance With Original Additional Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Budget Expenditures June 30, 2004 Actual (Under) PUBLIC WORKS· BUREAU OF ENGINEERING Salaries $ 67,819 $ 17,054 $ 84,873 $ 75,940 $ 3,724 $ 79,664 $ (5,209) Expenses 3,545 (170) 3,375 1,357 943 2,300 (1,075) Equipment 227 227 179 179 (48) Special 15 15 (15) Subtotal 71,379 17,111 88,490 77,297 4,846 82,143 16,347) PUBLIC WORKS· BUREAU OF FINANCIAL MANAGEMENT AND PERSONNEL SERVICES Salaries 7,001 969 7,970 7,399 398 7,797 (173) Expenses 271 (5) 266 198 37 235 (31) Equipment Subtotal 7,273 964 8,237 7,598 435 8,033 (204) PUBLIC WORKS· BUREAU OF STREET LIGHTING Salaries 13,684 2,735 16,419 14,683 754 15,437 (982) Expenses 1,026 (96) 930 462 133 595 (335) Equipment 5 75 80 62 11 73 (7) Special 3,063 939 4,002 3,018 606 3,624 (378) Subtotal 17,778 3,653 21,431 18,225 1,504 19,729 (1,702) PUBLIC WORKS • BUREAU OF STREET SERVICES Salaries 79,517 7,800 87,317 78,282 3,755 82,037 (5,280) Expenses 51,071 4,445 55,516 44,505 7,214 51,719 (3,797) Equipment 25 25 14 5 19 (6) Subtotal 130,588 12,270 142,858 122,801 10,974 133,775 19,083) NON-DEPARTMENTAL Water and Electricity 1,827 1,827 1,545 278 1,823 14) TOTAL PUBLIC WORKS 267,963 41,262 309,225 267,412 21,366 288,778 120,447)

HEALTH AND SANITATION

ENVIRONMENTAL AFFAIRS Salaries 2,807 145 2,952 2,758 138 2,896 (56) Expenses 246 1 247 54 154 208 (39) Subtotal 3,053 146 3,199 2,812 292 3,104 195)

Continued

· 170 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function and Object Budget and Actual {Non-GAAP Budgetary Basis) - (Continued) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Variance With Original Additional Flnal Budget Adopted Appropriations Final Encumbrances Total Over Bud!!et and Transfers BudHet Expenditures June 30, 2004 Actual (Under) PUBLIC WORKS - BUREAU OF SANITATION Salaries $ 158,670 $ 4,683 $ 163,353 $ 151,472 $ 6,552 $ 158,024 $ (5,329) Expenses 52,058 5,775 57,833 46,708 8,089 54,797 (3,036) Equipment 16 17 33 4 13 17 (16) Subtotal 210,744 10,475 221,219 198,184 14,654 212,838 (8,381) NON-DEPARTMENTAL Water and Electricity 567 567 476 91 567 TOTAL HEAL TH AND SANITATION 214,364 10,621 224,985 201,472 15,037 216,509 (8,476)

TRANSPORTATION Salaries 91,254 13,203 104,457 97,498 5,095 102,593 (1,864) Expenses 24,361 485 24,846 19,204 4,246 23,450 (1,396) Equipment 20 20 (20) TOTAL TRANSPORTATION 115,615 13,708 129,323 116,702 9,341 126,043 (3,280)

CULTURAL AND RECREATIONAL SERVICES CONVENTION CENTER Salaries 13,205 484 13,689 13,016 567 13,583 (106) Expenses 7,959 (481) 7,478 6,510 953 7,463 (15) Special 556 35 591 381 205 586 (5) Subtotal 21,720 38 21,758 19,907 1,725 21,632 (126) CULTURAL AFFAIRS Salaries 5,022 685 5,707 5,400 270 5,670 (37) Expenses 1, 173 63 1,236 1,162 74 1,236 Equipment 11 11 11 11 Special 5,592 117 5,709 4,073 1,549 5,622 (87) Subtotal 11,798 865 12,663 10,646 1,893 12,539 (124) zoo Salaries 13,653 256 13,909 12,290 678 12,968 (941) Expenses 3,080 169 3,249 2,120 763 2,883 (366) Equipment 86 86 77 3 60 (6) Special 207 207 3 3 (204) Subtotal 17,026 425 17,451 14,490 1,444 15,934 (1,517) NON-DEPARTMENTAL Water and Electricity 15,861 15,861 11,793 4,068 15,861 TOTAL CULTURAL AND RECREATIONAL SERVICES 66,405 1,328 67,733 56,836 9,130 65,966 (1,767) Continued

- 171 - CITY OF LOS ANGELES

Variance With Original Additional Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Budget Expenditures June 30, 2004 Actual (Under) COMMUNITY DEVELOPMENT AGING Salaries $ 3,382 $ 743 s 4,125 $ 3,589 $ 176 $ 3,765 $ (360) Expenses 115 258 373 137 119 256 (117) Equipment 5 5 1 4 5 Subtotal 3,497 1,006 4,503 3,727 299 4,026 (477) COMMISSION FOR CHILDREN, YOUTH AND THEIR FAMILIES Salaries 1,427 (150) 1,277 1,171 56 1,227 (50) Expenses 382 4 386 185 162 347 139) Subtotal 1,809 (146) 1,663 1,356 218 1,574 189) COMMUNITY DEVELOPMENT Salaries 18,726 14,040 32,766 27,906 1,415 29,321 (3,445) Expenses 1,913 3,471 5,384 2,414 1,747 4,161 (1,223) Equipment 67 182 249 1 66 67 (182) Subtotal 20,706 17,693 38,399 30,321 3,228 33,549 (4,850) DISABILITY Salaries 1,613 (59) 1,554 1,332 63 1,395 (159) Expenses 384 39 423 267 130 397 (26) Equipment 5 5 3 2 5 Special 50 1 51 43 7 50 1 Subtotal 2,047 114) 2,033 1,645 202 1,847 1186) LOS ANGELES HOUSING Salaries 28,627 2,645 31,272 29,105 1,791 30,896 (376) Expenses 6,605 1,373 7,978 6,328 1,136 7,464 (514) Equipment 16 429 445 168 200 368 (77) Special 500 (5) 495 286 154 440 (55) Subtotal 35,748 4,442 40, 190 35,887 3,281 39,168 (1,022) PLANNING Salaries 19, 185 1,127 20,312 19, 152 964 20, 116 (196) Expenses 1,476 24 1,500 847 627 1,474 (26) Equipment 87 87 83 4 87 Subtotal 20,748 1, 151 21,899 20,082 1,595 21,677 12221 TOTAL COMMUNITY DEVELOPMENT 84,555 24,132 108,687 93,018 8,823 101,841 16,846)

Continued

- 172 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses by Function and Object Budget and Actual (Non·GAAP Budgetary Basis) • (Continued) General Fund For the Fiscal Year Ended June 30, 2004 (amounts expressed In thousands)

Variance With Original Additional Final Budget Adopted Appropriations Final Encumbrances Total Over Budget and Transfers Budget Expenditures June 30, 2004 Actual {Under) PENSION AND RETIREMENT CONTRIBUTION Non-Departmental $ 27,214 $ 520 $ 27,734 s 25,782 $ 1,352 s 27,134 $ (600)

CAPITAL OUTLAY Non-Departmental 19,400 17,367 36,767 11,776 9,210 20,986 (15,781)

TRANSFERS TO OTHER FUNDS Non-Departmental 502,108 40,839 542,947 537,679 537,679 (5,268)

GRAND TOTAL $ 4,016,259 $ 238,364 $ 4,254,623 $ 3,868,885 $ 240,271 $ 4,109,156 $ (145,467)

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- 174 - CITY OF LOS ANGELES

SPECIAL REVENUE FUNDS

Special Revenue Funds are used to account for revenues derived from specific taxes, governmental grants, or other revenue sources that are designated to finance particular functions and activities of the City. Six funds are reported as major funds and are presented in the basic financial statements. Twenty-eight funds and one component unit are separately identified in the Nonmajor Special Revenue Funds combining schedules and they account for 60.9% of the combined revenues of the Non major Special Revenue Funds. Three groupings of numerous smaller funds are reported for allocations from other governmental agencies, other grants and other special revenue funds.

Special Parking Revenue Fund - Accounts for all monies collected from parking meters in the City, except those monies from meters located in established vehicle parking districts. Monies in this fund may be used for the purchase, installation and maintenance of parking meters; the policing of parking meters and parking meter spaces; the collection of monies deposited in parking meters; the purchase, improvement, and operation of off-street parking facilities; the painting and marking of streets and curbs for the direction of traffic and parking of vehicles; and the installation of traffic signs, signals and other traffic control devices.

Street Lighting Maintenance Assessment Fund - Accounts for revenues received for maintenance and operation of the majority of the streetlights in the City. Revenues are derived from benefit assessments to properties that comprise the Los Angeles City Lighting District. Expenditures include payments of electricity bills, replacement and modernization of older lighting systems, all repairs, engineering and administrative costs, purchase of supplies and equipment, and other items associated with the operation and maintenance of the street lighting system.

Sanitation Equipment Charge Fund - Accounts for revenues received from the sanitation equipment charge to be used for the payment of principal and interest, installment payments, lease payments and associated expenses relating to financing those activities and costs.

Special Police Communications/911 System Tax Fund -Accounts for the special tax imposed on each parcel, improvement to property, and use of property to finance improvements to the police communications system that includes the 911 system for the fire and police emergency calls.

Local Public Safety Fund - Accounts for the City's share of the one-half cent sales tax allocated by the State to replace at least 50% of the property tax revenue shifted to schools. Funds must be expended for public safety, primarily on fire and police services.

Stormwater Pollution Abatement Fund - Accounts for the charge on all properties in the City in order to treat and abate stormwater. The charge is based on stormwater runoff and pollutant loading associated with property size and land use.

- 175 - CITY OF LOS ANGELES

SPECIAL REVENUE FUNDS - (Continued)

Special Fire Safety and Paramedic Communications Equipment Tax Fund - Accounts for the special tax to finance the replacement of the Fire Department's current communications and dispatch systems.

Library Fund - Accounts for the revenues and expenditures of the Library department in operating and maintaining a central library that has fourteen specialized reference and circulating book allocations and reading rooms, eight regional branches providing reference and circulating service in their respective regions of the City, fifty-nine branches providing neighborhood service and two traveling branches/bookmobiles.

Automated Traffic Surveillance and Control (ATSAC) Fund - Accounts for funds to be used in constructing an ATSAC system that will link computer-controlled intersections in the San Fernando Valley.

Landfill Closure and Post-closure Maintenance Funds - Account for funds to be used exclusively to defray the cost of closure of City landfills and their post-closure maintenance as required by law.

Zoo Fund - Accounts for the revenues derived from the operations as well as all appropriations to finance the operation, maintenance, management, control and improvement of the Los Angeles Zoo.

Matching Campaign Fund - Accounts for matching public funds to partially finance campaigns for elective City offices.

Mobile Source Air Pollution Reduction Fund - Accounts for the amount allocated to the City from a fee imposed on motor vehicle registration in order to implement the California Clean Air Act of 1988 that mandates the reduction of air pollution from motor vehicles.

Older Americans Act Funds - Accounts for grants received and expended for various programs and activities of the elderly.

Home Investment Partnership Program Fund - Accounts for the grants received from HUD to expand the supply of decent, safe, sanitary and affordable housing with the primary focus on rental housing, and to strengthen the abilities of state and local governments to provide housing to persons principally of low and very low income.

Rental Rehabilitation Program Fund - Accounts for monies received or collected by the City as grants, loans, fees, penalties or otherwise arising out of the City's rental rehabilitation program as set forth by HUD.

- 176 - CITY OF LOS ANGELES

SPECIAL REVENUE FUNDS - (Continued)

Disaster Assistance Fund - Accounts for grants received for emergency and disaster recovery costs and similar grant programs.

Transportation Fund - Accounts for grant funds from the Metropolitan Transit Authority (MTA) to implement the Transportation Improvement Program Call for Projects (TIP).

Crime Bills Funds - Accounts for grant funds from the Community Oriented Policing Services (COPS) Office of the United States Department of Justice for the technology and civilianization programs and to pay for the salaries of police officers.

Local Law Enforcement Block Grant Fund - Accounts for grant funds from the United States Department of Justice under the Local Law Enforcement Block Grant Program to finance any authorized law enforcement program.

CDBG Earthquake Fund - Accounts for grants received from HUD to supplement the Community Development Block Grant emergency funds to assist in the repairs and rehabilitation of earthquake damaged and abandoned multi-family and condominium projects in the City.

Economic Development Section 108 Loan Guarantee Program Fund - Accounts for loan guarantee funds from HUD for housing, commercial and industrial development projects.

Earthquake Section 108 Loan Program Fund - Accounts for the funds borrowed from HUD to supplement the City's Earthquake Emergency Loan Program.

Forfeited Assets Trust of Police Department - Accounts for monies forfeited in connection with various Federal and State violations and awarded to the City pursuant to Title 21 United States Code Section 881; California Health and Safety Code Section 11489; or any other Federal or State statute relating to forfeited assets. Both State and Federal laws require that these forfeited assets be used to enhance law enforcement resources and not to supplant resources that have been committed to this purpose in their absence.

Economic Development Initiative Grant Fund - Accounts for Federal grant funds administered by the Los Angeles Community Development Bank (not a commercial bank) to provide economic development loans, guarantees and other forms of credit, credit enhancements and capital to certain businesses or community development enterprises within the greater Los Angeles area.

Workforce Investment Act Fund - Accounts for the grants received from the United States Department of Labor for the purpose of providing employment and training opportunities for the disadvantaged residents and dislocated workers of the City.

- 177 - CITY OF LOS ANGELES

SPECIAL REVENUE FUNDS - (Continued) library Trust - Accounts for gifts and donations to the City's central library and regional branches.

Seismic Bond Reimbursement Fund - Accounts for the funds received from the Federal government and other sources to reimburse the City for its seismic bond program.

Nonmajor Other Grant Funds - Accounts for various grants received from the Federal and State governments used for a specific purpose, activity or facility. This group represents 14% of the combined revenues of the Nonmajor Special Revenue Funds. Included in this group are four annually budgeted funds: Community Services Block Grant, Household Hazardous Waste, Housing Opportunities for Persons with AIDS, and Supplemental Law Enforcement Services.

Allocations From Other Governmental Agencies - Accounts for funds received by the City from various sources used for engineering design, fire protection, acquiring rights if any, construction and for various other programs. This group represents 5.4% of the combined revenues of the Non major Special Revenue Funds. Included in this group are eighteen partially budgeted funds: Bicycle License, Bus Bench Advertising, Business Improvement, City Planning Systems Development, Community Based Services Program AB2800, Cultural Affairs Trust, Curbside Recycling, Environmental Affairs Trust, Fire Hydrant Installation and Main Replacement, First and Broadway Project Child Care, Integrated Solid Waste Management, Pershing Square Project, Street Banners Revenue, Targeted-Destination Ambulance Services, Used Oil Collection Trust, Urban Development Action Grant, Warner Center Transportation Improvement, and Youth Opportunities Movement.

Convention Center Special Revenue Fund - Accounts for the proceeds of taxable lease revenue bonds to provide partial financing of the City's share of certain land, infrastructure and related costs for the development of the Staples Arena, a state-of- the art sports arena.

Nonmajor Other Special Revenue Funds - Accounts for the activities of non-grant Special Revenue Funds that represent 19.7% of the combined revenues of the Nonmajor Special Revenue Funds. Included in this group are nineteen annually budgeted funds: Arts and Cultural Facilities and Services, Arts Development Fee, Building and Safety Systems Development, City Employees Ridesharing, City Ethics Commission, City of Los Angeles Affordable Housing, Citywide Recycling Trust, Department of Neighborhood Empowerment, El Pueblo de Los Angeles Historical Monument, Los Angeles Convention and Visitors Bureau, Major Projects Review, Municipal Housing Finance, Procurement Reengineering, Rent Stabilization, Street Damage Restoration Fee, Systematic Code Enforcement Fee, Tax Reform, Telecommunications Liquidated Damages and Lost Franchise Fees, and Traffic Safety.

- 178 - Special Revenue Funds

Combining Balance Sheet Nonmajor Special Revenue Funds June 30, 2004 (amounts expressed in thousands)

Street Special Police Special Lighting Sanitation Communi· Parking Maintenance Equipment cations/911 Local Public Revenue Assessment Charge Sxstem Tax Safe!}'. ASSETS Cash and Pooled Investments $ 87,755 $ 30,613 $ 78,538 $ 11,592 $ Other Investments Taxes Receivable (Net of Allowance for Uncollectibles of $15) 1, 189 Accounts Receivable (Net of Allowance for Uncollectibles of $2,351) 212 2,085 1,473 Special Assessments Receivable (Net of Allowance for Uncollectibles of $1,220) 5,061 Investment Income Receivable 704 279 199 Intergovernmental Receivable 316 9,141 Loans Receivable (Net of Allowance for Uncollectibles of $391,241) Due from Other Funds 2,241 Loans Receivable from Component Unit Advances to Other Funds Restricted Assets

TOTAL ASSETS $ 88,671 $ 40,316 $ 80,290 $ 12,980 $ 9,141

LIABILITIES AND FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ 1,160 $ 2, 199 $ 1,485 $ $ Obligations Under Securities Lending Transactions 12,748 3,834 1,701 Accrued Salaries and Overtime Payable Accrued Compensated Absences Payable Intergovernmental Payable Due to Other Funds 409 4 37 654 Deferred Revenue and Other Credits 398 6,323 153 916 2,825 Deposits and Advances 59 4 Advances from Other Funds Other Liabilities

TOTAL LIABILITIES 14,774 8,530 5,509 2,617 3,479 FUND BALANCES (DEFICIT) Reserved for: Encumbrances 8,349 9,381 14,045 33 Assets Not Available for Appropriation Special Purposes Unreserved and Undesignated 65,548 22,405 60,736 10,330 5,662

TOTAL FUND BALANCES (DEFICIT) 73,897 31,786 74,781 10,363 5,662 TOTAL LIABILITIES AND FUND BALANCES $ 88,671 $ 40,316 $ 80,290 $ 12,980 $ 9,141 Continued ...

- 179 - CITY OF LOS ANGELES

Combining Statement of Revenues, Expenditures and Changes in Fund Balances (Deficit) Nonmajor Special Revenue Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Street Special Police Special Lighting Sanitation Communica- Parking Maintenance Equipment tions/911 Local Public Revenue Assessment Charge sistem Tax Safe!),: REVENUES Property Taxes $ $ $ $ 16,930 $ Other Taxes Licenses and Permits 273 Intergovernmental 184 31,594 Charges for Services 31,534 2,145 68,500 Services to Enterprise Funds 300 Fines Special Assessments 42,653 Investment Earnings (Losses) 32 282 101 110 Program Income Other 4 244 256 TOTAL REVENUES 31,570 46,081 68,857 17,040 31,594 EXPENDITURES Current: General Government Protection of Persons and Property 1,699 30,937 Public Works 43,937 Health and Sanitation 66,846 Transportation 14,787 Cultural and Recreational Services Community Development Capital Outlay 10,880 5,224 78,253 Debt Service: Principal Interest Cost of Issuance 1,422 TOTAL EXPENDITURES 25,667 49,161 146,521 1,699 30,937 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES 5,903 (3,080) (77,664) 15,341 657 OTHER FINANCING SOURCES (USES) Transfers In 211 43 Transfers Out (8,929) (39,296) (18,600) Issuance of Long-term Debt 117,350 Premium on Issuance of Long-term Debt 8,550 Loans from HUD TOTAL OTHER FINANCING SOURCES (USES) (8,929) 211 86,647 (18,600) NET CHANGE IN FUND BALANCES (3,026) (2,869) 8,983 (3,259) 657 FUND BALANCES (DEFICITS), JULY 1 76,923 34,655 65,798 13,622 5,005

FUND BALANCES (DEFICIT), JUNE 30 $ 73,897 $ 31,786 $ 74,781 $ 10,363 $ 5,662 Continued ...

• 186 - CITY OF LOS ANGELES

Budgetary Comparison Schedule (Non-GAAP Budgetary Basis) Annually Budgeted Nonmajor Special Revenue Funds· (Continued) For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Sanitation Equipment Charge Actual Variance With Amounts Final Budget Budgeted Amounts (Budgetary Positive Original Final Basis) (Negative) REVENUES AND OTHER FINANCING SOURCES Revenues Taxes $ $ $ .. $ Licenses, Permits and Fines Intergovernmental Charges for Services 71,715 71,715 67,028 (4,687) Special Assessments Interest 750 750 478 (272) Program Income Other 200 200 200 Total Revenues 72,665 72,665 67,706 (4,959) Other Financing Sources Transfers from Other Funds 43 43 Loans from Other Funds Total Other Financing Sources 43 43 TOTAL REVENUES AND OTHER FINANCING SOURCES 72,665 72,665 67,749 (4,916) EXPENDITURES AND OTHER FINANCING USES Expenditures Current General Government Protection of Persons and Property Public Works Health and Sanitation 17,863 18,169 14,752 3,417 Transportation Cultural and Recreational Services Community Development Capital Outlay Debt Service Principal 2,909 2,909 2,909 Interest 11,111 11,111 8,414 2,697 Total Expenditures 31,883 32,189 26,075 6, 114 Other Financing Uses Transfers to Other Funds 47,718 49,086 46,942 2,144 TOTAL EXPENDITURES AND OTHER FINANCING USES 79,601 81,275 73,017 8,258 EXCESS (DEFICIENCY) OF REVENUES AND OTHER FINANCING SOURCES OVER EXPENDITURES AND OTHER FINANCING USES (6,936) (8,610) (5,268) 3,342 FUND BALANCES (DEFICITS), JULY 1, RESTATED 6,936 6,936 8,642 1,706 Appropriation of Fund Balances and Carryforward Appropriations 1,674 (1,674) Encumbrances Lapsed FUND BALANCES (DEFICITS), JUNE 30 .;;$==== .;;$===·=· $ 3,37 4 .;$~==-3·;;,37;.4;. Continued ...

- 195 · CITY OF LOS ANGELES

Reconciliation of Operations on Budgetary Basis to the GAAP Basis Nonmajor Special Revenue Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Deficiency of Revenues and Other Financing Sources Over Expenditures and Other Financing Uses- Budgetary $ (12,811)

Basis Difference Adjustments for net changes to accrued assets and liabilities. The GAAP basis operating statement recognizes revenues as soon as they are both measurable and available, and expenditures generally are recorded when liability is incurred; whereas, the budget basis operating statement reflects revenues when received and expenditures when paid. 25,405

Grant funded loans are recorded as expenditures when disbursed and as program income when repaid (budget), as opposed to adjustments to the loans receivable account balance (GAAP). 13,116

Encumbrances, which represent commitments to acquire goods and services, are recorded as the equivalent of expenditures in the budget year incurred (budget), as opposed to a reservation of fund balance (GAAP). Encumbrances reported as budgetary expenditures 76,670 Prior year encumbrances expended in current year (68,702)

Perspective Difference Certain Nonmajor Special Revenue Funds are not included in the legally adopted budget; while for some, the budget provides for only the portion of fund receipts that are expended for City department operations. 8,568 Net Change in Fund Balances- Nonmajor Special Revenue Funds $ 42,246

DETAILS OF RESTATEMENT OF JULY 1 FUND BALANCES

Fund Balances, July 1, as previously reported $ 241,745

Proposition C Anti-Gridlock Transit Improvement reclassified as major fund (53,615)

Adjustment for accounts not budgeted in current year Allocations from Other Governmental Agencies (153)

Adjustment for a fund not budgeted in prior year Procurement Reengineering 209 Fund Balances, July 1, as restated $ 188,186

- 234 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses Budget and Actual (Non-GAAP Budgetary Basis) All Annually Budgeted Special Revenue Funds Year Ended June 30, 2004 (amounts expressed in thousands)

PROPOSITION A LOCAL TRANSIT ASSISTANCE Current· Special Purpose $111,347 $ 54,545 $ 165,892 $ 62,900 $ 18,330 $ 81,230 $ 84,662 Transfers to Other Funds 6,321 4,531 10,852 9,648 9,648 1,204 TOTAL 117,668 59,076 176,744 72,548 18,330 90,878 85,866

PROPOSITION C ANTI-GRIDLOCK TRANSIT IMPROVEMENT Current - Special Purpose 51,770 (30,371) 21,399 4,567 1,468 6,035 15,364 Capital Outlay 858 858 10 12 22 836 Transfers to Other Funds 17,242 31,610 48,852 25,603 25,603 23,249 TOTAL 69,012 2,097 71,109 30,180 1,480 31,660 39,449

SPECIAL GAS TAX STREET IMPROVEMENT Current· Special Purpose 10,028 147 10,175 4,196 1 4,197 5,978 Capital Outlay 10,362 1,614 11,976 1.991 3,038 5,029 6,947 Transfers to Other Funds 65,297 9,912 75,209 63,558 63,558 11,651 TOTAL 85,687 11,673 97,360 69,745 3,039 72,784 24,576

COMMUNITY DEVELOPMENT Current - Special Purpose 8,473 182,863 191,336 55,695 36,279 91,974 99,362 Transfers to Other Funds 23,593 18,602 42,195 . 32,636 32,636 9,559 TOTAL 32,066 201,465 233,531 88,331 36 279 124,610 108,921

NONMAJOR FUNDS

SPECIAL PARKING REVENUE Current· Special Purpose 22,571 42,368 64,939 13,258 1,939 15,197 49,742 Capital Outlay 29,304 29,304 491 1,719 2,210 27,094 Debt Service Principal 3,361 3,361 3,336 25 3,361 Interest 5,286 219 5,505 5,473 32 5,505 Transfers to Other Funds 273 42,722 42,995 846 846 42, 149 TOTAL 31,491 114,613 146,104 23,404 3,715 27,119 118,985

STREET LIGHTING MAINTENANCE ASSESSMENT Current· Special Purpose 24,720 9,464 34, 184 20,842 4,286 25,128 9,056 Capital Outlay 6,500 18,474 24,974 2,905 6,323 9,228 15,746 Transfers to Other Funds 20,023 1,404 21,427 20,200 20,200 1,227 TOTAL 51,243 29,342 80,585 43,947 10,609 54,556 26,029 Continued

- 235 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses Budget and Actual (Non-GAAP Budgetary Basis) All Annually Budgeted Special Revenue Funds· (Continued Year Ended June 30, 2004 (amounts expressed in thousands)

Addltional Variance With Original Appropriations, Final Budget Adopted Carryforward Final Encumbrances Total Positive Buda et and Transfers Budaet Exeenditures June 30, 2004 Actual (Neaativel SANITATION EQUIPMENT CHARGE Current - Special Purpose $ 17,863 $ 306 $ 18,169 $ 14,752 $ $ 14,752 $ 3,417 Debt Service Principal 2,909 2,909 2,909 2,909 Interest 11,111 11,111 8,414 8,414 2,697 Transfers to Other Funds 47,718 1,368 49,086 46,942 46,942 2,144 TOTAL 79,601 1,674 81,275 73,017 73,017 8,258

SPECIAL POLICE COMMUNICATIONS/ 911 SYSTEM TAX Current - Special Purpose 8,317 481 8,798 1,383 1,384 7,414 Transfers to Other Funds 19,498 19,498 18,920 18,920 578 TOTAL 27,815 481 28,296 20,303 20,304 7,992

LOCAL PUBLIC SAFETY Current - Special Purpose 9,910 9,910 9,910 Transfers to Other Funds 30,937 30,937 30,937 30,937 TOTAL 30,937 9,910 40,847 30,937 30,937 9,910

STORMWATER POLLUTION ABATEMENT Current - Special Purpose 17,279 2,903 20,182 8,232 5,425 13,657 6,525 Capital Outlay 6,825 6,825 1,528 894 2,422 4,403 Transfers to Other Funds 21,203 2,577 23,780 18,387 18,387 5,393 TOTAL 38,482 12,305 50,787 28,147 6,319 34,466 16,321

SPECIAL FIRE SAFETY AND PARAMEDIC COMMUNICATIONS EQUIPMENT TAX Current - Special Purpose 448 1,329 1,777 45 20 65 1,712

TRAFFIC SAFETY Current· Special Purpose 600 107 707 383 33 416 291 Transfers to Other Funds 20,464 (6,600) 13,864 13,864 13,864 TOTAL 21,064 (6,493) 14,571 14,247 33 14,280 291

TELECOMMUNICATIONS LIQUIDATED DAMAGE AND LOST FRANCHISE FEES Current - Special Purpose 3,948 3,925 7,873 3,967 808 4,775 3,098 Transfers to Other Funds 5,809 5,809 5,794 5,794 15 TOTAL 9,757 3,925 13,682 9,761 808 10,569 3, 113 Continued

· 236 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations. Expenditures and Other Financing Uses Budget and Actual (Non-GAAP Budgetary Basis) All Annually Budgeted Special Revenue Funds • (Continued Year Ended June 30, 2004 (amounts expressed in thousands)

Additional Variance With Original Appropriations, Final Budget Adopted Carryforward Final Encumbrances Total Positive Budaet and Transfers Budaet Expenditures June 30, 2004 Actual INeaative) LOS ANGELES CONVENTION AND VISITORS BUREAU Current • Special Purpose $ 7,459 $ 5,280 $ 12,739 $ 7, 154 $ $ 7, 154 $ 5,585 Transfers to Other Funds 72 72 (236) (236) 308 TOTAL 7,531 5,280 12,811 6,918 6,918 5,893

RENT STABILIZATION Current - Special Purpose 9,876 13,366 23,242 2,581 144 2,725 20,517 Transfers to Other Funds 9,850 1,559 11,409 9,578 9,578 1,831 TOTAL 19,726 14,925 34,651 12,159 144 12,303 22,348

ARTS AND CULTURAL FACILITIES AND SERVICES Current - Special Purpose 587 1,002 1,589 1,262 458 1,720 I 131 l Transfers to Other Funds 7,029 358 7,387 7,208 7,208 179 TOTAL 7,616 1,360 8,976 8,470 458 8,928 48

ARTS DEVELOPMENT FEE Current - Special Purpose 499 2, 187 2,686 237 16 253 2,433 Transfers to Other Funds 2,704 285 2,989 2,889 2,889 100 TOTAL 3,203 2,472 5,675 3,126 16 3, 142 2,533

CITY EMPLOYEES RIDESHARING Current - Special Purpose 19 19 19 Transfers to Other Funds 2,914 (112) 2,802 2,802 2,802 TOTAL 2,914 (93) 2,821 2,802 2,802 19

BUILDING AND SAFETY SYSTEMS DEVELOPMENT Current - Special Purpose 3,388 5,430 8,818 1,640 1,507 3, 147 5,671 Transfers to Other Funds 2,775 (821) 1,954 1,954 1,954 TOTAL 6,163 4,609 10,772 3,594 1,507 5, 101 5,671

CITY ETHICS COMMISSION Current - Special Purpose 146 1,961 2,107 2, 107 Transfers to Other Funds 2,077 1,719 3,796 1,980 1,980 1,816 TOTAL 2,223 3,680 5,903 1,980 1,980 3,923

LANDFILL MAINTENANCE Current - Special Purpose 178 178 178 Transfers to Other Funds 1,833 166 1,999 1,652 1,652 347 TOTAL 1,833 344 2,177 1,652 1,652 525 Continued

- 237 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses Budget and Actual (Non-GAAP Budgetary Basis) All Annually Budgeted Special Revenue Funds - (Continued Year Ended June 30, 2004 (amounts expressed in thousands)

Additional Variance With Original Appropriations, Final Budget Adopted Carryforward Final Encumbrances Total Positive Budget and Transfers Budget Expenditures June 30, 2004 Actual (Negative) EL PUEBLO DE LOS ANGELES HISTORICAL MONUMENT Current - Special Purpose $ 3,140 $ 216 $ 3,356 $ 2,428 $ 433 $ 2,861 $ 495 Transfers to Other Funds 147 147 111 111 36 TOTAL 3,140 363 3,503 2 539 433 2,972 531 zoo Current - Special Purpose 2,993 2,993 2,239 126 2,365 628 Transfers to Other Funds 17,182 4,615 21,797 15,977 15,977 5,820 TOTAL 17, 182 7,608 24,790 18,216 126 18,342 6,448

MAJOR PROJECTS REVIEW Current - Special Purpose 2,523 2,355 4,878 811 811 4,067

STREET DAMAGE RESTORATION FEE Current - Special Purpose 4,914 4,914 4,914 Transfers to Other Funds 4,547 4,547 4,547 4,547 TOTAL 4,547 4,914 9,461 4,547 4,547 4,914

SYSTEMATIC CODE ENFORCEMENT FEE Current - Special Purpose 7,023 9,861 16,884 3,949 3,949 12,935 Transfers to Other Funds 12,497 3, 195 15,692 13,758 13,758 1,934 TOTAL 19,520 13 056 32,576 17,707 17,707 14,869

MUNICIPAL HOUSING FINANCE Current - Special Purpose 6,627 7,374 14,001 (711) 68 (643) 14,644 Transfers to Other Funds 170 670 840 705 705 135 TOTAL 6,797 8,044 14,841 (6) 68 62 14,779

TAX REFORM Current - Special Purpose 5,763 1,201 6,964 328 120 448 6,516 Transfers to Other Funds 89 2,950 3,039 3,039 3,039 TOTAL 5,852 4, 151 10,003 3,367 120 3,487 6,516

CITY OF LOS ANGELES AFFORDABLE HOUSING Current - Special Purpose 22,430 55,358 77,788 14,542 3,456 17,998 59,790 Transfers to Other Funds 156 156 54 54 102 TOTAL 22,430 55,514 77,944 14,596 3,456 18,052 59,892

CITYWIDE RECYCLING Current - Special Purpose 13, 182 1,725 14,907 1,851 4,692 6,543 8,364 Transfers to Other Funds 2,467 854 3,321 2,378 2,378 943 TOTAL 15,649 2,579 18,228 4,229 4,692 8,921 9,307 Continued

- 238 - CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses Budget and Actual (Non-GAAP Budgetary Basis) All Annually Budgeted Special Revenue Funds - (Continued Year Ended June 30, 2004 (amounts expressed in thousands)

Additional Variance With Original Appropriations, Final Budget Adopted Carryforward Final Encumbrances Total Positive Budget and Transfers Budget Expenditures June 30, 2004 Actual (Negative) DEPARTMENT OF NEIGHBORHOOD EMPOWERMENT Current - Special Purpose $ 1,855 $ 4,078 $ 5,933 $ 542 $ 928 $ 1,470 $ 4,463 Transfers to Other Funds 5,232 1, 105 6,337 4,814 4,814 1,523 TOTAL 7,087 5, 183 12,270 5,356 928 6,284 5,986

PROCUREMENT REENGINEERING Current - Special Purpose 18,209 18,209 2 2 18,207 Transfers to Other Funds 191 191 191 191 TOTAL 191 18,209 18,400 193 193 18,207

COMMUNITY SERVICES BLOCK GRANT Current - Special Purpose 569 7,456 8,025 2,266 4,569 6,835 1, 190 Transfers to Other Funds 1, 147 278 1,425 1,218 1,218 207 TOTAL 1,716 7,734 9,450 3,484 4,569 8,053 1,397

WORKFORCE INVESTMENT ACT Current - Special Purpose 4,052 67,768 71,820 40,536 11, 122 51,658 20,162 Transfers to Other Funds 8,800 9, 164 17,964 10,011 10,011 7,953 TOTAL 12,852 76,932 89,784 50,547 11,122 61,669 28, 115

MOBILE SOURCE AIR POLLUTION REDUCTION Current - Special Purpose 3,131 3,964 7,095 3,044 255 3,299 3,796 Capital Outlay 210 210 10 10 200 Transfers to Other Funds 1,821 151 1,972 1,945 1,945 27 TOTAL 4,952 4,325 9,277 4,989 265 5,254 4,023

OLDER AMERICANS ACT Current - Special Purpose 21,121 21,121 15,040 1,486 16,526 4,595 Transfers to Other Funds 1,455 1,326 2,781 1,990 1,990 791 TOTAL 1,455 22,447 23,902 17,030 1,486 18,516 5,386

HOME INVESTMENT PARTNERSHIP PROGRAM Current - Special Purpose 1,204 153,851 155,055 33,638 16,824 50,462 104,593 Transfers to Other Funds 3,931 2,370 6,301 5,528 5,528 773 TOTAL 5,135 156,221 161,356 39,166 16,824 55,990 105,366

HOUSEHOLD HAZARDOUS WASTE Current - Special Purpose 250 250 250 250 Transfers to Other Funds 2,376 550 2,926 1,519 1,519 1,407 TOTAL 2,626 550 3, 176 1,769 1,769 1,407 Continued

- 239 • CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses Budget and Actual (Non-GAAP Budgetary Basis) All Annually Budgeted Special Revenue Funds • (Continued Year Ended June 30, 2004 (amounts expressed in thousands)

Addttional Variance With Original Appropriations, Final Budget Adopted Carryforward Final Encumbrances Total Positive Bud9et and Transfers Bud9et Expenditures June 30, 2004 Actual (Ne9ativel HOUSING OPPORTUNITIES FOR PERSONS WITH AIDS Current· Special Purpose $ 68 $ 19,233 $ 19,301 $ 5,003 $ 8,647 $ 13,650 $ 5,651 Transfers to Other Funds 231 231 231 231 TOTAL 299 19,233 19,532 5,234 8,647 13,881 5,651

DISASTER ASSISTANCE Current - Special Purpose 53,917 44, 103 98,020 58, 166 58, 166 39,854 Transfers to Other Funds 728 124 852 852 852 TOTAL 54,645 44,227 98,872 59,018 59,018 39,854

FORFEITED ASSETS TRUST OF POLICE DEPARTMENT Current - Special Purpose 1,500 1,344 2,844 653 304 957 1,887 Transfers to Other Funds 245 245 245 245 TOTAL 1,745 1,344 3,089 898 304 1,202 1,887

SUPPLEMENTAL LAW ENFORCEMENT Current - Special Purpose 2,076 2,076 2.076 Transfers to Other Funds 8,051 8,051 5,219 5,219 2,832 TOTAL 8,051 2,076 10, 127 5,219 5,219 4,908

LOCAL LAW ENFORCEMENT BLOCK GRANT Current - Special Purpose 797 14,844 15,641 15,641 Transfers to Other Funds 5,442 2,917 8,359 7, 171 7, 171 1, 188 TOTAL 6,239 17,761 24,000 7, 171 7, 171 16,829

ALLOCATIONS FROM OTHER GOVERNMENTAL AGENCIES Current - Special Purpose 4,917 1,647 6,564 2,767 41 2,808 3,756 Transfers to Other Funds 8,682 5,558 14,240 12,438 12,438 1,802 TOTAL 13,599 7,205 20,804 15,205 41 15,246 5,558

TOTAL BUDGETED SPECIAL REVENUE FUNDS $864,712 $ 956,005 $1,820,717 $826,598 $135,839 $ 962,437 $858,280

ALL ANNUALLY BUDGETED SPECIAL REVENUE FUNDS Current - Special Purpose $432,267 $ 753,091 $1, 185,358 $ 390,438 $123,786 $514,224 $671,134 Capital Outlay 16,862 57,285 74, 147 6,925 11,996 18,921 55,226 Debt Service Principal 6,270 6,270 6,245 25 6,270 Interest 16,397 219 16,616 13,887 32 13,919 2,697 Transfers to Other Funds 392,916 145,410 538,326 409,103 409, 103 129,223 TOTAL $864,712 $ 956,005 $1,820,717 $ 826,598 $ 135,839 $ 962,437 $ 858,280

• 240 - Debt Service Funds

Debt Service Funds are used to account for the payment of maturing principal and hterest on the City's and component units' general obligation and revenue bonds, and certificates of participation. CITY OF LOS ANGELES

Combining Balance Sheet (Continued) Nonmajor Debt Service Funds June 30, 2004 (amounts expressed In thousands)

Other Special Sanitation Nonmajor Parking Equipment Convention Debt Service Revenue Charge Center Funds Total ASSETS Cash and Pooled Investments $ 10,891 $ 28,330 $ 2,649 $ 1,662 $ 191,669 Other Investments 13, 169 13, 169 Taxes Receivable (Net of Allowance for Uncollectibles of $3,717) 13,338 Investment Income Receivable 35 1,023 TOTAL ASSETS $ 10,891 $ 28,330 $ 15,853 $ 1,663 $ 219,199

LIABILITIES AND FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ $ $ $ $ 23 Obligations Under Securities Lending Transactions 389 15 22, 140 Deferred Revenue and Other Credits 21 10,914 Matured Bonds and Interest Payable 1,555 1,555 Other Liabilities 24 24

TOTAL LIABILITIES 410 1,594 34,656 FUND BALANCES Reserved for Debt Service 10,891 28,330 15,443 69 184,543

TOTAL LIABILITIES AND FUND BALANCES $ 10,891 $ 28,330 $ 15,853 $ 1,663 $ 219,199

- 245 - CITY OF LOS ANGELES

Combining Statement of Revenues, Expenditures and Changes in Fund Balances - (Continued) Non major Debt Service Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Other Special Sanitation Non major Parking Equipment Convention Debt Service Revenue Charge Center Funds Total REVENUES Property Taxes $ $ $ $ $ 139,944 Charges for Services 3,920 3,920 Investment Earnings (Losses) 299 92 1,336 51 672 Other 4,657 4,657 TOTAL REVENUES 299 92 9,913 51 149,193 EXPENDITURES Current: General 7,016 7,016 Cultural and Recreational Services 1,352 1,352 Debt Service: Principal 3,105 600 7,137 9,385 86,957 Interest 5,501 5,896 22,861 7,709 89,116 Cost of Issuance 420 Advance Refunding Escrow 3,253 TOTAL EXPENDITURES 8,606 6,496 38,366 17,094 188, 114 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES (8,3071 (6,404) (28,453) (17,043) (38,921) OTHER FINANCING SOURCES (USES) Transfers In 8,809 18,911 19,639 17,092 64,989 Transfers Out (538) Issuance of Refunding Bonds 77,345 Premium on Issuance of Refunding Bonds 4,736 Payment to Refunded Bond Escrow Agent (81,660) TOTAL OTHER FINANCING SOURCES (USES) 8,809 18,911 19,639 17,092 64,872

NET CHANGE IN FUND BALANCES 502 12,507 (8,814) 49 25,951 FUND BALANCES, JULY 1 10,389 15,823 24,257 20 158,592

FUND BALANCES, JUNE 30 $ 10,891 $ 28,330 $ 15,443 $ 69 $ 184,543

- 250 - CITY OF LOS ANGELES

Budgetary Comparison Schedule (Non-GAAP Budgetary Basis) Annually Budgeted Nonmajor Debt Service Funds - (Continued) For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Staples Arena Actual Variance With Amounts Final Budget Budgeted Amounts (Budgetary Positive Original Final Basis! !NegativeJ REVENUES AND OTHER FINANCING SOURCES Revenues Taxes $ $ $ $ Charges for Services 3,500 3,500 3,920 420 Interest 250 250 110 !140) Total Revenues 3,750 3,750 4,030 280 Other Financing Sources Transfers from Other Funds TOTAL REVENUES AND OTHER FINANCING SOURCES 3,750 3,750 4,030 280 EXPENDITURES AND OTHER FINANCING USES Expenditures General Government 2,753 7,258 1,352 5,906 Debt Service Principal 910 910 910 Interest 2,964 2,964 2,963 Advance Refunding Escrow Total Expenditures 6,627 11,132 5,225 5,907 Other Financing Uses Transfers to Other Funds TOTAL EXPENDITURES AND OTHER FINANCING USES 6,627 11,132 5,225 5,907 EXCESS (DEFICIENCY) OF REVENUES AND OTHER FINANCING SOURCES OVER EXPENDITURES AND OTHER FINANCING USES (2,877) (7,382) (1,195) 6,187 FUND BALANCES, JULY 1, RESTATED 2,877 2,877 3,469 592 Appropriation of Fund Balance and Carryforward Appropriations 4,505 (4,505) FUND BALANCES, JUNE 30 $ $ $ 2,274 $ 2,274 Continued ..

- 264 - CITY OF LOS ANGELES

Budgetary Comparison Schedule (Non-GAAP Budgetary Basis) Annually Budgeted Nonmajor Debt Service Funds - (Continued) For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Total Annuall~ Bud9eted Non major Debt Service Funds Actual Variance With Amounts Final Budget Bud9eted Amounts (Budgetary Positive Ori9inal Final Basis! !Ne9ative) REVENUES AND OTHER FINANCING SOURCES Revenues Taxes $ 77,878 $ 77,878 $ 94,567 $ 16,689 Charges for Services 3,500 3,500 3,920 420 Interest 1,125 1,125 2,324 1,199 Total Revenues 82,503 82,503 100,811 18,308 Other Financing Sources Transfers from Other Funds 538 538 TOTAL REVENUES AND OTHER FINANCING SOURCES 82,503 82,503 101,349 18,846 EXPENDITURES AND OTHER FINANCING USES Expenditures General Government 2,753 7,258 1,352 5,906 Debt Service Principal 67,640 67,640 67,640 Interest 46,245 46,245 42, 109 4, 136 Advance Refunding Escrow 3,253 3,253 Total Expenditures 116,638 124,396 114,354 10,042 Other Financing Uses Transfers to Other Funds 538 (538) TOTAL EXPENDITURES AND OTHER FINANCING USES 116,638 124,396 114,892 9,504 EXCESS (DEFICIENCY) OF REVENUES AND OTHER FINANCING SOURCES OVER EXPENDITURES AND OTHER FINANCING USES (34, 135) (41,893) (13,543) 28,350 FUND BALANCES, JULY 1, RESTATED 34, 135 34, 135 106,256 72, 121 Appropriation of Fund Balance and Carryforward Appropriations 7,758 [7,758) FUND BALANCES, JUNE 30 $ $ $ 92,713 $ 92,713

• 265 · Capital Projects Funds

Capital Projects Funds are used to account for major capital improvements which are financed from the City's and component units' general obligation bonds and certificates of participation issues, special assessments, certain Federal grants, and specific receipts. CITY OF LOS ANGELES

CAPITAL PROJECTS FUNDS

Capital Projects Funds are used to account for capital improvements which are financed from the City's and component units' general obligation bond, certificates of participation issues, special assessments, certain Federal grants and other specific receipts. All of the City's Capital Projects Funds are considered nonmajor funds. Fourteen funds and a component unit are separately identified. These funds represent 96.5% of the combined revenues of the Capital Project Funds. The other smaller funds are grouped as other capital project funds.

General Obligation Bonds - Series 1989-A, Series 1991-A, Series 1992-A, Series 1993-A, Series 1994-A, Series 1995-A, Series 1999-B, Series 2000-A, Series 2001-A, Series 2002-A, and Series 2003-A - These funds account for the proceeds from the sales of bonds authorized by the voters in April 1989, June 1990, November 1998, November 2000, and March 2002 for the acquisition, improvement, and construction of certain branch libraries, police and fire safety facilities and equipment, animal shelter, and to reinforce, renovate and replace City owned seismically deficient bridges and buildings.

Recreation and Parks Grant Fund - Accounts for grants received for major capital improvements undertaken by the City's Department of Recreation and Parks.

Local Transportation Fund - Accounts for the City's 25% share of one percent of the sales tax allocated by the local transportation planning agency for a balanced transportation program for bicycle and pedestrian facilities.

Parks Assessment Fund - Accounts for assessments levied pursuant to Proposition K- Los Angeles Kids program approved by City voters on November 5, 1996. The assessments from the City of Los Angeles Landscaping and Lighting District 96-1 will be used for the acquisition of land, construction of capital improvements and maintenance of facilities. The fund also accounts for the proceeds from the sale of special assessment bonds.

Convention Center Capital Project Fund - Accounts for the proceeds of certificates of participation to provide additional financing for the acquisition, construction and improvements to the existing convention and exhibition center of the City.

Other Capital Projects Funds - Account for the activities of smaller Capital Project Funds and represent 3.5% of the combined revenues. Included in this group is Park and Recreational Sites and Facilities, an annually budgeted fund.

• 267 • CITY OF LOS ANGELES

Combining Balance Sheet Nonmajor Capital Projects Funds June 30, 2004 (amounts expressed in thousands)

General Obligation Bonds Series 1989-A Series 1991-A Series 1992-A Series 1993-A ASSETS Cash and Pooled Investments $ 2,232 $ 2,292 $ 2,966 $ 6,699 Other Investments Accounts Receivable Special Assessments Receivable Investment Income Receivable 19 19 24 65 Intergovernmental Receivable Due from Other Funds

TOTAL ASSETS $ 2,251 $ 2,311 $ 2,990 $ 6,764

LIABILITIES AND FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ $ $ $ 54 Obligations Under Securities Lending Transactions 328 336 435 983 Intergovernmental Payable Due to Other Funds 26 Deferred Revenue and Other Credits 10 11 14 36 Deposits and Advances Advances from Other Funds

TOTAL LIABILITIES 338 347 449 1,099 FUND BALANCES Reserved for Encumbrances 18 85 28 210 Unreserved and Undesignated 1,895 1,879 2,513 5,455

TOTAL FUND BALANCES 1,913 1,964 2,541 5,665

TOTAL LIABILITIES AND FUND BALANCES $ 2,251 $ 2,311 $ 2,990 $ 6,764 Continued ...

- 268 • CITY OF LOS ANGELES

Combining Balance Sheet - (Continued) Nonmajor Capital Projects Funds June 30, 2004 (amounts expressed in thousands)

General Obli~ation Bonds Series 1994-A Series 1995-A Series 1999-B Series 2000-A ASSETS Cash and Pooled Investments $ 5, 176 $ 23,416 $ 7,730 $ 21,091 Other Investments Accounts Receivable Special Assessments Receivable Investment Income Receivable 66 197 77 184 Intergovernmental Receivable Due from Other Funds 20

TOTAL ASSETS $ 5,242 $ 23,634 $ 7,807 $ 21,275

LIABILITIES ANO FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ $ 9 $ 193 $ 1,192 Obligations Under Securities Lending Transactions 759 3,435 1, 134 3,095 Intergovernmental Payable Due to Other Funds 315 5 123 Deferred Revenue and Other Credits 37 110 42 101 Deposits and Advances Advances from Other Funds

TOTAL LIABILITIES 796 3,869 1,374 4,511 FUND BALANCES Reserved for Encumbrances 152 2,666 2,059 2,243 Unreserved and Undesignated 4,294 17,099 4,374 14,521

TOTAL FUND BALANCES 4,446 19,765 6,433 16,764

TOTAL LIABILITIES AND FUND BALANCES $ 5,242 $ 23,634 $ 7,807 $ 21,275 Continued ...

• 269 - CITY OF LOS ANGELES

Combining Balance Sheet - (Continued) Non major Capital Projects Funds June 30, 2004 (amounts expressed in thousands)

Recreation General Obligation Bonds and Series 2001-A Series 2002-A Series 2003-A Parks Grant ASSETS Cash and Pooled Investments $ 90,434 $ 240,257 $ 279,429 $ 27,759 Other Investments Accounts Receivable 75 Special Assessments Receivable Investment Income Receivable 871 2,066 2,337 232 Intergovernmental Receivable 1,305 Due from Other Funds 10 21 12 388

TOTAL ASSETS $ 91,315 $ 242,344 $ 281,778 $ 29,759

LIABILITIES AND FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ 2,293 $ 3,726 $ 254 $ 1,546 Obligations Under Securities Lending Transactions 13,269 35,251 40,998 4,073 Intergovernmental Payable 1 3 Due to Other Funds 219 1,062 313 2 Deferred Revenue and Other Credits 473 1,146 1,309 134 Deposits and Advances 4 Advances from Other Funds 1,826

TOTAL LIABILITIES 16,254 41, 189 42,875 7,584 FUND BALANCES Reserved for Encumbrances 17,741 36,848 5,025 679 Unreserved and Undesignated 57,320 164,307 233,878 21,496

TOTAL FUND BALANCES 75,061 201,155 238,903 22,175

TOTAL LIABILITIES AND FUND BALANCES $ 91,315 $ 242,344 $ 281,778 $ 29,759 Continued ...

· 270 • CITY OF LOS ANGELES

Combining Balance Sheet· (Continued) Nonmajor Capital Projects Funds June 30, 2004 (amounts expressed In thousands)

Other Nonmajor Capital Local Parks Convention Projects Transeortation Assessment Center Funds Total ASSETS Cash and Pooled Investments $ 4,539 $ 95,982 $ $ 6,232 $ 816,234 Other Investments 1,641 1,641 Accounts Receivable 76 Special Assessments Receivable 1,874 1,874 Investment Income Receivable 38 770 2 11 6,978 Intergovernmental Receivable 183 1,488 Due from Other Funds 451

TOTAL ASSETS $ 4,760 $ 98,626 $ 1,643 $ 6,243 $ 828,742

LIABILITIES AND FUND BALANCES LIABILITIES Accounts, Contracts and Retainage Payable $ 3 $ 2,977 $ $ 165 $ 12,412 Obligations Under Securities Lending Transactions 666 11,832 198 116,792 Intergovernmental Payable 4 Due to Other Funds 3,220 108 5,393 Deferred Revenue and Other Credits 205 1,740 6 5,375 Deposits and Advances 4 Advances from Other Funds 1,826

TOTAL LIABILITIES 874 19,769 477 141,806 FUND BALANCES Reserved for Encumbrances 393 19,011 177 87,335 Unreserved and Undesignated 3,493 59,846 1,642 5,589 599,601

TOTAL FUND BALANCES 3,886 78,857 1,642 5,766 686,936 TOTAL LIABILITIES AND FUND BALANCES $ 4,760 $ 98,626 $ 1,643 $ 6,243 $ 828,742

- 271 - CITY OF LOS ANGELES

Combining Statement of Revenues, Expenditures and Changes in Fund Balances Non major Capital Projects Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

General Obligation Bonds Series 1989-A Series 1991-A Series 1992-A Series 1993-A REVENUES Other Taxes $ $ $ $ Licenses and Permits Intergovernmental Charges for Services Special Assessments Investment Earnings (Losses) Other 397 6 TOTAL REVENUES 398 6 EXPENDITURES Capital Outlay 34 209 48 3,234 Debt Service: Cost of Issuance TOTAL EXPENDITURES 34 209 48 3,234 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES 364 (209) (48) (3,228) OTHER FINANCING SOURCES (USES) Transfers In Transfers Out Issuance of Long-term Debt Premium on Issuance of Lang-term Debt TOTAL OTHER FINANCING SOURCES (USES) NET CHANGE IN FUND BALANCES 364 (209) (48) (3,228) FUND BALANCES, JULY 1 1,549 2,173 2,589 8,893 FUND BALANCES, JUNE 30 $ 1,913 $ 1,964 $ 2,541 $ 5,665 Continued ...

• 272 • CITY OF LOS ANGELES

Combining Statement of Revenues, Expenditures and Changes In Fund Balances • (Continued) Nonmajor Capital Projects Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

General Obli9at1on Bonds Series 1994-A Series 1995-A Series 1999-B Series 2000-A REVENUES Other Taxes $ $ $ $ Licenses and Permits Intergovernmental Charges for Services Special Assessments Investment Earnings (Losses) 10 (6) (65) Other 15 TOTAL REVENUES 10 16 (6) (65) EXPENDITURES Capital Outlay 2,629 1,091 4,648 10,730 Debt Service: Cost of Issuance

TOTAL EXPENDITURES 2,629 1,091 4,648 10,730 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES (2,619) (1,075) {4,654) (10,795) OTHER FINANCING SOURCES (USES) Transfers In Transfers Out Issuance of Long-term Debt Premium on Issuance of Long-term Debt TOTAL OTHER FINANCING SOURCES (USES)

NET CHANGE IN FUND BALANCES (2,619) (1,075) {4,654) (10,795) FUND BALANCES, JULY 1, 7,065 20,840 11,087 27,559

FUND BALANCES, JUNE 30 $ 4,446 $ 19,765 $ 6,433 $ 16,764 Continued ..

· 273 • CITY OF LOS ANGELES

Combining Statement of Revenues, Expenditures and Changes in Fund Balances· (Continued) Nonmajor Capital Projects Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Recreation General Obligation Bonds and Series 2001-A Series 2002-A Series 2003-A Parks Grant

REVENUES Other Taxes $ $ $ $ Licenses and Permits Intergovernmental 20,147 Charges for Services Special Assessments Investment Earnings (Losses) (256) (313) 3,468 (37) Other TOTAL REVENUES (256l (313l 3,468 20, 110

EXPENDITURES Capital Outlay 67,209 64,722 6,994 25,350 Debt Service: Cost of Issuance 1,941 TOTAL EXPENDITURES 67,209 64,722 8,935 25,350 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES (67,465l (65,035) (5,467l (5,240) OTHER FINANCING SOURCES (USES) Transfers In 1,500 292 Transfers Out (352) (1,500) Issuance of Long-term Debt 233,365 Premium on Issuance of Long-term Debt 11,005 TOTAL OTHER FINANCING SOURCES (USES) (352) 244,370 292 NET CHANGE IN FUND BALANCES (67,817) (65,035) 238,903 (4,948) FUND BALANCES, JULY 1 142,878 266,190 27, 123

FUND BALANCES, JUNE 30 $ 75,061 $ 201,155 $ 238,903 $ 22,175 Continued ..

• 274 • CITY OF LOS ANGELES

Combining Statement of Revenues, Expenditures and Changes in Fund Balances • (Continued) Nonmajor Capital Projects Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Other Nonmajor Capital Local Parks Convention Projects Transportation Assessment Center Funds Total REVENUES Other Taxes $ $ $ $ 1,804 $ 1,804 Licenses and Permits 20 20 Intergovernmental 1,902 22,049 Charges for Services 10 10 Special Assessments 25,241 25,241 Investment Earnings (Losses) 28 (184) 7 2,654 Other 11 429 TOTAL REVENUES 1,940 25,057 7 1,835 52,207 EXPENDITURES Capital Outlay 433 30,073 38 615 218,057 Debt Service: Cost of Issuance 1,941 TOTAL EXPENDITURES 433 30,073 38 615 219,998 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES 1,507 (5,016) (31) 1,220 (167,791) OTHER FINANCING SOURCES (USES) Transfers In 50 1,842 Transfers Out (4,507) (6,359) Issuance of Long-term Debt 233,365 Premium on Issuance of Long-term Debt 11,005 TOTAL OTHER FINANCING SOURCES (USES) (4,507) 50 239,853 NET CHANGE IN FUND BALANCES 1,507 (9,523) (31) 1,270 72,062 FUND BALANCES, JULY 1 2,379 88,380 1,673 4,496 614,874 FUND BALANCES, JUNE 30 $ 3,886 $ 78,857 $ 1,642 $ 5,766 $686,936

· 275 · CITY OF LOS ANGELES

Budgetary Comparison Schedule {Non-GAAP Budgetary Basis) Annually Budgeted Nonmajor Capital Projects Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands}

Local Transportation Actual Variance With Amounts Final Budget Budgeted Amounts {Budgetary Positive Original Final Basis) {Negative) REVENUES Taxes $ $ $ $ Intergovernmental 1,801 1,196 1,902 706 Charges for Services 10 10 10 Interest ____1_56_ 178 107 (71) TOTAL REVENUES ___1"',9-'-67'-- 1,384 2,019 635 EXPENDITURES AND OTHER FINANCING USES Expenditures Capital Outlay 1,991 2,011 699 1,312 Other Financing Uses Transfers to Other Funds TOTAL EXPENDITURES AND OTHER FINANCING USES 1,991 2,011 699 1,312 EXCESS {DEFICIENCY) OF REVENUES OVER EXPENDITURES AND OTHER FINANCING USES (24) (627) 1,320 1,947 FUND BALANCES, JULY 1 24 24 2,173 2,149 Appropriation of Fund Balances and Carryforward Appropriations 603 (603) Encumbrances Lapsed 7 7

FUND BALANCES, JUNE 30 $ $ -- $ 3,500 =$==.;3;;;·;;;50;,;0~ Continued ...

- 276 - CITY OF LOS ANGELES

Budgetary Comparison Schedule (Non-GAAP Budgetary Basis) Annually Budgeted Nonmajor Capital Projects Funds - (Continued) For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Park and Recreational Sites and Facilities Actual Variance With Amounts Final Budget Budgeted Amounts (Budgetary Positive Original Final Basis) (Negative) REVENUES Taxes $ 1,200 $ 1,305 $ 1,804 $ 499 Intergovernmental Charges for Services Interest TOTAL REVENUES 1,200 1,305 1,804 499 EXPENDITURES AND OTHER FINANCING USES Expenditures Capital Outlay 900 2,247 235 2,012 Other Financing Uses Transfers to Other Funds 1,239 275 964 TOTAL EXPENDITURES AND OTHER FINANCING USES 900 3,486 510 2,976 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES AND OTHER FINANCING USES 300 (2, 181) 1,294 3,475 FUND BALANCES, JULY 1 (300) (300) 2,320 2,620 Appropriation of Fund Balances and Carryforward Appropriations 2,481 (2,481) Encumbrances Lapsed 422 422 FUND BALANCES, JUNE 30 $ -- $ $ 4,036 $ 4,036 Continued ...

- 277 - CITY OF LOS ANGELES

Budgetary Comparison Schedule (Non-GAAP Budgetary Basis) Annually Budgeted Nonmajor Capital Projects Funds - (Continued) For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Total Annually Budget Nonmajor Capital Projects Funds Actual Variance With Amounts Final Budget Budseted Amounts (Budgetary Positive Original Final Basis) (Negative) REVENUES Taxes $ 1,200 $ 1,305 $ 1,804 $ 499 Intergovernmental 1,801 1,196 1,902 706 Charges for Services 10 10 10 Interest 156 178 107 (71) TOTAL REVENUES 3, 167 2,689 3,823 1,134 EXPENDITURES AND OTHER FINANCING USES Expenditures Capital Outlay 2,891 4,258 934 3,324 Other Financing Uses Transfers to Other Funds 1,239 275 964 TOTAL EXPENDITURES AND OTHER FINANCING USES 2,891 5,497 1,209 4,288 EXCESS (DEFICIENCY) OF REVENUES OVER EXPENDITURES AND OTHER FINANCING USES 276 (2,808) 2,614 5,422 FUND BALANCES, JULY 1 (276) (276) 4,493 4,769 Appropriation of Fund Balances and Carryforward Appropriations 3,084 (3,084) Encumbrances Lapsed 429 429 FUND BALANCES, JUNE 30 $ $ $ 7,536 $ 7,536

- 278 - CITY OF LOS ANGELES

Reconciliation of Operations on Budgetary Basis to the GAAP Basis Non major Capital Projects Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Excess of Revenues and Other Financing Sources Over Expenditures and Other Financing Uses- Budgetary $ 2,614

Basis Difference Adjustments for net changes to accrued assets and liabilities. The GAAP basis operating statement recognizes revenues as soon as they are both measurable and available, and expenditures generally are recorded when llabillty ls incurred; whereas, the budget basis operating statement reflects revenues when received and expenditures when paid. (163)

Encumbrances, which represent commitments to acquire goods and services, are recorded as the equivalent of expenditures in the budget year incurred (budget), as opposed to a reservation of fund balance (GAAP). Encumbrances reported as budgetary expenditures 455 Prior year encumbrances expended in current year (98)

Perspective Difference Certain Nonmajor Capital Projects Funds are not included in the legally adopted budget; while for some, the budget provides for only the portion of fund receipts that are expended for City department operations. 69,254

Net Change in Fund Balances- Nonmajor Capital Projects Funds $ 72,062

- 279 · CITY OF LOS ANGELES

Supplemental Schedule of Budget Appropriations, Expenditures and Other Financing Uses Budget and Actual (Non-GAAP Budgetary Basis) All Annually Budgeted Capital Projects Funds Year Ended June 30, 2004 (amounts expressed In thousands)

PARK AND RECREATION SITES AND FACILITIES Capital Outlay 900 1,347 2,247 83 152 235 2,012 Transfers to Other Funds 1,239 1,239 275 275 964 TOTAL 900 2,586 3,486 358 152 510 2,976

TOTAL BUDGETED CAPITAL PROJECTS FUNDS $ 2,891 $ 2,606 $ 5,497 $ 754 $ 455 $ 1,209 $ 4,288

ALL ANNUALLY BUDGETED CAPITAL PROJECTS FUNDS Capital Outlay $ 2,891 $ 1,367 $ 4,258 $ 479 $ 455 $ 934 $ 3,324 Transfers to Other Funds 1,239 1,239 275 275 964 TOTAL $ 2,891 $ 2,606 $ 5,497 $ 754 $ 455 $ 1,209 $ 4,288

· 280 • Fiduciary Funds

Pension Trust and Agency Funds are used to account for the activities of the City's three contributory defined benefit pension plans and for assets held by the City as an agent for others. CITY OF LOS ANGELES

FIDUCIARY FUNDS

Fiduciary Funds are used to report assets held by the City in a trustee or agency capacity for others and therefore cannot be used to support the City government's programs. These include Pension Trust Funds and Agency Funds.

Pension Trust Funds - These funds are used to report resources that are held in trust for the members and beneficiaries of the City's defined benefit and pension plans namely: City Employees' Retirement System, Fire and Police Pension System, and Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan.

Agency Funds - These funds accounts assets held by the City as an agent for others, for example, federal and state income tax withheld from employees, and assessments for payments of certain conduit debt.

- 281 - CITY OF LOS ANGELES

Combining Statement of Fiduciary Net Assets Pension Trust Funds June 30, 2004 (amounts expressed in thousands)

Water and Power Employees' Fire and City Retirement and Police Employees' Death Benefit Pension Retirement Insurance Plan sistem sistem Total ASSETS Cash and Pooled Investments $ 609 $ 815 $ 639 $ 2,063 Receivables: Contributions 5,063 5,063 Accrued Investment Income 26,204 46,628 28,095 100,927 Contingent Disability Benefit Advance 3,310 3,310 Other Receivables 6,069 5,983 12,052 Due from Brokers 338,303 113,195 451,498 Other Investments: Temporary 911,327 569,114 538,715 2,019, 156 U. S. Government Agencies Securities 274,561 1,093,224 492,025 1,859,810 Domestic Corporate Bonds 643,595 1,568,575 727,529 2,939,699 International Bonds 77,277 128,340 156,073 361,690 Domestic Stocks 3,872,739 5,495,427 3,572,190 12,940,356 International Stocks 1,773,542 1,485,917 3,259,459 Mortgage-backed Securities 227,802 379,065 606,867 Real Estate 949,164 306,308 1,255,472 Venture Capital and Alternative Investments 354, 172 291,698 645,870 Security Lending Collateral 104,914 1,398,032 996,067 2,499,013 Capital Assets Furniture, Fixtures and Equipment (Net of Accumulated Depreciation of $53) 113 113 TOTAL ASSETS 6, 148,407 13,720,399 9,093,612 28,962,418 LIABILITIES Accounts Payable and Accrued Expenses 2,213 6,829 19,284 28,326 Benefits in Process of Payment 1,421 5,378 6,799 Due to Brokers 452,469 343,823 796,292 Obligations Under Securities Lending Transactions 104,914 1,398,032 996,067 2,499,013 Mortgage Loan Payable - Current 58,375 58,375 Mortgage Loan Payable - Non current 229,087 229,087 TOTAL LIABILITIES 108,548 2, 150, 170 1,359,174 3,617,892 NET ASSETS Held in Trust for Pension and Postemployment Healthcare Benefits Benefit Pension Plans 5,961,400 11,000,160 6,895,303 23,856,863 Postemployment Healthcare Plans 570,069 839,135 1,409,204 Disability Plan 45,651 45,651 Death Benefit Plan 32,808 32,808 TOTAL NET ASSETS $ 6,039,859 $ 11,570,229 $ 7,734,438 $ 25,344,526

- 282 - CITY OF LOS ANGELES

Combining Statement of Changes in Fiduciary Net Assets Pension Trust Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Water and Power Employees' Fire and City Retirement and Police Employees' Death Benefit Pension Retirement Insurance Plan sistem sistem Total ADDITIONS Contributions Employer $ 66,895 $ 136,203 $ 140,201 $ 343,299 Plan Member 38,730 73,439 93,418 205,587 Other 15,758 15,758 Total Contributions 105,625 225,400 233,619 564,644 Investment Income Net Appreciation in Fair Value of Investments 482,736 1,410,906 1,072,478 2,966, 120 Interest Income 97,046 183,256 94,971 375,273 Dividend Income 36,284 99, 182 67,629 203,095 Other Investment Income 6,323 7,615 13,938 Real Estate Operating Income, Net 51,417 30,133 81,550

Investment Income 616,066 1,751,084 1,272,826 3,639,976 Investment Expense (1,521) (28,250) (20,309) (50,080) Net Investment Income 614,545 1,722,834 1,252,517 3,589,896

TOTAL ADDITIONS 720, 170 1,948,234 1,486, 136 4, 154,540 DEDUCTIONS Benefit Payments 318,821 563,731 438,530 1,321,082 Refunds of Member Contributions 3,585 3,963 11,338 18,886 Administrative Expenses 3,364 9, 131 10,871 23,366 TOTAL DEDUCTIONS 325,770 576,825 460,739 1,363,334 CHANGE IN NET ASSETS Benefit Pension Plans 402,634 1,245,379 910, 161 2,558,174 Postemployment Healthcare Plans 126,030 115,236 241,266 Disability Plan (3,645) (3,645) Death Benefit Plan (4,589) (4,589)

TOTAL CHANGE IN NET ASSETS 394,400 1,371,409 1,025,397 2,791,206 Net Assets Held in Trust for Pension and Postemployment Healthcare Benefits, July 1 Benefit Pension Plans 5,558,766 9,754,781 5,985, 142 21,298,689 Postemployment Healthcare Plans 444,039 723,899 1,167,938 Disability Plan 49,296 49,296 Death Benefit Plan 37,397 37,397 NET ASSETS HELD IN TRUST FOR PENSION AND POSTEMPLOYMENT HEALTHCARE BENEFITS, JUNE 30 $ 6,039,859 $ 11,570,229 $ 7,734,438 $ 25,344,526

- 283 - CITY OF LOS ANGELES

Combining Statement of Fiduciary Assets and Liabilities Agency Funds June 30, 2004 (amounts expressed in thousands)

Internal Revenue Code Section 501 (c) Other Public Building Employee Agency Works and Safe!)'. Benefits Funds Total ASSETS Cash and Pooled Investments $ 33,831 $ 25,392 $ 18,042 $ 21,030 $ 98,295 Other Investments 904 904 Special Assessments Receivable 317 317 Investment lnc'ome Receivable 215 42 257 Intergovernmental Receivable 2,060 2,060 Advances to Other Funds 12,636 12,636

TOTAL ASSETS $ 48,527 $ 25,392 $ 18,257 $ 22,293 $ 114,469

LIABILITIES Fiduciary Liabilities $ $ $ 15,610 $ 15,080 $ 30,690 Obligations Under Securities Lending Transactions 2,647 617 3,264 Deposits and Advances 48,527 25,392 6,596 80,515

TOTAL LIABILITIES $ 48,527 $ 25,392 $ 18,257 $ 22,293 $ 114,469

- 284 - CITY OF LOS ANGELES

Combining Statement of Changes in Fiduciary Assets and Liabilities Agency Funds For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Balance Balance July 1, June 30, 2003 Additions Deductions 2004 PUBLIC WORKS ASSETS Cash and Pooled Investments $ 31,990 $ 34,427 $ 32,586 $ 33,831 Intergovernmental Receivable 225 2,000 165 2,060 Oue from Other Funds 111 111 Advances to Other Funds 12,621 8,216 8,201 12,636 TOTAL ASSETS $ 44,947 $ 44,643 $ 41,063 $ 48,527 LIABILITIES Due to Other Funds $ 138 $ 8 $ 146 $ Deposits and Advances 44,809 44,636 40,918 48,527 TOTAL LIABILITIES $ 44,947 $ 44,644 $ 41,064 $ 48,527

BUILDING AND SAFETY ASSETS Cash and Pooled Investments $ 17,843 $ 76,154 $ 68,605 $ 25,392 LIABILITIES Deposits and Advances $ 17,843 $ 76,154 $ 68,605 $ 25,392

INTERNAL REVENUE CODE SECTION 501 (cl EMPLOYEE BENEFITS ASSETS Cash and Pooled Investments $ 13,088 $ 182,723 $ 177,769 $ 18,042 Investment Income Receivable 240 215 240 215 TOTAL ASSETS $ 13,328 $ 182,938 $ 178,009 $ 18,257 LIABILITIES Fiduciary Liabilities $ 11,432 $ 180,291 $ 176,113 $ 15,610 Obligations Under Securities Lending Transactions 1,896 2,647 1,896 2,647 TOTAL LIABILITIES $ 13,328 $ 182,938 $ 178,009 $ 18,257

Continued

- 285 - CITY OF LOS ANGELES

Combining Statement of Changes in Fiduciary Assets and Liabilities Agency Funds • (Continued) For the Fiscal Year Ended June 30, 2004 (amounts expressed in thousands)

Balance Balance July 1, June 30, 2003 Additions Deductions 2004 OTHER AGENCY FUNDS ASSETS Cash and Pooled Investments $ 20,532 $ 880, 147 $ 879,649 $ 21,030 Other Investments 1,057 324 477 904 Special Assessments Receivable 375 317 375 317 Investment Income Receivable 50 42 50 42 TOTAL ASSETS $ 22,014 $ 880,830 $ 880,551 $ 22,293 LIABILITIES Fiduciary Liabilities $ 15,474 $ 709,601 $ 709,995 $ 15,080 Obligations Under Securities Lending Transactions 464 617 464 617 Deposits and Advances 6,076 170,611 170,091 6,596 TOTAL LIABILITIES $ 22,014 $ 880,829 $ 880,550 $ 22,293

TOTAL AGENCY FUNDS ASSETS Cash and Pooled Investments $ 83,453 $ 1, 173,451 $ 1,158,609 $ 98,295 Other Investments 1,057 324 477 904 Special Assessments Receivable 375 317 375 317 Investment Income Receivable 290 257 290 257 Intergovernmental Receivable 225 2,000 165 2,060 Due from Other Funds 111 111 Advances to Other Funds 12,621 8,216 8,201 12,636 TOTAL ASSETS $ 98,132 $ 1, 184,565 $ 1, 168,228 $ 114,469 LIABILITIES Fiduciary Liabilities $ 26,906 $ 889,892 $ 886, 108 $ 30,690 Obligations Under Securities Lending Transactions 2,360 3,264 2,360 3,264 Due to Other Funds 138 8 146 Deposits and Advances 68,728 291,401 279,614 80,515 TOTAL LIABILITIES $ 98,132 $ 1, 184,565 $ 1, 168,228 $ 114,469

- 286 - s T A T I s T I c A L

Section CITY OF LOS ANGELES

GENERAL GOVERNMENTAL EXPENDITURES BY FUNCTION LAST TEN FISCAL YEARS (dollar amounts expressed in millions)

Function 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

General Government $ 985.8 $ 966.2 $ 694.4 $ 745.6 $ 617.4 $ 573.9 $ 509.0 $ 508.6 $ 704.9 $ 562.3

Protection of Persons and Property 1,851.5 1,710.4 1,712.0 1,646.3 1,683.6 1,636.0 1,587.9 1,550.1 1,397. 1 1,543.4

Public Works 309.0 334.3 370.2 358.5 300.1 256.4 213.9 256.4 197.7 119.8

Health and Sanitation 328.4 285.4 297.8 264.1 262.5 266.5 281.7 272.5 252,5 209.4

Transportation 259.7 243.2 232.9 218.5 210.3 188.4 258.8 173.4 185.7 209.1

Cultural and Recreational Services 294.5 277.0 265.6 249.9 239.5 231.0 200.0 204.3 179.2 178.9

Community Development 430.8 373.1 528.5 386.1 296.0 286.3 523.0 325.4 263.0 230.2

Capital Outlay 522.2 558.5 403.7 404.7 463.1 394.4 400.9 326.3 334.6 283.1

Debt Service 331.0 372.0 324.6 350.0 286.2 307.7 268.1 261.2 205.8 176.4

Total $5,312.9 $5,120.1 $4,829.7 $4,623.7 $4,358.7 $4,140.6 $4,243.3 $3,878.2 $3,720.5 $3,512 6

Note· Amounts shown are on the GAAP basis and include all governmental fund types- General, Special Revenue, Debt Service, and Capital Projects Funds. Beginning fiscal year 2001, GASB Statements Nos. 33 and 36 were implemented and beginning fiscal year 2002, GASB Statement Nos. 34 and 37 and GASB Interpretation No. 6 were implemented. Prior year amounts were not restated to conform with the new reporting requirements.

$2,000

$1,800

$1,600

$1,400

$1,200 ""' ~ $1,000 :ii] .!: $800

$600

$400

$200

$0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal Years

General Government • Protection of Persons and Property Ill Public Works I

i .m Health and Sanitation • Transportation m Cultural and Recreational Services I

• Community Development III Capital Outlay • Debt Service

- 287 - CITY OF LOS ANGELES

GENERAL GOVERNMENTAL REVENUES BY SOURCE LAST TEN FISCAL YEARS (dollar amounts expressed in millions)

Function 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

Taxes $2,625.5 $2,373.7 $2,226.7 $2,379.1 $2,179.7 $2,058.1 $2,023.1 $1,945.1 $1,843.4 $1,769.6

Licenses and Permits 39.7 41.0 38.8 36.8 38.5 31.8 30.3 28.4 21.6 24.9

Intergovernmental 884.7 935.6 997.2 836.9 761.0 747.5 723.9 7024 733.5 823.3

Charges for Services 892.5 825.3 786.1 732.5 727.5 684.4 682.5 661.5 626.8 601.4

Fines 123.2 131.8 114.1 114.5 113.2 106.5 90.1 83 5 72.5 82.6

Special Assessments 97.4 92.6 93.2 94.2 86.6 83.2 80.0 54.6 48.3 41.5

Interest 13.5 159.0 114.3 154.9 97 8 101.5 123.3 118.6 106.7 83.0

Other 91.7 67.3 52.2 62.7 62.0 30.3 30.3 22.6 30.6 27.9

Total $4,768.2 $4,626.3 $4,422.6 $4,411.6 $4,066.3 $3,843.3 $3,783.5 $3,616.7 $3,483.4 $3,454.2

Note: Amounts shown are on the GAAP basis and include all governmental fund types- Genera!, Special Revenue, Debt Service, and Capital Projects Funds. Beginning fiscal year 2001, GASS Statement Nos. 33 and 36 were implemented and beginning fiscal year 2002, GASB Statement Nos. 34 and 37 were implemented. Prior year amounts were not restated to conform with the new reporting requirements.

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

! 111 Taxes Ill Licenses Intergovernmental Ill Charges for Services ill Fines Ill Special Assessments Ill Interest ill Other I

• 288 - CITY OF LOS ANGELES

GENERAL GOVERNMENTAL TAX REVENUES BY SOURCE LAST TEN FISCAL YEARS {dollar amounts expressed In mllllons)

Function 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

Property Taxes $ 882.5 $ 792.9 $ 741.0 $ 663.8 $ 615.6 $ 575.6 $ 583.9 $ 601.2 $ 564.3 $ 532.7

Sales Taxes 381.1 367.1 346.3 488.7 442.1 406.2 399.4 369.0 370.8 355.7

Utility Users Taxes 572.0 521.2 478.3 556.4 491.9 487.1 481.9 466.2 430.2 427.6

Business Taxes 372.4 356.9 358.9 344.2 319.2 300.8 295.6 283.4 282.6 268.4

Other Taxes 417.5 335.6 302.2 326.0 310.9 288.4 262.3 225.3 195.5 185.2

Total $2,625.5 $2,373.7 $2,226.7 $2,379.1 $2,179.7 $2,058.1 $2,023.1 $1,945.1 $1,843.4 $1,769.6

Note: Amounts shown are on the GAAP basis and include all governmental fund types- General, Special Revenue, Debt Service, and Capital Projects Funds. Beginning fiscal year 2001, GASB Statement Nos. 33 and 36 were implemented and beginning fiscal year 2002, GASB Statement Nos. 34 and 37 were implemented. Prior year amounts were not restated to confrom with the new reporting requirements.

10% 11%

• Property Taxes

• Sales Taxes

W Utility Users II Business Taxes 1111 Other Taxes

- 289 - CITY OF LOS ANGELES

PROPERTY TAX LEVIES AND COLLECTIONS LAST TEN FISCAL YEARS (dollar amounts expressed in thousands)

Delinquent Total Total Delinquent Percent Outstanding Taxes as 0/o Fiscal Current Current Taxes of Levy Delinquent of Current Year Tax Levy* Collections Collected Collections Taxes Tax Levy

1994-95 $ 486,482 $ 429,926 $ 54,098 88.37% $ 64,888 13.34%

1995-96 472,383 438,431 24,743 92.81% 65,417 13.85%

1996-97 472,855 430,919 30, 134 91.13% 63,821 13.50%

1997-98 475,288 451,997 44,078 95.10% 61,451 12.93%

1998-99 490, 167 464,713 29,208 94.81% 60,411 12.32°/o

1999-00 520,804 489,591 28,973 94.01% 62,847 12.07%

2000-01 554,825 528,543 39,684 95.26% 69, 104 12.46%

2001-02 591,029 560,750 36,810 94.88% 68,691 11.62%

2002-03 624,633 599,921 40, 110 96.04% 71,530 11.45%

2003-04 673,417 645,697 41,358 95.88% 71,467 10.61%

• One percent basic levy only, which is a General Fund revenue; excludes City levy for debt service.

$800,000

$700,000

$600,000

f/1 ,::, c: $500,000 f/1 "'::, $400,000 .c:0 .E"'" $300,000 $200,000

$100,000

$0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal Years 111111111 Total Current Tax Levy o:::::J Delinquent Taxes Collected i IIIIIIIIIOutstanding Delinquent Taxes --Total Current Collections J

• 290 • CITY OF LOS ANGELES

ASSESSED AND ESTIMATED ACTUAL VALUE OF PROPERTY LAST TEN FISCAL YEARS (dollar amounts expressed in thousands)

Assessed and Estimated 1 Year Actual Value ( l Average Assessed of Real Personal Annual Value 12 Levl Proee~ ! Proeerty Total Growth Per Caeita 1995 $ 181,616,824 $ 12, 134,608 $ 193,751,432 0.43% $ 54

1996 172,793,228 12,375,211 185,168,439 -4.43°/o 51

1997 169,725,582 12,959,484 182,685,066 -1.34% 50

1998 169,203,053 13,525,933 182,728,986 0.02o/o 49

1999 173,237,992 14,653,711 187,891,703 2.83% 50

2000 185,780,706 15,107,113 200,887,819 6.92% 53

2001 198,860,259 15,986,311 214,846,570 6.95% 56

2002 212,651,362 17,490,449 230, 141,811 7.12°/o 60

2003 227,593,072 16,806,678 244,399,750 6.20% 63

2004 246,906,688 16,640,805 263,547,493 7.83% 67

Source: Taxpayer's Guide - Auditor Controller, County of Los Angeles.

(1) Net of Homeowners' Exemption. (2) Assessed at 1OOo/o of estimated actual value.

$300,000,000

$250,000,000

$200,000,000 'C "'c "'::, $150,000,000 0 .s:

.!:"'" $100,000,000

$50,000,000

$0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal Years

I• Real Property • Personal Property !

- 291 - CITY OF LOS ANGELES

PROPERTY TAX RATES DIRECT AND OVERLAPPING DEBT TAX RATE AREA# 4 ' (PER $100 OF ASSESSED VALUE) LAST TEN FISCAL YEARS

Fiscal City of Los Angeles L.A. Unified L.A. County Metropolitan Year Los Angeles County School District Flood Control Water District General Total

1994-95 $ 0.025211 $ 0.001993 $ 0.004036 s 0.006041 $ 0.008900 $ 1.000000 $ 1.046181

1995-96 0.038012 0.001814 0.003358 0.000963 0.008900 1.000000 1.053047

1996-97 0.035969 0.001604 0.003338 0.001991 0.008900 1.000000 1.051802

1997-98 0.031098 0.001584 0.012017 0.002197 0.008900 1.000000 1.055796

1998-99 0.030161 0.001451 0.024749 0.001953 0.008900 1.000000 1.067214

1999-00 0.031113 0.001422 0.031528 0.001765 0.008900 1.000000 1.074728

2000-01 0.026391 0.001314 0.040765 0.001552 0.008800 1.000000 1.078822

2001-02 0.040051 0.001128 0.048129 0.000473 0.007700 1.000000 1.097481

2002-03 0.042312 0.001033 0.036973 0.000881 0.006700 1.000000 1.087899

2003-04 0.050574 0.000992 0.077145 0.000462 0.006100 1.000000 1.135273

Source: Tax Rates, Los Angeles County Tax Collector.

Tax Rate Area# 4 is used to illustrate the breakdown of a tax rate within the City and applies to most property within the City of Los Angeles.

! 1.100000 +----+---+---+------+---+----+----+----+------+--

~ 1.080000

~ ..e 1.osoooo +-----l---~---+------+-- 1.040000

1.020000

1.000000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal Years

- 292 - CITY OF LOS ANGELES

TEN LARGEST PROPERTY TAXPAYERS 2003-04 SECURED ASSESSED VALUATION

SECURED ASSESSED NAME VALUATION

Tosco Corporati.on $ 798,205, 186

Douglas Emmett Realty Funds 1995-2000 796,607,999

Ultramar Inc. 786,783,561

Anheuser-Busch Inc. 722,041,340

Equilon Enterprises LLC 647,798,597

One Hundred Towers LLC 511,890,334

Maguire Partners 355 S. Grand LLC 446,436,322

2121 Avenue of the Stars LLC 352,695,600

Paramount Pictures Corp. 347,769,229

Duesenberg Investment Company 323,930,616

TOTAL $ 5,734,158,784

Source: California Municipal Statistics

· 293 · CITY OF LOS ANGELES

SPECIAL ASSESSMENT BILLINGS AND COLLECTIONS LAST TEN FISCAL YEARS (dollar amounts expressed in thousands)

Special Special Fiscal Assessment Assessment Year Billings Collected

1994-95 $ 41,594 $ 41,182

1995-96 45, 114 47,286

1996-97 83,910 80,480

1997-98 95,010 97,918

1998-99 98,023 96,739

1999-00 100,925 97,343

2000-01 107,291 105,130

2001-02 108,080 105,298

2002-03 107,100 109,834

2003-04 114,531 115,861

$120,000

$100,000 "' ].. $80,000 ~ "'0 -(=. $60,000 .5

$40,000

$20,000

so 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal Years

El Special Assessment Billings • Special Assessment Collected

- 294 - CITY OF LOS ANGELES

STATEMENT OF LEGAL DEBT MARGIN JUNE 30, 2004

General Fund Receipts $ 3,585,316,653 (a)

Multiplied by 15% (b)

Maximum debt service level for all voter-approved and non-voter approved debt 537,797,498

Deduct- Debt service levels: Non-voter approved $ 141,008,595 Voter-approved 136,739,299 277,747,894

Legal Debt Margin- 48.35°/o of maximum debt service level $ 260,049,604

General Fund Receipts $ 3,585,316,653 (a)

Multiplied by 6% (b)

Maximum debt service level for non-voter approved debt 215,118,999

Deduct- Debt service level for non-voter approved debt 141,008,595

Legal Debt Margin -34.45% of maximum debt service level for non-voter approved debt $ 74,110.404

Notes: (a) General Fund receipts are on a non-GAAP budgetary basis and include budgeted operating transfers from certain funds. The amounts have been adjusted upwards to reflect bond proceeds to pay for capitalized interest.

{b) Council File Nos. 98-0459 and 98-0459-51 The 6o/o maximum non-voter approved debt service level can be exceeded in two instances: (1) There is a guaranteed new revenue stream for the debt payments and the additional debt will not cause the debt service ratio to exceed 7 .5o/o, or (2) There is no guaranteed revenue stream for the debt but the 6% ratio shall only be exceeded for one fiscal year.

- 295 - CITY OF LOS ANGELES

RATIO OF NET GENERAL BONDED DEBT TO ASSESSED VALUE AND PER CAPITA LAST TEN FISCAL YEARS

General Fiscal Year Ratio to Bonded Ended Net General Assessed Debt Per June 30 Bonded Debt Assessed Value Value Population Capita

1995 $ 410,665,000 $193,751,432,512 .21% 3,593,700 $ 114.27

1996 619,665,000 185,168,438,903 .33o/o 3,638,100 170.33

1997 587,005,000 182,685,065,873 .32°/o 3,681,700 159.44

1998 554,150,000 182,728,986,088 .30°/o 3,722,500 148.87

1999 525,915,000 187,891,702,720 .28°/o 3,781,500 139.08

2000 551,220,000 200,887,819,478 .27°/o 3,746,300 147.14

2001 602,580,000 214,846,570,333 .28°/o 3,802,700 158.46

2002 765,535,000 230,141,811,081 .33°/o 3,807,400 201.07

2003 978,120,000 244,399,750, 197 .40°/o 3,864,400 253.11

2004 1, 140,850,000 263,547,493,340 .43% 3,912,200 291.61

$1,200,000,000 4,000,000

$1,000,000,000 3,900,000 .,,- c.. ,, $800,000,000 -'.-- 3,800.000 ,,.. c: c: 0 0 m $600,000,000 · 3,700,000 .. e "''5 .. Q. c: 0 .. CL (!) $400,000,000 3.600,000 -z..

$200,000,000 3,500,000

$0 3,400,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal Years

I-Net General Bonded Debt --Population I

- 296 - CITY OF LOS ANGELES

RATIO OF ANNUAL DEBT SERVICE FOR GENERAL BONDED DEBT TO TOTAL GENERAL GOVERNMENTAL EXPENDITURES LAST TEN FISCAL YEARS (dollar amounts expressed in thousands)

Fiscal Year Total General Ended General Bonded Governmental June 30 Debt Service Expenditures Ratio

1995 $ 35,666 $ 3,512,577 1.02°/o

1996 50,302 3,720,548 1.35°/o

1997 65,995 3,878,252 1.70%

1998 64,038 4,243,332 1.51 °/o

1999 62,230 4,140,677 1.50%

2000 61,066 4,358,686 1.40o/o

2001 66,324 4,623,685 1.43o/o

2002 72,238 4,829,674 1.50%

2003 94,864 5, 120, 111 1.85%

2004 114,321 5,312,933 2.15°/o

Note: Amounts shown are on the GAAP basis and include all governmental fund types (General, Special Revenue, Debt Service and Capital Projects Funds).

$140,000 $6,000,000

$120,000 $5.000,000

$100,000 $4,000,000 u~ •! 'E $80,000 , ~ $3,000,000 "c :5"' $60,000 c.~ c~ w• $2,000,000 $40,000

$20,000 $1,000,000

$0 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal Years -+-Total General General Ill Governmental Bonded Expenditures (In Debt Service Thousands) (In thousands)

- 297 - CITY OF LOS ANGELES

COMPUTATION OF OVERLAPPING DEBT JUNE 30, 2004

Share of Debt Name of Governmental Unit Percentage{°/o} Amount"'

Los Angeles County 39.919 $ 9,368,989 Los Angeles County Flood Control District 40.556 55.701,638 Metropolitan Water District of Southern California 20.643 92,372,264 Los Angeles Community College District 70.952 477,943,315 Beverly Hills Unified School District 0.200 221,439 Inglewood Unified School District 1.272 960,487 Las Virgenes Joint Unified School District 1.326 1,125,690 Los Angeles Unified School District 86.978 3,723,976, 117 Other School Districts Various 74,367 City of Los Angeles Community Facilities District Nos. 3 and 4 100.000 145,710,000 City of Los Angeles Assessment District No. 1 100.000 12,996,494 Mountains Recreation and Conservation Authority Assessment Districts 99.976 -100.000 27,966,447 Los Angeles County Regional Park and Open Space Assessment District 39.919 117,210,000 Los Angeles County Metropolitan Transit District Benefit Assessment Districts 100.000 150, 179,270 Los Angeles County General Fund Obligations 39.919 573,653, 175 Los Angeles County Pension Obligations 39.919 527,271,068 Los Angeles County Superintendent of Schools Certificates of Participation 39.919 10,280,683 Los Angeles County Sanitation District Nos. 1,3, 4, 5, 8 and 16 Authorities 0.00005 - 12.022 9,814,365 Inglewood Unified School District Certificates of Participation 1.272 39,559 Los Angeles Unified School District Certificates of Participation 86.978 650,556,300 Las Virgines Joint Unified School District Certificates of Participation 1.326 265,200

Total Gross Overlapping Debt 6,587,686,867 Less: Los Angeles Co. COPs (100% Self-supporting from leasehold revenues on properties in Marina del Rey) (22,093,171)

TOTAL OVERLAPPING DEBT $ 6,565,593,696

Source: California Municipal Statistics, Inc. * Amounts as of 7/1104

- 298 - CITY OF LOS ANGELES

REVENUE BOND COVERAGE FOR AIRPORTS, HARBOR, POWER, WATER AND WASTEWATER BONDS LAST TEN FISCAL YEARS (dollar amounts expressed in thousands)

Direct Net Revenue Fiscal Gross Operating Available for Debt Service Reguirements Year Revenue Exeense Debt Service Princieal Interest Total Coverage

1994-95 $ 3,299,714 $ 2,755,948 $ 543,766 $ 171,168 $441,330 $ 612,498 0.89

1995-96 3,334,952 2,636,292 698,660 315,278 428,732 744,010 0.94

1996-97 3,431,297 2,708,206 723,091 149,340 471,274 620,614 1.17

1997-98 3,603,016 2,817,541 785,475 133,515 376,679 510,194 1.54

1998-99 3,663, 127 2,930,304 732,823 149,605 374,323 523,928 1.40

1999-00 4,004,547 3,110,161 894,386 154,975 357,805 512,780 1.74

2000-01 4,812,941 3,958,907 854,034 133,470 364,351 497,821 1.72

2001-02 3,939,333 3,244,534 694,799 117,190 356,748 473,938 1.47

2002-03 3,954,913 3,447,894 507,019 112,465 378,679 491,144 1 03

2003-04 4,202,597 3,628,698 573,698 144,037 393,501 537,538 1.07

Note: In 1994-1996, the amounts provided for the payment of principal and interest on the refunded bonds are included in the Debt Service Requirements but are not reflected in the Net Revenue Available for Debt Service. Prior years' revenue and expense were not adjusted to reflect the effect of certain adjustments.

$1,000,000

I $900,000 $800,000 __)____ ---+-- $700,000

'C" $600,000 ..c ~ $500,000 "0 .c I- .!: $400,000 $300,000

$200,000

$100,000

$0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal Years

Debt Service

L___ N_e_t _R_e_ve_n_u_e_A_v_;a_ila_;b_;lec_f__:o_c_r =D=eb:ctc_ __/ I - Principal c:== Interest I

- 299 - CITY OF LOS ANGELES

DEMOGRAPHIC STATISTICS LAST TEN FISCAL YEARS

Personal Fiscal Estimated Median Income Public School Unemployment 2 3 4 Year Population (il Age ( l Per Capita ! ) Enrollment ! l Rate (SJ

1994-95 3,593,700 31.8 $ 23,449 798,019 8.4°/o

1995-96 3,638, 100 32.1 24,408 808,128 8.5°/o

1996-97 3,681,700 32.4 25,239 845,267 7.4%

1997-98 3,722,500 n/a 27,220 868,583 7.2%

1998-99 3,781,500 n/a 27,973 902,135 6.4%

1999-00 3,746,300 31.4 29,235 864,225 6.1%

2000-01 3,802,700 31.3 30,368 873,560 6.7°/o

2001-02 3,807,400 32.1 30,804 894,183 6.9°/o

2002-03 3,864,400 32.7 n/a 900,436 6.9°/o

2003-04 3,912,200 nla nla 891,252 6.8°/o

(1) State Department of Finance estimates as of January 1 of each year. (2) Information from Fiscal Years 1994-95 through 1998-99 is taken from the California Department of Finance Survey for Los Angeles County; separate figures for the City are not compiled. Data for Fiscal Years 1999-00 through 2002-03 are provided by the U.S. Census Bureau -- American Community Survey 2003, Multi-Year Profile, General Demographic Characteristics for the City of Los Angeles. (www. census. g av /acs/www/P rod ucts/Profi les/C hg/2003/ AC srr a bu la r/16 0/1 6 OOOU so.) (3) U. S. Department of Commerce, Bureau of Economic Analysis (http:1/www .bea.gov/bea/regional/reis/drill.cfm) figures for Los Angeles County separate figures for the City are not compiled. (4) Los Angeles Unified School District's statistical records as of the beginning of each school year which include the City and all or significant portions of a number of smaller cities and unincorporated territories. (5) California Employment Development Department data for the City of Los Angeles. n/a • Not Available.

• 300 - CITY OF LOS ANGELES

CONSTRUCTION, PROPERTY VALUE AND BANK DEPOSITS LAST TEN FISCAL YEARS (dollar amounts expressed in thousands)

Authorized Property Value Fiscal Year New of New Units Ended Dwelling Non- Bank June 30 Units Residential Residential Deposits*

1995 1,668 $ 1,029,978 $ 1,237,016 $ 36,916,927

1996 2, 119 814,491 944,456 32,954,527

1997 3,103 877,155 970,079 36,223,216

1998 3,678 613,439 1,410,737 34,494,521

1999 3,577 635,971 1,602,881 35,440,077

2000 6,902 869,562 2,090,292 37,075,135

2001 9,331 1,737,314 1,414,762 40,374,533

2002 5,469 786,644 1,606,379 48,718,852

2003 10,733 1,814,866 1,079,147 61,317,797

2004 8,598 2,302,012 1,039,991 51,166,102

* Source: Internet http//www.fdic.gov/sod//sodinstBranchRpt.asp. Amounts are based on fiscal years ending June 30 and cover all banks located in the City of Los Angeles.

- 301 - CITY OF LOS ANGELES

MISCELLANEOUS STATISTICS Juno 30, 2004

Year of Incorporation 1850

Year of Current Charter adoption 1999

Form of government Mayor/Council

Area (square miles) 470

Centerline miles of streets 7,221

Number of street lights 242,000

Fire Protection: Number of stations 103 Number of firefighters 3,382

Police Protection: Number of stations 18 Number of police officers 9,095

Education: Number of schools and centers* 1,001 Number of major universities 6 Number of community colleges 7

Recreation and Culture: Community centers 232 Golf courses 13 Libraries 72 Museums 7 Park acreage 15,600 Parks 389 Swimming pools 59 Tennis courts 287

Energy Services: Kilowatt hours sold (billions) 1, 161 Customers - average number (thousands) 1,428 Energy production (billion kwh) 24,386 Net system capability (megawatts) 7,093

Continued ...

Data from Los Angeles Unified School District which covers the City of Los Angeles and a number of smaller cities and unincorporated territories.

- 302 - CITY OF LOS ANGELES

MISCELLANEOUS STATISTICS (Continued) June 30, 2004

Water Services: Gallons sold (billions) 203 Customers - average number (thousands) 662 Net water supply (billions of gallons) 225

Port of Los Angeles: Miles of waterfront 43 Number of major container terminals 26 Inbound tonnage (million tons) 103.9 Outbound tonnage (million tons) 58.1

Airports: Number of airports 4 Aircraft movements (thousands) 1,280 Passengers (millions) 65 Air cargo (thousand tons) 2,661

Sewerage system: Miles of sanitary sewers 6,500 Miles of storm sewers 1,500

Total employees 44,650

- 303 - This page intentionally left blank

- 304 - APPENDIX C

SUMMARY OF CERT Al N PROVISIONS OF THE TRUST AGREEMENT

The follc:Ming is a surrmary of certain prc:wisions contained in the Master Trust Agreement and the Fifth Supplemental Trust Agreement and is not a full description or statement thereof. In addition to the prc:wisions surrmari,ed belcw, certain prc:wisions of the Master Trust Agreement and the Fifth Supplemental Trust Agreement are described earlier in the Official Statement. Reference should be made to complete copies of the Master Trust Agreement and the Fifth Supplemental Trust Agreement for a full description of their terms.

MASTER TRUST AGREEMENT

"Acquisition Fund' shall mean the fund or funds held b,r the Trustee or the City consisting of a portion of the proceeds of the Bonds used to pay the Costs of a Prqject.

"Additional Bonds" shall mean the indebtedness issued pursuant to Section 2.09 of the Master Trust Agreement.

"Authori2ed City Representative'' shall mean the City Administrative Officer, any Assistant City Adninistrative Officer, cr such other official cr emplo,ree of the City designated as an AuthoriLEd City Representative in a Supplemental Trust Agreement or b,r written notice to the Trustee signed b,r the City Adninistrative Officer. Any action required or authori,ed to be taken b,r the City in the Master Trust Agreement cr any Suppemental Trust Agreement may be taken b,r an Authori,ed City Representative to the extent authcriLEd b,r a Sur;plemental Trust Agreement or such written notice.

"Bond" or "Bonds'' shall mean any evidence of indebtedness of the City issued under and in accordance with the prc:wisions of Article II of the Master Trust Agreement, including, but not linited to the Initial Bonds and all Additional Bonds issued pursuanttothe Master Trust Agreement.

"Bond Counsel" shall mean an attorne,r cr firm of attorneys acceptilie to the City who are natiaially recogniLEd as experts in the area of municipal finance and who are faniliarwith the transactions caitemplated underthe Master Trust Agreement.

"Bondholder," "holder," "cwner" or" registered cwner" shall mean the person in whose name any Bond cr Baids are registered ai the oocks maintained b,r a Regstrar and shall include any Credit Prc:wider or Liquidty Prc:wider to which a Repayment Obligatiai is then cwed, to the extent that such Repayment Obligation is deemed to be a Bond underthe prc:wisions of Section 2.1 Oof the Master Trust Agreement.

"Business Day'' shall mean any day other than a Saturday, a Sunday or a day on which banks in the State of Califcrnia or the City in which the principal corporate trust office of the Trustee is located are authoriLEd or obligated b,r I.M' or executive crdertoclose.

"Charter" shall mean the Charter of the City of Los Angeles, as amended frorntimetotime.

"City'' shall mean the City of Los Angeles, California.

"City Attorney'' shall mean legal counsel to the City who otherwise acts as pro.tided for in Section 42 of the Charter.

C-1 "Code'' shall m2a11 the I ntemal Re.tenue Cale of 1986, as arrended, and the United States Treasury Regul ati ons applicable thereto.

" Consultant'' shal I m2a11 any I ndepcndent consultant, consulting firm, engineer, architect, eng neeri ng firm, architectural firm, accamtant or accounting firm, or other expert recognized to be wel 1-qual i fi ed fcr wcrk of the character required and retained by the City to perform acts and carry out the duties pr0.tided for such consultant in the Master Trust A greerrent.

"Continuing Disclosure Certificates" means those certain Continuing Disclosure Certificates executed by the City, dated the date of issuance and delivery of a Series of Bonds, as orignally executed and as may be arrended from ti me to ti me.

"Corporation Representative'' m2a11s any r:ersai designated by the Board of Directcrs of the Municipal I mpr0.tement Corporation of Los Angeles, a non-profit public benefit corporation duly crganized and existing under and by virtue of the l.ws of the State to act on behalf thereof with respect to the Master Trust Agreement.

"Costs'' or "Costs of a Prqject" shall m2a11 all costs of planning, developing, financing, caistructing, installing, equipping, furnishing, impr0.ting, accµiring, enlarging andft)r ren0.tating a Prqject and placing the sarre in service.

"Credit Facility'' shall m2a11 a policy of municipal oond insurance, a letter of credit, surety oond, line of creclt, guarantee, standby purchase agreement cr ether financial instrument which cbligates a third party to make payment of or pr0.ti de funds to the Trustee for the payment of the pri nci pal of and/or i nterest on Bands.

"Credit Pr0.tider" shall m2a11 the party obligated to make r:avment of principal of and interest on Bonds under a Credit Facility.

"Debt Service'' means, for arty Fiscal Year, the sum of (1) the interest accruing during such Fiscal Year on all Bonds (including all OutstandngAdditional Bonds) and all Outstanding Parity Bonds, assuming that all Outstanding serial Bonds and all Outstanding serial Parity Bonds are retired as scheduled and that all Outstanding term Baids and all Outstanding term Parity Bonds are prepaid or paid from sinking fund payments as scheduled (except to the extent that such interest is to be paid from the proceeds of sale of any Outstanding Bonds or Outstandng Parity Bonds), (2) that portion of the principal amount of all Outstanding serial Bonds and Outstanding serial Parity Bonds maturing in such Fiscal Year or maturing in the next succeeding Fiscal Year accruing during such Fiscal Year in each case call)Uted as if such principal maturity were deemed to accrue daily during such Fiscal Year in equal amounts 0.ter a twelve--m:Jnth µcried ending ai the maturity date, and (3) that portiai of the principal amount of all Outstandng term Bonds and all Outstandngterm Parity Bonds required to be prepaid cr paid in such Fiscal Year cr during the next succeeding Fiscal Year in each case corrputed as if such principal anrunts were deemed to accrue daily during such Fiscal Y ear in equal anrunts 0.ter a twelve--m:J11th pcri eel end ng on the payment or prepayment date; pr0.tided that, as to any such Bonds and Outstanding Parity Bonds bearing or comprising interest at other than a fixed rate, the rate of interest used to cal cul ate Debt Service shal I be me hundred ten percent ( 11036 ) of the greater of (a) the daily average interest rate on such Baids and Outstanding Parity Bonds during the twelve (12) calendar maiths preceding the date of cal cul ati on (or the pcrti on of the then current Fi seal Year that such Bands and Outstand ng Parity Baids have oorne interest) cr (b) the most recent effective interest rate on such Baids and Outstand ng Parity Baids prior to the date of cal culati ai; and pr0.ti ded furtherthat if any series or issue of such Bonds and Outstanding Parity Bonds have twenty-five percent (25%) or more of the aggregate principal amount of such series cr issue due in any aieyear, Debt Service shall be deternined fcrthe Fiscal Year of deternination as if the principal of and interest on such series or issue of such Bands and Outstand ng Parity Bands were being paid from the date of incurrence thereof in substantially ecµal annual amounts 0.ter a µcried of ten (10)

C-2 years fran the date of calculation; and provic:W further that, as to any such Bonds and Outstanding Parity Bonds or p:irtions thereof bearing no interest l:utwhich are sold at adiscoont and which dscount accretes with respect to such Bands and Outstanding Parity Bands cr p:irti ans thereof, such accreted discount shal I be treated as interest in the calculation of Debt Service at maturity in the year in which it matures; and provic:W further that the anrunt on dep:isit in a debt service reserve fund on any date of calculation of Debt Service shall be c:Wucted from the armunt of principal due at the final maturity of the Bands and Outstanding Parity Bands for which such debt service reserve fund was established and in each preceding year until such armunt is exhausted.

"Debt Service Fund' shall mean the Debt Service Fund required to be created b,r Section 4.03 of the M aster Trust Agreement.

"Event of Default" shall mean any occurrence or event specified in Section 7.01 of the Master Trust Agreement.

"Fiscal Year" shall mean the period ohime beginning onJ uly 1 of each given year and ending aiJ une 30ofthe imrediately sub,equentyear, or such othertwelve--m:l'lth period as the City designates as its fi seal year.

"Government Obligations'' shall mean (1) United States Obligatiais (includng obligations issued or held in book-entry form) and (2) prerefunc:W municipal obligations meeting the follcwing conditions: (a) the municipal obligations are not suqject to redemption prior to maturity, or the trustee has been given irrevocable instructions concerning their calling and redemption and the issuer has covenanted not to redeem such obligations other than as set forth in such instructions; (b) the municipal obligations are secured b,r cash and/or United States Obligations, which United States Obligations may be applied only to interest, principal and prenium plyments of such municipal obligations; (c) the principal of and interest on the United States Obligatiais (pus any cash in the escrcw fund) are sufficient to meet the liabllities of the municipal obligations; (d) the United States Obligations serving as security for the municipal obligations are held b,r an escrcw agent cr trustee; (e) the United States Obligations are not available to satisfy any other claims, includng those against the trustee or escrcw agent; and (f) the municipal obligations are rated in the highest rating category of any Rating Agency which then maintains a rating on any of the Bonds.

"Independent" shall mean, when used with respect to any specified firm or indvidual, such a firm or individual who (i) does not have any drect financial interest cr any material indirect financial interest in the operatiais of the City, other than the pic¥ment to be received under a contract fcr services to be perfonred, and (ii) is not cainectedwith the City as an official, officer or errplo,ree.

"Initial Bonds" shall mean the $86,640,CXXl Sanitation Equipment Charge Re.tenue Bonds, Series 2001-A authorized pursuanttothe First Supplemental Trust Agreement.

"Liquidity Facility'' shall mean a letter of credit, line of credt, standb,r r:urchase agreement or other financial instrument, including a Credit Facility, which is available to provide funds with which to purchase Bonds.

"Liquidity Provider" shall mean the entity, including aCredt Provider, which is obligated to provide funds to purchase Baids undertheterms of a Liquidity Facility.

" Master Trust Agreement'' shal I mean the Master Trust Agreement dated as of September 1, 2001 between the City and the Trustee, as the same may be amenc:W from ti me to ti me.

C-3 "MaxirrumAnnual Debt Service" shall mean the g-eatest Debt Service in any Fiscal Year during the pericx:l begnning with the current Fiscal Year and ending with the Fiscal Year in which the last Outstandng Bands mature b,r their term;.

"Notes" shall mean Baids issued under the p-O!isiais of Article 11 of the Master Trust Ag-eement, which have a maturity of one year or Iess from their date of original issuance.

"Operations and Maintenance Expense Fund' shall mean the fund b,r that name created pursuant to Section 4.04(a) of the Master Trust Agreement.

"Outstanding'' when used with resr:ect to Bonds shall mean all Bonds, which have been authenticated and delivered underthe Master Trust Agreement, except:

(a) Bonds cancelled or purchased b,r the Trustee for cancellation or delivered to or acqui red b,r the Trustee for cancel I ati on and, i n al I cases, with the i ntent to extinguish the debt represented thereb,r;

(b) Bonds deemed to be paid in accordance with Article VI of the Master Trust Agreement (Defeasance);

(c) Bonds in lieu of which other Bonds have been authenticated under Sections 2.05, 2.06 or 2.07 of the Master Trust Agreement;

(d) Bonds that have become due (at maturity or on redemption, acceleration or otherwise) and for the payment of which sufficient moneys, including interest accrued to the due date, are held b,r the Trustee or a Paying Agent;

(e) Bonds which, under the term; of the Supplemental Trust Agreement pursuant to which they were issued, are deemed to be no longer Outstanding;

(f) Repayment Obligations deemed to be Bonds under Section 2.1 O of the Master Trust Agreement; and

(g) for purposes of any consent or other action to be taken b,r the holders of a specified percentage of B ands under the Master Trust Agreement, B ands kncwn to the Trustee to be held b,r or for the account of the City or b,r any person controlling, controlled b,r or under common control with the City.

"Outstanding Parity Bonds" shall mean all revenue bonds, contracts (whether in the form of installment purchase agreements, lease or sublease agreements, or otherwise) or notes of the City, authorized, executed, issued and delivered b,r the City prior to the date of execution and delivery of the Master Trust Agreement, the payments of which are on a parity with the Bands, said Outstanding Parity Bonds consisting of the base rental payments and installment payments supporting the Series 1995-A Bonds, the Series 1996-A Bonds, the Series 1997-A Bonds, the Series 1997--B Bonds, and the Series 1999- A Bonds.

"Paying Agent'' or" Paying Agents'' shall mean, with resr:ect to any Bonds cr Series of Bonds, the Treasurer or such banks, trust companies or other financial institutions or other entities designated in a Sur;pl ernental Trust Agreement as the pl ace where such Bands shal I be payable.

C-4 "Pernitted I rwestrrents" shall m2a11 any of the follcwing securities if and to the extent the sarre are µemitted by I.M' and shall include such other securities as are set rut in an ar;pliGilie Supplemental Trust Agreement:

(1) Cash (insured at all times by the Federal Deposit Insurance Corporation or otherwise collateralizedwith obligations described in paragraph (2) belcw);

(2) Direct obligations of (including obligations issued or held in book entry form on the books of) the Department of the Treasury of the United States of America;

(3) Obligations of any of the follcwing federal agencies which obligations represent the full faith and credit of the United States of America, including:

• Export--1 mport B ank • Farm Credit System Financial Assistance Corporation • Farmers Home Admi ni strati on • General Service Administration • U.S. Maritime Administration • Small BusinessAdninistration • Gc:wernment National Mortgage Association • (GNMA) • U.S. Department of Housing& Urban Development • (PHA's) • Federal Housing A dni ni strati on

(4) senicr del:t obligatims rated "AAA" by S&P and "Aaa'' by Mcxrl/s issued by the Federal National Mortgage Association or the Federal Horne Loan Mortgage Corporation;

( 5) U .S. dol Iar denoni nated deposit accounts, federal funds and banker's acceptances with domestic commercial banks, which have a rating on their short-term certificates of deposit on the date of purchase of" A-1" or "A-1 +'' by S& P and "P-1" by M CXJay' s and maturing no more than 360 c:a,rs after the date of purchase. (Ratings m hd ding cornpani es are not considered as the rating of the bank);

(6) commercial paper which is rated at the time of purchase in the single highest classification, "A++" by S&P and "P-1 by Mcxrl/s and which matures not more than 270 days after the date of purchase;

(7) irwestments in a money market fund rated "AAni' or "AAm-G" or better by S& P;

(8) Pre-refunded Municipal Obligations defined as follcws: Any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local gc:wernmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obi i gor to cal I on the date specified i n the notice; and

(A) which are rated, based on an irrevocable escrcw account or fund (the "escrcw''), in the highest rating category of S& P and MCJOdy's or any successors thereto; or

C-5 (B) with the prior written approval of S&P, (i) which are fully secured as to pri nci pal and interest and rederll]ti on premium, if any, b,r any escrcw consisting only of cash or obligations described in paragraph (2) aro;e, which escrcw may be applied only to the payment of such pri nci pal of and i nterest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified rederll)tion date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which escrcw is sufficient, as verified b,r a nationally recognized independent certified public accountant, to pay principal of and interest and rederll)tion premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to aro;e, as appropriate;

(9) investment agreements approved in writing for a Series of Bonds b,r the appl i Gille Credit Provider, sur:,:xirted b,r apr:ropri ate opinions of counsel, with notice to S& P;

( 1O) ether investments and form; of investments (including repurchase agreements) approved in writing fcr a Series of Bonds b,r the ar;plicable Credit Provider, with nctice to S& P;

(11) the State of California Local Agency Investment Fund (LAI F); and

(12) the City Treasurer's general pooled investment fund; provided that such fund is rated "AA" or better b,r S& P or "Aa' or better b,r Moody's.

"Project" shall mean any and all equipment, property and facilities financed or to be financed in whole cr in part with proceeds of one or more Series of Bonds, or any refinancings thereof.

"Rating Agency'' shall mean a nationally recognized rating agency providing a rating for any Outstand ng Bands and the Outstand ng Parity Baids.

"Rebate Fund" shall mean any fund created b,r the City pursuant to a Suppemental Trust Agreement in connection with the issuance of any Baids fcr the r:urpose of carplying with the Code and providing for the col Iecti on and hd ding for and payment of armunts due to the United States of America

" Rederll)ti on Account" shal I mean any of the Redemption Accounts created pursuant to Section 4.03 of the Master Trust Agreement and further described in a Supp emental Trust Agreement.

"Refundng Baids'' shall mean any Bonds issued pursuant to Article II of the Master Trust Agreement to refund or defease all or a p:lltion of any Outstandng Bonds cr Outstanding Parity Bonds or Subordinated Obi i gati ons.

"Registrar" shall mean, with respect to any Bonds, the l:ank, trust conµmy or other entity designated i n a Supplemental Trust A greementto perform the function of Registrar underthe Master Trust Agreement or any Suppemental Trust Agreement, and which entity has accepted the position in accordance with Section 8.12 of the MasterTrustAgreement.

"Repayment Obligations" shall mean an obligation arising under a written agreement of the City and a Credit Provider r:ursuant to which the City agrees to reimburse the Credit Provider for armunts paid through a Credit Facility to be used to pay debt service on any Bonds or an obligation arising under a written agreement of the City and a Liquidity Provider pursuanttowhich the City agrees to reimburse the Liquidity Provider for armunts paid through a Liquidity Facility to be used to purchase Bonds.

C--6 " Reserve Fund' shal I mean the trust fund and the accounts therein created pursuant to Section 4.03(c:) of the Master Trust Ag-eement and that is required to l:e funded fcr the purJX6e of providng additi anal security fcr Outstanding Baids issued pursuant to the term; of the Master Trust Agreement and the Outstand ng Parity Baids.

"Reserve Fund Surety Policy'' shall mean an insurance policy, surety bond or a letter of credit dep:15itedwith the Trustee for the credit of a bond reserve account within the Reserve Fund in lieu of or partial sub,titution for cash or securities ai dep:15ittherein.

"Reserve Requirement'' means, with respect to each series of Baids, as of the date of calculatiai, the least of (a) the rrnxirnum annual Debt Service with respect to such series of Bonds, (b) 125% of the average annual aggregate Debt Service with respect to such series of the Balds, and (c:) 10)6 of the prcx:eeds of such series of Balds; provided, hcwe..rer, the Reserve Requirement with respect to the Outstanding Parity Bonds and all series of Bonds combined shall not exceed the maximum annual Debt Service with respect to the Outstanding Parity Bonds and all series of Bonds combined.

"Responsible Officer" shall mean an officer, trust officer or assistant trust officer of the Trustee assigned b,r the Trustee to adni ni ster the Trust Agreement.

"Re..renues'' means (1) the Sanitation Equiprrent Charge received b,r the Sanitation Equiprrent Charge Special Re..renue Fund after deduction of adni ni strati on charges b,r the Department of Water and Pcwer of the City, (2) any ether legally availalje income, rates, fees, charges and other moneys which the City designates b,r ordinance or resol uti ai fcr dep:15it in the Sanitation Equi prrent Charge Special Re..renue Fund, and (3) the earnings on and income derived frcrnthe investment of the armunts set forth in clause(l) and (2) abcwe andfromarmunts on dep:15it in the Reserve Fund.

"Sanitation Equiprrent Charge" shall mean the sanitation equiprrent charge imp::t,ed b,r Section 66.40 et seq of Article 6.1 of Chapter VI of the Municipal Code of the City, including penalties and del i nquenci es, as such charge may l:e revised from ti me to ti me.

"Sanitation Equiprrent Charge Special Re..renue Fund' shall mean the fund b,r that name created pursuant toArtide 7 of Chapter 6 of Division 5 (Sectiai 5.121.5) of theAdninistrative Code of the City, or any successor fund held b,r the City.

"Series 1995-A Bonds" shall mean the $31,500,CXXl Municipal Improvement Corporation of Los Angeles Sanitation Equiprrent Charge Revenue Bonds Series 1995-A, dated February 1, 1995.

"Series 1996-A Bonds" shall mean the $23,420,CXXl Municipal Improvement Corporation of Los Angeles Sanitation Equiprrent Charge Revenue Bonds Series 1996-A, dated Deceml:er 1, 1996.

"Series 1997-A Baids'' shal I mean the $15,585,CXXl Municipal Improvement Corporation of Los Angeles Sanitation Equiprrent Charge Re..renue Bonds Series 1997-A, datedJ anuary 15, 1997.

"Series 1997--B Bonds" shall mean the $42,0SO,CXXl Municipal Improvement Corporatiai of Los Angeles Sanitation Equipment Charge Re..renue Bonds Series 1997--B, dated Noveml:er 15, 1997.

"Series 1999-A Bonds" shall mean the $22,255,CXXl Municipal Improvement Corporatiai of Los Angeles Sanitation Equipment Charge Re..renue Bonds Series 1999-A, datedJ anuary 1, 1999.

C-7 "Series 2003-A Bonds" shall mean the $47,825,CXXl Sanitation Equiprrent Charge Revenue Bonds, Series 2003-A authorized pursuant to the Second Supplemental Trust Agreement, dated April 1, 2003.

"Series2003--B Bonds" shall mean the $61,120,CXXl Sanitation Equiprrent Charge Revenue Bonds, Series 2003--B authorized pursuant to the Third Supplemental Trust Agreement, dated December 1, 2003.

"Series 2004-A Bonds" shall mean the $56,230,CXXl Sanitation Equiprrent Charge Revenue Bonds, Series 2004-A authorized pursuant to the Fourth Supplemental Trust Agreement, dated March 15, 2004.

"Series 2005-A Bonds" shall mean the $45,750,CXXl Sanitation Equiprrent Charge Revenue Bonds, Series 2005-A authorized pursuant to the Fifth Supplemental Trust Agreement, dated July 1, 2005.

"Series' shall mean Bonds designated as a separate Series b,r a Supplemental Trust Agreement.

"State'' shall mean the State of California.

" Subordinated Obi i gati on" shal I mean any bond, note or other i ndebtedness issued or incurred b,r the City which ranks junior and subordinate to the Bonds.

"Supplerrental Trust Agreerrent'' shall mean any dcx:ument supplementing or amending the Master Trust Agreement or pr0.tiding for the issuance of Bonds and entered into as pr0.tided in Article VI 11 of the M aster Trust Agreement.

"Treasurer" shall mean the Treasurer of the City as set forth in the Charter.

"Trustee" shall mean the entity named as such in the heading of the Master Trust Agreement unti I a successor replaces it and, thereafter, shal I mean such successor.

" United States Obligations'' shall mean drect and general cblig31iais of the United States of Arrerica, or cbligations that are uncaidtiaially guaranteed as to principal and interest b,r the United States of Arrerica, including, with respect aily to drect and general cbligations and not to guaranteed cblig31ions, e.tidences of OM1ership of prop:l'tiaiate interests in future interest andµ principal payments of such obligations, p-0.tided that investments in such p-q:iortiaiate interests must be linited to circumstances wherein: (1) a bank or trust conµmy acts as custodian and hdds the underlying United States Obligations; (2) the OM1er of the investrrent is the real party in interest and has the right to r:roceed drectly and indvidually against the cbligcr of the underlying United States Obligations; and (3) the underlying United States Obligations are held in a special accoont separate fran the custcclan's general assets and are not available to satisfy any claim of the custodan, any person claining throogh the custodian cr any person to whom the custodian maybe obligated." United States Obligations" shall include any stripped interest or principal portion of United States Treasury securities and any stri pped interest portion of Resol uti on Trust Corporation securities.

ISSUANCE OF BONDS

Issuance of Bonds, Form. Bonds may be issued b,r the City under the terms of the Master Trust Agreement fcr any purp:ise payable from the Sanitation Equiprrent Charge Spccial Re.tenue Fund for which the City, at the tirre of such issuance, may incur such debt. Baids may be issued under the Master Trust Agreement aily if the pr0.tisions of Sections 2.08 and 2.09 thereof are satisfied. Bonds may be in

C--8 certificated or uncertificated form. Bonds issued in certificated fcrm may be freely transferalje or may be immblized and held b,r a custcx:lian for the beneficial cwners, all as shall be set forth or µemitted in the Sur;plemental Trust Agreement providing for the issuance of such Bonds. Bonds may have notations, Iegends or endorsements recµi red b,r I.w or usage and shal I be numbered and dated as provided in the app i calj e Supplemental Trust Agreement.

All Baids shall state that the,r are issued under and secured b,r the Master Trust Agreement and shall further contain a statement sub,tanti ally to the fol Icwi ng effect:

"Neither the faith and the credit nor the taxing p::wer of the City of Los Angeles, the State of California or any public agency, otherthan the City of Los Angeles to the extent of Revenues, is pledged to the payment of the pri nci pal of, preni um, if any, or interest on, this B and."

Terms, Medium and Place of Payment. Bonds shall be issued in the principal amount, shall bear interest at a rate cr rates, which may include a rate of 0)6 andµ including vari alj e or aj ustabl e rates or rates set b,r auction, or b,r such ether methods as the City may deternine, and such interest may be payable pcricx:lically, in whole or in part, or may be accumulated and paid at maturity or at such other time or times as the City shall deternine. Bonds shall mature and shall be suqject to rederrptiai pricr to their resr:ective maturities, all as shall be set forth in the applicable Supplemental Trust Agreement. Payments with respect to the Bands shal I be made as provided i n the Supplemental Trust Agreement provi di ng for the issuance of such B ands, which provi si ans shal I include the designation of the currency in which such payments shal I be made. In addition, each such Supplemental Trust Agreement may provide for the appointment of a Registrar cr Regstrars and a Paying Agent cr Paying Agents and such other agents as the City shall determine to be necessary in addition to or in place of the Trustee.

Execution andAuthenticatiai. Bonds, if in certificated fcrm, will be signed fcr the City as provided in the Supplemental Trust Agreement or in a resdutiai of the City authorizing such Bonds. A Bond in certificated form will not be valid until the Trustee or its agent or an authenticating agent designated b,r the City manually signs the certificate of authentication on the Bond. Such signature will be conclusive evidence that the Bond has been authenticated under the Master Trust Agreement. Different authenticating agents may be appointed for different Series of Bonds.

With respect to Bonds issued under the Master Trust Agreement in uncertificated form, the procedures for issuance and delivery and evidence of validity, cwnership, transfer and exchange shall be as provided in a Supplemental Trust Agreement, and neither the provisions of this Sectiai nor any ether provision of the Master Trust Agreement shall be deemed to prohibt or restrict the issuance of uncertificated Bonds.

Bond Register. Bonds of each Series may be presented at the principal corporate trust office of the Registrar for such Series, unless a dfferent office has been designated for such purpose, for regstratiai, transfer and exchange. The Regstrar for a Series of Baids will keep a register of such Series of Bonds and of their transfer and exchange.

Issuance of Series of Bonds; Supplemental Trust Agreement; Application of Bond Proceeds. Bands, incl udi ng Refunding Bands, may be issued, from ti me to ti me under the Master Trust Agreement, provided that prior to or simultaneously with the original delivery of each Series of Bonds there shall be fi I ed with the Trustee the fol I cwi ng:

(i) an original executed counterpart or a cop,r of the Master Trust Agreement, together with al I prior Supplemental Trust Agreements;

C--9 (ii) an original executed counterpart or a cop,r of the Supplemental Trust Agreement or Supplemental Trust Agreements providing for the issuance of such Series of Bonds and setting forth the terms of such Series of Bonds;

(iii) the certificate of the Authorized City Representative or the Consultant or Consultants, if any, required b,r Section 2.09 of the Master Trust Agreement (coverage test for issuance of Bonds);

(iv) a certificate of the Authorized City Representative stating that none of the Events of Default have occurred and remain uncured;

(v) an opinion of Bond Counsel to the effect that the issuance of such Bonds has been duly authorized and that the Bonds are valid and binding obiigations of the City; and

(vi) written instructions from the City to authenticate the Bonds and, upon receipt of the purchase price, to deliver the Bonds to or upon the order of the purchasers named in such instructions.

When the documents mentioned in clauses (i) to (vi), inclusive, of the immediately preceding paragraph shall have been filed with the Trustee and when such Bonds shall have been executed and authenticated, the Trustee or authenticating agent shall deliver such Bonds to or upai the order of the r:urchasers thereof, rut only upai payment b,r the purchasers of the purchase price of such B ands.

Test for Issuance of Bonds. The City may at any time issue Bonds, including any Additional B ands, in accordance with the Master Trust Agreement; provided:

(a) The Revenues for the most recent Fiscal Year for which the City has unaudited financial statements certified b,r a City Representative preceding the date of adoption b,r the City Council of the City of the resolution authorizing the issuance of such Bonds, as evidenced b,r a calculation prepared b,r the City Representative on file with the Trustee, shall have produced a sum equal to at I east one hundred ten percent ( 11036) of the Debt Service for such Fiscal Year; and

(b) The Revenues for the most recent Fiscal Year preceding the date of adoption b,r the City Council of the City of the resolution authorizing the issuance of such Bonds, including adjustments to give effect as of the first day of such Fi seal Year to increases or decreases in the Sanitation Equipment Charge or other rates and charges described in clause (2) of the definition of Revenues approved and in effect as of the date of calculation, as evidenced b,r a calculation prepared b,r the City Representative and on file with the Trustee, shall have produced a sum equal to at least one hundred ten percent (11036) of the Debt Service for such Fiscal Year plus the Debt Service which would have accrued had such proposed Bonds been issued at the beginning of such Fiscal Year; and

(c) The estimated Revenues for the then current Fiscal Year and for the first Fiscal Year thereafter, as evidenced b,r a certificate of the City Representative on file with the Trustee, plus an allcwance for estimated Revenues for each of such Fiscal Years arising from any increase or decrease in the Sanitation Equipment Charge or other rates and charges described in clause (2) of the definition of Revenues estimated to be fixed and prescribed to the extent such increases or decreases shal I take effect during such period, as evidenced b,r a certificate of the City Representative on file with the Trustee, shall produce a sum equal to at

C-10 I east one hundred ten percent ( 11036) of the estimated maxi mum annual Debt Service for each of such Fi seal Years, after giving effect to the issuance of such proposed Bands.

The tests set fath al:ote shall nct be recµired for the issuance of Refunding Bonds (other than Refundng Baids issued to refund cr defease Subcrdnate Oblig3tiais) if the City shall instead deliver to the Trustee a certificate of an Authorized City Representative shewing that Maximum Annual Debt Service on all Outstandng Baids and Outstanding Parity Bonds payable from the Revenues after the issuance of said Series of Refunding Bonds will not exceed the Maximum Annual Debt Service on all Outstanding Bonds and Outstanding Parity Bonds payable from the Revenues prior to the issuance of said Series of Refunding Bonds. In addition, the documents relating to each series of Additional Bonds issued in accordance with the Section shall provide that, prior to or simultaneous with the issuance of such series of Bonds, there shall be deposited into the Reserve Fund an armunt equal to the difference between the Reserve Requirement for the Outstanding Bonds, the Outstanding Parity Bonds and the mw Bonds and the amount on deposit therein on the date of issuance of the nav Bonds. Notwithstanding the foreg:iing, such deposit may be in the formofaCredt Facility as provided in Section 4.07 of the Master Trust Agreement.

For purposes of this test, the calculation of Revenues shall not include, for any Fiscal Year, the amount deposited or to be deposited into the Operations and Maintenance Expense Fund relating to such Fi seal Year.

Repayment ObligatiaisAfforded Status of Bonds. If a Credit Provider or Liquidity Provider makes payment of principal of a Band or ad.tances funds to purchase or provide for the purchase of Bands and is entitled to reimbursement thereof, pursuant to a separate written agreement with the City, but is not reimbursed, the City's Repayment Obligation under such written agreement may, if so provided in the written agreement and to the extent provided in such agreement and the applicable Supplemental Trust Agreement( s), be afforded the status of a Band issued under the Master Trust Agreement.

REVENUES AND FUNDS

Bonds Secured by Pledge of and Lien on Revenues. All Revenues and all amounts on deposit in the Sanitation Equipment Charge Special Revenue Fund are hereby irrevocably pledged to the payment of the Bonds as provided herein and to the payment of any Outstanding Parity Bonds, and the Revenues shal I not be used duri ng any month of any Fi seal Y ear for any other purpose if any of the transfers required by Section 4.04 or 4.06 of the Master Trust Agreement are del i nquent; provided that, subsequent to the transfers required by Section 4.04, or Section 4.06 of the Master Trust Agreement if the alternative procedures set forth therein are uti Ii zed, there may be ar;porti med such sum, fcr such purposes as may be pemitted to be paid frcrn the Sanitatiai Equipment Charge Special Revenue Fund rut of the Revenues constituting surplus as set forth in Section 4.04(e) or 4.06(d) as applicable. This pledge shall constitute a first and exclusive lien on Revenues and, suqject to application of amounts on deposittherein as pernitted herein, the Sanitation Equipment Charge Special Revenue Fund and the other funds and accounts created hereunder for the payment of the Bond and all Outstanding Parity Bonds in accordance with the term, hereof. Excer:t for the Outstanding Parity Bonds, the City hereby represents and states that the City has not previously created any charge or lien on or any security interest in the Revenues, and the City covenants that, until all the Baids authcri zed and issued under the provi si ms of the Master Trust Agreement and the interest thereon shall have been paid or are deemed to have been paid, it will not, except as specifically provided in the Master Trust Agreement, grant any parity pledge of or any security interest in the Revenues or any of the other security which is pledged pursuant to the Granting Clause of the Master Trust Agreement, cr create cr pernittobecreatedany charge or lien thereon or any security interesttherein ranking prior to or on a parity with the charge cr I ien of the Baids frcrn ti me to ti me Outstand ng underthe Master Trust Agreement

C-11 Provisions of Trust Agreerrent Subject to Charter Provisions and City Achinistrative Cod2. The City covenants to cause the appropriations and transfers of Revenues required b,r the Master Trust Agreerrentto be made only in accordance with Section 5.121.5 of the City's Administrative Cod2 and the Master Trust Agreerrent. The City further covenants not to arrend or revise such provisions in a manner that night have a material adverse effect on the Bonds while any Bonds are Outstanding.

Establ ishrrent of Funds and Accounts.

The City hereb,r establishes or authorizes the establishrrent of the follcwing special trust funds and accounts:

(a) Acquisition Funds. Proceeds of each Series of Bonds which are to be used to pay Costs of a Prqject shall be deposited into a fund created for such Series of Bonds at the tirre of issuance of such Series which shall be designated "Sanitation Equiprrent Charge Revenue Bonds Acquisition Fund, Series ____ " (each, respectively, an "Acquisition Fund') which shall be held, maintained, disbursed and accounted for in accordance with the provisions of the Charter of the City, Section 4.08 of the Master Trust Agreerrent and, to the extent consistent therewith, the appl i cable Suppl errental Trust A greerrent.

(b) Debt Service Fund. There is created and established under the terms of the Master Trust Agreerrent a fund to be designated the "Sanitation Equiprrent Charge Revenue Bonds Debt Service Fund (the "Debt Service Fund"). There are created in the Debt Service Fund three separate accounts designated "Interest Account," "Principal Account" and "Redemption Account." There is created in the Interest Account a subaccount for each Series of Bonds. There is created in the Principal Account a subaccount for each Series of Bonds. There is created in the Redemption Account a subaccount for each Series of Bonds. The Debt Service Fund and the accounts and subaccounts therein shall be held, maintained, disbursed and accounted for b,r the Trustee in accordance with the provisions of the Master Trust Agreerrent including the provisions of Sections 4.04, 4.05 and 4.06 of the Master Trust Agreerrent

(c) Reserve Fund. There is created and established underthe terms of the Master Trust Agreerrent a fund to be designated "The Sanitation Equiprrent Charge Revenue Bonds Reserve Fund" (the "Reserve Fund'), which shall be held as a separated and distinct fund for the pro rata benefit of all Outstanding Bonds and Outstanding Parity Bonds as rreasured b,r outstanding principal amount. The City may, at the tirre of the issuance of each Series of Bonds, authorize the creation of a separate bond reserve account within the Reserve Fund for such Series, provided that any separate account established within the Reserve Fund is for accounting purposes only and does not affect the pledge of the Reserve Fund in the Granting Clause of the Master Trust Agreerrent. The Reserve Fund shall be held b,r the Trustee or any agent of the Trustee, and amounts therein shall be deposited, maintained, disbursed and accounted for in accordance with the provi si ans of Section 4.07 of the Master Trust A greerrent.

(d) Additional Funds, Accounts and Subaccounts. The City may, in its discretion, create or authorize the creation of additional funds, accounts or subaccounts for a particular Series of Bonds pursuant to the terms of a Supplerrental Trust Agreerrent, which funds or accounts may be held b,r it or the Trustee. The Trustee may create such other temporary accounts or subaccounts not inconsistent with the provisions of the Master Trust Agreerrent, which the Trustee finds to be convenient in the performance of its duties under the Master Trust A greerrent.

C-12 Receipt and Deoosit of Revenues; Withdrawals. All Revenues shall be retained by the City in the Sanitation Equiprrent Charge Special Revenue Fund except that amounts on deposit therein shall be transferred from the Sanitation Equip-rent Charge Special Revenue Fund for the follcwing purp:ises at the fol Icwi ng ti mes in the fol Icwi ng order of priority and al I moneys i n such fund shal I be held i n trust and shall be applied, used and withdrawn only for the purp:ises hereinafter authorized in the Master Trust Agreerrent:

Debt Service Fund. On the 15th day of each month corrmenci ng October 15, 2001, the City shal I transfer to the Trustee for deposit in the Debt Service Fund an amount equal to a portion of the Debt Service on the Bonds, which portion shall be calculated as follcws: (1) an amount equal to the interest the payable on each Series of Bonds on the next Payrrent Date (less any amount received as accrued interest from the proceeds of any such Bonds which is available for such interest payrrent) divided by the number of months intervening between the first day of the month in which the first transfer to the Debt Service Fund with respect to the next Payrrent Date is made and the next such Payrrent Date, plus (2) an anrunt equal to the pincipal of each Series of Bonds payable on the next principal Payrrent Date divided by the number of months intervening between the first day of the month in which the first transfer to the Debt Service Fund with respect to the next principal Payrrent Date is made and the next such principal Payrrent Date.

The City shall also transfer on the 15th day of each month to the applicable fiduciary of the Outstanding Parity Bonds for deposit in the applicable payrrent fund, without preference or priority with respect to the Master Trust Agreerrent, and in the event of any insufficiency of such moneys, ratably without any discrimination or preference with respect to the Master Trust Agreerrent, any Debt Service on the Outstanding Parity Bonds in substantially equal monthly deposits of Debt Service, calculated as follcws: (1) amounts equal to the interest portion of the Outstanding Parity Bonds payable to the owners thereof on the next interest payrrent date with respect to the Outstanding Parity Bonds (less any amount received as accrued interest or capitalized interest from the proceeds of the Outstanding Parity Bonds which is available for such interest payrrent) divided by the number of months intervening between the first day of the month in which the first transfer to the appropriate payrrent fund is made and the next such interest payrrent date, plus (2) beginning in the month which is twelve months before the first principal payrrent date with respect to the Outstanding Parity Bonds, an amount equal to such principal portion divided by twelve, or, if there are faver than twelve months before the first principal payrrent date, an amount equal to the principal portion divided by the number of months between the first deposit therein and the pri nci pal payrrent date.

No deposit need be made in the Debt Service Fund for the Bonds or the applicable debt service fund for the Outstanding Parity Bonds if the amount in the Debt Service Fund cr appliGilie debt service fund for the Outstanding Parity Baids is at least equal to the amount of the due and payable on the Bonds or such Outstanding Parity Bonds on the next succeeding Payrrent Date.

All money in the Debt Service Fund shall be used and withdrawn by the Trustee in accordance with the Section 4.05 of the Master Trust Agreerrent

( a) Reserve Fund. On the 15th day of each month, ccrnrrend ng in the month fol Icwi ng the withdrawal of any moneys from the Reserve Fund in accordance with Section 4.07 of the Master Trust Agreerrent, and continuing for eleven additional months thereafter, and prior to application of amounts on deposit in the Sanitation Equiprrent Charge Special Revenue Fund pursuant to clauses (ci) and (e) belcw, the City shall transfer to the Trustee for deposit in the Reserve Fund one-twelfth of the amount of the withdrawal. The Reserve Fund shall be held by the Trustee (or any Co-Trustee as pr0.tided in Section 8.15 of the Master Trust Agreerrent) for the pro rata benefit of the Master Trust Agreerrent and the Outstanding Parity Bonds.

C-13 Notwithstanding the foregoing, the City may provide for the Reserve Fund by a Credit Facility as set forth in Section 4.07(b) of the Master Trust Agreement.

(b) Sulrrdnate Debt Service Furd On the 15th ci¥ of each rronth, p-ovic:W no further deposits are required to be made pursuant to clauses (a) through (c) above, including deposits to any of such Funds to the extent that Revenues in any prior month have been insufficient to satisfy the deposit requirements provided above, and provided further, that there is an armunt al deposit in the Reserve Fund equal to the Reserve Requirement, the City shall transfer to the ar;plicable fiduciary fcr deposit in the appicable payment fund, debt service payments with resP=ct to arty subordnate debt authorized pursuant to Section 5.04 of the Master Trust Agreement, as directed by a City Representative.

(c) Surplus. On the 15th ci¥ of each rnaith, p-ovic:W no further deposits are required to be made pursuant to clauses (a) through (d) above, moneys on deposit in the Sanitation Equipment Charge Special Revenue Fund may be expended by the City at any time for any purpose pernitted by I.M'.

(d) Restatement of Outstanding Parity Bonds. The MasterTrustAgreement is intenc:Wto be a restatement of the obligation of the City to appy Revenues to the Outstanding Parity Bonds in accordance with the dcx:uments relating thereto, and is not in any way to be construed as a modification thereof.

Withdrawals From Debt Service Fund. Money set aside and placed in a Debt Service Fund for any Series of Bonds shall remain therein until from time to time expended for the aforesaid purJX6e5 thereof and shall not be used fcr any other purp:ise whatsoever, excer:t that any such money so set aside and placed in a Debt Service Fund may be temporarily invested as provic:W in Section4.10ofthe Master Trust Agreement, but such investment shall not affect the obligation of the City to cause the full anrunt required by the term, of this Section to be available in a Debt Service Fund at the time required to meet payments of principal of and interest on Bonds of the Series for which it is accumulated.

On or before each interest payment date for any Outstanding Series of Bonds, the Trustee or, if applicable, the Paying Agent for such Bonds shall transfer from the Debt Service Fund to the Interest Account for such Series an armunt which, together with amounts on deposit therein and available for such purpose, is sufficient to make the interest payment due on such bonds on such payment date. On or before each principal payment date for any Outstanding Seri es of Bands, incl ud ng any mandatory rederll)tion date from sinking installment payments for term Bonds of a Series of Bonds, the Trustee or, if applicable, the Paying Agent for such Bonds shall transfer from the Debt Service Fund to the Principal Account for such Series an armunt which, together with armunts al deposit therein and available for such purp:ise, is sufficient to make the principal payment due on such bonds on such payment date.

On or before each date on which Bonds of any Series shall become suqject to optional or mandatory redemr:tion (other than from sinking installment payments) in accordance with the provisions of any Supplemental Trust Agreement, the Trustee or such Paying Agent, as applicable, shal I pay to the Owners of such Bonds from the Redemption Account, an amount of interest and p-incipal, and prenium, if any, on such Bands to be mandatori ly or q:iti alal ly redeemed on said date. On the date that is specified in such notice and in accordance with the Supplemental Trust Agreement pursuant to which such B ands are issued, the City shall have caused to be dep:Jsited in the Redemr:(ialAccount fcr such Series, an anruntwhich, tcgether with anrunts on deposit therein and available for such r:urr:ose, is sufficient to pay the redemption price of such B ands on such redemption date.

C-14 The Trustee shall pay the principal of, rederrption prenium, if any, and interest on each Series of Bonds on the payment dates therefore as established under the applicable Supplemental Trust Agreement with the proceeds transferred to it b,r the City in accordance with the foregoing provisions, whether or not the City submits to it any of the foregoing written demands. All mone,r remaining in the Debt Service Fund ai the final payment or maturity date fcr a Series of Bonds, in excess of (i) the amount required to make provisions for the payment in full of principal of, rederll)tion premium, if any, (ii) interest payable on such Bands or the payment of amounts required to be rebated, pursuant to the Code, to the United States of America with respect such Bonds and (iii) any amounts then cwed to the Trustee, shall be returned to the City and deposited b,r the City in the Sanitation Equipment Charge Special Revenue Fund.

Payments made b,r the Trustee or a Paying Agent in Section 4.05 of the Master Trust Agreement shall be made solely to the extent that moneys are on deposit in the appropriate Debt Service Fund. The Trustee or the applicable Paying Agent shall, at least ten (1 O) Business Days prior to each payment date on any Bonds, or as otherwise directed in any Supplemental Trust Agreement, give the Paying Agent notice b,r telephone, promptly confirmed in writing, of the full amount required to be deposited with the Trustee or such Paying Agent to pay the amount required to be paid on such payment date in respect of such Bonds, in the event the amount then on deposit in the Debt Service Fund therefor is insufficient to pay the amounts due on such Bonds on such payment date. A Paying Agent which is other than the Trustee shall immediately notify the Trustee if, on any payment date, it does not have sufficient funds in any Debt Service Fund it holds to pay in full all amounts of principal and interest due on the related Series of Bonds on such date, and the Trustee shall transfer to such Paying Agent the amount of such deficiency to the extent available from any Debt Service Funds held b,r the Trustee or any other Paying Agents. If, on any payment date, the Trustee and all Paying Agents other than the Trustee, if any, do not have sufficient amounts in the Debt Service Funds (without regard to any amounts which may be available in the Reserve Fund) to pay in full with respect to Bonds of all Series all amounts of principal andft)r interest due on such date, the Trustee shall cause all the Paying Agents other than it, if any, to renit all amounts held b,r them in any Debt Service Fund to the Trustee and the Trustee shall allocate the total amount which is available to make payment on such date (without regard to any amounts in the Reserve Fund) as follcws: first to the payment of past due interest on Bonds of any Series, in the order in which such interest came due, then to the payment of past due principal on Bands of any Seri es, in the order in which such principal came due, then to the payment of interest then due and payable on the Bands of each Seri es due on such payment date and, if the amount available shall not be sufficient to pay in full all interest on the Bonds then due, then pro rata among the Series according to the amount of interest then due and second to the payment of principal then due on the Bonds and, if the amount available shall not be sufficient to pay in ful I al I principal on the Bands then due, then pro rata among the Seri es according to the principal amount then due on the Bands.

Notwithstanding the foregoing, the City may, b,r Supplemental Trust Agreement, provide for different provisions and timing of deposits with the Trustee or a Paying Agent and different methods of paying principal of or interest on Bonds of any Series depending upon the terms of such Series of Bonds and may provide for payment through a Credit Facility with reimbursement to the Credit Provider from the respective Debt Service Fund created for the Series of Bonds for which such Credit Facility is provided.

Alternative Receipt and De(XlSit of Revenues, Withdrawals. If the Outstanding Parity Bonds have been paid in full or defeased in accordance with the terms of their authorizing documents, the City may, b,r a written request to the Trustee signed b,r an Authorized City Representative, utilize the payment provisions described belcw instead of the provisions of Section 4.04 and Section 4.05 of the Master Trust Agreement summarized above.

C-15 All Revenues shall be retained b,r the City in the Sanitation Equipment Charge Special Revenue Fund except that armunts on deposit therein shall be transferred from the Sanitation Equipment Charge Special Revenue Fund for the follONing r:urp:ises at the follONingtirres in the follcwing order of priority and all rmneys in such fund shall be held in trust and shall be ar;plied, used andwithdriMlll only for the purp:ises hereinafter authorized in this Sectiai:

(a) Del:( Service Funct Reserve Fund Nct later than 10 cb,rs picr to each interest payrrent date, the City shall withdra,v from the Sanitation Equipment Charge Special Revenue Fund and transfer to the Trustee an armunt sufficient, with other available rroneys, if any, pro.tided to the Trustee to make such dep:isits, to make the dep:isits described in clause (1) thra.gh (3) inclusive belcw and the Trustee shall deposit such sum; so withdra,vn to the credit of the follcwing accamts in the follONing p-icrity:

(1) to the credit of the Interest Account of the Debt Service Fund an amount (together with any available rmneys in such account) equal to the interest payable on the Outstanding Bands on such Payrrent Date;

(2) to the credit of the Principal Account of the Debt Service Fund an amount (together with any rmneys in such account) equal to the principal and Accreted Value coning due and payable (whether b,r maturity or mandatory sinking fund payrrents) on the Outstanding Bands on such Payrrent Date; and

(3) to the credit of the Reserve Fund such portion of the balance, if any, remaining after making the deposits described in clauses (1) and (2) alx:we to increase the amount on deposit in the Reserve Fund to an armunt equal to the Reserve Fund Requi rerrent, or if the enti re balance is Iess than the armunt necessary, then the enti re balance shall be deposited into the Reserve Fund;

(b) If the Revenues are at any tirre insufficient to make the deposits required b,r this Section, the City may, at its electiai, deposit with the Trustee funds frcrn any available sources with the direction that such funds be deposited into the funds and accounts or specified funds and accounts held b,r the Trustee. If the Revenues and any other funds pro.tided b,r the Agency are insufficientto make the full deposits required b,r such sectiais (a)(l) or (a)(2) abo.te, the Trustee shall creclt the respective subaccounts ai a p-o rata basis.

( c) U nl ess ctherwi se pro.tided in a Suppl errental Trust Agreerrent, any rmne,rs remaining in the Sanitation Equipment Charge Special Revenue Fund after making all of the deposits described in this Section for any Bond Year rmneys on deposit in the Sanitation Equiprrent Charge Special Revenue Fund may be expended b,r the City for any purpose permitted b,r law and will no longer constitute" Revenues."

No deposit need be made in the Debt Service Fund for the Baids if the anrunt in the Debt Service Fund is at least equal to the amount of the due and payable on the Bonds on the next succeeding Payrrent Date.

Reserve Fund. Each Suppl errental Trust A greerrent pro.tiding for the issuance of a Seri es of Bands shall require as a condition of issuance that an armunt be deposited in the Reserve Fund so that, together with any Reserve Fund Surety Policy, the armunt on deposit therein will be equal to the Reserve Requirerrent. Any cash to be deposited in the Reserve Fund may be derived from proceeds of a Series of Baids or any other legally available source of funds. In the event that federal tax I.M' in the opinion of Bond Counsel would prohibit the Reserve Requirerrent or any portion thereof from being paid from the

C-16 proceeds of any such Series of Bonds, the City shall be pernitted to pay the portion of the Reserve Requirement not pernitted to be paid from such Bond proceeds from Revenues, to the extent pernissible under federal tax l~s. in not less than equal monthly installments within sixty (60) months from the date of issuance of said Series of Bonds.

Moneys held in the Reserve Fund shall be used for the purp:ise of paying principal and interest on Outstanding Bonds and Outstanding Parity Bonds as described belcw. If, on any principal or interest payment date for any Bonds, the amounts in the Debt Service Fund for any Bonds available therefor are insufficientto pay in full the amountthen due on the Bonds, moneys held in the Reserve Fund shall be used and withdr~n b,r the Trustee for the payment of principal and interest thereon. If amounts in the Reserve Fund consist of l:x:Jth cash and one or more Reserve Fund Surety Policies, the Trustee shall make any required payments of amounts in the Reserve Fund first from any cash held irwestedtherein, prior to making a dr~ used to make any dep:isit required to be made to the Rebate Fund created for the Bonds at the written direction of the City if the City does not have other funds available from which such dep:isit can be made.

The Trustee shall seniannually on or about February 1 and August 1 of each year and at such other times as the City shall request, value the Reserve Fund on the basis of the cost value thereof. For purp:ises of deternining the amount on dep:isit in the Reserve Fund, any Reserve Fund Surety Policy held b,r, or the benefit of which is available to, the Trustee shall be deemed to be a dep:isit in the face amount of the Reserve Fund Surety Policy or the stated amount of the Reserve Fund Surety Policy pr0.tided, exceptthat, if the amount available under a Reserve Fund Surety Policy has been reduced as a result of a payment having been made thereunder or as a result of the termination, cancellation or failure of such Reserve Fund Surety Policy and not reinstated or another Reserve Fund Surety Policy pr0.tided, then, in valuing the Reserve Fund, the value of such Reserve Fund Surety Policy shall be reduced accordingly. Upon each such valuation, the Trustee shall prepare a written certificate setting forth the Reserve Requirement as of such valuation date and the value of the Reserve Fund and deliver a cop,r thereof to an Authorized City Representative, upon any valuation of the Reserve Fund and deliver a cop,r thereof to an Authorized City Representative, upon any valuation of the Reserve Fund at cost value, the value of the Reserve Fund exceeds the aggregate Reserve Requirement for all Bonds then Outstanding, the amount in excess of the Reserve Requirement may, at the option of the City, be withdr~n and paid to the City to be used for any l~ul purp:ise, unless an Event of Default exists under the Master Trust Agreement, in which event the excess amount shal I be retained i n such fund; pr0.ti ded that, if such amounts are used for a purp:ise other than payment of the related Series of Bonds, there shall be delivered to the Trustee with the request for such funds an qJi ni on of Bond Counsel that the purp:ise for which such funds are to be used is a I~ul purp:ise for which such proceeds may be used under the Charter and that such use shal I not result i n the i ncl usi on of interest on any Bonds issued as tax--exerll)t Bonds in gross income of the recipient thereof for federal income tax purposes. If, upon any valuation of the Reserve Fund at cost value, the value is less than the relevant Reserve Requirement, the City shall replenish such amounts within twelve (12) months after the date of such val uati on, in accordance with the pr0.ti si ons bel cw.

A Reserve Fund Surety Policy shall be acceptable in lieu of a dep:isit of cash or securities into the Reserve Fund, or may be substituted for amounts on dep:isit in the Reserve Fund, only if at the time of such dep:isit (i) such Reserve Fund Surety Policy extends to the maturity of the related Series of Bonds, or the City has agreed, b,r Supplemental Trust Agreement, that it will replace such Reserve Fund Surety Policy prior to its expiration with another Reserve Fund Surety Policy which shall have no ad.terse effect on the ratings, if any, then in effect on the Bonds, or with cash and (ii) the face amount of the Reserve Fund Surety Policy, together with amounts ai dep:isit in the Bond Reserve Fund, including the face amount of any other Reserve Fund Surety Policy benefiting such account, is at least equal to the Reserve Requirement. Any moneys in the Reserve Fund in excess of the Reserve Requirement as a result of such the substitution of a Reserve Fund Surety Policy shall be used to pay costs associated with obtaining the Reserve Fund Surety Policy.

C-17 If moneys have been withdrawn from a bond reserve account in the Reserve Fund or a payrrent has been made under a Reserve Fund Surety Policy constituting all or a portion of the Reserve Fund, and dep:isited into the Debt Service Fund to prevent a default on the Bonds, then the City will pay to the Trustee rut only as pro.tided in Section 4.04 of the Master Trust A greerrent, the ful I amount so withdrawn, together with interest, if any, required under the term; of the Reserve Fund Surety Policy, or so much as shall be required to restore the Reserve Fund to the Reserve Requirerrent and to pay such interest, if any. Such repayrrent shall be made in no more than twelve (12) substantially equal monthly installrrents each due on the first Business Day of the month comrrenci ng with the first month after such withdrawal occurs. If such repayrrent is with respect to a draw under a Reserve Fund Surety Pol icy, the Trustee shal I pay to the prc:wider of such Reserve Fund Surety Policy the amount received b,r the Trustee from the City which is designated to be used to reimburse the prc:wider of such Reserve Fund Surety Policy. The Trustee shall imrrediately notify the paying agent for the Reserve Fund Surety Policy, if any, of such reimburserrent.

Moneys in the Reserve Fund shall be invested and reinvested b,r the Trustee at the written direction of an Authorized City Representative in Permitted lnvestrrents. lnvestrrents in the Reserve Fund shall not have maturities which extend beyond five years from the date of the investrrent unless the investrrent is suqject to rederll)tion at par. No investrrent in the Reserve Fund may have a maturity in excess of the final maturity dates of the Bonds.

All money remaining in the Reserve Fund on the final payrrent date of a Series of Bonds, in excess of the amount requi red to make pro.ti si ans for the payrrent i n ful I of the interest andft)r the principal of al I such Bonds shall be transferred to the City for dep:isit in the Sanitation Equipment Charge Special Revenue Fund.

Acquisition Fund. Each Acquisition Fund established to pay the Costs of a Prqject shall be held b,r the City or the Trustee. All moneys in each Acquisition Fund shall be held and dsbursed as pro.tided in the Supp errental Trust Agreerrent cr Sur;pl errental Trust Agreerrents under which such fund is created, and, absent such directions, shall be held and disbursed as deternined b,r the City. Notwithstandng this prc:wisiai, no Acquisition Fund shall be required fcr agven Series of Baids if such Baids are Refunding Balds cr if the City otherwise deternines thatthere is no need to create an Acquisition Fund for such Series.

Moneys Held in Trust for Matured Bonds; Unclaimed Moneys. All moneys which shall have been withdrawn from a Debt Service Fund and set aside or dep:isited with a Paying Agent for the purp:ise of paying any of the Bonds, either atthe maturity thereof or upon call for redemption, or which are set aside b,r the Trustee for such purp:ises and for which Bonds the maturity date or redemption date shall have occurred, shall be held in trust for the respective holders of such Bonds. But arty moneys which shall be so set aside cr dep:isited and which shall remain unclairred b,r the holders of such Bonds for a period of one (1) year after the date on which such Bonds shall have become due and payable (or such longer period as may be required b,r State law) shall be paid to the City, and thereafter the holders of such Bonds shall look only to the City for payrrent and the City shall be obligated to make such payrrent, but only to the extent of the amounts so received without any interest thereon, and neither the Trustee nor any Paying Agent shall have any responsi bi Iity with respect to any of such moneys.

lnvestrrents. Moneys held b,r the Trustee or any Paying Agent in the Reserve Fund (suqject to Section 4.07(d)), a Debt Service Fund, an Acquisition Fund cr any other fund or account estiliished and held b,r the Trustee or any Paying Agent pursuant to the Master Trust Agreerrent or any Supplerrental Trust Agreerrent shall be invested and reinvested as directed b,r the City in Pernitted lnvestrrents, sul::ject (excer:t in the case of the Reserve Fund) to any addtional restrictions set forth in the Sur;plerrental Trust Agreerrent creating such fund or account. The City shall drect such investrrents b,r written certificate (upon which the Trustee or a Paying Agent may conclusively rely) of an Authorized City Representative or b,r telephone instruction fol Icwed b,r prompt written confirmation b,r an Authorized City Representative; in the absence

C-18 of any such instructiais, the Trustee cr a Pa,ring Ag2nt shall, to the extent practicable, irwest in the Pemitted I rwestrrents descril:ed in paragraph (7) of the definition thereof. I rwestrrents shal I mature not later than such ti rres as shal I be necessary to provide moneys when needed for payrrents to be made from such funds and accounts. The Trustee or a Paying Agent, as applicable, shall sell and reduce to cash a sufficient amount of any such irwestrrents whenever the cash balance in any such funds is insufficient to pay the amounts due therefrom The Trustee shall not be liable for any la,s resulting from its corrpliance with the written drectiais of the City or as a result of liquidating irwestrrents to provide funds for any required payrrent, transfer, withdrawal or dsl:urserrent from any fund cr accamt in which such irwestrrents are held. The Trustee or any Paying Ag2nt rray buy cr sell any Pemitted I rwestrrent through its OM1 (or any of its affi Ii ates') i rwestrrent departrrent.

OTHER COVENANTS OF THE CITY

Payrrent of Principal and Interest. The City covenants and agrees that it will duly and punctually pay or cause to be paid from Revenues and to the extent thereof the principal of, premium, if any, and interest on every Bond at the place and on the dates and in the manner specified in the Master Trust Agreerrent, the applicable Supplerrental TrustAgreerrents and in the Bonds, according to the true intent and rreaning thereof, and that it will faithfully do and perfcrm all covenants and agreerrents in the Master Trust Agreerrent and in the Bonds contained, provided that the City's obligation to make payrrent of the principal of, prenium, if any, and interest on the Bonds shall be linited to payrrent from Revenues, the funds and accounts pledg2d therefcre in the Granting Clause of the Master Trust Agreerrent and any ether source which the City rray specifically provide for such r:urp:ise, and no Baidholder shall have any right to enforce payrrent from any other funds of the City.

Performance of Covenants b,r City; Authority; Due Execution. The City covenants that it will faithfully perform at al I ti mes any and al I covenants and agreerrents contained in the Master Trust A greerrent, in any and every Outstand ng Baid executed, authenticated and delivered hereunder and in al I of its prcx:eedi ngs pertaining hereto. The City represents that it is duly authcrized under the Constitution and laws of the State and the Charter to issue the Baids and pledg2 and grant a security interest in Revenues and other security pledg2d thereto or in which a security interest is granted and, except for the Outstanding Parity Bonds, that the City has not previously pledged such revenues or other assets to secure other obligations.

Against Encurrbrances. The City will not make any pledg2 of or place any lien on Revenues or the moneys in the Sanitation Equipment Charge Special Revenue Fund except as provided herein. In addition to the issuance of any Addi ti anal Bands as provided in Section 2.09 of the Master Trust Agreerrent, the City rray at any tirre, or from tirre to tirre, issue e.tidences of indebtedness cr incur other obligations for any Iawful purp:ise which are payable from and secured b,r a pl edge of and Ii en ai Revenues or any moneys in the Sanitatiai Equipment Charg2 Special Revenue Fund as rray from tirre to tirre be dep:isited therein, provided that such pl edge and Ii en shal I be subordi nate in al I respects to the pl edg2 of and Ii en thereon provided herein.

Subordinated Obligations. The City may, from tirre to tirre, incur Subordinated Obligations at such tirres and upon such terms as the City shall determine. In connection with such indebtedness, the City covenants that:

(1) The trust agreerrent or other dcx:urrents pursuant to which any Subordinated Obligations are incurred shal I specifically state thatthe I ien on or security interest granted thereb,r in the Revenues is junior and subordinate to the lien on and security interest in such Revenues and other assets granted to secure the B ands; and

C-19 (2) Pa,rrrent of p-incipli of, prenium, if any, and interest al such Subcrdinated Oblig31:ials shall nct l:e made unless all dep:isits recµiredto l:e made to the Trustee cr a PayingA92ntto l:e used to pay Debt Service al the Bonds orto replenish the Reserve Fund are then current in accordance with Section 4.04 or 4.06, as applicable, of the MasterTrustAgreerrent.

Sanitation Equiprrent Charge. If at any tirre during a Fiscal Year the City shall determine that the Sanitation Equipment Charg2 is not l:eing maintained at a level sufficient to provide for pa,rrrent of all Debt Service within the Fiscal Year, t0g2ther with any amount required to replenish the Reserve Fund in accordance with Section 4.04 or 4.06, as applicable, of the Master Trust Agreerrent and to pay all fees, ca;ts and expenses required to l:e paid hereunder and under the Master Trust Agreerrent, the City shall take actial at that tirre to maintain the Sanitation Equipment Charg2 at a level sufficient to provide for pa,rrrent of all Debt Service within the Fiscal Year, t0g2ther with any anrunt recµired to replenish the Reserve Fund in accordance with Section 4.04 or 4.06, as applicable, of the Master Trust Agreerrent and to pay all fees, ca;ts and expenses required to l:e paid hereunder and under the Master Trust Agreerrent; p-ovided, hewever, that to the extent the City designates other legally

Collection of Sanitation Equipment Charge. The City will not take any action, which would materially ad.tersely affect its ability to collect the Sanitation Equipment Charg2 in accordance with the r:rcx:edures set forth in Sectials 66.43 and 66.45 of the M unicipli Code of the City.

No Inconsistent Contract Provisions. The City covenants that it will not take any action which, in the City'sjudgrrent atthetirre of such action, will substantially impair cr materially ad.tersely affect Revenues, cr will sub,tantially impair or materially ad.tersely affect in any manner the pledg2 of, lien al cr security interest granted in Revenues herein crthe rights of the holders of the Bond,. The City shall l:e uncalditionally and irrevcx:;iliy cblig3ted, so lalg as any of the Bond, are Outstanding and unpaid, to take all la.Nful actial necessary cr required to pay from Revenues the pri nci r:aJ of and interest al the Bands and to make the other payments provided for herein.

Maintenance of Pewers. The City covenants that it will at all times use its l:est efforts to maintain the p:wers, functials, duties and cblig3tions new rep:ised in it pursuant to the Charter and all other laws applicable to it.

Accounts. The City covenants that it will keep and provide accurate oooks and record, of account shewing all Revenues received and all expenditures of the City and that it will keep or cause to l:e kept accurate oooks and record, of account shewing all moneys, Revenues, accounts and fund, (including the Sanitation Equiprnent Charg2 Special Revenue Fund, and all ether accounts provided fcr in or pursuant to the Trust Agreement) and that all such oooks and record, shall l:e q:ien up:in reasonable notice during business hours to the Trustee and to the OWners of not less than ten percent (1036) of the principal amount of Bond, then Outstanding, or their representatives duly authorized in writing. So I ong as any of the Bone!, remain Outstanding, the City will prepare and file with the Trustee audited financial statements including a staterrent of the inccrne and expenses fcr such Fiscal Year and a balance sheet prepared as of the close of such Fiscal Year for the City all acccrnpanied b,r a certificate or opinion in writing of an independent certified public accamtant of rec~nized standing, selected b,r the City, which opinial shall include a staterrent that said financial staterrents present fairly in all material respects the financial p:isition of the City and are prepared in accordance with generally accepted accounting pri nci pl es; provided, hewever, the Trustee shal I hold such financial staterrents solely as an accorrmxlati al to the holders of the Baid, and shal I we no duty cr cbl i g31:i al to revi av such financial staterrents.

C-20 DEFEASANCE

B ands or porti ans thereof ( such porti ans to be in integral multi pl es of an authorized denonination) which have been paid in full or which are deemed to have been paid in full shall no longer be secured b,r or entitled to the benefits of the Master Trust Agreement, except for the purposes of payment from moneys or Gc:wernment Obligations held b,r the Trustee or a Paying Agent for such purpose. When all Bonds which have been issued under the Master Trust Agreement have been paid in full or are deemed to have been paid in full, and all other sums payable hereunder b,r the City, including all necessary and proper fees, compensation and expenses of the Trustee, each Registrar and each Paying Agent, have been paid or are duly pro.tided fcr, then the right, title and interest of the Trustee in and to the Revenues and the other assets pl edged to secure the Bands hereunder shal I thereupon cease, terminate and become void, and thereupon the Trustee shall cancel, discharge and release the Master Trust Agreement, shall execute, ackncwledge and deliver to the City such instruments as shall be requisite to evidence such cancell ati ai, discharge and rel ease and shal I assign and del iverto the City any property and revenues at the ti me suqj ect to the Master Trust Agreement which may then be in the Trustee's possession, ex cert funds cr securities in which such funds are invested and are held b,r the Trustee or a Paying Agent for the payment of the principal of, prenium, if any, and interest on the Bonds.

A Baid shall be deemed to be paid within the meaning of the Master Trust Agreement and for all purposes of the Master Trust Agreement when payment of the principal, interest and prenium, if any, either (a) shall have been made or caused to be made in accordance with the terms of the Bonds and the Master Trust Agreement or (b) shall have been pro.tided for b,r irrevocably depositing with the Trustee in trust and setting aside exclusively for such payment, (i) moneys sufficient to make such payments andft)r (ii) naicallable Gc:wernment Obligatiais, maturing as to principal and interest in such amounts and at such times as in the opinion of an independent certified r:ublic accountant will insure the availability of sufficient moneys to make such payments. At such ti mes as B ands shal I be deemed to be paid hereunder, such Bands shal I no Ianger be secured b,r or entitled to the benefits of the Master Trust Agreement, except fcr the r:urposes of payment frcrn such moneys or Gc:wernment Obi i gati ms.

Any deposit under clause (b) of the foregoing paragraph shall be deemed a payment of such Bonds. Once such deposit shall have been made, the Trustee shall notify all holders of the affected Baids that the deposit required b,r (b) abcwe has been made with the Trustee and that such Bonds are deemed to have been paid in acccrdancewith the Master Trust Agreement. No notice of redemption shall be required at the time of such defeasance or prior to such elate as may be required b,r the Sur;plemental Trust Agreement under which such Baidswere issued. The City may at any time, prior to issuing such notice of redemption as may be required b,r the Sur;plemental Trust Agreement under which such Baids were issued, modify or otherwise change the scheduled date for the redemption or payment of any Bond deemed to be paid under the terms of the foregoi ng paragraph in accordance with the terms of the Bands or the Master Trust Agreement suqject to (a) receir:t of an ai:p-c:wing opiniai of Baid Coonsel that such actiai will not ad.tersely affect the tax-€Xemr:( status with respect to the interest ai any Bond then Outstanding and (b) receipt of an apprc:wing opiniai of a natiaially reccgnized accoonting firm that there are sufficient moneys andµ Gc:wernment Obligatiais to pro.tide fcr the payment of such Bonds. Notwithstanding anything in the Master Trust Agreement to the contrary, moneys frcrn any trust cr escrcw established fcr the defeasance of Baids may bewithdr.Mlll and delivered to the City so long as the requirements of subparagraphs (a) and (b) abcwe are met prior to or concurrently with any such withdrawal.

DE FAUL TS AND REMEDIES

Events of Default. Each of the follcwing events shall constitute and is referred to in the Master Trust Agreement as an" Event of Default":

C-21 ( a) a fai I ure to pay the pri nci pal of or pre mi um, if any, on any of the B ands, when the same shall become due and payable at maturity or upon redemption;

(b) a failure to pay any installment of interest on any of the Bonds when such interest shal I become due and payable;

(c) a failure to pay the purchase price of any Bond when such purchase price shall be due and payable upon an optional or mandatory tender date as provided in a Supplemental Trust Agreement;

(d) a failure by the City to observe and perform any covenant, condition, agreement or p-ovisiai (ether than as sra:ified in paragraphs (a), (b) and (c) above) that are to be ooserved cr perfonmed by the City and which are contained in the Master Trust Agreement cr a Sur;pl ernental Trust Agreement, which failure shall caitinue fcr a pericxl of sixty (60) days after written notice specifying such failure and requesting that it be remedied, shall have been gven to the City b,r the Trustee, which notice may be gven at the discretion of the Trustee and shall be gven at the written request of hdders of 2':136 cr more of the principal annJnt of the Series of Bonds then Outstanding wha,e Bonds are in default under (a), (b) or(c) above, unless the Trustee, crthe Trustee and holders of Baids in a principal annJnt nct Iess than the pri nd pal annJnt of such Seri es of Bands the holders of which requested such notice, shall agree in writing to an extension of such pericxl prior to its expiration; provided, hcwever, that the Trustee or the Trustee and the hdders of such principal anrunt of Bonds shal I be deemed to have agreed to an extensi ai of such peri al if cmective acti ai is initiated b,r the City within such pericxl and is being diligently pursued until such failure is corrected;

(e) bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, includng witha!t linitatiai p-oceedngs under Charter 9 of 11 United States Cale (as the sarre may from ti me to ti me be hereafter amended), or other proceed ngs for relief under any federal cr state bankrur:xcy I.M' cr sinilar I.M' fcr the relief of del:tcrs are instituted b,r cr against the City and, if instituted against the City, said p-cx:eedings are caisented to cr are not dsnissed within 60 days after such institutiai; cr

(f) with respect to any Series of Baids, the occurrence of any ether Event of Default as is p-ovi ded in a Supp ernental Trust Agreement authcrizi ng the issuance of such Seri es.

Remedies.

(a) Upon the occurrence and continuance of any Event of Default, the Trustee in its discretion may, and upon the written direction of the holders of 2':136 cr more of the principal amount of the Bands then Outstandi ng whose B ands are i n default under (a), ( b) or (c) above, and receipt of indemnity to its satisfactiai, shall, in its cwn name and as the Trustee of an express trust:

(i) by mandamus, or other suit, action or proceeding at law or in equity, enforce all rights of the applicable Series of Bondholders, and require the City to carry out any agreements with or for the benefit of the Bondholders and to perform its or their duties under the Charter or any other I.M' to which it is suqject and the Master Trust Agreement, provided that any such remedy may be taken only to the extent permitted underthe applicable provisions of the Master Trust Agreement;

(ii) bring suit upon the applicable Series of Bonds;

C-22 (iii) comrrence an action or suit in equity to require the City to account as if it were the trustee of an express trust for the Bondholders; or

(iv) by action or suit in equity enjoin any acts or things which may be unlawful or in violation of the rights of the Bondholders.

(b) The Trustee shall be under no obligation to take any action with respect to any Event of Default uni ess the Trustee has actual kncwl edge of the occurrence of such Event of Default.

Restoration to Forrrer Position. If any proceeding taken by the Trustee to enforce any right under the Master Trust Agreerrent shall have been discontinued or abandoned for any reason, cr shall have been detemined adversely to the Trustee, then the City, the Trustee, and the Baidholders shall be restored to their forrrer p:isitiais and rights hereunder, respectively, and all rights, remedies and p:wers of the Trustee shall continue as though no such proceeding had been taken.

Bondholders' Right To Direct Proceedings. Anything in the Master Trust Agreerrent to the contrary notwithstanding, holders of a majcrity in p-incipll armunt of the Bonds then Outstandng shall have the right, at any tirre, by an instrurrent in writing executed and delivered to the Trustee, todirectthetirre, rrethod and pace of conducting all rerredial p-oceedngs available to the Trustee under the Master Trust Agreerrent to be taken i n connection with the enforcerrent of the term, of the Master Trust A greerrent cr exerd sing any trust cr p:wer conferred on the Trustee by the Master Trust Agreerrent; provided that such direction shall not be otherwise than i n accordance with the provi si ans of the I aw and the Master Trust A greerrent and that there shall have been p-ovided to the Trustee security and indemnity satisfactory to the Trustee againstthe costs, expenses and Ii abi I iti es to be incurred as a resultthereof by the Trustee.

Linitation on Right To Institute Proceedings. No Bondholder shall have any right to institute any suit, actiai or p-oceedng in equity or at law for the execution of any trust cr p:wer hereunder, or any other rerredy under the Master Trust A greerrent or on such B ands, uni ess such Bondholder cr Bondhd ders p-e.tioosly shall have given to the Trustee written notice of an Event of Default as hereinabove provided and unless also holders of 25% or more of the principal armunt of the Series of Bonds then Outstanding that are in default (which could include such Bondholders) shall have made written request of the Trustee to do so, after the right to institute such suit, action or proceeding under Section 7.02 of the Master Trust Agreerrent shal I have accrued, and shall have affcrdedthe Trustee a reasaiable q:;p:irtunity to p-oceedto institute the sarre in either its cr their narre, and unless there also shall have been offered to the Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities tobe incurred therein orthereiby, and the Trustee shall not have compied1Mth such request within a reasaiabie tirre; and such nctificatiai, request and offer of indemnity are hereiby dedared in e.tery such case, at the q:tiai of the Trustee, to be condtiais p-ecedentto the institutiai of such suit, action or p-oceeding; it being understood and intended that no one or more of the Bondholders shall have any right in any manner whate.ter by his or their actiai to affect, dsturb cr p-~udce the security of the Master Trust Agreerrent, or to enfcrce any right hereunder or under the Baids, except in the manner herein p-ovid2d, and that all suits, actiais and p-oceedngs at law cr in equity shall be instituted, had and maintained in the manner herein p-ovi ded and fcr the equal benefit of al I Bondholders.

Application of Moneys. If an Event of Default shall occur and be continuing, all amounts then held or any moneys received by the Trustee, by any receiver or by any Bondholder pursuant to any right gven cr action taken under the rele.tant p-ovisiais of the Master Trust Agreerrent (which shall not include moneys provided through a Credit Facility, which moneys shall be restricted to the specific use fcrwhich such rrmeys were p-ovidcd), after r:avrrent of the costs and expenses of the proceedi ngs resul ti ng i n the col I ecti on of such moneys and of the expenses, Ii abi I iti es and advances incurred cr made by the Trustee (incl ud ng attcrneys' fees anddsl:urserrents), shall be applied as follONs:

C-23 (a) Unless the principal of al I the Bands suqj ect to acceleration shal I have been declared due and payable, al I such moneys shal I be applied ( i) first, to the payrrent to the persons entitled thereto of all installrrents of interest then due on the Bond;, with interest on overdue installrrents, if I.Mful, at the rate per annum as p-ovided in any Supplerrental TrustAg-eerrait, as the case ITTc¥ be, in the crder of rraturity of the installrrents of such interest ard, if the anrunt arailable shall nct be sufficient to r:av in full any pmicular installrrent of interest, then to the r:avrrent rataijy, acccrdng to the anrunts due ai such installrrent, and (ii) secaid, to the r:avmnt to the pcrsais entitled thereto of the unpaid principcil anrunt of any of the Bm:ls which shall hare becare due with interest ai such Bonds at such rate as provided in a Supplerrental Trust Agreerrent from the respective dates upon which they becarre due and, if the amount available shall not be sufficient to pay in full Bonds on any particular date determined to be the payrrent date, together with such interest, then to the payrrent rataijy, according to the amount of p-i nci P3I and interest due ai such date, in each case to the persons entitled thereto, without any di scri ni nati ai or p-ivi Iege.

(b) If the principal of al I the Bands suqj ect to acceleration shal I have been declared due and payable, al I such moneys shal I be applied to the payrrent of the principal and interest then due and unpaid upon the Bands, with interest on overdue interest and principal, as aforesaid, without preference or priority of principal over interest or interest over principal, or of any i nstal I rrent of interest over any other i nstal I rrent of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any di scri ni nation or privi Iege.

(c) If the p-i nci pal of al I the Baids suq ect to accel erati ai shal I hare been declared due and r:avable, and if such declaratiai shall thereafter hare been rescinded and annulled under the provisiais of Section 7.02( b) and Secti ai 7.03 of the Master Trust A greerrent, then, suqj ect to the p-ovi si ms of dause (b) of this Section which shall be applicable in the event that the p-incipcil of all the Bond; shall later beccrne due and payable, the moneys shall be applied in accordance with the provisions of clause (a) of this Section.

Whenever moneys are to be applied pursuant to the provisions of this Section, such moneys shall be applied at such ti mes, and from ti rre to ti rre, as the Trustee shal I determine, haring due regard to the armunt of such moneys arailable fcr ar;plication and the likelihocd of addtiaial moneys becaring arailable for such ar;plicatiai in the future. Wheneverthe Trustee shall ar;ply such funds, it shall fix the date (which shall be an interest r:avrrent date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the anrunts of principal and interest to be paid on such date shall cease to accrue. The Trustee shall give notice of the deposit with it of any such moneys and of the fixing of any such date b,r first-class United States mail, postage p-epald, to all Bondholders and shall not be recµired to make payrrent to any Bondhd der unti I such Bone!, shal I be presented to the Trustee fcr appropriate endorserrent or for cancellatiai if fully paid

TRUSTEE, PAYING AGENTS; REGISTRAR

Duties of Trustee.

(a) If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and p::wers and use the sarre degree of care and ski 11 in their exercise as a prudent person would exercise or use under the ci rcurnstances in the conduct of such person's cwn affairs.

( b) The Trustee shal I perfcrm the duties set forth in the Master Trust A g-eerrent and no implied duties cr cbl igati ms shal I be read into the Master Trust Agreerrent against the Trustee.

C-24 (c) Exceptduringthe continuatiai of an Event of Default, in the absence of any negligence on its part or any kncwledge to the contrary, the Trustee may condusively rely, as to the truth of the staterrents and the correctness of the opinions expressed, upon certificates or opinions fumi shed to the Trustee and caiforning to the requirerrents of the Master Trust Agreerrent. Hcwever, the Trustee shal I examine the certificates and opi ni ms to deterni ne whether they caifcrm to the requi rerrents of the MasterTrustAgreerrent.

(d) The Trustee may not be relieved from liability for its cwn negligent action, its cwn negligent failure to act or its cwn willful nisconduct, except that:

(i) the Trustee shall not be liable for any error of judgrrent made in good faith b,r a Respaisible Officer unless the Trustee was negligent in ascertaining the pertinent facts; and

(ii) the Trustee shall not be liable with respect to any action it takes or onits to take in good faith in accordance with a direction received b,r it from Bondholders or the City in the manner provided in the MasterTrustAgreerrent.

(e) The Trustee shall not, b,r any provision of the Master Trust Agreerrent, be required to expend cr risk its cwn funds or otheiwise incur any financial liabllity in the performance of any of its duties hereunder, or in the exercise of any of its rights cr p::wers, if repayrrent of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. The Trustee shall be under no obligation to exercise any of the rights or p::wers vested in it b,r the Master Trust Agreerrent at the request or direction of any of the holders of the Bonds, unless such holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred b,r it in corrpliancewith such request cr drectiai.

Riqhts of Trustee. Sul::ject to the fcreg:iing Section, the Trustee shall be protected and shal I incur no Ii abi Ii ty i n acting or proceedi ng i n good faith upon any resolution, notice, telegram, request, consent, waiver, certificate, direction, staterrent, affidavit, voocher, bond, requisition or other paper or docurrent which it shall in good faith believe to be genuine and to have been passed or signed b,r the proper board or person or to have been prepared and furnished pursuant to any of the provisions of the Master Trust Agreerrent, and the Trustee shall be under no duty to make investigation or inquiry as to any staterrents contained or matters referred to in any such instrurrent, but may accept and rely upon the sarre as conclusive evidence of the truth and accuracy of such staterrents.

The Trustee may consult with counsel with regard to legal questions, and the opinion of such counsel shall be full and compiete authorization and protection in respect of any action taken or suffered b,r the Trustee hereunder in good faith in acccrdance therBVith.

Whenever in the administration of the trusts or duties imposed upon it b,r the Master Trust Agreerrent the Trustee shall deem it necessary that a matter be proved or established prior to taking or not taking any action hereunder, such matter may be deemed to be caiclusively proved and established b,r a certificate of the City, and such certificate shall be full warrant to the Trustee for any action taken or not taken b,r it in good faith underthe provisions of the Master Trust Agreement in reliance ai such certificate.

Notice of Defaults. If (i) an Event of Default has occurred or (ii) an event has occurred which with the giving of notice andft)rthe lapse of tirrewould be an Event of Default and, with respect to such events for which notice to the City is required before such events will become Events of Default, such notice has been given, then the Trustee shall promptly, after obtaining actual notice of such Event of Default cr event described in (ii) of the first sentence of this Section, give notice thereof to each Bondholder. Except in the

C-25 case of a default in payrrent or purchase al ally Bald;, the Trustee maywithholdthe notice if and so long as a cormittee of its Responsible Officers in gxxl faith deternines that withholding the notice is in the interests of the Bondholders.

Eligibility of Trustee. The MasterTrustAgreerrent shall always hare a Trustee that is a trust conµmy, l:anking asscx:iatial or a l:ank haring the p:wers of a trust conµmy and is organized and doing business under the lcn,vs of the United States or any state or the District of Columbia, is authorized to conduct trust business under the lcn,vs of the State, is suqject to supervision or examination b,r United States, a state or District of Columbia authority and has (together with its corporate parent) a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual repat of caldtial.

Repl acerrent of Trustee. The Trustee may resign b,r notifying the City in writing prior to the prq:iosed effective date of the resignation. The holders of a majority in principal amount of the Bond; may remcwe the Trustee b,r notifying the remcwed Trustee and may appoint a successor Trustee with the City's consent. The City may rermve the Trustee, b,r notice in writing delivered to the Trustee at least sixty (60) days prior to the proposed rermval date; pro.tided, hcwever, that the City shall have no right to remcwe the Trustee during any tirre when an Event of Default has occurred and is continuing or when an event has occurred and is continuing or condition exists which with the giving of notice or the passage of tirre or l:x:Jth would be an Event of Default.

No resignation or remcwal of the Trustee underthis Section shall be effective until a new Trustee has taken office and delivered a written acceptance of its appointrrent to the retiring Trustee and to the City. lmrrediately thereafter, the retiring Trustee shall transfer all property held b,r it as Trustee to the successcr Trustee, the resignati al cr remcwal of the retiring Trustee shal I then ( but only then) become effective and the successor Trustee shall hare all the rights, p:wers and duties of the Trustee under the Master Trust A greerrent.

If the Trustee resigns or is remcwed or for any reason is unable or unwilling to perform its duties underthe Master Trust A greerrent, the City shal I promptly appoint a successor Trustee.

If a Trustee is not perfcrning its duties hereunder and a successcr Trustee cb2s not take office within sixty (60) days after the retiring Trustee delivers notice of resignation or the City delivers notice of remcwal, the retiring Trustee, the City or the holders of a majority in principal amount of the Bald; may petition ally court of competent j uri sd cti on for the ar;poi ntrrent of a successor Trustee.

Paving Agent. The City may upon notice to the Trustee at any tirre or from tirre totirre ar;pdnt a Pa,ringAgent cr Paying Agents fcrthe Bald; cr fcr ally Series of Bald;, and each Paying Agent, if other than the Trustee, shal I designate to the City and the Trustee its principal office and signify its acceptance of the duties and obligations imposed upon it hereunder or under a Supplerrental Trust Agreerrent b,r a written instrurrent of acceptance delivered to the City and the Trustee under which each such Paying Agent wi II agree, particularly:

(a) to hold all sums held b,r it for the payrrent of the principal of, premium or interest al Bond; in trust for the benefit of the Balcholders until such sums shall be paid to such Balcholders cr otherwise disposed of as herein pro.tided;

(b) to keep such oooks and reccrd, as shall be consistent with prudent industry practice, to rrake such oocks and reccrd, arailable fcr inspectial b,r the City and the Trustee al each Business Day during reasalabl e l:usi ness hours; and

C-26 (c) upai the recµest of the Trustee, tofatfwith deliver to the Trustee all sum, so held in trust b,r such Paying Agent.

Registrar. The City shall appoint the Registrar for the Bonds or a Registrar or Registrars fcr any Seri es of Bands and may from ti rre to ti rre rennte a Reg strar and name a repl acerrent. Each Registrar, if ether than the Trustee, shall designate to the Trustee, the Paying Agent for the Baids for which it is Regstrar, and signify its acceptance of the duties inµ:ised upai it hereunder or under a Supplerrental Trust Agreerrent b,r a written instrurrent of acceptance delivered to the City and the Trustee under which such Registrar will agree, particularly, to keep such books and records as shall be consistent with prudent industry practice and to make such books and reccrds availabie for inspection b,r the City, the Trustee, and the Paying Agent for the Bonds fcrwhich it is Regstrar on each Business Day during reasonable business hours.

Other Aq2nts. The City, or the Trustee with the consent of the City, may from tirre to tirre appoint other agents as may be appropriate at the tirre to perform duties and obligations under the Master Trust Agreerrent or under a Supplerrental Trust Agreerrent al I as pr0.tided b,r Supplerrental Trust Agreerrent or resolution of the City.

Several Capacities. Anything in the MasterTrustAgreerrent to the contrary notwithstanding, with the consent of the City, the sarre entity may serve under the Master Trust Agreerrent as the Trustee or a Paying Agent, Registrar and any other agent as appointed to perform duties or obligations under the Master Trust Agreerrent, under a Supplerrental Trust Agreerrent or an escrcw agreerrent, or in any corrbination of such capacities, to the extent pernined b,r lcn,v. A Paying Agent and the Registrar shall be entitled to the same protectiais, linitations from liability and indemnities afforded to the Trustee under the Master Trust Agreerrent.

Co-Trustees. Ar;pdntrrent of Co-Trustee. It is reccgnized that in the case of the Reserve Fund, which will secure pro rata each Series of Bonds and all Outstanding Parity Bonds, it may be more corwenient for another fiduciary to hold such Reserve Fund, cr a portion thereof. Consequently, it may be necessary that the City appoint an additional individual or institution as a separate or co-trustee. In the case of the Reserve Fund, the City shall appoint a co-trustee.

A ccounti ng Records and Reports of the Trustee.

(a) The Trustee shall at all tirres keep, or cause to be kept, proper records in which complete and accurate entries shal I be made of al I transactions made b,r it relating to the proceeds of the Bonds and all funds and accounts established b,r it pursuant to the Master Trust Agreerrent. Such records shall be available for inspection with reasonable prior notice b,r the City on each Business Day during reasonable business hours and b,r any Bondholder, or his agent or representative duly authorized in writing, at reasonable hours and under reasonable ci rcum;tances.

(b) The Trustee shall p-0.tide to the City each m:rth, and at any other tirre recµested b,r the City, a rep:rt of any Baid p-cxeeds received during that m:rth, if any, and the amounts deposited into each fund and account held b,r it under the Master Trust Agreerrent and the amount disbursed from such funds and accounts, the earnings thereon, the endng balance in each of such funds and accoonts and the i nvestrrents of each such fund and account.

(c) The Trustee shall annually, within thirty (30) days after the end of the Fiscal Year, furnish to the City and to each Bondholder who shall have filed his name and address with the Trustee fcr such r:urp:ise (at such Baidhdder's cost) a staterrent (which need not be audited) c0.teri ng receipts, interest, disburserrents, allocation and application of Bond p-oceeds, Re.tenues and any

C-27 other mone,rs in any of the fund, and accounts established b,r it pursuant to the M aster Trust Agreement or any Supplemental Trust Agreement for the preceding year.

MODIFICATION OF THE MASTER TRUST AGREEMENT

Supplemental Trust Agreements Not Requiring Consent of Bondholders. The City may, from time to time and at any time, withrut the caisent of cr notice to the Bondholders, execute and deliver Suppemental Trust Agreements suppementing andµ amending the Master Trust Agreement or any Sur;plernental Trust Agreement as fdlcws:

(a) to pro.tide for the issuance of a Series or multiple Series of Bonds under the p-o.tisiais of Section 2.08 of the Master Trust Agreement and to set forth the term; of such Bond; and the special p-o.ti si ms which shal I appy to such Baid,;

(b) to cure any formal defect, mission, incaisistency or arrbiguity in, or answer any cµestions arising under, the Master Trust Agreement or any Sur;plemental Trust Agreement, pro.tided such supplement or amendment is not materially ad.terse to the Bondholders;

(c) to add to the co.tenants and agreements of the City in the Master Trust Agreement cr any Suppemental Trust Agreement other Co.tenants and agreements, or to surrender any right or pcwer reserved or conferred upai the City, pro.tided such supplement or amendment shall not ad.tersely affect the interests of the Baidhd ders;

(d) to confirm, as further assurance, any interest of the Trustee in and to the Revenues cr in and to the fund, and accounts held b,r the Trustee or any other agent cr in and to any other moneys, securities or fund, of the City pro.tided pursuant to the Master Trust Agreement or to otheiwise add additional security for the Bondholders;

(e) to evidence any change made in the terms of any Series of Bond; if such changes are authorized b,r the Supplemental Trust Agreement at the time the Series of Bond; is issued and such change is made in accordance with the term; of such Supp emental Trust Agreement;

(f) to carply with the recµirernents of the Trust Indenture Act of 1939, as frcrn time to time amended;

(g) to mxlify, alter, amend or suppement the Master Trust Agreement cr any Supplemental Trust Agreement in any other respect, which is not materially ad.terse to the B aidhol ders;

(h) to pro.tide for uncertificated Bond; cr for the issuance of coopais and bearer Bond; or Bond; registered only as to principal;

(i) to qualify the Bond; or a Series of Baid; fcr a rating or ratings b,r a natiaially recognized rating agency;

U) to accornmxlate the technical, q:ieratiaial and structural features of Bond; which are issued or are proposed to be issued, including, but not limited to, changes needed to accommodate commercial paper, auction bond;, variable rate or aqjustable rate bond;, discounted cr corrpcAJnd interest baid, or other fcrms of indebtedness which the City from time to time deems appropriate to incur;

C-28 (k) to accarmxlate the use of a Credt Facility or Licµidty Facility fcr specific Bonds or a specific Seri es of Bands; or

(I) to corrply with the recµiremnts of the Cale as are necessary, in the q:inion of Bond Coonsel, to prevent the federal income taxation of the interest on any Bonds, including, without linitatiai, the segregation of Sanitation Equipment Charges into different funds.

Before the City shall, pursuant to the provisions described alx:we, execute any Supplerrental Trust Agreerrent, there shall have been delivered to the City and Trustee an opinion of Bond Counsel to the effect that such Suppl errental Trust A greerrent is authorized or permitted by the Master Trust A greerrent and will, upon the execution and delivery thereof, be valid and binding upon the City in accordance with its terms.

Supplerrental TrustAgreerrent Requiring Consent of Bondholders.

(a) Except for any Supplerrental Trust Agreerrent entered into pursuant to the preceding Section and any Supplerrental Trust Agreerrent entered into pursuant to subsectiai (b) belcw, sul::ject to the terms and provisions caitained in Section 9.03 of the Master Trust Agreerrent and nct ctherwise, the holders of nct less than 51% in aggregate principal anrunt of the Bonds then Outstanding shal I have the right frcrn ti rre to ti rre to consent to and approve the executi ai by the City of any Supplerrental Trust Agreerrent deemed necessary cr desiral:je by the City fcr the purp:ises of mxlifying, altering, arrending, supperrenting cr rescinding, in any particular, any of the terms cr provi si ms contained in the Master Trust Agreerrent or in a Surµ errental Trust Agreerrent; provided, hcwever, that, unless awoved in writing by the holders of all the Bonds then Outstandng or unless such change affects less than all Series of Bonds and the follONing subsectiai (b) is ar;picable, ncthing herein caitai ned shal I pernit, or be caistrued as pernini ng, (i) a change in the scheduled ti mes, anrunts cr currency of r:avrrent of the principal of cr interest on any Outstanding Baids or (ii) a reducti ai in the principal anrunt cr redeni:ti ai price of any Outstanding Baids cr the rate of interest thereai; and provided that ncthing herein caitained, includng the provisiais of subsectiai (b) belcw, shall, unless approved in writing by the holders of all the Baids then Outstanding, permit or be construed as pernining (iii) the creatiai of a lien (excer:t as expressly pernined by the Master Trust Agreerrent) upon or pledge of Revenues created by the Master Trust Agreerrent, ranking prior to cr on a pmty with the claim created by the Master Trust Agreemnt, (iv) except with respect to additiaial security which ITTc¥ be provided fcr a particular Series of Bonds, a preference or priaity of any Bond cr Baids cr Outstand ng Parity Bonds over any ether Bond cr Bands or Outstand ng Parity Baids with respect to the security granted therefcre under the Granting Clause hereof, or (v) a reduction in the aggregate principal anrunt of Baids the caisent of the Bondholders of which is required for any such Supplerrental Trust Agreerrent. Nothing herein contained, hcwever, shall be construed as making necessary the ai:p-oval by Bondholders of the execution of any Sur;plerrental Trust Agreerrent as authorized in the previoos Section, including the granting, fcr the benefit of particular Series of Bonds, security in addtion to the pledge of Revenues.

(b) The City may, from tirre to tirre and at any tirre, execute a Supplerrental Trust Agreerrent which arrends the provi si ms of an earlier Suppl errental Trust A greerrent under which a Series cr multiple Series of Baids were issued If such Supplerrental Trust Agreerrent is executed for one of the purposes set forth in Section 9.02 of the Master Trust Agreerrent no notice to or consent of the Bondholders shall be required. If such Supplerrental Trust Agreerrent caitains provisions which affect the rights and interests of less than all Series of Bonds Outstanding and Section 9.02 authorizing change without the consent of Bondholders is not applicable, then this subsection (b) rather than subsection (a) abcwe shall control and, suqject to the terms and provisions contained in this subsection (b) and not otherwise, the holders of not less than 51% in

C-29 aq;regate p-incipal arm.mt of the Outstarding Bards of all Series which are affected b,r such changes shall have the right from tim2 to tim2 to caisent to any Suppem2ntal Trust Ag-eem2nt d2erred necessary or desirable b,r the City for the r:urp:ises of mxli fyi ng, altering, arnendi ng, supp em2nti ng or rescinding, in any particular, any of the term; or provisions contained in such Supplem2ntal Trust Ag-eem2nt and affecting only the Bards of such Series; p-ovided, hcwever, that, unless approved in writing b,r the holders of all the Bards of all the affected Series then Outstanding, nothing herein contained shall pernit, or l:e caistrued as pernitting, (i) a change in the scheduled times, anrunts cr currency of r:avm2nt of the p-incipal of cr interest ai any Outstandng Bards of such Series cr (ii) a reduction in the p-incipal anrunt or redefl1'.(ion pice of any Outstandng Ba-ids of such Series cr the rate of interest thereon.

(c) If at any tim2the City shall desire to enter into any Sur;plem2ntal TrustAg-eem2nt for any of the r:urp:ises requiring a vcte of the Bondhdders, the City shall cause nctice of the prq:xised executiai of the Sur;plem2ntal Trust Ag-eem2nt to l:e given b,r first-class United States mail, p:istage prepaid, to all Bondholders cr, under subsection (b), all Bondholders of the affected Series. Such notice shal I briefly set forth the nature of the p-q:xised Sur;plem2ntal TrustAg-eem2nt and shall state that a cop,r thereof is on file at the office of the City for inspection b,r all Bondholders and it shall not l:e required that the Bondholders approve the final form of such Supplem2ntal Trust Agreem2nt but it shal I l:e sufficient if such Bondholders approve the substance thereof.

(ci) The City may execute and deliver such Suppem2ntal TrustAg-eem2nt in substantially the form described in such notice, but aily if there shall have first l:een delivered to the City (i) the required consents, in writing, of Baidhd ders and (ii) the qJi ni ai of Baid Counsel required b,r the Iast r:aragraµi of Section 9.02.

(e) If Bondholders of not less than the percentage of Bonds required shall have consented to and ai:proved the executiai and delivery thereof as herein provided, no Bondholders shall have any rig-it to cgect to the a::lq:Jtion of such Sur;plem2ntal Trust Agreem2nt, or to cgect to any of the term; and p-ovisiais contained therein or the operation thereof, cr in any rranner to cµestiai the p-q:riety of the executiai and delivery thereof, cr to enjdn cr restrain the City from executing the same cr from taking any action pursuant to the provisions thereof.

CREDIT PROVIDERS

If a Credit Facility is provided for a Series of Bonds or for specific Bonds, the City may in the Supplem2ntal Trust Agreem2nt under which such Bonds are issued, provide any or all of the follcwing rights to the Credit Provider as the City shall deem to l:e appropriate:

(1) the right to make requests of, direct or consent to the actions of the Trustee or to cthetwise direct proceedings all as p-ovided in Artide VII of the MasterTrustAg-eem2nt to the same extent and in pace of the cwners of the Ba-ids which are secured b,r the Credit Facility and for such r:urp:ises the Credit Provider shall l:e d2erred to l:e the Bondholder of such Bonds; and

(2) the righttoact in pace of the cwners of the Bards which are secured b,r the Credit Facility for r:urp:ises of removing a Trustee or aJJIX)i nti ng a Trustee under Article V 111 of the Master Trust Agreem2nt.

The rights granted to any such Credit Provider, with respect to the provisions of Articles VI and VI I cf the MasterTrustAg-eem2nt shall l:e dsregarded and l:e of no effect if the Credit Provider is in default of its paym2nt obligations under its Credit Facility.

C-30 MISCELLANEOUS PROVISIONS

Severability. In case any one or more of the provisions of the Master Trust Agreerrent, or of any Bonds issued hereunder shall, for any reason, be held to be illegal or invalid, such illegality or invalidity shall net affect any other provisiais of the Master Trust Agreerrent or any ether Baids, and the Master Trust Agreerrent and any Bonds issued hereund2r shall be caistrued and enforced as if such illegal or invalid provisions had not been contained herein or therein.

No Personal Liability of City Officials; Linited Liability of City to Baidholders. No covenant or agreerrent contained in the Bonds or in the Master Trust Agreerrent shall be deemed to be the covenant cr agreerrent of any present or future official, officer, agent or errplo,ree of the City, in his individual cap3.city, and no persai executing the Bonds shall be liabie personally ai the Baids or be suqject to any persaial liability cr accountabi Iity b,r reason of the issuance thereof.

FIFTH SUPPLEMENTAL TRUST AGREEMENT

The follONing provisions of the Fifth Sur;plerrental Trust Agreerrent are surrmarized belcw. Many of the provisions of the Fifth Supplerrental Trust Agreerrent are described earlier in the Official Staterrent reference shoo Id be made to the Fifth Suppl errental Trust A greerrent for a ful I descri pti on of its terms.

TAX COVENANTS

Series 2005-A Rebate Fund. The City hereb,r agrees that it will execute the Tax Certificate with respect to the Series 2005-A Bonds. Upai the written request of the City, the Trustee will create and establish the "City of Los Angeles Sanitation Equiprrent Charge Revenue Bonds Rebate Fund, Series 2005-A" (the "Series 2005-A Rebate Fund') to be held and adninistered b,r the Trustee. Notwithstandng any other provisiai contained herein relating to the dep:isit of investrrent earnings on armunts ai dep:isit in any fund cr accoont hereunder, at the written direction of the City, earnings which are sul::ject toa federal tax or rebate requirerrent, as provided in the Tax Certificate, shall be dep:isited in the Series 2005-A Bonds Rebate Fund for that purp:ise. The Trustee shall not be responsible for calculating the rebate amount or for the adequacy or ccrrectness of arty rebate report or rebate cal cul ati ms.

Preservation of Tax Exemption.

(a) The City shall carply with the covenants and agreerrents set forth in the Tax Certificate.

(b) The City shall net use cr pernit the use of any prcx:eeds of Series 2005-A Bonds or any ether funds held b,r the Trustee underthe Fifth Supp errental Trust A greerrent, d rectly or ind rectly, to acquire any securities or cbligatiais, and shall net use cr pernit the use of any armunts received b,r the City or the Trustee with respect to the Series 2005-A Bonds in any manner, and shall nct take cr pernit to be taken any ether action or actions, which would cause any Series 2005-A Bonds to be "federally guaranteed' within the meaning of Section 149(b) of the Code cr any "arbitrage l:md' within the meaning of Sectiai 148 of the Code and appiGilie regulations prcrnulgated from tirre to tirre thereund2r and under Sectiai 103(c) of the Code. The City shal I dJserve and nct violate the requirerrents of Sectiai 148ofthe Code and any appiGilie regulations. If the City is of the q:Jinion that it is necessary to restrict cr linittheyield ai the investrrent of maie,r held b,r the Trustee orto use such money in certain manners, in order to

C-31 as it is directed to take to use such rraie,r in accordance with such certificate and instructions, irrespective of whether the Trustee shares such opi ni on.

(c) The City shall not take any action, or fail to take any action, if any such action or failure to take action would cause the Series 2005-A Bonds to be" private activity bonds" within the rreaning of Section 141 of the Code.

(d) The City shail at all tirres do and ~rforrn all acts and things ~rnitted b,r I.M' and the Fifth Suppierrental Trust Agreerrent which are necessary or desirable in crder to assure that interest paid m the Seri es 2005--A Bmds (cr any of them) wi II not be ind uded in gross i ncorre fcr federal i ncorre tax PJrJX6e5 and shal I take no action that would result in such interest bei ng included in gross i ncorne for federal i ncorne tax purposes.

ADDITIONAL EVENT OF DEFAULT

As ~rmitted b,r Section 7.0l(f) of the MasterTrustAgreerrent, failure of the City to comply with the tax co.tenants set forth in Section 6.2 of the Fifth Suppierrental Trust Agreerrent shall be an Event of Default under Section 7.01 of the Master Trust Agreerrent with respect to the Series '2!Xf5-A Bonds issued r:ursuant to the Fifth Suppi errental Trust A greerrent.

C-32 APPENDIX D

PROPOSED FORM OF BOND COUNSEL OPINION

[ Closing Date]

City of Los Angeles 200 North Main Street Los Angeles, California 90012

$45,750,000 City of Los Angeles, California Sanitation Equiprrent Charge Revenue Bonds, Series 2005-A

L adi es and Gentl erren:

We have acted as Bond Counsel to the City of Los Angeles, California (the "City") in connection with the issuance of $45,750,000 aggregate principal amount of City of Los Angeles, California Sanitation Equiprrent Charge Revenue Bonds, Series 2005-A (the" Bonds"). The Bonds are being issued pursuant to the Charter of the City, Ordinance No. 174129 adopted thereunder on July 24, 2001, a resolution of the City adopted by the City Council on February 25, 2004, and a MasterTrustAgreerrent, dated as of September 1, 2001, as supplerrented by a Fifth Supplerrental Trust Agreerrent, dated as of July 1, 2005 (collectively, the "Trust Agreerrent"), each by and between the City and U.S. Bank National Association, as successor trustee (the ''Trustee"). The City intends to use the proceeds of the Bonds to finance the acquisition of refuse collection containers, equiprrent and vehicles and the design, planning, improverrent andft)r construction of certain sanitation facilities.

As Bond Counsel, we have exanined copies certified to us as being true and complete copies of the proceedings of the City in connection with the issuance of the Bonds. We have also exanined such certificates of officers of the City and others as we have considered necessary for the purposes of this opinion.

Based upon the foregoing, we are of the opinion that:

1. The Bonds constitute valid and binding linited obligations of the City as provided in the Trust Agreerrent, and are entitled to the benefits of the Trust Agreerrent. The Bonds are payable from Revenues (as such term is defined in the TrustAgreerrent).

2. The TrustAgreerrent has been duly and validly authorized, executed and delivered by the City and, assuning the enforceability thereof againstthe Trustee, constitutes the legally valid and binding obligation of the City, enforceabie against the City in accordance with its terms. The Trust Agreerrent creates a valid pledge, to secure the payrrent of principal of and interest on the Bonds, of Revenues and other amounts held by the Trustee in the funds and accounts established pursuant to the Trust Agreerrent, suqject to the provisions of the Trust Agreerrent permitting the application thereof for the purposes and on the terms and conditions set forth therein.

The opinions expressed in paragraphs 1 and 2 above are qualified to the extent the enforceability of the Bonds and the Trust Agreerrent may be limited by applicable bankruptcy, insolvency, debt

D-1 aqjustrrent, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally or as to the availability of any particular remedy. The enforceability of the Bonds and the Trust Agreerrent is suqject to the effect of general principles of equity, including, without linitation, concepts of materiality, reasonableness, good faith and fair dealing, to the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, to the limitations on legal remedies against cities in California and to any linitations upon the imposition of fees and charges under Article XIII C or Article XIII D of the California Constitution. No opinion is expressed herein regarding the effect Article XIII C or Article XIII D of the California Constitution may have on Revenues (as such term is defined in the Trust Agreerrent).

No opi ni on is expressed herei n on the accuracy, cornpl eteness or sufficiency of the Official Staterrent or other offering material relating to the Bands.

Respectfully submitted,

D-2 APPENDIX E

PROPOSED FORM OF SPECIAL TAX COUNSEL OPINION

[ Closing Date]

City of Los Angeles Los Angeles, California

Re: $45,750,CXX) City of Los Angeles, California Sanitation Equiprrent Charge Revenue Bond; Seri es 2005-A

Ladies and Gentl erren:

We have acted as Special Tax Counsel to the City of Los Angeles, California (the "City"), in connection with the issuance of its $45,750,CXXl aggregate principal amount of Sanitation Equiprrent Charge Revenue Bond;, Series 2005-A (the" Bond,"). The Bond, are authorized underthe Charter of the City and Ordinance No. 174129, adopted by the City on July 24, 2001 (the "Ordinance"), and are being issued under a Master Trust Agreerrent, dated as of September 1, 2001, as amended and supplerrented, and a Fifth Supplerrental Trust Agreerrent, dated as of July 1, 2005 (collectively, the "Trust Agreerrent''), by and between the City and U.S. Bank National Association, as successor trustee (the "'Trustee"). Capitalized terms not otherwise defined herein shall have the rreanings ascribed thereto in the Trust A greerrent.

We have examined originals, or copies identified to our satisfaction as being true copies, of the Ordi nance, the Resol uti on, the Trust A greerrent, the Tax Certificate relating to the B one!, (the ''Tax Certificate"), the opinion of Fulbright& Jaworski L.L.P., Bond Counsel, certificates of the City and others, and such other docurrents, opinions and matters as we have considered necessary or appropriate under the ci rcumstances to render the opi ni ons set forth herein.

Certain requirerrents and procedures contained or referred to in the Trust Agreerrent, the Tax Certificate and other relevant docurrents rnay be changed and certain actions (including, without linitation, defeasance of the Bonds) rnay be taken or omitted under the circumstances and suqject to the terms and conditions set forth in such docurrents, upon the ad.lice or with the appr0.ting opinion of nati anal ly recognized bond counsel. No opinion is expressed herein as to any Bond if any such change occurs or action is taken or onitted upon the ad.lice or appr0.tal of counsel other than ourselves.

We have assurred the genuineness of all docurrents and signatures presented to us. We have not undertaken to verify independently, and have assumed, the accuracy of the factual matters represented, warranted or certified in the docurrents we reviaved. We have also assumed compliance with all c0.tenants and agreerrents contained in the Trust Agreerrent and the Tax Certificate, including (without linitation) c0.tenants and agreerrents compliance with which is necessary to assure that future actions or oni ssi ons wi 11 not cause the interest on the B one!, to be incl uded i n gross i ncorne for federal i ncorre tax purposes. Further, we have assumed the correctness of the conclusion contained in the opinion of Bond Counsel that the Bond, constitute the legally valid and binding special obligations of the City, payable frorn and secured by a pledge of the Revenues (defined in the Trust Agreerrent), suqject to the pr0.tisions

E-1 of the Ordinance and the Trust Agreerrent pernining the application thereof for the purposes and on the term; and conditions set forth therein.

B ased on and suqj ect to the foregoing, and i n reliance thereon, as of the date hereof, we are of the opi ni on that, under existing I aw:

1. Assuming corrpliance b,r the City with certain covenants in the Trust Agreerrent and the Tax Certificate and requirerrents of the Internal Revenue Code of 1986, as arrended, regarding the use, expenditure and i nvestrrent of proceeds of the Bands and the ti rrely payrrent of certain i nvestrrent earnings to the United States, interest on the Bonds is excludable from gross income for federal income tax purposes. Failure to comply with such covenants and requirerrents may cause interest on the Bonds to be included in federal gross income retroactive to the date of issuance of the Bonds. Further, we render no opinion as to the exclusion from gross income for federal income tax purposes of the interest on the Bonds in the event any action is taken or onined to be taken relating to such covenants and requirerrents upon the approval of counsel other than ourselves.

2. Interest on the Bonds is not treated as an item of tax preference in calculating the federal alternative ni ni mum taxable income of individuals and corporations. Interest on the Bands is, hcwever, included as an adjustrrent in the calculation of federal corporate alternative ninirnum taxable income and may therefore affect a corporation's alternative minimum tax liability.

3. I nterest on the Bands is exerrpt from personal income taxes imposed b,r the State of California

We express no opinion on any matter other than as specifically set forth herein.

Respectfully subnined,

E-2 APPENDIX F

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (the" Disclosure Certificate") is executed and delivered b,r the City of Los Angeles, California (the "City") in connection with the issuance b,r the City of $45,750,000 aggregate principal amount of Sanitation Equiprrent Charge Revenue Bonds, Series 2005-A (the "Bonds"). The Bonds are being issued pursuant to a Master Trust Agreerrent dated as of September 1, 2001 and a Fifth Supplerrental Trust Agreerrent dated as of July 1, 2005 (collectively, the "Trust Agreerrent'') between the City and U.S. Bank National Association, as successor trustee (the ''Trustee"). The City covenants and agrees as fol I cws.

Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered b,r the City for the benefit of the Holders and Beneficial owners of the Bonds and in order to assist the Participating Underwriters in corrplying with Securities and Exchange Commission Rule 15c2-l 2.

Section 2. Definitions. In addition to the definitions set forth in the Trust Agreerrent, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Disclosure Certificate, the follcwing capitalized terms shall have the follcwing meanings:

"Annual Report'' shall rrean any Annual Report provided b,r the City pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

"Beneficial owner" shall rrean any person who (a) has or shares the pcwer, directly or indirectly, to vote or consent with respect to, or to dispose of cwnership of, any Bonds (including persons holding Bonds through noninees, depositories or other intermediaries), or (b) is treated as the cwner of any Bonds for federal i ncorne tax purposes.

"Dissemination Agent'' shall mean each of the City Adninistrative Officer of the City or any other person authorized to act on his behalf, acting in the capacity of Dissemination Agent, or any successor Dissemination Agent designated in writing b,r the City and which has filed with the City a written acceptance of such designation.

" Halder" shal I rrean the person i n whose name any Bond shal I be registered.

"Listed Events" shall rrean any of the events listed in Section 5(a) of this Disclosure Certificate as Listed Events.

"Official Staterrent" shall mean the Official Staterrent datedJ une 22, 2005, issued b,r the City in connection with the sale of the Bonds.

"National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. The National Repositories currently approved b,r the Securities and Exchange Commission are set forth in its website located at http: //vlMMi.sec.gov fi nfofrnunici pal/nrmsir.htm

"Participating Underwriter" shall rrean any of the original underwriters of the Bonds required to corrply with the Rule in connection with the offering of the Bonds.

"Repository" shall mean each National Repository and each State Repository, if any.

F-1 "Rule" shall mean Rule 15c2-12 acbpted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"State'' shall mean the State of California

"State Repository" shall mean any public or private repository or entity designated by the State as a state repository for the purpose of the Rul e and recognized as such by the Securities and Exchange Commission of the United States. As of the date of this Disclosure Certificate, there is no State Repository.

Section 3. Provision of Annual Reports.

(a) The City shall cause the Dissenination Agent to, not later than June 30 of each year, commencingJ une 30, 2006, for the report for the 2004-05 fiscal year, or if the fiscal year end changes fromJ une 30, not later than 365 days afterthe end of the City's fiscal year, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. If the Dissemination Agent is other than the City or the City Administrative Officer, not later than fifteen (15) days prior to said date, the City shall provide the Annual Report to the Dissenination Agent (if otherthan the City). The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross,eference other information as provided in Section 4 of this Disclosure Certificate; provided that the City's audited financial statements may be submitted separately from the balance of the Annual Report if they are not available by that date. If the City's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c).

(b) If the City is unable to provide to the Repositories an Annual Report by the date required in subsection (a), the City shall send a notice to each Repository in substantially the form attached as Exhibit A hereto.

(i) deternine each year prior to the date for providing the Annual Report the name and address of each Repository; and

(ii) if the Dissenination Agent is otherthan the City, file a report with the City certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided and listing all the Repositories to which it was provided.

Section 4. Content of Annual Reports. The City's Annual Report shall contain or incorporate by reference the fol Icwi ng:

(1) The audited financial statements of the City for the prior fiscal year, prepared accordance with generally accepted accounting principles applicable to governmental entities from time to time. If the City's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a) hereof, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement, and the audited financial statements shal I be fi Ied in the same manner as the Annual Report when they become avai I able.

(2) An update to the tables set forth in the Official Statement under the caption "SANITATION EQUIPMENT CHARGE" entitled ''Table No. 2-Sanitation Equipment Charge Rate History," "Table No. 3-Department of Water and Paver Billings and Collections, Sanitation Equipment Charge," "Table No. 4-Historical Debt Service Coverage," and "Table No. 5-Pro--Forma Statement of Debt Service

F-2 Coverage" and an urx:Jate to the follcwing sections set forth in APPENDIX A to the Official Statement: "BUDGET AND REVENUES," "MAJOR GENERAL FUND REVENUE SOURCES," "FINANCIAL OPERATIONS," "BONDED AND OTHER INDEBTEDNESS" and "LITIGATION." The City need not urx:Jate any particular table or chart included in such sections so long as (i) the City provides urx:Jated information generally of the type previously included in such table or chart or (ii) such table or chart constitutes information not deemed to be operating data under the Rule.

Any or all of the item; listed alxlve may be incorporated b,r reference from other documents, including official statements of debt issues of the City or related public entities, which have been subnitted to each of the Repositories or the Securities and Exchange Commission. If the document incorporated b,r reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The City shall clearly identify each such other documents so incorporated b,r reference.

Section 5. Reporting of Significant Events.

(a) To the extent applicable and pursuanttothe provisions of this Section 5, the City shall give, or cause to be given, notice of the occurrence of any of the follcwing events with respect to the Bonds, if material (each of which is a "Listed Event"):

( 1) principal and interest payment delinquencies;

(2) non-payment related defaults;

(3) modifications to rights to Bondholders;

( 4) opti anal , contingent or unscheduled bond cal Is;

( 5) defeasances;

( 6) rati ng changes;

( 7) adverse tax opinions or events affecting the tax-exempt status of the Bands;

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

(9) unscheduled draws on credit enhancements reflecting financial difficulties;

(10) substitution of credit or liquidity providers, or their failure to perform; and

( 11) rel ease, substitution or sale of property securing repayment of the Bands.

(b) Whenever the City obtains kncwledge of the occurrence of a Listed Event, the City shall as soon as possible determine if such event would be material under applicable federal securities laws.

(c) If the City has determined that kncwledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the City shall promptly file notice of such occurrence with each National Repository or with the Municipal Securities Rulemaking Board, and with the State Repository. Notwithstanding the foregoing, notice of Listed Events described in clauses (4) and (5) of subsection (a) need not be given any earlier than the notice (if any) of the underlying event is given to Hal ders of affected Bands pursuant to the Trust Agreement.

F-3 Section 6. Ternination of Reporting Obligation. The City's obligations under the Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all the Bonds. If such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such ternination in the same manner as for a Listed Event under Section S(c).

Section 7. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent other than the original Dissemination Agent to assist it in carrying out its obligations under the Disclosure Certificate, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent (otherthan the City or the City Adninistrative Officer) shall not be responsible in any manner for the content of any notice or report prepared b,r the City pursuanttothe Disclosure Certificate.

Section 8. Amendment; Waiver. Notwithstanding any other provision of the Disclosure Certificate, the City may amend the Di sci osure Certificate, and any provision of the Di sci osure Certificate may be waived, provided that the follcwing conditions are satisfied:

(a) If the amendment or waiver relates to the provisions relating to the filing of an Annual Report or the giving of notice of a Listed Event as set forth in Sections 3(a), 4 or S(a) hereof, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of busi ness conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, aftertaking into account any amendments or interpretations of the Rule, as wel I as any change in circumstances; and

(c) The amendment or waiver either (i) is approved b,r the Holders of the Bonds in the same manner as provided in the Trust Agreement for amendments to the Trust Agreement with the consent of Holders or (ii) does not, in the opinion of nationally recognized bond counsel, materially irrpair the i nterests of the Holders or Benefi ci al owners of the B ands.

In the event of any amendment or waiver of a provision of this Disclosure Certificate, the City shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented b,r the City. In addition, if the amendment relates to the accounting principles to be follcwed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section S(c) hereof and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on-the basis of the former accounting principles.

Section 9. Additional Information. Nothing in the Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissenination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required b,r or notice of occurrence of a Listed Event in addition to that which is specifically required b,r this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

F-4 Section 10. Default. In the event of a failure of the City to comply with any provision of this Disclosure Certificate, the Trustee may (and, at the request of any Participating Underwriter or the Holders of at least 25% aggregate principal amount of Outstanding Bonds, shall), or any Holder or Beneficial owner of the Bonds or any Participating Underwriter may take such actions as may be necessary and appropriate, incl udi ng seeki ng mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate; provided, that any such action may be instituted only in the Superior Court of the State in and for the County of Los Angeles or in the U.S. District Court in or nearesttothe County of Los Angeles. A default underthis Disclosure Certificate shall not be deemed an Event of Default underthe Trust Agreement, and the sole remedy underthis Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance.

Section 11. Duties, I rrmunities and Liabilities of Dissenination Agent. The Dissenination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, the Trustee and the City agrees to i ndernni fy and save the Di ssemi nation Agent, its officers, di rectors, emplo,rees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of its p:wers and duties hereunder, including the costs and expenses (including attorneys' fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful nisconduct. The obligations of the City under this Section 11 shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.

Section 12. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Trustee, the Dissemination Agent, the Participating Underwriters and the Holders and Beneficial Owners from ti me to ti me of the Bands, and shal I create no rights i n any other person or entity.

Dated: J uly 7, 2005

CITY OF LOS ANGELES, CALIFORNIA

Assistant City Administrative Officer

F-5 EXHIBIT A

NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: City of Los Angeles, California (the "City")

Name of Bond Issue: Sanitation Equipment Charge Revenue Bonds, Series 2005-A

Date of Issuance: J uly 7, 2005

NOTICE IS HEREBY GIVEN that the City has not pr0.tided an Annual Report with respect to the abcwe--narred Bonds as required b,r the Continuing Disclosure Certificate datedJ uly 7, 2005. The City anticipates that the Annual Report wi 11 be fi I ed b,r ______.

Dated:

CITY OF LOS ANGELES, CALIFORNIA

F--6 APPENDIX G

BOOK ENTRY-ONLY SYSTEM

1. The Depository Trust Corrpany ("DTC"), New Yark, NEW Yark, will act as securities depository forthe Bonds. The Bonds will be issued as fully,egistered 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,egistered Bond certificate will be issued for the Bonds, each in the aggregate principal amount of the Bonds, and will be deposited with DTC.

2. DTC, the world's largest depository, is a linited---purpose trust company organized under the NEWY ark Banking Law, a "banking organization" within the meaning of the NewY ark Banking LiM', a merrber of the Federal Reserve System, a "clearing corporation" within the meaning of the New Yark 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 2 million issues of U.S. and non--U.S. equity issues, corporate and municipal debt, issues, and money market instruments from over 85 countries that DTC's participants ("Direct Participants") deposit with 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 elininates the need for physical movement of securities certificates. Direct Participants include l:x:Jth U.S. and non--U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly--cwned subsidiary of The Depository Trust& Clearing Corporation ("DTCC"). DTCC, in turn, is cwned by a nurrber of Direct Participants of DTC and Merrbers of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the NEW Yark Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as l:x:Jth U.S. and non U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard& Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com

3. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The cwnership interest of each actual purchaser of each Bond ("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. B enefi ci al Owners are, hewever, expected to receive written confi rmati ans provi di ng detai Is 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 cwnership interests in the Bands are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of B enefi ci al owners. B enefi ci al owners wi 11 not receive certificates representing their cwnershi p interests in Bonds, except in the eventthat use of the book-entry system forthe Bonds is discontinued.

4. To facilitate subsequent transfers, all 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 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial cwnership. DTC has no kncwledge of the actual Beneficial owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be

G-1 the Beneficial owners. The Direct and Indirect Participants will remain responsible for keeping account of thei r holdings on behalf of their customers.

5. Corweyance of notices and other communications b,r DTC to Direct Participants, b,r Direct Participants to Indirect Participants, and b,r Direct Participants and Indirect Participants to Beneficial Owners wi 11 be governed b,r arrangements among them, suqj ect to any statutory or regulatory requirements as may be in effect from ti me to ti me. Benefi ci al owners of Bands may wish to take certai n steps to augment the transnission to them of notices of significant events with respect to the Bonds, such as rederrptions, tenders, defaults, and proposed amendments to the Bond documents. For exarrple, B enefi ci al owners of B ands may wish to ascertai n that the nominee holding the Bands for their benefit has agreed to obtain and transnit notices to Beneficial owners. In the alternative, Beneficial owners may wish to provide thei r names and addresses to the registrar and request that copies of notices be provided directly to them.

6. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to deternine b,r lot the amount of the interest of each Direct Participant in such issue to be redeemed.

7. Neither DTC nor Cede & Co. (nor any other DTC noninee) will consent or vote with respect to Bonds unless authorized b,r a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede& Co. a consenting or voting right to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

8. Redemption proceeds, distributions, and dividend payments on the Bonds will be made to Cede & Co., or such other noni nee as may be requested b,r 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 shewn on DTC's records. Payments b,r Participants to Beneficial owners will be governed b,r 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 nor of its nominee, the Trustee, or the City, suqject 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 noninee as may be requested b,r an authorized representative of DTC) is the responsibility of the City or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners wi 11 be the responsi bi I ity of Direct and Indirect Participants.

9. DTC may discontinue providing its services as depository with respect to the Bonds at any time b,r giving reasonable notice to the City or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered.

10. The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered.

11. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof.

The City cannot and does not give any assurances that DTC will distribute to Participants or that Participants or others will distribute to the Beneficial Owners payments of principal of and

G-2 interest and premium, if any, on the Bonds paid or any redemption or other notices or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The City is not responsible or liable for the failure of DTC or any Participant or Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Bonds or any error or delay relating thereto.

Neither the City nor the Trustee will have any responsibility or obiigation to Participants, to Indirect Participants orto any Beneficial OWnerwith respect to (i) the accuracy of any records maintained b,r DTC, any Participant, or any Indirect Participant; (ii) the payment b,r DTC or any Participant or Indirect Participant of any amount with respect to the principal of or prenium, if any, or interest on the Bonds; (iii) any notice which is permitted or required to be given to Holders under the Indenture; (iv) the selection b,r DTC, any Participant or any Indirect Participant of any person to receive payment in the event of a partial redemption of the Bonds; (v) any consent given or other action taken b,r DTC as Bondholder; or (vi) any other procedures or obligations of DTC, Participants or Indirect Participants under the book-entry system.

G-3 APPENDIX H

FORM OF MUNICIPAL BOND NEW ISSUE INSURANCE POLICY

H-1 Exhibit A F6IC flnanclal Guaranty Insurance Company 125 Park Avenue >low Yvrk. NY IOIH7 T 212"312·3000 T 81111· ,52·000 l

Municipal Bond New Issue Insurance Policy

Issuer: Policy Number: Control Number: 0010001

Bonds:

Ftnanc,al Guaranty Insurance Company ("Financial Gua York stock insurance company, in co11sidcratio11 of the payment of the premium and su r rms of this Policy, hereby unconditionally and ifrcvocably agrees to pay to U.S. Bank Tr ~ Association or its successor, as its agent (the "Fiscal /\gem"), for the benefit of Bondho rtion of the principal and interest on !he above- described debt obligations ( the "Bonds all become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer.

Financial Guaranty will make such payments to the Fiscal Agent on the date such principal or interest becomes Due for Payment or on the Business next follnwing the day on which Financial Guaranty shall have received Nc,tice of Nonpayment, whichever is later, The Fiscal Agent will disburse to the Bondholder the face ammmt of principal and interest which is then Due for Payment but is unpaid by reason of '\'onpayment by the Issuer but only upon hy the Fiscal Agent, in fonn reasonably satisfactory to it, of (i) evidence of the Bondholder's right to receive payment of the principal or interest Due for Payment and (ii) any appropriate instruments of that all of the Bondholder's rights to payment of such principal or interest Due for Payment shall thereupon vest in Financial Guaranty. Upon such disbursementr Fin:incial Guaranty shall hecnrnc the ovmcr of the Bond, appurtenant coupon or right to payment of principal or interest on such Bond and shall be fully subrogared to all of the Bondholder's rights thereunder, including the Bondholder's right to payment thereo[

"T'hls: Policy is non~cancc.:Uahle for any reason. 'fhe premiun1 on thJs Policy is not refundable for any reason, includ.ing the payment of the Bonds prior to their maturity. This Policy docs not insure against loss of any prepayment premium which nmy at any tirue bt:' payable vvil:h respect to any Bond.

r\s used tbe term "'Bondholder" n-1eans, as to a particular Bond. the person other than the Issuer who, at the lime c,f Nonpayment, is entitled under the terms of such Bond to payment thereof. "Due for Payment" rneans. \1irhcn to the principal of a th.e stated nraturity date thereof or the date on which the same shall have been duly called for sinking fond redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking ftmd redemption), acceleration or other advancemetll of 11IBlurity and means, when referring to interest on a !fond, the stated date for payment of interest. ""lonpaymellt" in respect of a Bond means the failure of the Issuer to have provided suffictent funds to the for payment in full of all

FGIC is a registered service msrk used by F111aroal Guaranty Insurance Company \.lnder license from its panml {';t'l;t1'l;j')ny, FGIC Corpomtiort Form 9000 (10/93) Page 1 of 2 F6IC financial Guaranty Insurance Company 125 Park Avcnut· Nev. York, NY 10017 T 212·)1231)1)1) T Rtlll·l5Z.Oll01

Municipal Bond New Issue Insurance Policy

principal and int·crcst Due for on such Bond, "Notice" JT1C:ans telephonic or telegraphl~ notice, suh.'iceqnently confinned in or wdtten notice by or certified mail) from a l!ondholder or a paying agent for the B~nds to Financial . . "Business Day" m~•,. ,any day other than a Saturday, Sunday or a on which the fiscal Agent is authom.cd law to (!li":sed.

In Witness Whereof, Financial Uuarancy has caused this cu with ils corporate seal and to be signed by its duly authorized officer in focsi effective and binding upon Financial Guaranty virtue of the countersignature of its

Prc!lideuJ

Effective Date: Authorized Representative

U.S. Bank Trust National Association, acknowledges that it has to perform the duties of Fi.seal under this Policy.

Authorized Offi

f GIC is a reg1s1erect serv1Ce mark usod by Fi11anc1al Guaranty Insurance Company under I~from its parent company, rG1C COTPOrallon. Farm 9000 {i 0/93) Page 2 of 2