NEW ISSUE -- BOOK-ENTRY ONLY RATINGS: Taxable (Federal) Moody's: Aaa Tax-Exempt (~,tate of California) Standard & Poor's: AAA Fitch: AAA (See "'RATINGS" herein) In the opinion of Orric~. Herrington f3> Sutcliffe LLP, Counsel, interest on the Bonds is not excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, but is exempt from State of California personal income taxes. Bond Counsel expresses no opinion regarding any other federal or state tax comequences relating to the ownership or disposition of. or the accrual or receipt of interest on, the Bonds. See "'f'AX MA'T''T'ERS" herein.

$426,131,120.25 COUNTY OF SACRAMENTO TAXABLE PENSION FUNDING BONDS, SERIES 2004 $324,582,426.50 Series 2004C-1 $39,147,165.75 Series 2004C-2 $62,401,528.00 Series 2004C-3 (Convertib:le Rate Securities) (Convertible Auction Rate Securities) (Convertible Auction Rate Securities) (CARSSM) (CARSSM) (CARSSM) Dated: Date of Delivery Due: As shovvn on inside cover page The County of Sacramento (the "County") is issuing its Taxable Pension Funding Bonds, Series 2004 (the "Bonds") pursuant to Articles 10 and 11 (commencing with Section 53570) of Chapter 3, Division 2, Title 5 of the Government Code of the State of California under an Indenture (the "Indenture") dated as of July 1, 2004, by and between the County and Deutsche Bank National Trust Company, as trustee (the "Trustee"), to refund the (as defined herein) evidencing the County's current unfunded actuarial accrued liability as of July l, 2004 to the Sacramento County Employees' Retirement System ("SCERS") and to pay the costs of the financing. The Bonds will be issued to refinance the County's statutory obligation pursuant to Section 31584 of the County Employees Retirement Law of 1937, as amended (the "Retirement Law"), to appropriate and make payments to SCERS for certain amounts arising as a result of retirement benefits accruing to members of SCERS. The County is obligated to satisfy its obligations under the Bonds from any money available in any fund in the County treasury. The Bonds are not limited as to payment to any special funds of the County. See "PLAN OF FINANCING" and " AND SOURCES OF PAYMENT FOR THE BONDS." The Bonds will be issued as Convertible Auction Rate Securities. Interest will not be payable with respect to the Series 2004C-1 Convertible Auction Rate Securities (the "C-1 CARS"), the Series 2004C-2 Convertible Auction Rate Securities (the "C-2 CARS") and the Series 2004C-3 Convertible Auction Rate Securities (the "C-3 CARS" and, together with the C-1 CARS and the,C-2 CARS, the "CARS") during their respective Initial Auction Rate Periods, being the period from the Date of Delivery to their respective Full Accretion Dates (defined below). Interest on the C-1 CARS will accrue from the Date of Delivery at 3.4225%, compounded semi-annually on January IO and July 10 of each year commencing July 10, 2004 to July»IO, 2006 (the "C-1 Full Accretion Date"). Interest on the C-2 CARS will accrue from the Date of Delivery at 4.6110%, compounded semi-annually on January IO and July 10 of each year commencing July 10, 2004 to July 10, 2009 (the "C-2 Full Accretion Date"). Interest on the C-3 CARS will accrue from the Date of Delivery at 5.6275%, compounded semi-annually on January 10 and July 10 of each year commencing July 10, 2004 to July 10, 2014 (the "C-3 Full Accretion Date"). For each subsequent Auction Rate Period, the CARS will bear interest on their accreted value as of their respective Full Accretion Dates at the Auction Rates determined by implementation of the Auction Procedures until or prior redemption or conversion, if any. See "THE BONDS - Convertible Auction Rate Securities (CARS)" and APPENDIX G - "AUCTION AND SETTLEMENT PROCEDURES."

The Bonds are being-issued in fully registered form, and when issued will be registered in the name of Cede & Co., as nominee ofThe Depository Trust Company ("DTC") in the United States. DIC will act as securities depository for the Bonds. Individual purchases will be made in book-entry form only in denominations of: $25,000 maturity amount or any integral multiple thereof. Purchasers will not receive certificates representing their beneficial ownership interest in the Bonds purchased. See APPENDIX C - "DTC AND THE BOOK-ENTRY SYSTEM." The C-1 CARS and the C-3 CARS are subject to mandatory sinking fund redemption prior to maturity as described herein. See "THE BONDS - Convertible Auction Rate Securities (CARS) - Mandatory Sinking Fund Redemption." The CARS are subject to optional redemption prior to maturity as described herein. See ''THE BONDS - Convertible Auction Rate Securities (CARS)- Optional Redemption.'' The payment of principal or accreted value of and interest on the Bonds when due will be insured by a insurance policy to be issued by MBIA Insurance Corporation (the "Insurer"), simultaneously with the delivery of the Bonds. See "FINANCIAL GUARANTY INSURANCE." MBIA THE BONDS DO NOT CONSTITUTE AN OBLIGATION OF THE COUNTY FOR WHICH THE COUNTY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE COUNTY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE BONDS NOR THE OBLIGATION OF THE COUNTY TO PAY THE PRINCIPAL, ACCRETED VALUE OR REDEMPTION PRICE OF OR THE INTEREST ON THE BONDS CONSTITUTES AN INDEBTEDNESS OF THE COUNTY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY LIMITATION.

This cover page contains information for general reference only. It is not intended to be a summary of the security or terms of this issue. Investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used on this cover page not otherwise defined shall have the meanings set forth herein. The Bonds will be offered when, as and if issued and received by the Underwriters, subject to the approval as to their legality by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel, and certain other conditions. First Southwest Company is serving as financial advisor to the County in connection with the issuance of the Bonds. Certain k,gal matters will be passed upon for the Underwriters by their counsel, Lofton & Jennings, San Francisco, California, and for the County by Hawkins Delafield & Wood LLP, Sacramento, California, Disclosure Counsel and by the County Counsel. It is anticipated that the Bonds will be available for delivery through the DTC book-entry system in New York, New York, and through the Euroclear System and Clearstream, Luxembourg in Europe on or about July I, 2004.

LEHMAN BROTHERS Bear, Stearns & Co. Inc. Banc of America Securities LLC Stone & Youngberg LLC E.J. De La Rosa & Co. Inc. Dated: June 24, 2004 ·

sM Servicemark of Inc. MATURITY SCHEDULE

$426,131,120.25 Series 2004C Convertible Auction Rate Securities (CARSSM)

Maturity Accreted Value Initial Full Accretion Date Initial Principal at Full Interest Date/Initial Subseries Qy.!yJ_Q) Amount Accretion Date Rate Auction Date CUSIPNo.t ISINt

Subseries 2004C-l 2030 $324,582,426.50 $347,675,000 3.4225% 7/10/06 78612PAA8 US78612PAA84

Subseries 2004C-2 2031 $39,147,165.75 $49,225,000 4.6110% 7/10/09 78612PAB6 US78612PAB67 Subseries 2004C-3 2033 $62,401,528.00 $108,850,000 5.6275% 7/10/14 78612PAC4 US78612PAC41

CUSIP and ISIN numbers are provided for reference only. Neither the County nor the Underwriters take any responsibility for the accuracy of such numbers. SM Servicemark of Lehman Brothers Inc. COUNTY OF SACRAMENTO, CALIFORNIA COUNTY OF SACRAMENTO BOARD OF SUPERVISORS Muriel P. Johnson, Chair District 3 Roger Dickinson Illa Collin · District I District 2

Roger Niello Don Nottoli· Dtstrict4 District 5

COUNTY OFFICIALS

Teny Schutten Geoffrey B. Davey Co~ty Executive Chief Financial/Operations Officer

Robert A. Ryan, Jr. Mark Norris County Counsel Director of Finance

SPECIAL SERVICES

BOND COUNSEL Orrick, Herrington & Sutcliffe LLP San Francisco, California

DISCLOSURE COUNSEL Hawkins Delafield & Wood LLP Sacramento, California

FINANCIAL ADVISOR First Southwest Company Woodland Hills, California

UNDERWRITERS' COUNSEL Lofton & Jennings San Francisco, California

TRUSTEE Deutsche Bank National Trust Company San Francisco,. California

BROKER".'DEALERS

Lehman Brothers Inc. . Bear, Stearns & Co. Inc. San Francisco, California Los Angeles, California · (Broker-Dealer for the C-1 and C-2 CARS) (Broker-Dealer for the C-3 CARS)

AUCTION AGENT Wilmington Trust Company Wilmington, Delaware

ACTUARIAL CONSULTANT Mercer Human Resource Consulting San Fr'!flcisco, California This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement. If given or made, such other information or representations must not be relied upon as having been authorized by the County or the Underwriters.

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

Certain of the information s~t forth herein has been obtained from official smirces which are believed to be reliable, but is not guaranteed as to accuracy or completeness and is not to_' be construed as a representation by the Underwriters. The information and expressions of opinion herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the County since the date hereof. This Official Statement is submitted with respect to the sale of the Bonds referred to herein and may not be reproduced or used, in whole or irt part, for any' other purpose, unless authorized in writing by the County. All summaries of the documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provi~ions. ·

In connection with the offering of the Bonds, the Underwriters may overallot or effect transactions which stabilize or maintain the market price of the bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, -may.be discontinued at any time. The Underwriters may offer and sell the Bonds to certain dealers, institutional investors arid others at prices lower than the public offering prices stated on the cover page hereof and said public offering prices may be changed from time to time by the Underwriters.

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

Certain statements in this Official Statement, which may be identified by the use of such terms as "plan," "project," "expect," "estimate," "budget" or other similar words, constitute forward-looking statements. Such forward-looking statements refer to the achievement of certain results or other expectation or performance which involve known and ·unknown risks, uncertainties and other factors. These risks, uncertainties and other factors may cause actual results, performance or achievements to be materially different from any projected results, performance or achievements described or implied by such forward-looking statements. The County does not plan to issue updates or revisions to such forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based, occur, or if actual results, performance or achievements are materially different from any results, performance or achievements described or implied by such forward-looking statements.

The Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon an exemption from the registration requirements cont8:lled in such Act.

Other than with respect to information concerning the Insurer contained under the caption "FINANCIAL GUARANTY INSURANCE" and APPENDIX F - "FINANCIAL GUARANTY INSURANCE POLICY'' herein, none of the information in this Official Statement has been supplied or verified by the Insurer and the Insurer makes no representations or wammty; express or implied, as to (i) the accuracy or completeness of such information; or (ii) the validity of the Bonds. TABLE OF CONTENTS

SUJvlJvfARY STATEMENT ...... S-1 INTRODUCTION ...... : ...... : ...... 1 Purpose ...... :...... 1 Security and So:urces of Payment for the Bonds ...... 1 Summaries Not _Definitive ...... 2 Continuing Disclosure ...... 2 PLAN OF FINANCING ...... :...... 2 Ge:neral ...... ,...... 2 The Debenture ...... 2 SOUR.CES AND USES OF FUNDS ...... 3 THEBONDS ...... 3 Redemption Procedures ...... 9 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS ...... 9 Ge:neral ...... 9 De,bt Service Schedule ...... 11 Financial Guaranty Insurance Policy ...... 11 FIN.Al>TCIAL GUARANTY IN-SURAN CE ...... 11 The Policy...... 12 The Insurer ...... 12 Insurer Information ...... 13 Financial Strength Ratings of the Insurer...... 13 ADDI'TIONAL BONDS ...... 14 RISKFACTORS ...... 14 Litnitation of Remedies ...... 14 County Financial Stress ...... 14 Retirement Plan ...... 15 State of Califomia Financial Condition ...... 16 VALIDATION ...... 17 THECOUNTY ...... 17 COUl\rTY FINANCIAL INFORMATION ...... 17 COUl\rTY INVESTMENT POLICY ...... 17 TAX ~JATIERS ...... 18 Tax: Status of the Bonds ...... 18 Sale and Exchange ofBonds ...... 19 Foreign Investors ...... 19 ERISA. CONSIDERATIONS ...... 19 CER.T,I\IN LEGAL MATTERS ...... 20 CONTINUING DISCLOSURE ...... 20 FINA}:rCIAL STATEMENTS ...... 21 LITIGA.TION ...... 21 RAID:rGS ...... 22 UNDERWRITING ...... 22 FINAJ'TCIAL ADVISOR ...... 22 MISCELLANEOUS ...... 23 APPENDIX A- CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA ...... A-1 APPENDIXB- THE COUNTY OF SACRAMENTO AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2003 ...... B-1 APPENDIXC­ DTC AND THE BOOK-ENTRY ONLY SYSTEM ...... C-1 APPENDIXD­ SUMMARY OF THE INDENTURE ...... D-1 APPENDIXE­ PROPOSED FORM OF OPINION OF BOND COUNSEL ...... E-1 APPENDIXF­ FINANCIAL GUARANTY INSURANCE POLICY ...... F-1 APPENDIXG­ AUCTION AND SETTLEMENT PROCEDURES ...... :...... G-1 APPENDIXH­ TABLE OF ACCRETED VALUES ...... H-1 APPENDIX! - FORM OF CONTINUlNG DISCLOSURE CERTIFICATE ...... 1-l

ii SUMMARY STATEMENT

This Summary Statement is qualified in its entirety by reference. to the more detailed infonnation included and referred to elsewhere in this Official Statement. The offering of the Bonds to potential investors · is made only by means of the entire Official Statement. Capitalized terms used in this Summary Statement and not otherwise defined herein shall have the respective meanings assigned to them elsewhere in this Official Statement.

The County

The County of Sacramento (the "County") was incorporated in 1850·and encompasses approximately 994 square miles in the middle of the 400-mile-long Central Valley. The County's largest city, the City of Sacramento, is the seat of government for the State of California and also serves as the County seat The County has a charter form of government. It is governed by a five-member Board of Supervisors of the County (the "Board of Supervisors") elected to serve staggered four-year terms. A County Executive appointed by the Board of Supervisors conducts the day-to-day business of the County. See APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA" herein.

Purpose of the Issue

The County Employees Retirement Law of 1937, as amended (the ''Retirement Law"), obligates the Board of Supervisors to appropriate annual contributions to the Sacramento County Employees' Retirement System ("SCERS") to fund pension benefits for its employees, and to amortize the unfunded actuarial accrued liability ("UAAL") with respect to such pension benefits. The County will issue the Bonds pursuant to the Indenture (the "Indenture") dated as of July 1, 2004, by and between the County and Deutsche Bank National Trust Company, as trustee (the "Trustee") to refund a debenture (the ''Debenture") evidencing $420,000,000 of the County's current UAAL to SCERS as of July I, 2004 and to pay the costs of the financing. validation

The issuance of the Borids by the County as obligations of the County imposed by law, and certain other matters, were validated by a judgment of the Superior Court of the State of Califomia rendered on May 4, 2004. The time period for the filing of appeals with respect to the judgment expired on June 5, 2004. No appeals were filed and therefore, the judgment is final and unappealable. See "VALIDATION" herein.

Security and Sources of Payment of the Bonds

General. The Bonds are secured under the· terms of the Indenture as described herein. The Bonds are exempt from the debt limitations of the California Constitution, and the County is obligated to satisfy its obligations under the Bonds from any money lawfully available in any fond iii the County treasury and the payment of the principal or accreted value of and interest on the Bonds is not limited to any special ·source of funds of the County. The Bonds do not constitute an obligation of SCERS. The Indenture provides that the County is obligated to deposit in the Debt Service Fund maintained in the treasury of the County not later than July 31 of each Fiscal Year the amount of the County's obligation under the Bonds in such Fiscal Year, and on the last Business Day immediately prior to each. payment date for the Bonds to withdra'iv from the Debt Servic:e Fund arid deposit with the Trustee in immediately available funds an amount of money equal to the County's obligation on the Bonds on such date which amount is to be deposited by the Trustee in the Redemption Fund No assurance can be given· as to the amount and source of funds available in the' County treasury for such transfer at any particular tiine.

S-1 THE BONDS DO NOT CONSTITUTE AN OBLIGATION OF THE COUNTY FOR WHICH THE COUNTY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE COUNTY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE BONDS NOR THE OBLIGATION OF THE COUNTY TO PAY THE PRINCIPAL, ACCRETED VALUE OR REDEMPTION PRICE OF OR THE INTEREST ON THE BONDS CONSTITUTES AN INDEBTEDNESS OF THE COUNTY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION.

Financial Guaranty Insurance Policy. Payment of the principal or accreted value of and interest on the Bonds when due will be insured by a financial guaranty insurance policy to be issued by MB IA Insurance Corporation (the ''Insurer") concurrently with the delivery of the Bonds. See "FINANCIAL GUARANTY INSURANCE" and APPENDIX F - "FINANCIAL GUARANTY INSURANCE POLICY" herein.

Risk Factors

An investment in the Bonds involves certain risks. Investors must read this entire Official Statement to obtain information essential in making an informed investment decision. See ''RISK FACTORS" herein for a discussion of factors that should be considered, in addition to the other matters set forth herein, in evaluating the investment quality of the Bonds.

The Bonds

The CARS will be in fully registered form and will be issued in denominations of $25,000 Maturity Amount or any integral multiple thereof.

Book-Entry Only System

The Bonds will be issued in book-entry form and when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC''). DTC will act as securities depository for the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only. Clearstream and the Euroclear System may hold omnibus positions on behalf of their participants through customers' securities accounts in Clearstream's and Euroclear's names on the books of their respective depositories which in turn are to hold such positions in customers' securities accounts in the depositories' names on the books of DTC. See APPENDIX C - "DTC AND THE BOOK-ENTRY ONLY SYSTEM" herein.

Tax Matters

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel, interest on the Bonds is nQ1 excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, but is exempt from State of California personal income taxes. Bond Counsel expresses no opinion regarding any other federal or state tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds.

Continuing Disclosure

The County has agreed to provide, or cause to be provided, in accordance with Securities Exchange Commission Rule 15c2-12(b)(5) (the "Rule"), certain annual financial information and operating data, including the audited financial statements of the County. See "CONTINUING DISCLOSURE" and. APPENDIX I - "Form of Continuing Disclosure Certificate" herein. The County has never failed to comply in all material respects with any previous undertakings with regard to the Rule to provide annual reports or notices of material events.

S-2 OFFICIAL STATEMENT

$426,131,120.25 COUNTY OF SACRAMENTO TAXABLE PENSION FUNDING BONDS, SERIES 2004C

$324,582,426.50 $39,147,165.75 $62,401,528.00 Series 2004C-1 Series 2004C-2 Series 2004C-3 (Convertible Auction Rate (Convertible Auction Rate (Convertible Auction Rate Securities) ( CARS SM) Securities) (CARS8M) Securities) (CARS8M)

INTRODUCTION

This Introduction is subject in all respects to the more complete information contained elsewhere in this Official Statement, and the offering of the Bonds to potential investors is made only by means of the entire Official Statement. Terms used in this Introduction and not otherwise defined shall have the respective mean:ings assigned to them elsewhere in this Official Statement.

Purp11>se

The purpose of this Official Statement, which includes the cover page and appendices hereto, is to set forth ,certain information concerning the issuance and sale by the County of Sacramento (the "County") of its Taxable Pension Funding Bonds, Series 2004 in the aggregate initial principal amount of $426,131,120.25, consisting of $324,582,426.50 principal amount of Series 2004C-1 Convertible Auction Rate Securities (the "C-1 CARS"), $39,147,165.75 principal amount of Series 2004C-2 Convertible Auction Rate Securities (the "C-2 CARS"), $62,401,528.00 principal amount of Series 2004C-3 Convertible Auction Rate Securities (the "C-3 CARS,"). The C-1 CARS, the C-2 CARS and the C-3 CARS, are collectively referred to herein as the "CARS" or the "Bonds." The Bonds are being issued pursuant to Articles 10 and 11 (commencing with Section 53570) of Chapter 3 of Division 2 of Title 5 of the Government Code of the State of California (the "State:") and an Indenture, dated as of July 1, 2004 (the "Indenture"), by and between the County and Deutsche Bank National Trust Company, as trustee (the ''Trustee").

Pursuant to Section 31584 of the County Employees Retirement Law of 1937, as amended (the "Retirement Law"), the County Board of Supervisors (the "Board") is obligated to appropriate and make payments to the Sacramento County Employees' Retirement System ("SCERS") arising as a result of retirement benefits accruing to members of SCERS. The County's statutory obligation includes, among others, the requirement to amortize the unfunded ·actuarial accrued liability ("UAAL") ·with respect to such retirement benefits. The County will execute a debenture (the ''Debenture"), dated July 1, 2004, in favor of SCERS to evidence $420,000,000 of the UAAL obligation of the County to SCERS as of July I~ 2004. The Bonds will be issued pursuant to the Indenture for the purpose of refunding the Debenture and paying costs of issuan.ce. See ''PLAN OF FINANCING" and "SOURCES AND USES OF FUNDS" herein. ..

Security and Sources of Payment for the Bonds

The County is obligated to satisfy its obligations under the Bonds from any money lawfillly available in any fund in the County treasury and the payment of the principal of and interest on the Bonds is not limited to any special source of funds of the County. The Bonds do not constitute an obligation of SCERS:

SM Servicemark of Lehman Brothers Inc.

1 THE BONDS DO NOT CONSTITUTE AN OBLIGATION OF THE COUNTY FOR WIIlCH THE COUNTY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE COUNTY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE BONDS NOR THE OBLIGATION OF THE COUNTY TO PAY THE PRINCIPAL, ACCRETED VALUE OR REDEMPTION PRICE OF OR THE INTEREST ON THE BONDS CONSTITUTES AN INDEBTEDNESS OF THE COUNTY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION.

Payment of the principal or accreted value of and interest on the Bonds when due will be insured by a financial guaranty insurance policy to be issued by the Insurer concurrently with the delivery of the Bonds. See "FINANCIAL GUARANTY INSURANCE" and APPENDIX F - ''FINANCIAL GUARANTY INSURANCE POLICY" herein.

Summaries Not Definitive

Brief descriptions of the Bonds, the County, SCERS and the Indenture are included in this Official Statement. Such descriptions do not purport to be comprehensive or definitive. All references herein to the Bonds and the Indenture are qualified in their entirety by reference to the actual documents, or with respect to the Bonds, the forms thereof included in the Indenture, copies of all of which are available for inspection at the offices of the County at 700 H Street, Sacramento, California 95814 and will be available upon request and payment of duplication costs from the Trustee.

Continuing Disclosure

The County has agreed to provide, or cause to be provided, in accordance with Securities Exchange Commission Rule 15c2-12(b)(5), certain annual fmancial information and operating data, including the audited financial statements of the County. See "CONTINUING DISCLOSURE" and APPENDIX I - ''Form of Continuing Disclosure Certificate" herein. The County has never failed to comply in all material respects with any previous undertakings with regard to the Rule to provide annual reports or notices of material events.

PLAN OF FINANCING

General

The Bonds are being issued to: (i) refund the obligation of the County to SCERS evidenced by the Debenture and (ii) pay the costs of issuance of the Bonds. See "SOURCES AND USES OF FUNDS"herein.

The authorization by the County of the issuance of the Bonds as obligations of the County imposed by law, an.cl the validity of the Bonds, the Indenture and certain related contracts were validated by judgment of the Superior Court of the State of California in and for the County of Sacramento rendered on May 4, 2004. The time period for filing of appeals with respect to the judgment expired on June 5, 2004. No appeals were filed and therefore, the judgment is final and unappealable. See "VALIDATION'' herein.

The Debenture

. Pursuant to the Retirement Law, the Board of Supervisors is required to appropriate and pay amounts determined to be owing to SCERS. The Bonds are issued in respect of the County's statutory obligation to amortize the UAAL imposed by the Retirement Law.

A portion of the proceeds of the Bonds will be used to provide funds to allow the County to refund its current UAAL with respect to retirement benefits accruing to members of SCERS as evidenced by the Debenture. The actuary for SCERS, Mercer Human Resource Consulting (the "Actuary") has certified that as of July 1, 2004 the UAAL will be not less than $430,000,000.

2 In respect of the Counfy's UAAL obligation to SCERS, the Counfy will execute the Debenture in favor of SCERS. · A portion of the Bonds are being issued for the pmpose of refunding the Debenture and the oblig.ation of the Counfy with respect to the retirement benefits represented thereby. The Debenture is an absolute and unconditional obligation imposed upon the Counfy by law and enforceable against the Counfy pursuant to the Retirement Law, and is not limited as to payment as to any source of funds of the Counfy. Upon the refunding of the Debenture with the proceeds of the Bonds, the Counfy' s obligation with respect to Bonds will be an unconditional obligation imposed upon the Counfy by law and enforceable against the County, and will not be limited as to payment to any special source of funds of the Counfy.

SOURCES AND USES OF FUNDS

The sources and uses of funds with respect to the Bonds are set forth below:

Sources of Funds Par Amount of Bonds $426,131,120.25 Total Sources $426,131,120.25

Uses of Funds Refunding of Debenture $420,000,000.00 Costs of Issuance (I) 6,131.120.25 Total Uses $426,131,120.25

(1) Includes Underwriters' discount, legal fees, fees of the financial advisor, the Trustee, rating agencies fees, bond insurance premium, printing costs and other miscellaneous expenses.

THE BONDS

The Bonds will be dated their date of original delivery and will be issued in fully registered form, without coupons, and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("OTC"). OTC will act as securities depository of the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only. Purchasers will not receive certificates representing their interests in the Bonds purchased. Payments of principal or accreted value of and interest on the Bonds will be paid by the Trustee to OTC, which is obligated in tum to remit such principal or accreted value and interest to its OTC Participants for subsequent disbursement to the beneficial owners of the Bonds. See APPENDIX C -"BOOK-ENTRY ONLY SYSTEM" herein.

Payment of interest on the Bonds due on or before the maturify or prior redemption thereof shall be made to the person whose name appears in the Bond registration books kept by the Trustee as the registered owner thereof as of the close of business on the Record Date immediately preceding· an Interest Payment Date, such interest to be paid by check mailed on the Interest Pay:m~nt Date by first class mail to such registered owner at the address as it appears in such books except that in the c~e of a Holder of $1,000,000 or greater in aggregate principal amount of Outstanding Bonds, such payment· shall, at such Holder's written request, receiv·ed by the Trustee prior to the applicable Record Date, be made by wire transfer of immediately available funds in accordance with written instructions provided by such Holder; any such written request shall remain in effect until rescinded in writing by the Holder. ·

General. The CARS will be issued only in amounts which have an accreted value as of the Full Accretion Date (defined below) (the "Maturify Amount") equal to $25,000 or any integral multiple thereof. See APPENDIX H - "TABLE OF ACCRETED VALUES" herein for the Accreted Values for each Maturify Amount as ofeach January 10 and July 10 through the Full Accretion Date for each sub-series of CARS. Such Table of Accreted Values is presented for illustrative pmposes only. Any Accreted Value determined in accordlance with terms of the Indenture shall control over any different Accreted· Value determined by

3 reference to such Table. Interest payments on the CARS are to be made by the Trustee to the persons who appear as registered owners on the registration books maintained by the Trustee as bond registrar as of the close of business on the second Business Day immediately preceding each Interest Payment Date (the "Regular Record Date").

Auction Agent and Auction Agent Agreement. Pursuant to the Indenture, the Trustee is authorized and directed by the County to enter into an auction agent agreement (the "Auction Agent Agreement") with Wilmington Trust Company (together with any successor bank or trust company or other'entity entering into a similar agreement with the Trustee, the "Auction Agent'') which provides, among other things, that the Auction Agent will follow the Auction Procedures for the purposes of determining the Auction Rate so long as the Auction Rate is to be based on the results of an Auction.

Broker-Dealers and Broker-Dealer A~reements. Each Auction requires the participation of one or more broker-dealers. The Auction Agent will enter into an agreement with Lehman Brothers Inc. (''Lehman Brothers'') with respect to the C-1 CARS and C-2 CARS and an agreement with Bear, Stearns & Co. Inc. ("'') with respect to the C-3 CARS and may enter into similar agreements (collectively, the ''Broker-Dealer Agreements'') with one or more additional broker-dealers (collectively, the ''Broker-Dealers") selected by the County. The County may remove any Broker-Dealer at any time, with the consent of the Insurer, for any breach of its obligations under the Indenture or the respective Broker-Dealer Agreement.

C-1 Convertible Auction Rate Securities (CARS). Interest willnot be payable with respect to the C-1 CARS during the C-1 Initial Auction Rate Period, being the period from the Date of Delivery to July 10, 2006 (the "C-1 Full Accretion Date)." Interest on the C-1 CARS will accrue from the Date of Delivery at 3.4225%, compounded semi-annually on January 10 and July 10 of each year commencing July 10, 2004 to the C-1 Full Accretion Date. At the end of the C-1 Initial Auction Rate Period, on the ·Initial Auction bate for the C-1 CARS, an Auction will be held. For each subsequent Auction Rate Period, the C-1 CARS will bear interest on their accreted value as of the C-1 Full Accretion Date at the Auction Rates determined by implementation of the Auction Procedures until maturity or prior redemption or conversion, if any. See"- Optional Redemption" and"- Conversion of Convertible Auction Rate Securities (CARS) to Fixed Interest Rates" below. Intei:est.on the C-1 CARS will be payable on the first Interest Payment Date following the Full Accretion Date. For each Auction Rate Period of 360 days or less, such Interest Payment Date will be the next Business Day after an Auction Date and for any Auction Rate Period greater than 360 days, such Interest Payment Date will be each January 10 and July 10 (or if such January 10 or July 10 is not a Business Day, the next Business Day following such January 10 or July IO). Following the C-1 Initial Auction Rate Period, Holders wiU not be entitled to put or tender their C-1 Convertible Auction Rates Securities to the County or any third. party liquidity provider and will be held as described in APPENDIX G - "AUCTION AND SETTLEMENT PROCEDURES" herein.

C-2 Convertible Auction Rate Securities (CARS). Interest will not be payable with respect to the C-2 CARS during the C-2 Initial Auction Rate Period, being the period from the Date of Delivery to July 10, Z0.09 (the "C-2 Full Accretion Date"). Interest on the C-2 CARS will accrue from the Date of Delivery at 4.6110%, compounded semi-annually on January 10 and July 10 of each year commencing July 10, 2004 to the C-2 Full Accretion Date. At the end of the C-2 Initial Auction Rate Period, on the Initial Auction Date for the C·2 CARS, an Auction will be held. For each subsequent Auction Rate Period, the C-2 CARS will bear interest on their accreted value as of the C-2 Full Accretion Date at the Auction Rates determined by implementation of the Auction Procedures until maturity or prior redemption or conversion, if any. See "- Optional Redemption" and"- Conversion of Convertible Auction Rate Securities (CARS) to Fixed Interest Rates" below. Interest on the C-2 CARS will be payable on the first Interest Payment Date following the Full Accretion Date. For each Auction Rate Period of 360 days or less, such Interest Payment Date will be the next Business Day· after an Auction Date and for any Auction Rate Period greater than 360 days, such Interest Payment Date will be each January 10 and July 10 (or if such January 10 or July 10 is not a Business Day, the next Business Day following such January 10 or July 10). Following the C-2 Initial Auction Rate Period, Holders will not be entitled to put or tender their C-2 Convertible Auction Rates Securities to the County or any third party

4 liquidity provider and Auctions will be held as described m APPENDIX G - "AUCTION AND SETTLEMENT PROCEDURES" herein.

C-3 Convertible Auction Rate Securities (CARS). Interest will not be payable with respect to the C-3 CARS during the C-3 Initial Auction Rate Period, being the period from the Date of Delivery to July 10, 2014 (the ''C-3 Full Accretion Date"). Interest on the C-3 CARS will accrue from the Date of Delivery at 5 .6275%, compounded semi-annually on January 10 and July 10 of each year commencing July 10, 2004 to the C-3 Full Accrntion Date. At the end of the C-3 Initial Auction Rate Period, on the Initial Auction Date for the C-3 CARS, an Auction will be held. For each subsequent Auction Rate Period, the C-3 CARS will bear interest on their accreted value as of the C-3 Full Accretion Date at the Auction Rates determined by implementation of the Auction Procedures until maturity or prior redemption or conversion, if any. See "- Optional Redemption" and"- Conversion of Convertible Auction Rate Securities (CARS) to Fixed Interest Rates" below. Interest on the C-3 CARS will be payable on the first Interest Payment Date following the Full Accretion Date. For each Auction Rate Period of 360 days or less, such Interest Payment Date will be the next Business Day after an Auction Date and for any Auction Rate Period greater than 360 days, such Interest Payment Date will be each January 10 and July 10 (or if such January 10 or July 10 is not a Business Day, the next Business Day following such January 10 or July 10). Following the C-3 Initial Auction Rate Period, Holders will not be entitled to put or tender their C-3 Convertible Auction Rates Securities to the County or any third party liquidity provider .and Auctions will be held as described in APPENDIX G - "AUCTION AND SETTLEMENT PROCEDURES" herein.

Deemed Self ,on Initial Auction Date. On the Initial Auction Date, each Existing Owner of CARS will be automatically deemed by the Auction Agent to have submitted a Sell Order for all of the CARS then owned by sw:~h Existing Owner unless such Existing Owner, prior to the Submission Deadline, submits a Hold Order to a Broker-Dealer indicating the Principal Amount of CARS which such Existing Owner desires to continue to hold regardless of the Auction Rate for the next succeeding Auction Rate Period.

Failed Initial Auction: Maximum Auction Rate. If an Auction is not held on the Initial Auction Date applicable to each subseries of CARS (for a reason other than a Catastrophic Event), such subseries of CARS shall lbear interest at the Maximum Auction Rate of 17% per annum (or the maximum rate, if any, established under the laws of the State for obligations of public agencies such as the County, if less than 17%) and the length of such Subsequent Auction Rate Period shall be 7 Rate Period Days, and provided further, that if such Maximum Auction Rate shall be in effect for the lesser of (a) three successive Auction Rate Periods or (b) 35 days, the County shall initiate proceedings to convert such CARS to a Fixed Rate. See "- .Conversion of Conv1~rtible Auction Rate Securities (CARS) to Fixed Interest Rates" below and APPENDIX D - "SUMMARY OF THE INDENTURE" and APPENDIX G - ''AUCTION AND SETTLEMENT PROCEDURES" herein.

Optional Redemption. The CARS are not subject to redemption prior to their respective Full Accretion Dates. The CARS are subject to redemption on their respective Full Accretion Dates and thereafter on any Business Day immediately following the end of an Auction Rate Period, from any available moneys, at the of the County, in whole, or in part, prorata among the holders, at a Redemption Price equal to the accreted value thereof, without premium plus accrued interest thereon to the date fixed for redemption. . :.i i Mandatory Sinking Fund Redemption. The C-l CA,RS and the C-3 CARS are subject to mandatory redemption by the County prior to their stated' niaturity. The CARS shall be redeemed, pro rata among the holders, solely from Sinking Fund Account Payments in;th.e amounts and on the dates set forth in the following respective schedules, upon mailed notice as provided in the Indenture, at a redemption price equal to the sum of the Maturity Amount thereof plus accrued interest thereon to the redemption date, without premium.

5 C-1 CARS Mandatory Sinking Fund Redemption Date (July 10) Maturity Amount 2007 $ 875,000 2008 400,000 2009 750,000 2010 1,950,000 2011 1,450,000 2012 4;600,000 2013 4,600,000 2014 2,175,000 2015 2,400,000 2016 4,775,000 2017 7,250,000 2018 7,500;000 2019 10,650,000 2020 12,025,000 2021 14,975,000 2022 17,025,000 2023 20,200,000 2024 22,800,000 2025 26,675,000 2026 29,650,000 2027 32,775,000 2028 36,825,000 2029 40,875,000 2030• 44,475,000

• Maturity.

C-3 CARS Mandatory Sinking Fund Redemption Date Quly IO) Maturity Amount 2032 $52,800,000 .. 2033• 56,050,000

• Maturity.

Auction Rate Provisions

General. While any Bonds are CARS, except as othenvise specifically provided in the Indenture, the provisions of the Indenture and the auction and settlement procedures specified in APPENDIX G shall govern the interest rates per annum and the payment terms of the CARS. See "- Auctions," "- Calculation and Payment of Interest and Interest Payment Dates" and "- Applicable Auction Rate" below. For ·a further description of the CARS, see APPENDIX D- "SUMMARY OF THE INDENTURE" and APPENDIX G­ "AUCTION AND SETTLEMENT PROCEDURES" herein.

Auctions. Except as otherwise provided in the Indenture, an Auction to determine the Auction Rate for each Auction Rate Period will be held on the Business Day immediately preceding the first day of each Auction Rate Period for each subseries of CARS (each an "Auction Date").

6 The first Auction Date will be July 10, 2006 with respect to the C-1 CARS, July 10, 2009 with respect to the C-2 CARS and July 10, 2014 with respect to the C-3 CARS. Thereafter, Auctions will be held on each Auction Date pursuant to the Auction Procedures. See APPENDIX D- "SUMMARY OF THE INDENTURE" and APPENDIX G- "AUCTION AND SETTLEMENT PROCEDURES" herein.

Calculation and Payment of Interest and Interest Payment Dates. Following their respective Full Accre:tion Dates the C-1 CARS, the C-2 CARS and C-3 CARS will bear interest at the applicable Auction Rate, computed for the actual number of days elapsed on the basis of a 360-day year and will be payable as follows: for each Auction Rate Period of360 days or less, the next Business Day after an Auction Date; (ii) for any Auction Rate Period greater than 360 days, each January 10 and July 10 (or if such January 10 or July 10 is not a Business Day, the next Business Day following such January 10 or July 10); and (iii) each Maturity Date for the CARS (each date referred to above being a "Interest Payment Date').

The term "Auction Rate Period" means, as to the applicable subseries of CARS, each period during which. a specific Auction Rate is in effect, as a result of an Auction, for such subseries of Auction Rate Securities, which Auction Rate Period may be a Standard Auction Rate Period or a Special Auction Rate Period as may be designated from time to time by the County pursuant to an Auction Period Adjustment for a subseries of Auction Rate Securities, each Auction Rate Period running from, and including, the Rate Adjustment Date and ending on, and including, the day immediately preceding the next succeeding Rate Adjustment Date; provided that the initial Auction Rate Period will be set forth on the inside front cover page of this Official Statement. The length of an Auction Rate Period may be adjusted pursuant to the Indenture. See APPENDIX G - "AUCTION AND SETTLEMENT PROCEDURES" herein.

The term "Standard Auction Rate Period" means any Auction Rate Period consisting of 7, 14, 21, 28 or 35 Rate Period Days, or such other period as may be designated from time to time by the County with the conse;nt of the Insurer. The term "Special Auction Rate Period" means a Subsequent Auction Rate Period, other than a Standard Auction Rate Period, that consists of a specified number of Rate Period Days not fewer than 42 and not more than 1,820 and evenly divisible by seven.

Applicable Auction Rate. The rate per annum at which interest accrues with respect to the CARS for any Auction Rate Period is referred to as the "Applicable Auction Rate" which cannot exceed the Maximum Annual Rate of 17% per annum or the maximum rate, if any, established under the laws of the State for obligations of public agencies such as the County, if less than 17%. The for the CARS during the Initial Auction Rate Period is set forth on the inside cover. Thereafter, the rate of interest for each Subsequent Auction Rate Period shall be equal to the annual rate of interest that results from the implementation of the Auction Procedures described in APPENDIX G - "AUCTION AND SETTLEMENT PROCEDURES" herein, and provided that:

(i) if a notice of Fixed Rate Conversipn of the CARS shall have' been given by the County, with the prior written consent of the Insurer, and in accordance with the Indenture and bec~use of the failure to satisfy one or more of the conditions set forth therein, such conversion shall not have taken effect, the rate of interest for the next succeeding Subsequent Auction Rate Period shall equal the Maximum Auction Rate on the proposed effective Fixed Rate Conversion Date and the length of su~h Subsequent Auction Rate Period shall be 7 Rate Period Days;

(ii) if, on any Auction Date, an Auction is not held due to a Catastrophic Event, then the rnte of interest for the next succeeding Subse.quent Auction Rate Period shall equal the most recent Auction Rate plus or minus the change in since the most recent Auction; and

(iii) if on any Auction Date, an Auction is not held for any other reason, the rate of interest for the next succeeding Subsequent Auction Rate _Period shall equal the Maximum Auction Rate on such Auction Date, and the length of such Subsequent Auction Rate Period shall be 7 Rate Period Days; and

7 (iv) if a notice of a change in the length of a Standard Auction Rate Period shall have been given by the County, with the prior written consent of the Insurer, and in accordance with the Indenture and because of a failure to satisfy the condition set forth therein, such change in length of the Standard Auction Rate Period shall not have taken effect, the rate of interest for the next succeeding Subsequent Auction Rate Period shall equal the Maximum Auction Rate on the proposed date of such change in length of the Standard Auction Rate Period, and the length of such Subsequent Auction Rate Period will be 7 Rate Period Days.

Notwithstanding the foregoing, if: (I) the ownership of the CARS is no longer maintained in book­ entry form by DTC, no further Auctions will be held and the rate of interest for any Subsequent Auction Rate Period commencing after the delivery of certificated securities representing the CARS shall equal the Maximum Auction Rate on the Business Day immediately preceding the first day of such Subsequent Auction Rate Period, and the length of such Subsequent Auction Rate Period shall be 7 Rate Period Days, (2) a Payment Default occurs during any Auction Rate Period (other than an Auction Rate Period consisting of more than 364 Rate Period Days), the rate of interest for each Subsequent Auction Rate Period commencing thereafter to and including the Subsequent Auction Rate Period, if any, during which, or commencing less than two Business Days after all such Payment Defaults are cured, shall equal the Overdue Rate for a Standard Auction Rate Period on the first day of each such Subsequent Auction Rate Period; or (3) a Payment Default occurs during a Special Auction Rate Period consisting of more than 364 Rate Period Days, (i) the rate of interest for the portion of such Special Auction Rate Period during which such Payment Default shall not have been cured shall equal the Overdue Rate for such Special Auction Rate Period on the day of the occurrence of such Payment Default and (ii) if such Payment Default shall have not been cured at least two Business Days prior to the next succeeding Subsequent Auction Rate Period, the rate of interest for such Subsequent Auction Rate Period and for each Subsequent Auction Rate Period commencing thereafter, to and including the Subsequent Auction Rate Period, if any, during which, or commencing less than two Business Days after, such Payment Default is cured, shall equal the Overdue.Rate for such Special Auction Rate Period on the first day of each such Subsequent Auction Rate Period.

Conversion of Convertible Auction Rate Securities (CARS) to Fixed Interest Rates. The County may, with the written consent of the Insurer and the Qualified Provider (if the affected CARS are covered by a Qualified Swap Agreement), convert all but not less than all of the Outstanding C-1 CARS or all but not less than all of the Outstanding C-2 CARS or all but not less than all of the Outstanding C-3 CARS from CARS to bonds, which bear interest at regular fixed rates and on such date, which may be the Full Accretion Date for such CARS or a Business Day immediately following the end of an Auction Rate Period (the "Fixed Rate Conversion Date''), the CARS of such Series will be subject to mandatory tender for purchase at a price equal to 100% of the Principal Amount of such CARS, plus accrued but unpaid interest (the "Tender Price"); provided that any such conversion shall be subject to the availability offunds sufficient to pay the Tender Price of such CARS having been provided to the Trustee through the remarketing of such CARS to new Holders. Not less than 40 days prior to the Fixed Rate Conversion Date, the Trustee is required to mail written notice of the conversion and mandatory tender to the Holders of the CARS to be converted (with a copy to the Insurer and the Auction Agent) setting forth the information required in the Indenture. Upon satisfaction of certain conditions set forth in the Indenture, the CARS shall be purchased or deemed purchased at the Tender Price. See APPENDIX G - "AUCTION AND SETTLEMENT PROCEDURES - Conversion of Auction Rate Securities to Fixed Interest Rate Bonds" herein.

The County may revoke its election to effect a conversion of the applicable subseries of the CARS to Fixed Rate Bonds by giving written notice of such revocation to the Trustee, the Insurer, the Auction Agent, the Qualified Swap Provider (if applicable), the Swap Policy Provider (if applicable), and the applicable Broker-Dealer and at any time prior to the Business Day immediately preceding the Fixed Rate Conversion Date.

Notice ofMandatory Tender for Purchase. In c·onnection with any mandatory tender for purchase of any CARS upon conversion to Fixed Interest Rates, the Trustee shall give notice as specified in the Indenture.

8 See APPENDIX G - "AUCTION AND SETTLEMENT PROCEDURES - Conversion of Auction Rate Securities to Fixed Interest Rate Bonds" herein.

Redemption Procedures

Notice of Redemption. Whenever redemption is authorized under the Indenture, the Trustee is required to mail a notice of redemption, containing the information required by the Indenture, by first-class mail not less than thirty (30) days nor more than forty five (45)days before the redemption date of any such Bonds or portions thereof to the respective Holders thereof. While the Bonds are held by DTC or its nominee, all such mailed notices shall be sent to DTC, or its nominee, as the registered owner of the Bonds to be redeemed.

Neither the failure of an owner to receive any such notice, nor the failure to give such notice to certain depositories or information services as required by the Indenture, nor any immaterial defect in any such notice, shall invalidate any of the proceedings for the redemption of any Bonds.

Effect ofRedemption. From and after the date fixed for redemption of any Bonds or any portions therecf, if notice of such redemption shall have been duly given and funds available for the payment of the redemption price of the Bonds or such portions thereof so called for redemption shall have been duly provided, no int,erest shall accrete or accrue on such Bonds or such portions thereof from and after the Redemption Date specified in such notice.

Defeasance of any Bond may result in a reissuance thereof, in which event a holder will recognize taxable gain or loss equal to the difference between the amount realized from the sale, exchange or retirement (less any accrued qualified stated interest which will be taxable as such) and the holder's adjusted tax basis in the Bonds. See "TAX MATTERS" herein.

SECURITY AND SOURCES OF PAYMENT FOR THE BONDS

General

The Bonds are exempt from the debt limitations of the Califomia Constitution, and the County is obligated to satisfy its obligations under the Bonds from any money available in any fund in the County treasury. The Bonds are not limited as to payment to any special funds of the County. The assets of SCERS are not available for payment of the Bonds and the Bonds do not constitute an obligation of SCERS.

The Indenture provides that the County is obligated to deposit in the Debt Service Fund maintained in the tre:asury of the County not later than July 31 of each Fiscal Year the amount of the County's obligations on the Bonds in such Fiscal Year. On the last Business Day immediately preceding each payment date for the Bonds, the Director of Finance is obligated to withdraw from the Debt Service Fund and deposit with the Trustee in immediately available funds an amount of money equal to the County's obligations on the Bonds on such date. All amounts payable by the Director of Finance to the Trustee pursuant to the Indenture must be promptly deposited by the Trustee upon receipt thereof in the Redemption Fund. Notwithstanding the foregoing, in the event the amounts deposited by the County in the Debt Service Fund as described above are insufficient for the purpose of paying the Bonds on any date on which payment of the Bonds is due on each paymmt date for the Bonds, the County is obligated to deposit or cause to be deposited with the Trustee the amo1mtdue on the Bonds on such payment dates from any money lawfully available in any fund in the County treasury.

In establishing the amounts of the County's obligations on the Bonds to be prepaid in each Fiscal Year follo\\ring the Full Accretion Dates of the CARS, (i) (A) the debt service for CARS with an Auction Rate Period of less than 360 Rate Period Days not subject to a Qualified Swap Agreement shall be prepaid at the actual average interest rate for the immediately preceding Fiscal Year plus 200 basis points (2.00%), and if

9 such information is not available for the full immediately preceding Fiscal Year, then the debt service for such CARS shall be prepaid at the average of the 1-month LIBOR Index plus 200 basis points (2.00%) for the immediately preceding Fiscal Year, provided, however, that if the average of the I-month LIB OR Index for the prior Fiscal Year is not available, then such debt service shall be prepaid at a rate mutually agreed to by the County and the Insurer; and (B) the debt service for CARS with an Auction Rate Period of 360 Rate Period Days or longer shall be prepaid at the actual interest rate in effect for such CARS; and (ii) the debt service for all other Bonds then Outstanding shall be prepaid at (A) the rate prescribed under the applicable Qualified Swap Agreement, if any, for CARS subject to a Qualified Swap Agreement, and (B) the actual rate for Fixed Rate Bonds, in each case, for all such Bonds Outstanding during the immediately preceding Fiscal Year.

THE BONDS DO NOT CONSTITUTE AN OBLIGATION OF THE COUNTY FOR WHICH THE COUNTY IS OBLIGATED TO LEVY OR PLEDGE ANY FORM OF TAXATION OR FOR WHICH THE COUNTY HAS LEVIED OR PLEDGED ANY FORM OF TAXATION. NEITHER THE BONDS NOR THE OBLIGATION OF THE COUNTY TO PAY THE PRINCIPAL, ACCRETED VALUE OR REDEMPTION PRICE OF OR THE INTEREST ON THE BONDS CONSTITUTES AN INDEBTEDNESS OF THE COUNTY, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISIONS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION.

[Remainder of the Page Intentionally Left Blank]

10 Debt Service Schedule

The following table sets forth the annual debt service schedule for the Bonds.

Fiscal Year Ending June 30 Principal Interest* Accreted Interest Fiscal Year Total 2005 2006 2007 $15,379,789.90 $15,379,789.90 2008 $816,882.50 15,342,742.15 $58,117.50 16,217,742.15 2009 373,432.00 16,857,295.01 26,568.00 17,257,295.01 2010 700,185.00 17,468,777.11 49,815.00 18,218,777.11 2011 1,820,481.00 17,387,881.92 129,519.00 19,337,881.92 2012 1,353,691.00 19,056,578.58 96,309.00 20,506,578.58 2013 4,294,468.00 17,126,636.06 305,532.00 . 21,726,636.06 2014 4,294,468.00 18,405,154.47 305,532.00 23,005,154.47 2015 2,030,536.50 21,851,672.09 144,436.50 24,026,672.09 2016 2,240,592.00 22,985,832.23 159,408.00 25,385 ,832.23 2017 4,457,844.50 22,018,960.42 317,155.50 26, 793;960.42 2018 6,768,455.00 21,016,797.64 481,545.00 28,266,797.64 2019 7,001,850.00 22,284,557.13 498,150.00 29,784,557.13 2020 9,942,627.00 20,700,724.23 707,373.00 31,350,724.23 2021 11,226,2 99 .50 20,981,958.50 798,700.50 33,006,958.50 2022 13,980,360.50 19,729,103.33 994,639.50 34,704,103.33 2023 15,894, 199 .50 19,438,734.43 1,130,800.50 36,463,734.43 2024 18,858,316.00 18,082,196.11 1,341,684.00 38,282,196.11 2025 21,285,624.00 17,359,656.14 1,514,376.00 40,159,656.14 2026 24,903,246.50 15,410,075.90 1,771,753.50 42,085,075. 90 2027 27,680,647.00 14,422,204.53 1,969,353.00 44,072,204.53 2028 30,598,084.50 13,321,072.98 2,176,915.50 46,096,072. 98 2029 34,379,083.50 11,347,425.16 2,445,916.50 48,172,425.16 2030 38,160,082.50 9,342,745.66 2,714,917.50 50,217,745.66 2031 41,520,970.50 7,781,823.96 2,954,029.50 52,256,823.96 2032 39,147,165.75 4,939,530.56 l 0,077,834.25 54,164,530.56 2033 30,269,184.00 2,927,577.40 22,530,816.00 55,727,577.40 2034 32,132 344.00 70,840.97 23,917,656.00 56,120,840.97 TOTAL $426,131, 120.25 $443,038,344.57 $79,618,879.75 . $948,788,344.57

" Each subseries is assumed to bear interest at an annual rate of 4.55% after its respective Full Accretion Dates.

Financial Guaranty Insurance Policy

Payment of the principal of and interest on the Bonds when due will be insured by a financial guaranty insuralllce policy to be issued by the Insurer concurrently with the delivery of the Bonds. See "FINANCIAL GUARANTY INSURANCE" and APPENDIX F - "FINANCIAL GUARANTY INSURANCE POLICY" herein. No representation is made by the County or the Underwriter as to the accuracy, completeness or adequacy of inf~rmation provided in Appendix F, or as to the absence of material adverse changes in the condition of the Insurer subsequent to the date hereof, including but not limited to a downgrade in the credit ratings ofthe Insurer.

FINANCIAL GUARAN1Y INSURANCE

The following information under this caption "FINANCIAL GUARANTY INSURANCE" has been furnished by the Insurer for use in this Official Statement. Reference is made to APPENDIX F for a specimen ofthe Policy.

II The Policy

The Policy unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the County to the Trustee or its successor of an amount equal to (i) the principal of (either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Bonds as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed by the Policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner of the Bonds pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law ( a "Preference").

The Policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Bonds. The Policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price of Bonds upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. The Policy also does not insure against nonpayment of principal of or interest on the Bonds resulting from the insolvency, negligence or any other act or omission of the Trustee or any other paying agent for the Bonds.

Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Trustee or any owner of a Bond the payment of an insured amount for which is then due, that such required payment has not been made, the Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trost National Association, in New York, New York, or its successor, sufficient for the payment of any such insured amounts which are th.en due. Upon presentment and surrender of such Bonds or presentment of such other proof of ownership of the Bonds, together with any appropriate instruments of assignment to evidence the assignment of the insured amounts due on the Bonds as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Bonds in any legal proceeding related to payment of insured amounts on the Bonds, such instruments being in a form satisfactory to U.S. Bank Trost National Association, U.S. Bank Trost National Association shall disburse to such owners or the Trustee payment of the insured amounts due on such Bonds, less any amount held by the Trustee for the payment of such insured amounts and legally available therefor.

The Insurer

The Insurer is the principal operating subsidiary of MBIA Inc., a New York Exchange listed company (the "Company"). The Company is not obligated to pay the of or claims against the Insurer. The Insurer is domiciled in the State of New York and licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United States and the Territory of Guam. The Insurer has three branches, one in the Republic of France, one in the Republic of Singapore and one in the Kingdom of Spain. New York has laws prescribing minimum capital requirements, limiting classes and concentrations of investments and requiring the approval of policy rates and forms. State laws also regulate the amount of both the aggregate and individual risks that may be insured, the payment of dividends by the Insurer, changes in control and transactions among affiliates. Additionally, the Insurer is required to maintain contingency reserves on its liabilities in certain amounts and for certain periods of time.

The Insurer does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to

12 the accuracy of the information regarding the Policy and the Insurer set forth under the heading "FINANCIAL GUARANTY INSURANCE". Additionally, the Insurer makes no representation regarding the Bonds or the advisability of investing in the Bonds.

Insurer Information

The following documents filed by the Company with the Securities and Exchange Commission (the "SEC") are incorporated herein by reference:

(1) The Company's Annual Report on Form 10-K for the year ended December 31, 2003; and

(2) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.

Any documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as amended, after the date of this Official Statement and prior to the termination of the offering of the Bonds offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof. Any statement contained in a document incorporated or deemed to be incorporated by reference herein, or contained in this Official Statement, shall be deemed to be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement.

The Company files annual, quarterly and special reports, information statements and other information with the SEC under File No. 1-9583. Copies of the SEC filings (including (1) the Company's Annual Report on Fonn 10-K for the year ended December 31, 2003, and (2) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004) are available (i) over the Internet at the SEC's web site at htmj/wv.rw.sec.gov; (ii) at the SEC's public reference room in Washington D.C.; (iii) over the Internet at the Company's web site at http://www.mbia.com; and (iv) at no cost, upon request to MBIA Insurance Corporation, 113 King Street, Armonk, New York 10504. The telephone number of the Insurer is (914) 273- 4545.

As of December 31, 2003, the Insurer had admitted assets of $9 .9 billion ( audited), total liabilities of $6.2 billion (audited), and total capital and surplus of $3.7 billion (audited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of March 31, 2004 ithe Insurer had admitted assets of $10.3 billion (unaudited), total liabilities of $6.5 billion (unaudited), and total capital and surplus of $3.8 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities.

Financial Strength Ratings of the Insurer

Moody's Investors Service, Inc. rates the financial strength of the Insurer "Aaa"

Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates the financial strength of the Insure:r "AAA."

Fitch Ratings rates the financial strength of the Insurer "AAA."

Each rating of the Insurer should be evaluated independently. The ratings refle~. the respective rating agency's current assessment of the creditworthiness of the Insurer and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency.

13 The above ratings are not recommendations to buy, sell or hold the Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the Bonds. The Insurer does not guaranty the market price of the Bonds nor does it guaranty that the ratings on the Bonds will not be revised or withdrawn.

In the event the ·Insurer were to become insolvent, any claims arising under a policy of financial guaranty insurance are excluded from coverage by the California Insurance Guaranty Association, established pursuant to Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1 of the California Insurance Code.

ADDITIONAL BONDS

The County may from time to time issue additional bonds to defease, retire or refund all or any portion of the Bonds or to refund any other evidences of indebtedness of the County arising pursuant to the Retirement Law, which such additional bonds may be issued on a parity with the Bonds without the consent of any Bondowner.

RISK FACTORS

The following information should be considered by prospective investors in evaluating the Bonds. However, it does not purport to be an exhaustive list of risks or other considerations which may be relevant to an investment in the Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such risks.

Limitation of Remedies

The rights of the owners of the Bonds are subject to the limitations on legal remedies against counties in the State of California, including applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally, now or hereafter in effect, and to the application of general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or in law. Bankruptcy proceedings, if initiated, could subject the owners of the Bonds to judicial discretion and interpretation of their rights in bankruptcy proceedings or otherwise, and consequently may entail risks of delay, limitation or modification of their rights.

County Financial Stress

A variety of circumstances affecting the County (and other counties in the State) have resulted in significant financial stress on the County over the last few years. Certain of these circumstances are described in Appendix A, and include (i) the financial condition of the State, which may result in decreased revenues from the State to the County; (ii) significant increases in labor costs of the County, including amounts required to be paid by the County to fund current and future retirement benefits, resulting from the resolution of litigation related thereto as well as renegotiation of labor agreements and enhancement of retirement benefits and the resulting impact on the required annual General Fund contribution to its employee pension plan; and (iii) a lower than expected anticipated net increase of approximately $8.7 million in General Fund revenues due to slowing revenue growth and the expiration of one-time and -term financing measures to support ongoing county programs.

In order to balance its budget for Fiscal Year 2003/04, the County utilized approximately $40.7 million in one time funding sources, including the refinancing of certain long-term obligations. The County utilized such sources to temporarily avoid reductions in public services that would otherwise be necessacy,

14 believing that the economic situation would improve for Fiscal Year 2004/05 due to an anticipated end to the . . economic recession.

However, the financial stress on the County is now anticipated to continue through Fiscal Year 2004/05. The County believes that the continuing financial difficulties are due to a variety of factors, including the following: the continuing effects of the economic recession, which has depressed General Fund revenues, particularly sales tax related revenues such as the Bradley Bums local sales tax and the Public Safety sales tax (Proposition 172) and an increase in Fiscal Year 2004/05 of approximately $12.5 million to the General Fund in net labor costs resulting from recently settled labor contracts and an increase of certain costs such as in-home support services and indigent medical/dental services.

On May 13, 2004, the County Board of Supervisors adopted a proposed budget for the 2004/05 Fiscal Year which provides for approximately $17.9 million in spending reductions from the Fiscal Year 2003/04 budget.

The 2004/05 Fiscal Year Budget includes program reductions totaling $24.1 million (including $6.2 million reductions approved midyear), and the use of approximately $9.0 million one-time funding sources such as proceeds from land sales, transfer of realignment revenue, and the use of redirected contingencies and capital maintenance funds.

The 2004/05 Fiscal Year Budget does not take into account additional revenue reductions resulting from the State's financial difficulties and budgeting process, which the County anticipates may be approximately $17.8 million. See "- State of California Financial Condition" herein and APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA" herein. The Board of Supervisors has already given conceptual approval of several budget reduction actions to address the impacts of the revised State budget, including reductions to the general government and prevention/intervention programs. The total cost reduction resulting from these actions is approximately $6.2 million.

Retirement Plan

Over the last few years, the County has experienced significant increases in the amount that it is requirnd to contribute annually to SCERS. The required County contribution increased from approximately $49 million in Fiscal Year 2002/03 to approximately $113 million in Fiscal Year 2003/04. The required contribution for Fiscal Year 2004/05 is estimated to be approximately $94 million. These increases are due to a variety of factors, including investment losses in the SCERS investment portfolio, and significant enhancements to the retirement benefits of employees. The level of future required contributions depends on a variety offactors, including future ·SCERS investment portfolio performance, and additional potential changes in retirement benefits. There can be no assurances that the required annual County contribution to SCERS will not co:ntinue to significantly increase, and that such increases will not materially adversely affect the financial conditton of the County. SCERS is also currently experiencing a significant UAAL which is expected to continue in the foreseeable future. In order to address a portion of the current UAAL, the County plans to issue the Bonds. See APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGAR.DING THE COUNTY OF SACRAMENTO, CALIFORNIA - Certain Information Conce:rning the Sacramento County Employees' Retirement System" herein for further discussion of pension benefits, County contributions and unfunded liabilities.

Many factors influence the amount of the County's pension benefit liability, including, without limitation, inflationary factors, changes in statutory provisions of the Retirement Law, changes in the levels of the benefits provided or in the contribution rates of the County, changes in actuarial assumptions or methods, and differences between the actual and anticipated investment experience of SCERS. Any of these factors could give rise to additional UAAL or additional current liability of the County to SCERS as a result of which the County would be obligated to make additional payments to SCERS. For information about the County's

15 retirement obligations and SCERS, see APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA" herein.

Beginning in December 1997, lawsuits were filed against the County and SCERS and 17 other Counties relating to the California Supreme Court decision in Ventura County Deputy Sheriff's Association et al. v. Board of Retirement of Ventura County Employees' Retirement Association, and County of Ventura which changed the existing law regarding the definition of the term "compensation eamable." Subsequently, the parties reached a settlement for an estimated $55 million and court approval of that settlement is ongoing. See APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA - The County - Litigation regarding Retirement Plan" herein.

State of California Financial Condition

The State of California is currently experiencing significant financial and budgetary stress. The County receives approximately 65.0% of its General Fund revenues from the State (including funds provided by the State for specific state and federal programs). On May 13, 2004, Governor Schwarzenegger released a revision of the State budget for Fiscal Year 2004/05 (the "May Revision"). Among other things, the May Revision provides for an exchange of vehicle license fees (''VLF') (which local governments including the County have received over the last several years) for property taxes. Under this plan, commencing in Fiscal Year 2004/05 the State would eliminate $4.1 billion in VLF backfill payments (which the State has provided over the last several years to compensate local government for reductions in the VLF fees), and would permanently reduce the VLF rate from 2.0% to 0.65%. Commencing in Fiscal Year 2006/07, local governments would receive an additional of property taxes in an amount equal to the VLF they would no longer receive. In addition, this plan contemplates submission to the voters of a constitutional amendment which would protect local government revenues from diversion by the State without voter approval. The County estimates that, if the plan described above is adopted in the form set forth in the May Revision, the County would be subject to a net reduction of General Fund revenues of approximately $12.2 million in each of Fiscal Years 2004/05 and 2005/06.

The May Revision also proposes to repeal counties' authority to charge jail booking fees to cities, which will reduce revenues to the County by approximately $3.0 million, and an approximately $5.0 million decrease for juvenile justice system costs previously funded through Temporary Assistance to Needy Families (TANF) block grant revenues. While the May Revision apparently relieves the County of the obligation to pay approximately $2.4 million in penalties related to the State's failure to implement a federally mandated child welfare computer system, the currently estimated net reduction resulting from the May Revision is approximately $17.8 million in Fiscal Year 2004/05 .

. The Fiscal Year 2004/05 State Budget is expected to be subject to significant negotiation and revision prior to adoption by the Legislature. There can be no assurances that the final State budget will not place additional burdens on local governments, including the County, or will. not significantly reduce revenues to local governments.

The County is considering various ways to mitigate the potentially adverse impacts of the State financial condition on the County, including staffing reductions, service reductions or other cost reductions, as well as the use of reserves. The Fiscal Year 2004/05 State Budget is subject to approval by the State Legislature, and the County cannot predict the ultimate impact of the final approved Fiscal Year 2004/05 State Budget on the County's financial situation. See APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA" herein.

16 VALIDATION

On February 3, 2004, the County, acting pursuant to the provisions of Sections 860 et seq. of the California Code of Civil Procedure, filed a complaint in the Superior Court of the State of California for the County of Sacramento seeking judicial validation of the transactions relating to the issuance of the Bonds and certain other matters. On May 4, 2004, the court entered a default judgment to the effect, among other things, that the Bonds are valid, legal and binding obligations of the County and that the Bonds are valid and in conformity with all applicable provisions of law. The Indenture executed by the County in connection with the issuance of the Bonds was also the subject of the default judgment, .and authorized the issuance of bonds to refund the Debenture. The time period for the filing of appeals with respect to the judgment expired on June 5, 2004 and no appeals were filed and therefore the judgment is final and unappealable. In issuing its opinion as to the validity of the Bonds, Bond Counsel has relied upon the entry of the foregoing default judgment.

THE COUNTY

The County was incorporated in 1850 and encompasses approximately 994 square miles in the middle of the 400-mile-long Central Valley. The County's largest city, the City of Sacramento, is the seat of government for the State of California and the County.

The County has a charter form of government. It is governed by a five-member Board of Supervisors elected to serve four-year terms. A County Executive appointed by the Board of Supervisors conducts the day­ to-day business of the County. See APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA" herein.

COUNTY FINANCIAL INFORMATION

Economic and demographic information regarding the county of Sacramento is contained herein in APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA" and APPENDIX B - ''THE COUNTY OF SACRAMENTO AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2003" herein. Each contains important information concerning the County and should be read in its entirety. In particular, Appendix A describes certain circumstances which could materially affect the financial condition of the County in Fiscal Year 2004/05 and future fiscal years.

COUNTY INVESTMENT POLICY

State law requires that all monies of the County, school districts, and certain special districts located within the County be held by the Director of Finance. · Pursuant to the County Charter and subject to annual review and renewal by the Board ofBupervisors, the Dire.ctor of Finance is authorized to invest and reinvest the funds. The County's General Fund, among other funds, is· invested in the Sacramento County Pooled (the "County Pool"), which is managed· by the Director of Finance. The County Pool is govemed by the Sacramento County Annual Investment Policy for the Pooled Investment Fund (the ''Investment Policy") as authorized by the Sections 53601 et seq. and 53635 et seq. of the Government Code of California (the "California Government Code") which the Director of Finance annually renders to the Board of Supervisors. The Board of Supervisors review and approve the Investment Policy at a public meeting. This policy defines investible funds, ·authorized instruments, credit quality required, maximum maturities and concentrations, collateral requirements, and provides the approved credit standards, investment objectives and specific constraints of the portfolios managed. The Investment Policy also authorizes the establishment and periodic review of investment guidelines, which provide specific guidance to the portfolio managers. These investment guidelines are fully consistent with and subordinate to the Investment Policy. Investments within the County Pool are reviewed on a monthly basis by an internal Investment Review Group, which consists of

17 the Director of Finance and his designees. The Investment Review Group reviews the investments to ensure compliance with government code and the Investment Policy. See APPENDIX A- "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA - Investment of County Funds; County Pool" herein.

TAX MATTERS

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel, interest on the Bonds is not excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code"), but is exempt from State of California personal income taxes. Bond Counsel expresses no opinion regarding any other federal or state tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. The proposed form of opinion of Bond Counsel is contained in Appendix E- "PROPOSED FORM OF OPINION OF BOND COUNSEL" herein.

The following is a summary of certain of the United States federal income tax consequences of the ownership of the Bonds as of the date hereof. Each prospective investor should consult with its own tax advisor regarding the application of United States federal income tax laws, as well as any state, local, foreign or other tax laws, to its particular situation.

This summary is based on the Code, as well as Treasury regulations and administrative and judicial rulings and practice. Legislative, judicial and administrative changes may occur, possibly with retroactive effect, that could alter or modify the continued validity of the statements and conclusions set forth herein. This summary is intended as a general explanatory discussion of the consequences of holding the Bonds generally and · does not purport to furnish information in the level of detail or with the investor's specific tax circumstances that would be provided by an investor's own tax advisor. For example, it generally is addressed only to original purchasers of the Bonds that are "U.S. holders" (as defined below), deals only with Bonds held as capital assets within the meaning of Section 1221 of the Code and does not address tax consequences to holders that may be relevant to investors subject to special rules, such as individuals, trusts, estates, tax-exempt investors, foreign investors, cash method taxpayers, dealers in securities, currencies or commodities, banks, thrifts, insurance companies, electing large partnerships, mutual funds, regulated investment companies, real estate investment trusts, FASITs, S corporations, persons that hold Bonds as part of a straddle, hedge, integrated or conversion transaction, and persons whose "functional currency" is not the U.S. dollar. In addition, this summary does not address alternative minimum tax issues or the indirect consequences to a holder of an equity interest in a holder of Bonds.

As used herein, a "U.S. holder'' is a "U.S. person" that is a beneficial owner of a Bond. A "non-U.S. investor" is a holder (or beneficial owner) of a Bond that is not a U.S. Person. For these purposes, a ''U.S. person" is a citizen or resident of the United States, a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof (except, in the case of a partnership, to the extent otherwise provided in Treasury regulations), an estate the income of which is subject to United States federal income taxation regardless of its source or a trust if (i) a United States court is able to exercise primary supervision over the trust's administration and (ii) one or more United States persons have the authority to control all of the trust's substantial decisions.

Tax Status of the Bonds

The Bonds will be treated, for federal income tax purposes, as a debt instrument. Accordingly, interest will be included in the income of the holder as it is paid (or, if the holder is an accrual method taxpayer, as it is accrued) as interest.

Holders of the Bonds that allocate (which generally will include all initial holders of the Bonds) a basis in the Bonds that is greater than the principal amount of the Bonds should consult their own tax advisors with respect to whether or not they should elect to amortize such premium under section 171 of the Code.

18 If a holder purchases the Bonds for an amount that is less than the principal amount of the Bonds, and such difference is not considered to be de minim.is, then such discount will represent market discount that ultimately will constitute ordinary income (and not capital gain). Further, absent an election to accrue market discom1t currently, upon a sale or exchange of a Bond, a portion of any gain will be ordinary income to the extent it represents the amount of any such market discount that was accrued through the date of sale. In addition, absent an election to accrue market discount currently, the portion of any interest expense incurred or continued to carry a market discount bond that does not exceed the accrued market discount for any taxable year, will be deferred.

Although the Bonds are expected to trade "flat," that is, without a specific allocation to accrued interest, for federal income tax purposes, a portion of the amount realized on sale attributed to the Bonds will be treated as accrued interest and thus will be taxed as ordinary income to the seller (and will not be subject to tax in the hands of the buyer).

Sale and Exchange of Bonds

Upon a sale or exchange of a Bond, a holder generally will recognize gain or loss on the Bonds equal to the difference between the amount realized on the sale and its adjusted tax basis in such Bond. Such gain or loss generally will be capital gain (although any gain attributable to accrued market discount of the Bond not yet taken into income will be ordinary). The adjusted basis of the holder in a Bond will (in general) equal its original purchase price and decreased by any payments received on the Bond. In general, if the Bond is held for longer than one year, any gain or loss would be long term capital gain or loss, and capital losses are subject to certain limitations.

See also, "THE BONDS - Redemption" regarding reissuance of the Bonds upon defeasance.

Foreii,i Investors

Distributions on the Bonds to a non-U.S. holder that has no connection with the United States other than holding its Bond generally will be made free of withholding tax, as long as that the holder has complied with c,~rtain tax identification and certification requirements.

ERISA CONSIDERATIONS

Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and Sectio:n 4975 of the Code, prohibit employee benefit plans ('"Plans") subject to ERISA or Section 4975 of the Code from engaging in certain transactions involving "plan assets" with persons that are "parties in interest" under ERISA or "disqualified persons" under the Code ( collectively, "Parties in Interest'?) with respect to the Plan.. ERISA also imposes certain duties on persons who are fiduciaries of Plans subject to ERISA Under ERISA, any person who exercises any authority or control respecting the management or disposition of the assets of a Plan is considered to be a fiduciary of such Plan (subject to certain exceptions not relevant here). A violation of these "prohibited transaction" rules may generate excise. tax and other liabilities llllder ERISA and the Code for fiduciaries and Parties in Interest.

The Underwriter, as a result of its own activities or because of the activities of an affiliate, may be considered Parties in Interest, with respect to certain plans. Prohibited transactions may arise under Section 406 of ERISA and Section 4975 of the Code if Bonds are acquired by a Plan with re~pect to which the Underwriter or any of its affiliates are Parties in Interest. Certain exemptions from the prohibited transaction rules could be applicable, however, depending in part upon the type of Plan fiduciary making. the decision to acquir,~ a Bond and the circumstances under which such decision is made. Included among these exemptions are those transactions regarding securities purchased during the existence of an underwriting, investments by insurance company pooled separate accounts, investments by insurance, company general accounts, investments by bank collective investment funds, transactions effected by "qualified professional asset

19 managers," and transactions affected by certain "in-house asset managers." Even if the conditions specified in one or more of these exemptions are met, the scope of the relief provided by these exemptions might or might not cover all acts which might be construed as prohibited transactions. In order to ensure that no prohibited transaction under ERISA or Section 4975 of the Code will take place in connection with the acquisition of a Bond by or on behalf of a Plan, each prospective purchaser of a Bond that is a Plan or is acquiring on behalf of a Plan will be required to represent that either (i) no prohibited transactions under ERISA or Section 4975 of the Code will occur in connection with the acquisition of such Bond or (ii) the acquisition of such Bond is subject to a statutory or administrative exemption.

Any Plan fiduciary who proposes to cause a Plan to purchase Bonds should (i) consult with its counsel with respect to the potential applicability of ERISA and the Code to such investments and whether any exemption would be applicable and (ii) determine on its own whether all conditions have been satisfied. Moreover, each Plan fiduciary should determine whether, under the general fiduciary standards of investment prudence and diversification, an investment in the Bonds is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan's investment portfolio.

CERTAIN LEGAL MATTERS

Legal matters incident to the authorization, issuance, sale and delivery by the County of the Bonds are subject to the approval of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon for the Underwriters by their counsel, Lofton & Jennings, San Francisco, California, and for the County by Hawkins Delafield & Wood LLP, Sacramento, California, Disclosure Counsel, and by the County Counsel. The fees of Bond Counsel, Disclosure Counsel and Underwriters' Counsel are contingent upon the sale of the Bonds.

CONTINUING DISCLOSURE

Pursuant to the Continuing Disclosure Certificate with respect to the Bonds (the "Continuing Disclosure Certificate"), the County has agreed to provide, or cause to be provided, to each nationally recognized municipal securities information repository and any public or private repository or entity designated by the State of California as a state repository for purposes of Rule 15c2-12(b)(5) (the "Rule'') adopted by the Securities and Exchange Commission (each, a "repository") certain annual financial information and operating data, including its audited fmancial statements, and an update of certain information contained in APPENDIX A - "CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA" herein. In addition, in the Disclosure Certificate, the County has agreed to provide, or cause to be provided, to each Repository in a timely manner notice of the following "Listed Events" if determined by the County to be material: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) modifications to the rights of owners of the applicable Bonds; (4) optional, contingent or unscheduled Certificate calls; (5) defeasances; ( 6) rating changes; (7) adverse tax opinions or events adversely affecting · the tax-exempt status of the applicable Bonds; (8) unscheduled draws on the debt service reserves reflecting financial difficulties; (9) unscheduled draws on credit enhancements reflecting fmancial difficulties; (10) substitution of credit or liquidity prdviders, or their failure to perform; and (11) release, substitution, or sale of property securing repayment of the applicable Bonds. These covenants have been made in order to assist the Underwriters in complying with the Rule.

The County has never failed to comply in all material respects with ·any previous undertakings with regard to the Rule to provide annual reports or notices of material events.

The County may am.end the Disclosure Certificate, and waive any provision thereof, without the consent of the Owners ofthe respective Bonds (except to the extent required under clause (3)(ii) below), if all

20 of the following conditions are satisfied: (1) if the amendment related to certain provisions of the applicable Disclosure Certificate, such amendment is made in connection with a change in circumstances that arises from a change in legal requirements, a change in law, or a change in the identity, nature or status of an obligated person with respect to the applicable Bonds, or the type of business conducted; (2) the undertaking as so amended would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original execution and delivery of the applicable Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (3) either (i) the amendment, in the opinion of nationally recognized bond counsel does not materially impair the interests of the Holders or beneficial Holders of the applicable Bonds, or (ii) the holders of the applicable Bonds consent to the amendment to the applicable Disclosure Certificate pursuant to the same procedures as are required for amendments to the applicable Indenture with consent of Holders of the applicable Bonds pursuant to the terms of the applicable Indenture. The County shall describe such amendment and the reason therefore in its next annual report filed with the Repositories.

In addition, the County's obligations under the Disclosure Certificate shall terminate (i) upon a legal defeasance, prior prepayment or payment in full of all of the applicable Bonds or (ii) if, in the opinion of nationally recognized bond counsel, the County ceases to be an "obligated person" (within the meaning of the Rule) with respect to the applicable Bonds or the applicable Bonds otherwise cease to be subject to the requin~ments of the Rule. The provisions of the Disclosure Certificate are intended to be for the benefit of the Holde:rs of the Bonds and beneficial owners of the Bonds and in order to assist the participating Underwriters in cora.plying with the Rule and shall be enforceable by the any Holder or beneficial owners of Bonds, provided that any enforcement action by any such person shall be limited to a right to obtain specific enforcement of the County's obligations under the Disclosure Certificate and any failure by the County to comply with the provisions thereof shall not be an event of default under the Indenture.

The specific nature of the information to be contained in the annual undertaking is set forth in APPENDIX I - "Form of Continuing Disclosure Certificate" herein.

FINANCIAL STATEMENTS

The County's financial statements for the fiscal year ended June 30, 2003, included in Appendix B hereto, have been audited by Macias, Gini & Company LLP, independent auditors, as stated in their report apperuing in Appendix B hereto. Macias, Gini & Company LLP has not consented to the inclusion of its report as Appendix B and has not 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 this Official Statement, and no opinion is expressed by Macias, Gini & Company LLP with respect to any event subsequent to its report dated December 26, 2003.

LITIGATION

To the best knowledge of the County there is no action, suit or proceeding known to be pending or threatened restraining or enjoining the execution or delivery of the Bonds or the Indenture or any other document relating to the Bonds, or in any way contesting or affecting the validity of the foregoing. .

There are a number of lawsuits. and claims pending against the County. Included in these are a numbe,r of property damage, personal injury and wrongful death actions seeking damages in excess of the County's insurance limits. In the opinion of the County Counsel, such suits and claims as are presently pending will not have a material adverse affect on the ability of the County to make debt service payments on the Bonds.

21 RATINGS

Moody's Investors Service ("Moody's"), Standard & Poor's Ratings Services, a Division of The McGraw Hill Companies ("S&P") and Fitch Ratings (''Fitch") have assigned ratings of "Aaa," "AAA" and "AAA, 11 respectively to the Bonds with the understanding that, upon delivery of the Bonds, the Insurance Policy will be issued by the· Insurer. In addition, the County has received underlying ratings of "A2" from Moody's and "AA-" from S&P for the Bonds based solely on Moody's and S&P's estimation of the ability of the County to make payments on the Bonds when due on a stand-alone basis, without giving effect to the Policy. Such ratings reflect only the views of Moody's and S&P, and do not constitute a recommendation to buy, sell or hold the Bonds. Explanation of the significance of such ratings may be obtained only from the respective organizations at: Moody's Investors Service, 99 Church Street, New York, New York 10007-2701, telephone number (212) 553-0300; and Standard and Poor's Ratings Services, 55 Water Street, New York, New York 10041, telephone number (212) 208-1767. There is no assurance that either such rating will continue for any given period of time or that they will not be revised downward or withdrawn entirely by the respective rating agencies, if in the judgment of either such rating agency circumstances so . Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Bonds.

UNDERWRITING

The Bonds are being purchased by Lehman Brothers Inc., as representative of the Underwriters set forth on the cover page hereof. The Underwriters have agreed, subject to certain conditions, to purchase such Bonds at a at the purchase price of $423,271,888.09 (representing the principal amount of the Bonds of $426,131,120.25 less an Underwriters' discount of $2,859,232.16).

The Purchase Contract relating to the Bonds (the "Purchase Contract") provides that the Underwriters will purchase all of the Bonds if any are purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in the Purchase Contract, the approval of certain legal matters by counsel and certain other conditions. The Underwriters may offer and sell the Bonds to certain dealers and others at prices lower than the offering prices stated on the cover page. The offering prices may be changed from time to time by the Underwriters.

FINANCIAL ADVISOR

First Southwest Company is employed as Financial Advisor to the County in connection with the issuance of the Bonds. The Financial Advisor's fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. First Southwest Company, in its capacity as Financial Advisor, does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies.

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

22 MISCELLANEOUS

Included herein are brief summaries of certain documents and reports, which summaries do not purport to be complete or definitive, and reference is made to such documents and reports for full and complete statements of the contents thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the County and the purchasers or owners of any of the Bonds.

The execution and delive:ry of this Official Statement has been duly authorized by the County.

COUNTY OF SACRAMENTO

By: Isl Geoffrey B. Davey Chief Financial/Operations Officer

By: Isl Muriel P. Johnson Chair of the Board of Supervisors

23 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIX A

CERTAIN FINANCIAL, ECONOMIC AND DEMOGRAPHIC INFORMATION REGARDING THE COUNTY OF SACRAMENTO, CALIFORNIA (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIX A

COUNTY INFORMATION

TABLE OF CONTENTS

THE c:OUNTY ...... 1 Ge:neral ...... ·...... l County Government ...... 1 Services ...... 1 County Employees; Collective Bargaining ...... 2 Re1tirement Plan ...... 3 Deferred Compensation Plan ...... 3 In-Home Support Services (IHSS) Workers ...... 4 COill..fTY FINANCIAL INFORMATION ...... 4 Budgeting Procedures ...... 4 Swnmary Financial Statements ...... 7 Financial Statements; GAAP Basis ...... 8 Investment of County Funds; Collllty Pool ...... 8 SOUF~CES OF COill..fTY REVENUES ...... 10 Property Taxes ...... 10 Sales Taxes ...... 15 Other Taxes ...... 15 Intergovernmental Revenues ...... 15 CERTAIN FACTORS AFFECTING REVENUES AND EXPENDITURES ...... 16 State Budget ...... 16 Article XIIIB ...... 18 Incorporation and Annexation Proceedings ...... 21 COill~TY DEBT SUMMARY ...... 22 General Fund and General Obligation Debt ...... 22 General Fund Lease Obligations ...... 23 Non-General Fund Revenue Obligations ...... , ...... 27 Direct and Overlapping Bonded Debt ...... 28 ECONOMIC AND DEMOGRAPHIC INFORMATION ...... 30 Population and Income ...... 30 Industry and Employment ...... ·.··· ...... 30 Major Employers ...... 31 Co1nmercial Activity ...... 32 Agiriculture ...... 33 Construction Activity ...... 34 Transportation ...... 34 Education ...... 35 CERTAIN INFORMATION CONCERNING THE SACRAMENTO COUNTY EMPLOYEES' RETIREMENT SYSTEM ...... 35 Impact of Pension Benefits Enhancements ...... 37 Contribution Rates and Funding Status ...... 37 Litigation Regarding Retirement Plan ...... 39 Impact of Investment Losses; Potential Significant Unfunded Liability...... 39 County Contributions ...... 40 Chim.ge in Actuary for SCERS ...... 40 (THIS PAGE INTENTIONALLY LEFT BLANK) THE COUNTY

Geneiral

Sacramento County was incorporated in 1850 as one of the original 27 counties of the State of California. The County's largest city, the City of Sacramento, is the seat of government for the State of California and also serves as the county seat. Sacramento became the state capital in 1854. The County is the major component of the Sacramento Metropolitan Statistical Area ("SMSA") which includes Sacramento, El Doradlo, and Placer Counties.

Sacramento County encompasses approximately 994 square miles in the middle of the 400-mile long Central Valley, which is California's prime agricultural region. The County is bordered by Contra Costa and San Joaquin Counties to the south, Amador and El Dorado Counties to the east, Placer and Sutter Counties to the north, and Yolo and Solano Counties to the west. Sacramento County extends from the low delta lands between the Sacramento and San Joaquin rivers north to about ten miles beyond the State Capitol and east to the foothills of the Sierra Nevada Mountains. The southernmost portion of Sacramento County has direct access to the San Francisco Bay.

Sacramento County is a long-established center of commerce for the surrounding area. Trade and services, federal, state and local government, and food processing are important economic sectors. Visitors are attracted to the County by the State Capitol and other historical attractions such as Sutter's Fort, as well as natural amenities. The County's location at the intersection of four major highways brings additional visitors destined for the San Francisco Bay Area, the Gold Country, the Central Valley and the Sierra Nevada Mountains.

Counity Government

The County has a charter form of government. It is governed by a five-member Board of Supervisors elected to serve four-year terms. Other elected officials include the Assessor, District Attorney and Sheriff. A County Executive appointed by the Board of Supervisors is responsible for the day-to-day business of the County.

Services

The County is responsible, pursuant to the County Charter, county ordinances or by st~te or federal mandate to provide social, health, justice, recreational, governmental and other services to county residents.

Health and Welfare. Under state law, the County is required to administer federal and state health and welfare programs, and to satisfy a portion of their costs with local revenues, such as sales and property taxes. Health services are dispensed through a network of comprehensive health centers and neighborhood clinics. Under state law,· counties have the responsibility to provide and help pay for community mental health, drug and akohol prevention and treatment programs. In addition, the County provides public health, immunization and environmental services. These services are located in both county facilities and a network of private providers under contract. •However, the County does not own or operate a county hospital. The County sold its former County Hospital to the University of California in 1973. The University of California, Davis operates the hospital today as a teaching facility, and is under contract with the County for indigent health care SefVlCE~S.

Disaster Services. The County coordinates an entire network of disaster services to handle floods, fires, storms, earthquakes, and other major emergencies. Command centers can be established centrally or in mobile trailers.

A-1 Criminal Justice. Primarily local county revenues support the County criminal justice network The Sheriff provides law enforcement services to the unincorporated area of the County, including narcotics/gangs and vice enforcement, investigation of arson, and homicides. In addition to general prosecution, the District Attorney provides consumer fraud, and assistance through the crime lab in locating and analyzing evidence from crime scenes. The County also operates various correctional facilities. State law requires that the County make an annual payment to the State, approximately $26.6 million in Fiscal Year 2004/05, for statewide trial court costs. The amount has been determined by the State and does not represent a fixed share of local court costs. In addition, the County makes an annual payment · to the State equal to ·one-half the growth in fine/penalty collections. The County is also responsible for providing and maintaining court facilities.

Property Tax System. The County is responsible for the administration of the property tax system, including property assessment, assessment appeals, collection of taxes, and distribution of taxes to cities, community redevelopment agencies, special districts, local school districts, and the County.

County Employees; Collective Bargaining

A summary of county employment levels ( actual employees and not budgeted positions) follows.

SACRAMENTO COUNTY Permanent Employees 1999 through 2004

1 As of December 31 Permanent < ) 1999 10,958 2000 11,946 2001 12,129 2002 13,484 2003 13,512 2004 (Z) 12,977

(1) Excludes temporary, limited-term, intermittent, and seasonal employees, which on April 14, 2004, totaled 1,756. (2) As of April 14, 2004.

For the 2004/05 Fiscal Year the County has budgeted approximately 14,600 permanent, full-time positions (excluding the independent Court). Approximately 142,252 of the positions are in classifications represented by one of 25 recognized employee labor organizations.

The following table summarizes the number of budgeted positions included in the larger labor organizations. These five organizations cover 72.9% of the represented budgeted position.

Employee Representation Organization Budgeted Positions Contract Term United Public Employees, Local 1 - Welfare 1,840 June 30, 2006 Office Technical 3,033 June 30, 2006 Deputy Sheriffs Association 1,910 June 30, 2004 Local 39 1,562 June 30, 2006 Health Services AFSCME 627 June 30, 2006 Probation Association 543 June 30, 2006 TOTAL 8,972

For much of the 1990s, employee compensation increases were limited because of the county's severe budget problems. All employees went at least two years without raises or cost-of-living-increases (COLAs). Entry level salaries were reduced and cash back medical insurance payments were eliminated for newly hired

A-2 employees. However, as the county's budget situation improved in the late 1990's, greater compensation increases were provided for county employees. Recent contracts have included COLAs, market driven equity increases, and health insurance subsidy increases. Lower salary steps created in the mid-1990s have been eliminated with the result that entry-level wages are ·15.0% higher than when the lower salary steps were in place.

In 1998, the voters of Sacramento County amended the County Charter to provide for binding arbitration with the Sacramento County Deputy Sheriff's Association (SCDSA). In the same election, the voters of the County also approved another Charter Amendment allowing either the Board of Supervisors or the Sheriff to submit the results of arbitration to the voters for ratification. An arbitration process was recently completed in December 2003. The arbitration decision is effective through June 30, 2004 and encompasses the 2002/03 and 2003/04 Fiscal Years. The arbitrators decision resulted in the award of pay and benefits increases for members of the DSA. One aspect of the award was having the County pay the employees' entire share of the annual contributions to SCERS and the debt service on the 1995 Pension Obligation Bonds. Prior to the arbitrators' award the County paid one-half of the employee share and the employees paid one-half their share. The employee contribution was approximately 4.3% of salary.

The Board of Supervisors has decided to submit the retirement contribution change to the voters of Sacramento County for ratification in the November 2004 election. If the voters approve the retirement contribution change, the change will apply retroactively and the two-year cost will be approximately $4.3 million

For 2004/05 Fiscal Year, the County Executive's budget includes compensation increases for all repres,~nted and unrepresented employees and vacant budgeted positions. All contractual obligations are fully funded. Compensation increases were assumed in the budget process and development of salary and benefit estimates. Health insurance subsidies for county employees are indexed to the Kaiser Family Plan rate.

Retirement Plan

Sacramento County Employees' Retirement System ("SCERS") is the County's defined benefit pension plan which covers substantially all of its employees. The plan provides "basic" death, disability and service retirement benefits based on specified percentages of final average salary and, in addition, for most memb,m provides annual cost-of-living adjustments after retirement.

At the end of this Appendix A is a general description of SCERS, the pension benefits available to County employees, the funding status of SCERS (including projected unfunded actuarial liability, required County annual contributions to SCERS, and other information relating to SCERS and the County's obligations to SCERS. See "CERTAIN INFORMATION CONCERNING THE SACRAMENTO COUNTY EMPLOYEES RETIREMENT SYSTEM" herein.

Deferred Compensation Plan

In addition to the defined benefit plan described above, the County has established a voluntary defem:d compensation ,plan available to all regular county employees under which participants· may elect to defer up to the lower of $13,000 or 100.0% of includable compensation in any calendar year to provide for retirement, disability, or death benefits. The County has established an investment fund for employee deferred compensation contributions and entered into a custodial agreement for this fund. Under terms of the plan, the assets of the funds are :managed by the County. Employees can direct investments into 28 different options provided by Fidelity Mutual Funds and Bank. None of these monies are invested in the Sacramento County Pooled Investment Fund. At December 31, 2003, approximately 11,550 employees partici:pated in the deferred compensation plan. Assets held in the investment fund on behalf of these employees aggregated approximately $537,137,822.

A-3 In-Home Support Services (IHSS) Workers

Pursuant to state law, Sacramento County has formed an IHSS Public Authority, an independent agency for which the Board of Supervisors serves as the Board of Directors. The.Public.Authority and the IHSS workers union, Service Employees International Union (SEIU) Local 250, reached agreement on a two­ year labor agreement. The agreement called for wage increase in both the 2001/02 and 2002/03 Fiscal Years and provides for health insurance coverage. Implementation of the agreement increased county costs by $11.4 million per year over a two-year period, with costs increasing by $8.1 million annually in Fiscal Year 2001/02 and by an additional $3.3 million annually in Fiscal Year 2002/03. The current labor agreement negotiated with SEIU is effective July 1, 2003 through October 31, 2004. This agreement provides for an increased county contribution to Kaiser health benefits, and includes a provision to offer health care benefits to an additional 25 IHSS caregivers (increasing from 2,875 to 2,900). All other terms and conditions of the prior agreement, including wages, remained unchanged. The net fiscal impact to the County as a result of this labor agreement is estimated approximately $350,000 over the 16-month period.

There is no wage increase included in the county's Recommended Proposed Budget for the 2004/05 Fiscal Year; however, the county's costs for this program are increasing significantly due to an anticipated 14.0% increase in the IHSS caseload.

COUNTY FINANCIAL INFORMATION

Budgeting Procedures

The County is required by state law to adopt a final balanced budget by August 31st of each year. The Board of Supervisors may, by adoption of a resolution, extend this deadline. For the 2004/05 Fiscal Year, in order to make budget decisions earlier, the County will hold budget hearings on May 3, 2004 through May 14, 2004. At the conclusion of this session of budget hearings, the Board of Supervisors will adopt a balanced Proposed Budget. Proposed Budget Workshop Hearings were held March 23, and April 13, 2004. Final Budget Hearings will be held August 30, 2004 through September 3, 2004 to adjust budgets based on actual, rather than estimated year-end fund balances and for any significant state budget actions. At the conclusion of the fmal budget hearings, the Board will adopt a balanced Final Budget.

Sacramento County continues to face tremendous budget challenges caused by slowing revenue growth (particularly local sales tax and sales tax from statewide pools), significant expenditure increases, retirement benefit enhancements, the extensive use of one-time and short-term financing measures to support ongoing programs, and state budget actions.

The County has been required to address its budgetary difficulties by a variety of means, including extending a hiring freeze and making it more restrictive, curtailing the reallocation of appropriations from one category to another, and informing county officials, county staff, and the public of the nature and magnitude of the budget problems.

Sacramento County's budget is developed through an open and collaborative process involving, county officials, county employees; community groups, and county residents. The focus of the decision­ making process is upon those portions of the budget over which the Board of Supervisors has the most discretion. Budget issues are presented to the Board and public well before decisions are required.

Along with developing the line item detail of the budget, the County breaks departmental budget into discrete programs and then segregates those programs into one of two broad categories: (I) mandated or self­ supporting programs, and (2) discretionary programs (those programs funded partially or entirely with general purpose revenues and over which the Board has some degree of discretion). ·

A-4 Due to uncertainty over the level and time of VLF backfill payments from the State and the known funding gap for Fiscal Year 2004/05, midyear budget reductions were recommended and approved during the 2003/04 Fiscal Year. Over $6.0 million in reductions, on a full-year basis were approved. For 2003/04 Fiscal Year, the reductions were used to offset VLF revenue shortfalls.

In anticipation of a very large funding gap in the General Fund for the 2004/05 Fiscal Year, the County allocated the anticipated general purpose financing to General Fund departments early in the budget process, on February 3, 2004. In essence, each department was given a net cost appropriation target. In addition, the Board of Supervisors approved countywide budgetary and service delivery obligations (mandates) and priorities to structure the reductions necessary to balance the 2004/05 Fiscal Year budget. Departments prepared budget requests identifying mandates and discretionary programs. The discretionary programs, from which the budget reductions must be made, were in turn identified by priority and by funding status: funded or unfunded to meet net appropriation targets.

Furthermore, in order to ensure that the budget remains in balance throughout the fiscal year, periodic reviews of actual receipts and expenditures will be made. In the event of any shortfall in projected revenue, the county anticipates that immediate steps will be taken to reduce appropriations. The County believes that appropriation reductions would be achieved through a combination of hiring freezes, employee furloughs and/or layoffs, and freezes on the purchase of equipment, services, and supplies. California counties are not permitted by state law to impose fees to raise general revenue, but only to recover the costs of regulation or provision of services.

Shown in the following table are summaries of the County's 2003/04 Adopted Final Budget and 2004/05 Recommended Proposed Budget.

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A-5 COUNTY OF SACRAMENTO General Fund 2003/04 Adopted Final Budget and 2004/05 Recommended Proposed Budget (Amounts Expressed in Thousands)

2004/05 2003/04 Adopted Recommended APPROPRIATIONS Final Budget Proposed Budget

Net Overall Reseive Increase $9,764 General Government 110,679 $105,815 Public Protection 478,605 515,251 Health and Human Seivices 523,209 539,256 Public Assistance 663,127 666,418 Education, Cultural and Recreation 9,392 9,650 Contingencies 5 000 5 000 Total Appropriations $1,799,776 $1,841,390

Beginning Fund Balance $33,566 $12,600 Departmental Canyover 29,300 $35,051 Net Overall Reseive Decrease $1,484 Property Taxes 157,052 168,813 Sales Taxes 77,871 75,443 Other Taxes · 26,203 26,640 Licenses and Permits 17,117 10,617 Fines, Fotfeitures and Penalties 20,734 19,106 Use of Money and Property 9,132 9,663 Aid from Other Government Agencies (State and Federal) 1,292,270 1,346,548 Charges for Current SeIVices 87,394 90,031 Other Revenue 49137 45 394 Total Available Funds $1,799,776 $1,841,390

Source: Sacramento County Office of Budget and Debt Management.

The 2004/05 Recommended Proposed Budget includes program reductions totaling $47.6 million; however, approximately $26.4 million is available for the restoration and additional funding to the highest priority programs. Sources of restoration funding include retirement cost reductions due to the planned Pension Obligation Bond issue, proceeds from land sale, transfer of realignment revenue, and $10.0 million set aside for program restorations in early budget planning. Even after the restorations, the budget falls approximately $21.1 million short of maintaining current service levels at new-year costs and absorbed new caseloads and service requirements. The Recommended Proposed Budget addresses the impact of local financial issues. The County will also be impacted by the State Budget whenever it is adopted. State actions, given the fiscal position of the State, will most likely only make the county' s situation worse. It is anticipated that State Budget impacts to the County will be addressed during Final Budget Hearings which currently· are to commence August 30, 2004. (See "State Budget" section herein.)

A-6 Summary Financial Statements The following summazy financial statements were taken from the County Financial Reports for the fiscal years ended June 30, 1999 through 2003.

COUNTY OF SACRAMENTO General Fund Revenues, Expenditures and Changes in Fund Balance 1998/99 Through 2002/03 (Amounts Expressed in Thousands)

1998/99 1999/00 2000/01 2001/02 2002/03

BE.GINNING FUND $ 91,008 $ 117,419 $ 145,022 $ 159,500 $ 134,185 BALANCE RI;VENUE Taxes 198,042 215,878 230,775 239,547 257,364 Licenses, permits and franchises 13,540 12,908 13,488 15,457 16,712 Fines, forfeitures and penalties 15,392 33,764 29,921 19,399 19,830 Revenues from use of money and property 32,713 30,733 27,691 24,582 15,880 Aid from other governmental agencies 889,163 985,754 1,065,684 1,189,683 1,213,471 Charges for current services 77,001 69,914 58,978 59,987 68,363 Other revenue 28.154 52 362 55 997 62005 92 569

Total Revenues $1,254,005 $1,401,313 $1,482,534 $1,610,660 $1,684,189 Op,erating and equity trans- fern from other funds 15 232 8 932 21,393 6655 21646 Total Revenues and Transfers $1,269,237 $1,410,245 $1,503,927 $1,617,315 $1,705,835

EXPENDITURES General government $ 74,290 $ 82,660 $ 75,175 $ 48,726 $ 25,070 Public protection 368,848 427,436 466,022 535,026 566,440 Health and sanitation 175,492 213,168 246,994 288,698 329,846 Public assistance 572,677 599,046 633,148 685,221 678,002 Public Ways and Facilities 67 67 67 67 67 Education 328 337 349 383 348 Recreation and cultural 6,153 7,433 8,858 9,498 9,668 Debt Service-Principal 0 0 0 0 819 Debt Service-Interest 0 0 0 0 237 Capital Outlay 0 0 0 0 IO 390

Total Expenditures $1,197,855 $1,330,147 $1,430,613 $1,567,619 $1,620,887 Opi~ting and equity transfers to other fllllds 44 971 . 52495 58 836 . 75 011 63268

Total Expenditures and Transfers $1,242,826 $1,382,642 $1,489,449 $1,642,630 $1,684,155

Excess/deficiency of revenue over/under expenditures and transfers $ 6,411 $ 27,603 $ 14,478 $ . -25,315 • $ 21,680

ENDING FUND $ 117,419 $ 145,022 $ 159,500 $ 134,185 $ 155,865 BALANCE

A-7 Financial Statements; GAAP Basis

The county's accounting policies conform to generally accepted accounting principles for the audited statements. The county's Governmental Fund types and Fiduciary Fund types use the modified accrual basis of accounting. Revenues are recognized in the accounting period in which they become available and measurable. Expenditures are recogriized in the accounting period in which the fund liability is incurred except for unmatured interest ·on general long-term debt which is recognized when due. The following exceptions apply: (1) certain fmes and forfeitures are recorded when received as they are not susceptible to accrual; and (2) vacation and sick leave benefits are recorded as paid. Proprietary Fund types use the accrual basis of accounting. Revenues are recognized in the accounting period in which they are earned and become measurable. Expenses are recognized in the period incurred.

Independently audited fmancial reports are prepared annually in conformity with generally accepted accounting principles for governmental entities. The annual audit report is generally available about seven months after the June 30 close of each fiscal year. Since 1996/97, the County's independent auditor is Macias, Gini & Company LLP. The Government Finance Officers Association (GFOA) has awarded Sacramento County the "Certificate of Achievement for Excellence in Financial Reporting" for its financial reports for Fiscal Years 1988/89 through 2001/02. The County's 2002/03 financial report continues to conform to the Certificate of Achievement requirements and it will be· submitted to the GFOA to determine its eligibility for another certificate.

Investment of County Funds; County Pool

State law requires that all monies of the County, school districts, and certain special districts located within the County be held by the Treasurer (Director of Finance). Pursuant to the County Charter and subject to annual review and renewal by the Board of Supervisors, the Director of Finance is authorized to invest and reinvest the funds. The County's General Fund, among other funds, is invested in the Sacramento County Pooled Investment Fund (the "County Pool"), which is managed by the Director of Finance. The County Pool is governed by the Sacramento County Annual Investment Policy for the Pooled Investment Fund (the "Investment Policy") as authorized by the Sections 53601 et seq. and 53635 et seq. of the Government Code of California (the "California Government Code") which the Director of Finance annually renders to the Board of Supervisors. The Board of Supervisors review and approve the Investment Policy at a public meeting. This policy defines investible funds, authorized instruments, credit quality required, maximum maturities and concentrations, collateral requirements, and provides the approved credit standards, investment objectives and specific constraints of the portfolios managed. The Investment Policy also authorizes the establishment and periodic review of investment guidelines, which provide specific guidance to the portfolio managers. These investment guidelines are fully consistent with and subordinate to the Investment Policy.

Authorized investments are required to match the general categories established by Sections 53601 et seq., 53635 et seq., and 16429.1 et seq. of the California Government Code; including the specific categories of financial futures and fmancial options contracts established by California Government Code Section 53601.1.

As of March 31, 2004, the County Pool was invested in a diversified portfolio of high-quality securities, including but not limited to U.S. Treasury notes and bills, U.S. agency securities, , negotiable certificates of deposit, funds, and time deposits. Additionally, up to $40.0 million of the assets of the County Pool may be invested in the Local Agency Investment Fund (LAIF), the California State investment pool. Approximately 0.8% of pool assets are invested in the County's Teeter Plan note program, which has a fmal maturity of five years. LAIF is a diversified investment pool, with an average maturity of approximately 160 days, offering participants daily liquidity. The County's Pool is rated by Standard and Poor's AAAf for credit quality and SI for volatility. Both ratings are the highest possible rating for each category. As of July 1, 2004, the County is discontinuing the ratings.

A-8 The 2004 Investment Policy currently provides the following: (1) the maximum maturity of any investment will be five years and the dollar weighted average maturity of all securities will be equal to or less than three years; (2) no more than 80.0% of the portfolio may be invested in issues other than U.S. Treasuries and G:>Vernment Agencies, and no more than 10.0% of the portfolio, except U.S. Treasuries and Government Agencies, may be invested in the securities of a single issuer including its related entities; (3) repurchase agreements are authorized in a maximum maturity not exceeding one year; (4) reverse repurchase agreements are authorized in connection with securities owned and fully paid for by the local agency fora minimum of 30 days prior to sale and in a maximum maturity of 92 days, unless the agreement includes a written codicil guaralllteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement and the final maturity date of the same security, and the proceeds of a reverse repurchase agreement may not be invested beyond the expiration of the agreement; and (5) repurchase agreements must be collate:ralized with either (a) U.S. Treasuries and Government Agencies with a market value of 102.0% for collateral maturing between one day to five years, marked to market daily and (b) money market instruments which are on the approved list for the County and which meet the qualifications of the Investment Policy, with a market value of 102. 0%. Use of mortgage-backed securities for collateral is not permitted, for the purpose of investing the daily excess bank balance, the collateral provided by the County's depository bank can be U.S. Treasuries, Government Agencies valued at 110.0% or mortgaged backed securities valued at 150.0%.

Investments within the County Pool are reviewed on a monthly basis by an internal Investment Review Group, which consists of the Director of Finance and his designees. The Investment Review Group reviews the investments to ensure compliance with government code and the Investment Policy. Additionally, an internal Investment Group, consisting of the Director of Finance and his designees, reviews the strategies and investment guidelines in relation to the changing financial markets and maintains certain approved lists under lthe Investment Policy. In both the cases of the Investment Review Group and the Investment Group, the role of the designees is advisory except where specifically authorized by the Director of Finance. Each quarter, a ten-in.ember Treasury Oversight Committee monitors the investment activities by reviewing the portfolio report produced by Standard and Poor' s. This report validates the compliance of all investment activities to the established investment parameters and monitoring guidelines.

The Investment Policy may be changed at any time at the discretion of the Board of Supervisors (subject to the state law provisions relating to authorized investments) and as the California Government Code is amended. There can be no assurance, therefore, that state law and/or the Investment Policy will not be amended in the future to allow for investments which are currently not permitted under such state law or the Investment Policy, or that the objectives of the County with respect to investments will not change.

The following table reflects certain limited information with respect to the County Pool for the quarter ending on March 31, 2004. As described above, a wide range of investments is authorized under state law. The value of the various investments in the County Pool will fluctuate on a daily basis as a result of a multitude of factors, including generally prevailing interest rates and other economic conditions; Therefore, there can be no assurance that the values of the various investments in the County Pool will not vary significantly from the values described below. In addition, the values specified in the following tables were based upon estimates of market values provided to the County by a third party. Accordingly, there can be no assurance that if these securities had been sold on the date indicated, the County Pool necessarily would have receive:d the values specified.

A-9 SACRAMENTO COUNTY INVESTMENT POOL INFORMATION Quarter Ending on March 31, 2004

Avenuze Daily Balance $2,075 011,356 Period-End Balance 2.148.838.915 Yield 1.529% Weighted Avenuze Maturity 188 Days Duration in Years .508 Years Historical Cost 2,143 086,227 Market Value 2.148 764.799 Percent of Market to Cost 100.26%

SOURCES OF COUNTY REVENUES

The County derives its revenues from a variety of sources including ad valorem property taxes, sales and use taxes, licenses, permits and franchises issued by the County, use of county property and money, aid from other governmental agencies, charges for services provided by the County and other miscellaneous revenues. For Fiscal Year 2004/05, the approximate percentages of the county's estimated total revenues, are allocated as follows:

COUNTY OF SACRAMENTO BREAKDOWN OF ESTIMATED REVENUE SOURCES FOR FISCAL YEAR 2004/05

Property Taxes 9.4% Sales Taxes 4.2 Other Taxes 1.5 Licenses & Permits 0.6 Fines, Forfeitures and Penalties 1.1 Use of Money and Property 0.6 Aid From Other Governmental Agencies 75.1 Charges for Current Services 5.0 Other Revenue _u Total 100.0%

Source: Sacramento County Office of Budget and Debt Management

Following is a description of various significant revenue sources.

Property Taxes

Assessed Valuation

Sacramento County assesses property values and collects and distributes secured and unsecured property ·taxes to the County, cities, school districts and other special districts within the county area. California law exempts $7,000 of the full cash value of an owner-occupied dwelling, but this exemption does not result in any loss of revenue to local agencies, since an amount equivalent to the taxes which would have been payable on such exempt values is paid by the State.

During Fiscal Years 1992/93 and 1993/94, Sacramento County lost over half of its property tax base as a result of state budget actions, which required the shift of property taxes to schools to relieve the State's burden in funding education. The county's property tax revenue loss from the tax shifts was $132.8 million in

A-10 2002/03. Sacramento County's share of property taxes has declined from 37.0% of total collections to 17.6% of collections due to tax shifts and the incmporation· of Citrus Heights, Elk Grove, and Rancho Cordova.

Assessed valuation in Sacramento County continues to grow, a reflection of the local real estate market In the early and mid 1990s there was very little growth in the Assessor's current tax rolls. The following table summarizes actual secured roll growth in recent years and the current estimate for the 2004/05 Fiscal Year:

Fiscal Year Secured Roll Growth 2001/02 8.61% 2002/03 10.50% 2003/04 9.95% 2004/05 Est. 11.00%

The Assessor's Roll lien date for the 2004/05 Fiscal Year roll is actually January 1, 2004. The real estate market in Sacramento County continues to flourish and the County anticipates significant growth in 2004/05.

In June 1978, Article XIIIA of the California Constitution was amended by Proposition 13 to, among other things, limit a county assessor's ability to annually adjust for inflation to 2.0% per year. On December 27, 2001, an Orange County Superior Court ruled in County of Orange v. Orange County Assessment Appeals Board No. 3 (the "Orange County Litigation") that the Orange County Assessor raised a homeowner' s assessment in violation of Article XIIIA by increasing the assessment on the homeowner' s property by more than 2.0% per year, when the price appreciation in prior years was less than 2.0% per year. Orange County raised assessments by more than 2.0% in a single year if the value of a property remained flat after a taxpayer purchased the property, and then increased by more than 2.0% in a subsequent year. On December 12, 2002, the Superior Court certified the lawsuit as a class action. On January 30, 2003, the Superior Court held a hearing and ruled that the Orange County Tax Collector must notify the affected taxpayers of their right to file tax refund claims. Implementation of the motion is pending further review by the appellate courts on the entire case. On April 18, 2003, the Superior Court entered a final judgment which held that the current statewide practice of restoring property assessment, after a prior assessment reduction due to an economic downturn, based on the market value was invalid. On June 12, 2003, an appeal was filed with the Court of Appeal, Fourth District, Division Three. On March 26, 2004, the Court of Appeal reversed the Supe1i.-or Court and directed it to enter a judgment in favor of Orange County. On May 5, 2004, the Respondent filed a petition to the California Supreme Court for a·review of the decision published by the Court of Appeal on March 26, 2004. The California Supreme Court is expected to issue its decision to accept or deny this petition for review within 60 to 90 days.

The County cannot predict the ultimate outcome of the Orange County Litigation. The Superior Court's ruling only applies to the particular assessment involved in this case. However, if the Superior Court's reasontng is applied generally, the loss of tax revenue to the County could be significant. Estimated impact of Orange County Litigation on Sacramento County's General Fund revenue for the 2003/04 Fiscal Year is approximately $6.5 million. The cumulative potential impact since 1998/99 is approximately $26.3 million.

Following are shown the 2004/05 (Estimated) and 2003/04 assessed valuations in the· County. A seven-year history of assessed valuation in the County is also provided.

A-11 COUNTY OF SACRAMENTO Assessed Valuations · 2004/05 (Estimated) and 2003/04 (Amounts Expressed in Thousands)

Assessed Valuation Net Assessed Reimbursed For Revenue . Valuation Exemptions Purposes <1> 2004/05 (Est.) Local Secured $84,069,567 $1,702,798 $82,366,769 Utility--Nonunitary 77,312 77,312 Utility--Unitary 1,708,659 1,708,659 Unsecured 4152,920 4,152.920 Total $90,008,457 $1,702,798 $88,305,659

2003/04 Local Secured $77, 128,043 $1,667,249 $78,795,292 Utility--Nonunitary 75,060 75,060 Utility-Unitary 1,658,892 1,658,892 Unsecured 4 031 961 306 4 032.267 Total $82,893,956 $1,667,555 $84,561,511

(l) Net Assessed Valuation plus State-Reimbursed Exemptions. Includes redevelopment increment of $2,754,018 in 2003/04 and an estimated $2,898,966 in 2004/05. Property taxes on this incremental assessed valuation are allocated for redevelopment projects, net of property tax shift to schools. Source: Sacramento County Department of Finance. COUNTY OF SACRAMENTO History of Assessed Valuations (Amounts Expressed in Thousands)

Total Fiscal Assessed Year Valuation <1> 1997/98 $54,810,113 1998/99 57,181,929 1999/00 60,640,474 2000/01 65,228,757 2001/02 70,700,747 2002/03 77,715,406 2003/04 84,561,511

(lj Valuations include secured and unsecured and utility roll property, reimbursable exemptions and redevelopment agency increments the taxes on which are payable to such agencies having project areas within the County. Source: Sacramento County Department of Finance.

Tax Levies, Collections and Delinquencies.

Taxes are levied for each fiscal year on taxable real property and personal property which is situated in the County as of the preceding January 1. Real property which changes ownership or is newly constructed is revalued at the time the change occurs or the construction is completed. The current-year property tax rate is applied to the reassessed value, and the taxes are then adjusted by a prorating factor that reflects the portion of the remaining tax year for which taxes are due.

A-12 For assessment and collection purposes, property is classified either as "secured" or ''unsecured" and is listed accordingly on separate parts of the assessment roll. The "secured roll" is that part of the assessment roll containing state-assessed property and real property having a tax lien which is sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the "unsecured roll".

Property taxes on the secured roll are due in two installments, on November 1 and February 1 of each fiscal year, and if unpaid, become delinquent on December 10 and April 10, respectively. A penalty of 10.0% attachi~s immediately to all delinquent payments. Property on the secured roll with respect to which taxes are delinquent is declared tax-defaulted on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of the penalty of 1.5% per month to the time of redemption, together with the defaulted taxes, delinquent penalties, costs and a redemption fee. If taxes are unpaid for a period of five years or more, the tax--defaulted property is subject to auction sale by the County Director of Finance.

Property taxes on the unsecured roll are due as of the January 1 lien dates and become delinqu~t, if unpaid, on August 31. A 10.0%penalty attaches to delinquent unsecured taxes.

If unsecured taxes are unpaid at 5:00 p.m. on October 31, an additional penalty of 1.5% attaches to them on the first day of each month until paid. The County has four ways of collecting delinquent unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the Clerk of the Court specifying certain facts in order to obtain a lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the County Recorder's office in order to obtain a judgment against the taxpayer and a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee.

Beginning in 1978/79, Article XIIIA of the California Constitution and its implementing legislation shifted the function of property taxation primarily to the counties, except for levies to support prior voted debt, and prescribed how levies on countywide property values are to be shared with local taxing entities within each county.

The County is responsible for determining the amount of the tax levy on each parcel which is entered onto tllie secured real property tax roll. Upon completion of the secured real property tax roll, the County's Director of Finance (Auditor-Controller) determines the total amount of taxes and assessments actually extended on the roll for each fund/agency for which a tax levy has been included. The Board of Supervisors of the C01mty, in 1993, adopted the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the ''Teeter Plan"), as provided for in Section 4701 et seq. of the State Revenue and Taxation Code. Generally, the Teeter Plan provides for a tax distribution procedure in which secured roll tax.es are distributed to taxing agencies within the County on the basis ofthe tax levy, rather than on the basis of actual tax co:llections. The County then receives all future delinquent tax payments, penalties and interest; therefore, a complex tax redemption distribution system for all taxing agencies is avoided. During the fiscal year, actual collections of current-year taxes are apportioned to each fund/agency pursuant to their pro-rata share of the total property tax roll. At the conclusion of the fiscal year, the Auditor reconciles actual collections versus the total taxes and assessments due each fund/agency. The County subsequently arranges an internally funded Teeter Plan financing to purchase the outstanding delinquencies to fund the remaining apportionment due each fund/agency. This fmancing transaction is usually completed in August each year. The subsequent collections of deliinquent taxes and penalties/interest are used as the source of repayment for the Teeter Plan fmancing. The County realizes its on going benefit from the Teeter Plan from the net penalties/interest collected in excess of the interest owed on the Teeter Plan fmancing.

Pursuant to California State Law, the County is required in connection with its Teeter Plan to establish a tax losses reserve fund to cover losses which may occur in the amount of tax liens as a result of special sales of tax--defaulted property (i.e., if the sale price of the property is less than the amount owed). The amount requir<~d to be on deposit in the tax losses reserve fund is, at the election of the County, one of the following amounts: (1) an amount not less than 1.0% of the total amount of taxes and assessments levied on the secured

A-13 roll for a particular year for entities participating in the Teeter Plan, or (2) an amount not less than 25.0% of the total delinquent secured taxes and assessments calculated as of the end of the fiscal year for entities participating in the Teeter Plan. The County's tax losses reserve fund is fully funded, in accordance with the county's election to be governed by the second alternative at $3.8 million as of June 30, 2002. Accordingly, any additional penalties and interest that otherwise would be credited to the tax losses reserve fund are credited to the County's General Fund. The County has elected to fund the tax losses reserve fund at an amount not less than the 25.0% of the total delinquent taxes and assessments calculated at the end of the fiscal year.

California State law has authorized the Teeter Plan for over40 years; however, until 1993, it had been implemented in only five counties. Legislation signed by the Governor on July 19, 1993 provided a financial inducement to utilize this simplified accounting method. In connection with its adoption of the Teeter Plan, the County was required to advance to each participating tax entity a portion of the outstanding delinquent secured property taxes outstanding. For Fiscal Year 1993194, delinquent secured property taxes amounts advanced to school districts in excess of the amount they would have received under the prior method of distribution were used as a credit against the county's property tax transfer obligation. The county's tax transfer obligation to its school districts was reduced as a result of the adoption of the Teeter Plan. The County continued implementation of the Teeter Plan for Fiscal Years 1994195 through 2003104 and plans to continue with the Teeter Plan indefinitely.

Shown in the following table are the countywide secured roll tax levies, and corresponding current levy delinquencies and total collections, since 1997/98.

COUNTY OF SACRAMENTO Secured Tax Levies, Delinquencies and Collections 1997/98 through 2004/05 (Estimated) (Amounts Expressed in Thousands)

Percent Current Current Percent Levy Levy Total Total Fiscal Secured Delinquent Delinquent Collections Current 1 2 Year Tax Levies < > June 30 June30 June 30 < > 1m

1997198 $500,035 $ 9,404 1.88% $490,631 98.12% 1998199 523,535 8,846 1.69 514,689 98.31 1999100 558,022 9,276 1.66 548,746 ·98.34 2000101 603,051 9,680 1.61 593,371 98.39 2001102 658,421 9,750 1.48 648,671 98.52 2002103 722,729 12,272 1.70 710,457 98.30 3 2003104 ( ) 788,633 NIA NIA NIA NIA 3 2004105 ( ) 859,610 NIA NIA NIA NIA

(I) Excludes bond service levies. (2) Includes prior-years' redemption, penalties and interest. (3) Estimate as of April 23, 2004.

Source: Sacramento County Department of Finance.

Largest Taxpayers

The ten largest taxpayers in the County, as shown on the 2003/04 secured tax roll, and the amounts of their property tax payments for all taxing jurisdictions within the County are listed in the following table. These taxpayers are expected to pay a total of $32,567,683 in property taxes or about 3.6% of the County's $989,33 8, 762 secured roll tax levy, including levies for bond debt service and special assessments;

A-14 SACRAMENTO COUNTY Largest Taxpayers 2003/04 Intel Corporation $ 6;151,425 SBC Pac Bell 5,456,657 Elliot Homes, Inc. 5,190,529 . Aerojet General Corporation 3,029,272 Sun Ridge LLC 2,927,215 Pacific Gas and Electric Co. 2,776,226 Calpine Natural Gas Co. 2,091,252 Spieker Properties 1,679,594 Donahue Schriber Realty Group 1,635,009 JB Management LP 1,630.504 Total $32,567,683

Source: Sacramento County Department of Finance.

Sales Taxes

The State collects a tax on retail transactions within unincorporated areas of the County and rebates 1.0% lo the County. The County also receives sales tax from countywide and statewide pools. The sales tax revenllte from these pools amounts to approximately 12.0% of total local sales tax revenue. One half-cent of the statewide rate is allocated for local public safety purposes pursuant to Proposition 172 and another half­ cent going is allocated to realignment pool.

In connection with the passage by the voters in the state of Proposition 58, which provides for the issuance by the State of up to $15 billion of Economic Recovery Bonds, the sales tax payable to the County was reduced by .25%. However, the legislation which placed Proposition 58 on the ballot also provides for reimbursement to the County of an amount equal to the loss of sales tax revenues. For purposes of this Appendix A, the County has treated reimbursements by the State of lost sales tax revenues as sales taxes.

Other Taxes

The County collects a 2.5% utility user tax, which is approximately $15.0 million for the 2004/05 Fiscal Year. It is used to provide funding for police patrols, public health and welfare, parks and other essential services. The County also imposes a 12.0% transient-occupancy tax, which is approximately $6.1 million for the 2004/05 Fiscal Year. It is used to primarily pay for civic and:cultural activities throughout Sacramento County and to bring tourism, businesses and jobs to the County. As budget pressure has increased in the county's General Fund~ an increasing amount of transient-occupancy tax financing ·has been transferred to the General Fund. Both revenue streams are general fund revenues, but the County has as a policy matter used the dollars for the purposes· describ'ed above.

Intergovernmental Revenues

California counties are political subdivisions of the State of California, and most of the financing for county programs is intergovernmental revenues. Approximately 53 .5% of the total financing of the County's 2004/05 General Fund· Budget consists of payments from the State' of California. hi addition, the federal govemmentprovides approximately 19.3% ofthe county's, General Fund financing. The majority 'of both the state and federal revenues support human assistance aid payments and other hum~ services programs includiing social services, public health, and mental health programs. The financial condition of the State, statewide economic conditions, and local caseloads have an impact on these revenues. The information presented regarding the County, including the information set forth in "COUNTY FINANCIAL INFORMATION' summarizes the County's expected Aid from Other Governmental Agencies for the current year. However, the amount of state and federal aid may vary from year to year.

A-15 CERTAIN FACTORS AFFECTING REVENUES AND EXPENDITURES

Following is a description of various significant factors affecting the revenues of the County. The following is not intended to constitute a complete list of the various factors that could materially affect the revenues and therefore the financial condition of the County, and there can be no assurances that other such factors do not currently exist or will not arise in the future.

State Budget

State budget decisions have a profound impact on Sacramento County as the provider of many state­ mandated services. California counties are political subdivisions of the State; this is a much closer tie to the State than that of cities.

The Governor and the Legislature have repeatedly demonstrated their willingness to involve local government funding in solving state-level budget problems. The property tax shifts of 1992 and 1993, resulting in the creation of the Educational Revenue Augmentation Fund (ERAF) is the best example, but the "Realignment" of human service programs in the early 1990s also involved cost and risk shifts from the State to counties and had real negative fiscal impact on counties for several years after inception.

The Governor has revised his preliminary budget proposals for Fiscal Year 2004/05 with the release of the "May Revision". These proposals, if enacted, would have.very significant impacts on Sacramento County. There are three major areas of concern from the perspective of the County:

1. The proposed unequal "swap" of car-tax revenues for property taxes. 2. Reductions in categorical funding for county programs where the County may not be able to make a corresponding reduction in expenditures. 3. . Other actions.

Educational Revenue Augmentation Fund (ERAF) 2004

The Governor's May Revision proposal continues to rely on a $1.3 billion funding shift from local government. Counties will bear $350.0 million of this proposed shift. Sacramento County's share is estimated at $12.2 million. The proposal calls for this unequal funding shift to last for two fiscal years, and be made "equal" beginning in Fiscal Year 2006/07.

Categorical Funding

The Governor proposed a number of categorical reductions in health and welfare programs.

1. Reducing IHSS provider wages from $9 .50 per hour to $6. 75 per hour. 2. Requiring a county match of 30.0% for child welfare services funding. 3. Reducing CalWorks and Foster Care Administration funding and CalWorks Grant levels. 4. Reducing state funding and/or increasing county match requirement in several mental health programs.

The aggregate potential impact from these proposals is that the County may actually save money; however, because it is unlikely that the IHSS provider wage rollback and the CalWorks grant reductions will be approved by the State Legislature, the end result may be that county costs are increased by $3.0 to $5.0 million annually.

A-16 Other State Budget Proposals

The Governor proposes to repeal the counties' rights to charge booking fees to cities, and to no longer provide Temporary Assistance to Needy Families (TANF) funding to Probation Departments. These proposals would add $8.6 million in costs to the county budget (or reduce revenues).

Timely State Action

The County also has concern over the timing of state budget actions and the ability to adjust for state budget actions. The Legislature very rarely sends a budget to the Governor by the June 15th deadline. In the past dr;::cade, the state budget has been adopted as late as early September on two separate occasions, including the most recent budget. When the state budget is adopted well after the official deadlines, the county's decision-making process then becomes compressed. ·Adjustments to correspond to state actions come well after the start of the fiscal year. Given the magnitude of the state's problem, and the large level of state funding in the county budget, the County could well be forced to cope with adverse state budget actions made at the very last minute.

Limitations on Taxes and Appropriations

Various provisions of state law limit the ability .of the county to impose or raise taxes and other revenues. Following is a discussion of certain of these provisions.

Article XIIIA

Article XIIIA of the California Constitution limits the amount of ad valorem taxes on real property to 1. 0% of "full cash value" as determined by the County Assessor. Article XIIIA defines "full cash value" to mean "the County Assessor's valuation of real property as shown on the 1975/76 tax roll under "full cash value"', or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment period." The "full cash value" is subject to annual adjustment to reflect increases, not to exceed 2.0% per year, or decreases in the consumer price index or comparable local data, or to reflect reductions in property value caused by damage, destruction or other factors.

Article XIIIA exempts from the 1.0% tax limitation any taxes to repay indebtedness approved by the voters prior to July 1, 1978, and allows local governments and school districts to raise their property tax rates above the constitutionally mandated 1. 0% ceiling for the purpose of paying off certain new general obligation debt issued for the acquisition or improvement of real property and approved by two-thirds of the votes cast by the qualified electorate. For school district general obligation debt and associated.tax rate increases the voter approval threshold is 55. 0%. Article XIIIA requires a vote of two-thirds of the qualified electorate to impose special taxes, the imposition of any additional ad valorem, sales or transaction tax on real property. In addition, Article XIIIA requires the approval of two-thirds of all members of the State Legislature to change any state laws resulting in increased tax revenues.

In June 1978, Article XIIIA ofthe California Constitution was amended by Proposition 13 to, among other things, limit a county assessor's ability to annually adjust for inflation to 2.0% per year. On December 27, 2001, an Orange County Superior Court ruled in County of Orange v. Orange County Assessment Appeals Board No. 3 (the "Orange County Litigation") that the Orange County Assessor raised a homeowner's assessment in violation of Article XIIIA by increasing the assessment on the homeowner's property by more than 2.0% per year, when the price appreciation in prior years was less than 2.0% per year. Orang,e County raised assessments by more than 2.0% in a single year if the value of a property remained flat after a taxpayer purchased the property, and then increased by more than 2.0% in a subsequent year. On December 12, 2002, the Superior Court certified the lawsuit as a class action. On January 30, 2003, the Superior Court held a hearing and ruled that the Orange County Tax Collector must notify the affected taxpayers of their right to file tax refund claims. Implementation of the motion is pending further review by

A-17 the appellate courts on the entire case. On April 18, 2003, the Superior Court entered a final judgment which held that the current statewide practice of restoring property assessment, after a prior assessment reduction due to an economic downturn, based on the market value was invalid. On June 12, 2003, an appeal was filed with the Court of Appeal, Fourth District, Division Three. On March 26, 2004, the Court of Appeal reversed the Superior Court and directed it to enter a judgment in favor of Orange County. On May 5, 2004, the Respondent filed a petition to the California Supreme Court for a review of the decision published by the Court of Appeal on March 26, 2004. The California Supreme Court is expected to issue its decision to accept or deny this petition for review within 60 to 90 days.

The County cannot predict the ultimate outcome of the Orange County Litigation. The Superior Court's ruling only applies to the particular assessment involved in this case. However, if the Superior Court's reasoning is applied generally, the loss of tax revenue to the County could be significant. Estimated impact of Orange County Litigation on Sacramento County's General Fund revenue for the 2003/04 Fiscal Year is approximately $6.5 million. The cumulative potential impact since 1998/99 is approximately $26.3 million.

Article XIIIB

Article XIIIB of the California Constitution (the "Gann Limit" provision) limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost ofliving, population and services rendered by the governmental entity. The "base year" for establishing such appropriation limit is the 1978/79 fiscal year and the limit is to be adjusted annually to reflect changes in population, consumer prices and certain increases in the cost of services provided by these public agencies. Increases in appropriations by a governmental entity are also permitted (i) if financial responsibility for providing services is transferred to the governmental entity, or (ii) for emergencies so long as the appropriations limits for the three years following the emergency are reduced to prevent any aggregate increase above the Constitutional limit. Decreases are required where responsibility for providing services is transferred from the government entity. In June of 1990, the voters passed Proposition 111 which revised the provisions for calculating the appropriation limitations. As amended in June 1990, the appropriations limit for the County in each year is based on the limit for the prior year, adjusted annually for changes in the cost of living and changes in population, and adjusted, where applicable, for transfer of fmancial responsibility of providing services to or from another unit of government. The change in the cost of living is, at the County's option, either (i) the percentage change in California per capita personal income, or (ii) the percentage change in the local assessment roll for the jurisdiction due to the addition of nonresidential new construction. The measurement of change in population is a blended average of statewide overall population growth, and change in attendance at local school and community college ("K-14") districts. The appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate "proceeds of taxes" received by the County over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by reductions in tax rates or fee schedules over the subsequent two years.

Appropriations subject to Article XIIIB generally include the proceeds of taxes levied by the State or other entity of local government, exclusive of certain state subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. Appropriations subject to limitation pursuant to Article XIIIB do not include debt service on indebtedness existing or legally authorized as of January 1, 1979, on bonded indebtedness thereafter approved according to law by a vote of the electors of the issuing entity voting in an election for such purpose, appropriations required to comply with mandates of courts or the federal government, appropriations for qualified out lay projects, and appropriations by the State of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels. "Proceeds of taxes" include, but are not limited to, all tax revenues and the proceeds to an entity of government from (i) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (ii) the investment of tax revenues. Article XIIIB includes a requirement that if an entity's revenues in any year exceed the amount permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two fiscal years.

A-18 On September 28, 2003, the Board of Supervisors approved publication of the annual appropriation limit for the Fiscal Year 2003/04 in the amount of $1,214,674,553. The limitation applies only to proceeds of taxes and therefore does not apply to service fees and charges, investment earnings on nonproceeds of taxes, fmes, :revenue from the sale of property and taxes received from the state and federal governments that are tied to special programs. Based on the 2003/04 Adopted Final Budget, the funds subject to limitation (total Gener.al Operating Budget minus nonproceeds of taxes, debt service, and 2003/04 carry over) are $283,603,572 below the Gann Limit.

Article XIIIB permits any government entity to change the appropriations limit by vote of the electorate in conformity with statutory and Constitutional voting requirements, but any such voter-approved chang1~ can only be effective for a maximum of four years.

Following is a comparison of the County's appropriation limit and appropriation subject to limitation for the, year's 1997/98 through 2003/04 Budgeted:

COUNTY OF SACRAMENTO

Appropriation Appropriation Subject !Jmi! to Limit Margin 1997/98 $837,545,193 $191,739,742 $645,805,451 1998/99 896,029,961 205,482,205 690,547,764 1999/00 951,699,711 218,266,806 733,432,905 2000/01 1,022,875,485 251,407,634 771,467,851 2001/02 1,149,956,656 259,937,148 890,019,507 2002/03 1,159,989,349 267,965,974 892,023,375 2003/04 1,214,674,553 288,479,641 926,194,912

Proposition 46

On June 3, 1986, California voters approved Proposition 46, which added an additional exemption to the 1. 0% tax limitation imposed by Article XIIIA. Under this amendment to Article )CTIIA, local governments and school districts may increase the property tax rate above 1. 0% for the period necessary to retire new general obligation bonds, if two-thirds of those voting in a local election approve the issuance of such bonds and the money raised through the sale of the bonds is used exclusively to purchase or improve real property. For sc:hool district general obligation debt and associated tax rate increases the voter approval threshold is 55.0%. . .

Proposition 62

Proposition 62 was adopted by the voters at the November 4, 1986, general election which (a) requires that any new or higher taxes for general governmental purposes imposed by local governmental entities, such as the County, be approved by a two-thirds vote of the governmental entity's legislative body and by a majority vote of the voters of the governmental entity voting in an election on the tax, (b) requires that any special tax (defmed as taxes levied for other than general governmental purposes) imposed by a local government entity be approved by an· entity voting in an election on the tax, (c) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax was imposed, (d) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA of the California Constitution, (e) prohibits the imposition of transaction taxes and sales taxes on the sale of reai property by local governmental entities, and (f) requires that any tax imposed by a local governmental entity on or after August 1, 1985, be ratified by a majority vote of the voters voting in an election on the tax within two years of the adoption of the initiative or be terminated by November 15, 1988. Proposition 62 further provided that if any jurisdiction imposed any tax proposition, the amount of property tax

A-19 revenue allocated to that jurisdiction shall be reduced by one dollar for each dollar of revenue attributable to such tax for each year the tax has been allocated.

Iri September 1995, the California Supreme Court invalidated a one-half cent sales tax imposed in 1986 by 54.0% of Santa Clara County's voters to fund local transportation projects (Santa Clara County Local Transportation Authority v. Guardino). The Court determined that the tax was a "special tax", one whose proceeds are dedicated to a special purpose (in this case, transportation). Consequently, the California Constitution required a two-thirds voter approval. The Court relied in part upon the provisions of Proposition 62, even though the California Appellate Courts had previously ruled Proposition 62 unconstitutional in most respects. ·

The Board of Supervisors placed two measures on the November 5, 2002 ballot, Measure G asking for continuation of the 2.5% utility tax and Measure H asking for continuation of the 2.0% increase in the Transient Occupancy Tax. The voters of the County approved both measures, continuing the revenue stream from the tax.es.

Proposition 218

On November 5, 1996, the voters of the State of California approved Proposition 218, known as the ''Right to Vote on Taxes Act". Proposition 218 added Articles XIIIC and XIIID to the California Constitution. and contained a number of interrelated provisions affecting the ability of the County to levy and collect both existing and future taxes, assessments, fees and charges.

Proposition 218 (Article XIIIC) requires that all new local tax.es be submitted to the electorate before they become effective. Tax.es for general governmental purposes of the County require a majority vote and taxes for specific purposes, even if deposited in the County's General Fund, require a two-thirds vote. Further, any general purpose tax which the County imposed, extended, or increased, without voter approval, after December 31, 1994, may continue to be imposed only if approved by a majority vote in an election which must be held within two years of November 5, 1996. The County has not imposed any new taxes or increased any such tax.es after December 31, 1994. (The County has extended the utility tax, as described below.) The voter approval requirements of Proposition 218 reduce the flexibility of the County to raise revenues through General Fund tax.es and may affect the ability of the County to continue to impose the utility tax, and no assurance can be given that the County will be able to raise such taxes in the future to meet increased expenditure requirements.

Proposition 218 (Article XIIIC) also expressly extends the initiative power to matters of local taxes, assessments, fees and charges. This means that the voters of the County could, by future initiative, reduce or repeal existing local tax.es, assessments, fees and charges. The initiative power granted under Proposition 218, by its terms, applies to all local fees and charges and is not necessarily limited to those that are property-related fees and charges. No assurance can be given that the voters of the County will not, in the future, approve an initiative or initiatives which reduce or repeal local tax.es, assessments, fees or charges, such as the transient­ occupancy tax and the utility tax which support the County's General Fund. In Fiscal Year 2003/04, the County expects to receive approximately $5. 7 million in transient-occupancy tax revenue and approximately $14.6 million in utility user tax revenue (approximately 5.9% of general-purpose revenues). The transient­ occupancy tax has historically been allocated by the Board of Supervisors to arts, cultural, and recreational programs. During the recent difficult budget years, up to $4.0 million of the transient occupancy tax revenue had been transferred to the General Fund for basic county services. This transfer to the General Fund peaked at $4.0 million and was reduced to $2.5 million as the budget situation improved. The 2001/02 and 2002/03 Adopted Final Budgets included a transfer of $2.5 million for basic county services. The 2003/04 Recommended Proposed Budget includes a transfer of $3 .5 million. Both of these tax.es, and other local taxes, assessments, fees and charges could be subject to reduction or repeal by initiative under Proposition 218.

A-20 Proposition 218 (Article XIIID) also adds several new requirements making it generally more difficult for local agencies to levy and maintain assessments for municipal services and programs such as landscape and lighting in specific areas. The County is unable to predict whether it will be able to continue to collect assessment revenues for these programs under Proposition 218. If such assessment revenues cannot be collected, the County presently intends to curtail such services rather than use amounts in the General Fund to support them.

In addition, Proposition 218 (Article XIIID) adds several provisions affecting property related fees and charges. All new and existing property related fees and charges must conform to requirements prohibiting, among other things, fees and charges which (i) generate revenues exceeding the funds required to provide the prope1ty related service, (ii) are used for any purpose other than those for which the fees and charges are imposed, (iii) area for a service not actually used by, or immediately available to, the owner of the property in ques1ion, or (iv) are used for general governmental services, including police, fire or library services, where the servic,e is available to the public at large in substantially the same manner as it is to property owners. Further, before any property related fee or charge may be imposed or increased, written notice must be given to the record owner of each parcel ofland affected by such fee orcharge. The County must then hold a hearing upon the proposed imposition or increase, and if written protests against the proposal are presented by a majority of the owners of the identified parcels, the County may not impose or increase the fee or charge. Moreover, except for fees or charges for sewer, water and refuse collection services, no property related fee or charge may be imposed or increased without majority approval by the property owners subject to the fee or charge or, at the option of the local agency, two-thirds voter approval by the electorate residing in the affected area.

The County operates a solid waste management system, which is funded by solid waste revenues deposited in the County Refuse Enterprise Fund. A significant portion of the revenues of the solid waste system consist of solid waste collection and disposal charges imposed by the County on a majority of the waste generators in the unincorporated area of the County. These solid waste collection and disposal charges are likely subject to the provisions of Proposition 218.

The County has several enterprise funds which are self-supporting, in addition to the Refuse Enterprise Fund. In addition, several bodies corporate and politic of the State of California which are legally distinct and separate from the County operate in an area generally coterminous with the County, including but not limited to the Sacramento Regional .County Sanitation District. These funds and special districts are supprnrted by fees and charges for services, including providing solid waste collection and disposal service and sewer and wastewater services. The initiative power granted under Proposition 218 may apply to such fees and charges, as may the majority protest provisions relating to new or increased property related fees or charge:s. In the event that fees and charges cannot pe appropriately increased or are reduced pursuant to the initiative power, the County may have to decide whether to support any deficiencies in these enterprise funds with monies from the General Fund or to curtail service, or both. In the case of an operating deficiency withi,n a special district within the County, the County may likewise elect to support any deficiencies with monies from the General Fund or, in the case of special districts operated by the County official ~s ex officio directors of such district, elect to curtail service, or both. The County is unable to predict whether the courts will interpret any of the county's ser:vice charge~ to.bepr~perty-t;elated fees or charges under Proposition 218.

Incomoration and Annexatiolll Proceedings

On November 5, 1996, the qualified voters approved the incorporation of the City of Citrus Heights, the first new City within the County in 52 years. The incorporation became effective January 1, 1997, and removed approximately 88,000 people from the unincorporated territory of the County.

State incorporation law requires that city incorporations be revenue neutral; i.e., to have no significant negative fiscal impact on the County. The County has discovered in its experience with the Citrus Heights, Elk Girove, and Rancho Cordova incorporations that the on-going fiscal viability of the new cities depends on the County accepting less than full revenue neutrality.

A-21 On July 1, 2001, the City of Elk Grove became fully responsible for providing services and is responsible for making revenue neutrality payments to Sacramento County. The City of Elk Grove is responsible for repaying the County approximately $5.0 million in net costs of providing these services to Elk Grove in the first year after incorporation. This debt is being repaid over a five-year period beginning in the 2001/02 Fiscal Year, and Elk Grove is making these repayments on a regular basis. The revenue neutrality obligation of the City of Elk Grove will be a share of the city property taxes. The revenue neutrality payments are thus "secured" from any future refusal of the City of Elk Grove to make the payments since the County collects and holds Elk Grove's property tax revenue.

On July 1, 2003 the City of Rancho Cordova became fully responsible for providing services and is also responsible for making revenue neutrality payments to Sacramento County. The City of Rancho Cordova is responsible for repaying the County approximately $6. 0 million in net costs of providing services to Rancho Cordova in the first year after incorporation. This debt will be repaid over a five-year period beginning in the 2003/04 Fiscal Year. The net fiscal impact on the County is approximately $6.6 million annually. However, if the City makes full revenue neutrality payments to the County, the new city's fiscal viability would be threatened. The County is willing to accept less than full revenue neutrality payments in the initial years after incorporation in exchange for fixed shares of the city's property tax revenue over time and the security that use of property tax for revenue neutrality brings.

Residents of other portions of the Unincorporated Area have been discussing potential incorporation. It appears that the Arden-Arcade communities are the only remaining portions of the Unincorporated Area which generate sufficient municipal revenues in comparison to municipal service costs to make incorporation fiscally viable.

Cities located in Sacramento County are planning for the annexation of portions of the Unincorporated Area Landowners are also interested in annexation to cities. State law requires that property tax exchange agreements be in place between the annexing city and the county before the Local Area Formation Commission (LAFCo) may consider an annexation proposal. Unlike incorporation revenue neutrality agreements, the annexation revenue sharing agreements take the form of legally binding contracts.

But in the longer run view, the County will be faced with a shrinking Unincorporated Area and an increase in the number of cities within the County and the size and population of existing cities. This will have fiscal effects on the County, change the county's role in regional governance, and impact the county workforce. COUNTY DEBT SUMMARY

General Fund and General Obligation Debt Short-Tenn Obligations

The County implemented a cash management program in 1982 to finance General Fund cash flow shortages occurring during its fiscal year. Since the program's inception, the County has sold tax and revenue anticipation notes in amounts in each year ranging up to $285 million. On July 1, 2003, the County issued $280.0 million in tax and revenue anticipation notes for Fiscal Year 2003/04. The notes will mature on July 30, 2004.

General Obligation Debt

There is no knowledge that the County has·never defaulted on the payment of principal or interest on any of its indebtedness. Since July 1, 1996, the County of Sacramento has had no direct general obligation bonded indebtedness.

A-22 The County's outstanding General Fund and General Obligation debt are summarized in the following chart. SHORT-TERM OBLIGATIONS OF THESACRAMENTOCOUNTYGENERALFUND

BORROWING DUE PROJECT ISSUED DATE AMOUNT OF BORROWING RATE(S) DATE - 2003 Tax and Revenue July 1, 2003 $280.0 million 2.00% July 30, 2004 Anticipatfon Notes (TRANS) = General Fund Lease Obligations

Sacramento County has entered into numerous long-term lease arrangements to finance capital projects. The following describes the general fund lease obligations (evidenced as Certificates of Participation or "Certificates") which are currently outstanding.

In 1990, the County entered into a lease transaction with the Sacramento County Public Facilities Financing Corporation in which $105,750,000 Certificates of Participation (Fixed Asset Acquisition Program) were sold. On October 9, 2002, the County entered into an interest-rate swap agreement to convert the remaining outstanding Certificates to a fixed-rate.

In 1994, the County entered into a lease transaction with the Sacramento County Public Facilities Financing Corporation in which $89,500,000 of Certificates of Participation were sold to construct two new facilities. In 1998, the County entered into a crossover refunding transaction in which 1997 Refunding Certificates of Participation (1994 Public Facilities Project-Coroner/Crime Lab and Data Center) were sold. On October 1, 2004, the Refunding Certificates will be used to redeem the outstanding 1994 Certificates, and the County will begin paying debt service on the Refunding Certificates.

In 1997, the County entered into a lease transaction with the Sacramento Public Facilities Financing Corporation in which $58,020,000 of Certificates of Participation {Public Buildings Facilities) were sold to finance~ parking facilities, a jail and to refund certain Certificates of Participation.

In 1999, the County entered into a lease transaction in which 1999 Refunding Certificates of Participation (Capital Projects) were sold for the refmancing of a golf course. The County anticipates that revenues from the Golf Fund will be sufficient to make all payments on the certificates. However, if Golf Fund revenues are insufficient, the County would be obligated to make payments from amounts available in the General Fund.

In 1999, the .Parking Authority for the County of Sacramento Parking Enterprise Fund sold 1999 Refunding Certificates of Participation to refinance the construction of parking facilities. The County anticipates that revenues from the Parking Enterprise Fund will be sufficient to · make payments on the Certifi,~ates.

In 1999,.the County entered into a lease transaction with the River City Regional Stadium Financing Auth61ity in which $39,990,000 Taxable Lease Revenue Bonds, Series 1999, were sold to finance the costs of a privately owned and operated baseball stadium. The County expects that revenues available from the operation of the Stadium· will be sufficient to make payments due from the County. However, if Stadium revenues are insufficient, the County would be obligated to make payments from amounts available in the General Fund.

A-23 In 2002, the Sacramento Regional Arts Facilities Financing Authority (SRAFFA), ajoint exercise of powers authority of which the County is a member sold $16,5 80,000 Certificates of Participation to fmance the improvement of two theaters in downtown Sacramento. The County expects to pay the Certificates from ticket surcharges for performances, naming rights, theater organization contributions and County contributions of approximately $66,000 per year.

In 2003, the County entered into a lease transaction in which $43,790,000 2003 Refunding Certificates of Participation were sold to refund outstanding 1993 Refunded Certificates which were used to fmance the Main Jail Detention Facility.

In 2003, the County also entered into a lease transaction with the Sacramento County Public Facilities Financing Corporation in which $15,230,000 of 2003 Certificates of Participation (Public Facilities Projects) were sold to fmance improvements to the Youth Center and the Boys Ranch, to accommodate American Disabilities Act improvements to various county facilities, and to pay a portion of the cost of acquiring the Mather Golf Course.

In 2003, the County entered into a lease transaction in which $35,140,000 2003 Refunding Certificates of Participation (Juvenile Courthouse Project) were sold to finance construction of a new Juvenile Courthouse facility.

The following provides a chart of the foregoing County lease obligations with nonprofit entities which obligate the County to make rental payments from its General Fund in sufficient amounts to pay debt service on the Certificates.

OUTSTANDING LONG-TERM OBLIGATIONS OF THE SACRAMENTO COUNTY GENERAL FUND

LEASES WITH PUBLIC FACILITIES FINANCING CORPORATION

AMOUNT OF ANNUAL RENTAL PAYMENT BORROWING/ BORROWING LEASE FINAL PAYMENT PROJECT STARTING DATE REMAINING BALANCE RAIB(S) PAYMENT DATE

1990 Certificates of Participation October 1990 $105. 75 million/ 4.85% Maximum of June2020 (Fixed Asset Acquisition $ 87. 305 million $8,760,218 Proizram) 1997 Refunding Certificates of April 1998 $88.36 million/ From4.30% Maximum of October 2027 Participation (1994 Public $88.36 million To5.00% $6,320,535 Facilities Project-Coroner/ Crime Lab and Data Center) 1997 Public Facilities Project August 1997 $58.020 million/ From4.000% Maximum of February 2019 (Public Buildings Facilities) $43.705 million to5.725% $4,725,490 1999 Refunding Certificates of July 2000 $15.960 million/ From3.95% Maximum of July 2018 Participation, (Capital Projects) $13.085 million to 5.125% $1,505,636 Employees Parking Facility and Cherry Island Golf Course $ 6.885 million/ Maximum of July 2018 $ 5.285 million $ 735,059

$ 9.015 million Maximum of July 2012 $ 7.8 00 million $ 770 578 2003 Refunding Certificates of December 2003 $43.79 million/ From2.00% Maximum of June 2015 Participation (Main Detention $43.79 million to4.50% $5,580,750 Facility) 2003 Refunding Certificates of December 2003 $15.230 million/ From2.000% Maximum of June2034 Participation (Public Facilities $15.230 million to4.600% $966,780 Projects)

2003 Refunding Certificates of June 2004 $35.140 million/ From4.00% Maximum of June 2035 Participation (Juvenile $35.140 million to5.00% $2,261,375 Courthouse Project)

A-24 LEASE WITH RIVER CITY REGIONAL STADIUM FINANCING AUTHORITY

ANNUAL FINAL PAYMENT RENTAL PAYMENT AMOUNT OF BORROWING/ BORROWING COUNTY LEASE DATE PROJECT STARTING DATE REMAINING BALANCE RATE(S) PAYMENT , Regional Stadium November 1999 $39.990 million/ From7.75% Maximum of November 2030 $38.715 million to 8.09% $2,388,696

LEASE WITH SACRAMENTO REGIONAL ARTS FACILITIES FINANCING AUTHORITY

PROJECT RENTAL PAYMENT AMOUNT OF BORROWING/ BORROWING ANNUAL FINAL PAYMENT STARTING DATE REMAINING BALANCE RATE(S) COUNTY LEASE DATE PAYMENT 'rojects $16.580 million/ From2.00% Maximum of March2003 September 2032 $16.580 million to 5.00% $1,055,893 - The following table contains annual debt service for each the of the outstanding issues of certificates of participation which are payable from the General Fund, as well as debt service for the County's outstanding Series 2003 Pension Obligation Bonds, and estimated debt service for the planned Series 2004 Pension Obligation Bonds (which are expected to be issued on July 1, 2004).

A-25 County of Sacramento Fiscal Year Long-Term General Fund Obligations Debt Service Summary

Series 19117 Serles 11199 Series 19911 • Serla 2003 Series 2003 Perie.I E•dlag Scries lll!IO Series 1994 Serles 111115 Series 11197 Rduadlag RefHding Leas" Rcv.. ue Serics 2002 Serics 2003 llefandillg Rduadlng Series 1003 Serles 2004 Juae 101• Serles cors COPs roe. COPs COPs COP, Bo•ds COi's COPs COPs COPs POBs POBs Flscd Year_ '!'_o~! . . --- -·--Ji;~... --··--..- - .. .. -- - . -- .. -- ·------·· . ------lit . -2oos ___ -·-- ~.fr5jsi ·s-i,222)23 si1,150,184-- -s4,m,240 -s2,m,360-S{484.JOl! ___sl,58o,356 · si.055J-t3--s9iio,108- -- u,459,738 · ii,s.tt,788 ------· ----: ss1,681,ooo ~-·2006=- . __ 7,467,339 .. ------·- 21,11o~i84 - -~-1,7~5,490 6,319,850 J,484;9~-----~J~.~!.__ !,059,243 --- 959,508 _ ·-5,-io1:~~f 2,214,98~---==-· . - -- ; . __ -~·~_._8_~ _200_7 ___ ·- ___ 7,598,979__ ·---- ._ 21,150,784 4,718,740_ -·. 6,316,793 1,478,058. . 3,573..,QQ. ___ _l,057,!J~ 963,095 -~,_1_54.,463 .. 2,216,238 Sl0,510,0Q\! __ SJ_;;,379,790a_ -· 80,117,106 ~(IO_J ·······-- . _ .. 7.584,8_!! ___ _11,150,784 -·- 4,58!,,~~~ . 6.,~11,055 1,473,439 3,57_~()91_. J,..Q.~1.100___ 955,720 5,209,663 _2,21~J.3!. _ _1!,Q.12,Q!l() 16,217,742! -- 91,345,E~ 2009 7,650,751 21,150,784 4,588,875 6,316,235 1,470,756 3,572,494 1,054,640 962,608 5,259,325 2,212,538 31,525,000 17,257,295! 103,021,301 11!10 1,123,145 "ss~,1i14 ··4;_~!.:s..1.;; - 6,311,ii~~ ·· 1,~64,90_!___ j;s69,019 1,051,1s9 · · 95~~08. f.m.~ _ 2.215,638 -1.6ff~'1 · 18ll8y~1J! 114:601J.s9 2011 7,797,202 58,081,889 4,587,825 6,320,535 1,460,559 3,566,475 1,048,711 957,283 5,364,575 2,214,988 7,644,393 19,337,882: 118,382,317 2012 7,931,436 . 60.730,786 4,590,825 6,3i7,900 1,447,840 3,564,475 i,0.52,226 . 965,095 5,418,975 2,216,813 7),44,393 20,506,579\ 122,387;343 --2011 --·---- 1,iii,2,124 - _,, ____ ~,505,785 -· 4,585,325 6J15:S25· 1,450,457 3,562,63 i 1:052,531 · 961,295 ~73,lSO -2,211,9S6 7,644,393 -21)26,636°! 126,452,408 ---2014 · -----· · (056,212· ..... · ··· ··· --66,400,1s4 4,5s1,325 ·· 6,319,619 ···· --i4s.nr- 3,56o,Ss6 1.ost.112 ·· --- -2022 ____ ------·------95,806,913 6,3i6;9~· 3,S24;i48- . ·,,047,331" ·--- 966,780------··- 2,213,575- --,:644,393 j4,104,ioT-- -- 152,224,731 ~ 2023. ···---- - .. . . ----- .. 6,316,2:.W-_____ .. 3,518,876 1,043,975 957,860 -----urH~99,427,2SS ... 36,463,734: - 't49:941,S19 °' ~-024__ ··--·----· 6,31t~---· 3,511,469 l,043,000 958,250 ---·- ___ !,]15,450_ 40,035,05~-- 38,282,196! _,,,_ 92,364,8~

-· .?.

(I) Assumes inteJCSt at lhe swap rate of 4.85% plus 30 basis points (hp) offccs. (l) Assumes interest at the swap rate of 5.935% to maturity plus 30 hp of fees. Ill Debt service on each Series is calculated at its respective Initial lnteresl Rate until its Full Accretion Date. Thereafter, debt service is calculated at 455%. Non-General Fund Revenue Obligations

In 1997, the County entered into a lease transaction with the Sacramento Public Facilities Financing Corpoiration in which $22,285,000 of Certificates of Participation (Solid Waste Facilities) were sold to finance improvements to the solid waste management system. The county's obligation is payable solely from the revenues of the county's solid waste management system.

In 1998, the County entered into a lease transaction with the Sacramento County Public Facilities Financing Corporation in which $12,565,000 of Certificates of Participation were sold to finance certain electrical generating and related equipment and improvements to the County's solid waste management system. Revenues generated by the project from the sale of electricity to the Sacramento Municipal Utility District will support the Certificates.

. In 2002, the County entered into a lease transaction with the Public Facilities Financing Corporation in which $5,265,000 of Certificates of Participation (Solid Waste Facilities) were sold to finance improvements to the solid waste management system. The county's obligation is payable solely from the revenues of the county's solid waste management system.

In 1998, the Department of Airports for the Airport Enterprise Fund sold $42,510,000 Airport System Revenue Refunding Bonds, Series 1998A and $45,620,000 Airport System PFC and Subordinate Revenue Refunding Bonds, Series 1998B to advance refund the County's Airport System Revenue Bonds and Airport System PFC and Subordinate Revenue Bonds which were issued to finance certain capital improvements at Sacramento International Airport.

Additionally, in 1998, the Department of Airports issued $9,900,000 Variable Rate Demand Special Facilities Airport Revenue Bonds, Series 1998 (The Cessna Aircraft Company Project), to finance the constmction of an aircraft maintenance hangar and associated facilities at the Sacramento International Airport.

In 2002, the Department of Airport's issued two series ofrevenue bonds to finance the construction of an $80.0 million parking garage located at Sacramento International Airport and to refund all outstanding Refunding Series 1989 and Refunding Series 1992A Airport Revenue Bonds.

A-27 OUTSTANDING LONG-TERM NON-GENERAL FUND OBLIGATIONS LEASES WITH PUBLIC FACILITIES FINANCING CORPORATION

SACRAMENTO COUNTY AIRPORT ENTERPRISE FUND

AMOUNT OF BORROWING/ ANNUAL FINAL RENTAL PAYMENT REMAINING BORROWING LEASE PAYMENT PROJECT STARTING DATE BALANCE RATE(S) PAYMENT DATE

1997 Public Facilities Project (Solid Waste $22.285 million/ From3.65% Maximum of Facilities) December 1997 $16.800 million to 5.30% $9,165,000 December 2016

$12.565 million/ From4.00% Maximum of 1998 Public Facilities Project (Gas to Energy) December 1999 $ 9.490 million to4.50% $1,090,931 December 2014

2002 Public Facilities Project (Solid Waste $5.265 million/ From3.00% Maximum of Facilities) December 2002 $4.990 million To 5.00% $420,750 December 2021

Airport System Revenue $111.0 million/ From4.625% Maximum of Bonds, Series 1996A and 1996B Januazy 1997 $86.140 million• to6.0% $8,148,640 July 2026

Airport System PFC and Subordinate Revenue $57.275 million/ From 4.625% Maximum of Bonds, Series 1996 J anuaiy 1997 $13.515 million"'"' to 6.0% $4,172,510 July 2026

Airport System Revenue $42.510 million/ From3.5% Maximum of Bonds, Series 1998A C2) June 1999 $40.985 million to 5.0% $12,115,766 June2026

Airport System PFC and Subordinate Revenue $45.62 million/ From 3.5% Maximum of Bonds, Series 1998B Pl June 1999 $44.740 million to 5.0% $3,952,096 June 2026 Airport System Revenue Bonds, $74.15 million/ Series 2002A (Non-AMT) July 2004 $74.15 million Maximum of $17.805 million/ From3% $4,847,294 July 2032 Series 2002B (AMT) July 2003 $16.620 million To5.25% $2,017,500 July 2020

*Balance reflects Advance Refunding of$15.04 million. **Balance reflects Advance Refunding of$43.76 million. 2 < >Advance refunding of the Airport System Revenue Bonds, Series 1989. <3>Advance Refunding of the Airport system Revenue Bonds, Series 1992.

Direct and Overlapping Bonded Debt

The following table presents a statement of the direct and overlapping bonded debt secured in whole or in part from property tax assessments in Sacramento County as of June 1, 2004.

A-28 COUNTY OF SACRAMENTO

2003/04 Assessed Valuation: $80,518,282,646 (after deducting $4,044,961,836 redevelopment tax allocation increment; includes unitary utility valuation) DIRECT AND OVERLAPPING BONDED DEBT % APPLICABLE DEBT6/l/04 Sacramento Regional County Sanitation District 100 $ 13,040,000 Los Rios Community College District 79.700 73,264,225 Center Joint Unified School District 95.341 19,120,757 Dry Cre,ek Joint School District Community Facilities District # 1 100 22,839,923 Elk Grove Unified School District and Community Facilities District# 1 100 113,359,579 Folsom-Cordova Unified School District School Facilities I.D. # l& #2 100 60,348,627 Grant Joint Union High School District 99.418 21,675,717 Natomas Unified School District 100 68,115,000 North Sacramento and Rohla School Districts 100 32,160,133 Rio Linda Union School District 100 30,794,791 Sacram,mto Unified School District 100 . 223,025,000 Sacram,~nto Unified School District Community Facilities District# 1 100 5,305,000 San Jua11 Unified School District 100 195,249,985 Other S·~hool Districts Various 18,303,683 City of:Polsom 100 32,160,000 Water Districts Various 798,877 Folsom Community Facilities Districts 100 158,185,000 Galt and Galt Schools. Community Facilities Districts 97.820-100 24,048,487 Rancho Cordova Community Facilities District 100 23,415,000 Rancho Murrieta Community Facilities Districts 100 8,270,000 Sacramento County Community Facilities Districts 100 65,022,336 City of Sacramento Community Facilities Districts 100 136,545,000 City of Elk Grove Community Facilities District# 2002-1 100 82,030,000 Southgate Recreation and Park Benefit Assessment District 100 4,565,000 1915 Act Bonds (Estimated) 100 134 450 161 TOTAL GROSS OVERLAPPING TAX AND ASSESSMENT DEBT $ I ,566, 092,281 Less: City of Folsom Water Bonds 85 000 TOTAL NET OVERLAPPING TAX AND ASSESSMENT DEBT $1,566,007,281 DIRECT AND OVERLAPPING GENERAL FUND OBLIGATION DEBT Sacramento County General Fund Obligations {ll 100 $ 354,541,290 Sacramento County Pension Obligations 100 528,590,854 Sacramento County Office of Education Certificates of Participation 100 · 13,790,000 Grant Joint Unified School District Certificates of Participation 99.418 63,776,647 Folsom-Cordova Unified School District Certificates of Participation 100 9,870,000 Natomas Unified School District Certificates of Participation 100 83,960,000 Sacramento Unified School District Certificates of Participation 100 68,999,548 San Juan Unified School District Certificates of Participation 100 15,305,000 Other 81:hool Districts Certificates of Participation Various 15,899,250 City of Folsom Certificates of Participation 100 20,230,000 City of Galt Certificates of Participation 100 8,707,999 City of Sacramento General Fund Obligations 100 759,841,500 Fair Oaks Fire Protection District Certificates of Participation 100 2,&90,000 Recreation and Park District Certificates of Participation 100 6 425 713 TOTAL GROSS OVERLAPPING LEASE OBLIGATION DEBT $1,952,827,801 Less: C'.ity of Sacramento self-supporting obligations 153 384 272 TOTAL NET DIRECT AND OVERLAPPING BONDED DEBT $1,799,443,529 2 GROSS COMBINED TOTAL DEBT $3,518,920,08i ) NET COMBINED TOTAL DEBT $3,365,450,810

(1) Excludes tax and revenue anticipation notes. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and tax allocation bonds, and nonbonded capital lease obligations. RATIOS TO ASSESSED VALUATION: Both Total Gross and Total Net Overlapping Tax and Assessment Debt 1.85% RATIOS TO ADJUSTED ASSESSED VALUATION: . Combim,d Direct Debt ($883,132, 144) 1.10% Gross Combined Total Debt 4.37% Net Combined Total Debt 4.18% Source: California Municipal Statistics, Inc.

A-29 ECONOMIC AND DEMOGRAPHIC INFORMATION

Population and Income

Population .in Sacramento County reflects continued growth as shown in the following table. Population rose 62.7% in the 1940's and 81.4% in the 1950's. During the 1960's, 1970's, 1980's and 1990's, population growth totaled 26.2%, 23.5%, 32.9%, and 16.2%, respectively. Since 1980, population growth has totaled 70.5%.

The State Department of Finance estimates county population at 1,335,400 as of January 1, 2004. Sacramento County currently has seven incorporated cities: Citrus Heights, Elk Grove, Folsom, Galt, Isleton, Rancho Cordova and Sacramento. Approximately 33.0% of the county's population lives in the City of Sacramento. Approximately 40.3% of the county's population lives in unincorporated areas, giving Sacramento County one of the largest unincorporated populations among all counties in the State.

Effective January 1, 2004, Rancho Cordova became a newly incorporated city. For purposes of the state's allocation of certain municipal revenues (including vehicle fees and gas tax) to a newly incorporated city, the "official" State Department of Finance population figure is calculated as three times the number of registered voters within the new city, rather that the actual population. Therefore, the estimated population for the City of Rancho Cordova is 71,772. ·

SACRAMENTO COUNTY Population

1940 1950 1960 1970 1980 1990 2004 Cities: Citrus Heights 87,000 Elk Grove 109,100 Folsom 1,690 3,925 5,810 11,003 29,802 65,600 Galt 1,333 1,868 3,200 5,514 8,889 22,150 Isleton 1,837 1,597 1,039 909 914 833 830 Rancho 71,772 Cordova Sacramento 105,958 137,572 191,667 257,105 275,741 369,365 441,000 Unincorporated Area 62.538 134,948 304,279 367,349 490,209 632,330 . 537,948

Total 170,333 277,140 502,778 634,373 783,381 1,041,219 1,335,400

Source: U.S. Census, except for 2003 figures, which are from the State Department of Finance.

Industry and Employment

Three major job categories comprised 76.8% of the Sacramento MSA's work force during 2003. They were services (37.1 %), government (25.3%), and wholesale and retail trade (14.4%).

As of April 2004, based on unadjusted data, unemployment in the Sacramento MSA was 5.2% compared to 6.1 % for the State. The following table summarizes annual average employment by industry in the Sacramento MSA.

A-30 SACRAMENTO METROPOLITAN STATISTICAL AREA Labor Market Survey <1> (Amounts Expressed in Thousands)

1999 2000 2001 2002 2003 Mining 0.5 0.6 0.6 0.5 0.5 Construction 43.9 48.3 54.8 56.6 60.8 Manufacturing Nondurables 12.9 12.6 11.9 11.5 11.1 Dm:able 31.7 32.3 32.5 29.9 28.4 Transportation and PubJ!ic Utilities 15.8 16.1 15.6 14.7 14.5 Wholesale Trade 19.7 20.2 21.4 21.0 21.1 Retail Trade 77.4 81.0 82.9 84.9 87.5 Finance, Insurance and Real Estate 50.1 48.9 49.3 52.0 56.5 Servic1~s 255.3 268.4 274.4 277.7 280.3 Government 178.6 181.4 187.8 194.7 191.6 Agriculture -1.,2 --4.:.Q --4.:.Q ---2.A --1d Total 689.8 713.8 735.2 746.9 755.8

Source: State Department of Employment Development (1) Amounts are averages for calendar years.

Major Employers

Major private employers in the Sacramento area include those in electronics, medical services, retail sales, and communications services. Major private employers, their products or services, and their number of employees in 2002/03 are listed in the table on the following page.

The State currently employs 66, 726 personnel in the County in various branches of government, making the State the largest employer in the area. County employees account for 14,733 additional jobs in the community.

McClellan Air Force Base, established in 1939, was one of five Air Force Material Command Logistics Centers in the United States. In July 1995, the Federal Base Realignment and Closure Commission identified McClellan for closure, and the base clqsed on July 13, 2001. In April 1999, the County Board of SupeIVisors approved the selection of an Equity Partner or "Master Developer" to accelerate the conversion of transferred parcels from military to commercial and industrial uses. The Board of SupeIVisors approved the Draft Final Reuse Plan in August 2000 with remaining environmental reviews being comple~.d in June 2002. The County and its Master Developer have over 3 million square feet under lease with. lllany other leases pending. More than 4,000 public and private sector jobs have been retained or created at McClellan. On November 13, 2001, the Board of Supervisors and Master Developer executed a purchase sale agreement which provided for the purchase of the majority of the Base property by the Master Developer, exclusive of the Airfield which is retained by the County and operated as a public airfield.

Mather Air Force Base was closed on September 30, •1993 as a result of previous federal action under the Base Realignment and Closure Act. County reuse planning efforts for the 5,700 acre base includes a diverse, set of activities including an air cargo and general. aviation airport; a wide variety of:office; irtdustrial and commercial development; housing, educational, and recreational uses. The goal of the reuse plan, which is now being implemented, is to maximize job creation and economic benefit to the County from the closure of the base. Mather reopened to aviation uses on May 5, 1995, and was formally added to the County Airport System as a cargo and general aviation airport. The California National Guard and the California Department of F ornstiy are established tenants at Mather. Other tenants of the airport include Emery Worldwide, Airborne

A-31 Express, United Parcel Service and Eagle Global Logistics. Both Emery Worldwide and Airborne Express operate out of new cargo sort facilities. County staff is currently working with the United States Postal Service to create Mather Airport as a Western Hub for several of its operations.

In addition to Mather Airport, Mather Regional Park (1,432 acres received by the County from the Air Force at no cost, through Park Public Benefit Conveyance) has been open to the public since fall 1996. Mather Golf Course (169 acres), purchased by the County, has been open to the public since 1994.

Presently, over 5,000 people work at Mather Airport and Commerce Center each day. In addition to those aviation companies previously listed, several other companies now call Mather home including McGraw-Hill Companies, which employs approximately 600 employees, Sutter Health which employs approximately 500 employees, and Sutter Connect, a division of Sutter Health, which employs approximately 400 employees. Other major tenants or landowners include Advance PCS, the Veterans Administration Hospital, which has recently undergone a $40.0 million expansion ·and renovation, and the California State Office of Emergency Services (Administration Offices and Emergency Operations Center) which employs approximately 350 employees in their $27.0 million facility. Finally, over 1,000,000 square feet of speculative office space is planned by at least three local developers who have all recently purchased land and/or buildings.

The previous function of the Sacramento Army Depot was to receive, store, and ship military hardware all over the world. The Depot officially closed in March 1995 also as a result of federal action under the Base Realignment and Closure Act. A developer has purchased the entire site and has leased it to manufacturers and warehousing firms.

SACRAMENTO METROPOLITAN STATISTICAL AREA Major Private Sector Employers (2003)

Company Product/Service Employees Kaiser Pennanente Medical Services 7,694 Intel Corporation Electronics 7,000 Raley's Inc. Retail Grocery 6,632 Sutter/California Health Services Medical Services 6,405 . CHW /Mercy Healthcare Medical Services 6,002 SBC Telecommunications 5,180 Hewlett Packard Electronics 4,500 Wal-Mart Stores Inc. Retail Sales 3,220 EDS Electronics 2,870 Health Net Medical Services 2,000 Wells Fargo Financial Services 2,000 Financial Services 2,000

Source: Sacramento Business Journal

Commercial Activity

Commercial activity is an important contributor to Sacramento County's economy. Between 1998 and 2002, taxable retail sales increased 38.7% from $8.72 billion to $12.09 billion. As shown in the following table, total taxable sales increased 31.9% from $13.33 billion to $17.58 billion.

A-32 SACRAMENTO COUNTY Taxable Transactions 1998 Through 2ooi<1> (Amounts Expressed in Thousands)

1998 1999 2000 2001 2002 (l) Apparel Stores $ 364,544 $ 369,927 $ 410,328 $ 435,758 $ 483,204 General Merchandise Stores 1,663,856 1,875,947 1,960,570 1,996,605 2,024,491 Specfatlty Stores 1,449,835 1,624,485 1,800,343 1,780,073 1,841,954 Food Stores 641,284 696,416 758,169 792,603 785,010 Package Liquor Stores 60,809 66,236 71,301 75,536 79,846 Eating and Drinking Places 1,008,886 1,080,021 1,163,483 1,242,312 1,310,209 Home Furnishings and ApJpliances 466,468 523,294 579,375 598,487 640,658 Building Materials andl Farm hnplements 655,614 932,551 1,049,133 1,102,951 1,186,185 Service Stations 517,785 630,998 811,847 816,696 788,871 Automobile, Boat, Motorcycle and Plane Dealers and Parts outlets 1,643,460 2,139,002 2,467,982 2,860,446 2,948,549 Total Retail Outlets $ 8,715,401 $ 9,938,877 $11,072,531 $11,701,467 $12,088,977

Busim:ss and Personal Services 619,589 705,364 729,836 861,189 873,113 All 0th.er Outlets 3,993 656 4 335 152 4 791358 4,659,145 4 615 469 Total All Outlets $13,328,646 $14,979,393 $16,593,725 $17,221,801 $17,577,559

Source: State Board of Equalization (!) Most recent annual data available.

Agricllllture

Agriculture continues to be an important factor in the county's economy; however, with the ever­ increasing urban and commercial development of Sacramento County, agriculture's relative impact on the local economy declines. The gross value of agricultural production in 2002 reached $275,937,000. Major individual products in terms of dollar value are shown in the following table:

SACRAMENTO COUNTY Agricultural Production 1998 through 2ooi<1> (Amounts Expressed in Thousands)

1 1998 1999 2000 2001 2ooi< ) Field Crops $ 37,135 $ 42,356 $ 43,756 $ 42,558 $ 49,719 Livestock and poultry products 51,103 48,790 43,121 49,927 38,824 Livestock and poultty 27,852 24,220 25,841 28,965 28,819 Vegetable crops 25,639 30,636 17,088 19,433 23,938 Fruit and nut crops 110,297 124,217 126,911 124,151 104,429 Nursery products 17,933 17,113 26,408 28,968 26,378 Seed crops 5,290 6,412 3,041 4,882 3,775 Apiazy products 159 115 065 59 55 Total $253,215 $275,408 $293,859 $298,943 $275,937

Source: Sacramento County Agricultural Commissioner. (I) Most recent annual data available.

A-33 Construction Activity

The value of building permits issued in the County totaled $2,864,188,147 in 2003, an increase of 2.9% from the prior year. From 1999 through 2003, the value of nonresidential building permits reflects a total reduction of 46.6%. Residential permit valuation increased 103.4% over the same period. In addition to annual building permit valuations, the numbers of permits for new dwelling units issued each year from 1999 through 2003 are shown in the following table.

SACRAMENTO COUNTY Building Permit Valuations 1999 through 2003 (Amounts Expressed in Thousands)

Valuation:

Residential $1,158,833 $1,449,414 $1,835,507 $2,317,674 $2,357,495 Nonresidential 948,189 1,183,303 547,986 466,514 506,642 Total $2,107,022 $2,632,717 $2,383,493 $2,784,188 $2,864,147

New Dwelling Units:

Single family 5,523 7,054 8,616 10,519 10,006 Multiple family 4.900 3.362 973 2609 2 328 Total 10,423 10,416 9,589 13,128 12,334

Source: Sacramento County Assessor's Office.

Transportation

The county's location and transportation network have contributed to the county's economic growth. The County is traversed by the main east-west and north-south freeways serving northern and central California. Interstate 80 connects Sacramento with the San Francisco Bay Area, Reno, Nevada, and points east. U.S. Highway 50 carries traffic from Sacramento to the Lake Tahoe Area. Interstate 5 is the main north­ south route through the interior of California; it runs from Mexico to Canada. California State Highway 99 parallels Interstate 5 through central California and passes through Sacramento.

Transcontinental and intrastate rail service is provided by the Union Pacific Railroad. Passenger rail service is provided by AMTRAK. Bus lines offering intercity as well as local service include Greyhound and Sacramento Regional Transit.

The Port of Sacramento provides direct ocean freight service to all major United States and world ports. It is a deep-water ship channel, located 79 nautical miles northeast of San Francisco. The three major rail links serving Sacramento connect with the Port. Interstate 80 and Interstate 5 are immediately adjacent to the Port.

Sacramento International Airport is about 12 miles northwest of downtown Sacramento. The airport is served by ten major carriers, two regional carriers, and two commuter carriers. Executive Airport, located in Sacramento, is a full-service, 680-acre facility serving general aviation. In addition to Sacramento International Airport, Executive Airport, and Mather Airport, there is one other county operated general airport and numerous private airports.

A-34 Sacramento County voters passed a ballot measure in November of 1988 providing for collection of an additional 1/2 cent sales tax (approximately $93,472,700 for 2004/05) to be used exclusively for transportation and air quality projects. Ballot language specified formula distribution: (1) for the cities and unincorporated area of the County; (2) for projects to reduce air pollution; and (3) for mass transit improvements. The 2004/05 share for the unincorporated area of the County is estimated to be $26,100,000.

Education

Public school education is provided by 16 School Districts (seven are Unified School Districts) consisting of the following types of schools: 223 elementary; 42 middle; 52 secondary (high); seven Kinde:rgarten through 8th grade; 25 Kindergarten through 12th grade; one 4th through 12th grade; one 7th through 12th grade; seven community; 17 charter; and five special education schools. Additionally, the Sacramento County Office of Education operates two community and six juvenile hall schools; and one environmental school. There are approximately 171 private schools in the County with an enrollment of approximately 20,081. Public school enrollment for 2003/04 was approximately 235,269.

The. Los Rios Community College District serves the majority of Sacramento County, as well as portions of El Dorado, Placer, Yolo and Solano Counties. The District maintains four campuses in the County -- American River College, located in the northeastern unincorporated area of Carmichael; Sacramento City College, located in Sacramento; Cosumnes River College, located in the southern area of the City of Sacrarnento; and Folsom Lake-El Dorado College located in the northeast area of the County. Spring 2004 enrolhnent at the four campuses totaled approximately 69,523. The southernmost portion of the County is served by the San Joaquin Delta Community College District.

California State University at Sacramento offers four-year programs in business administration, liberal arts, mgineering, education, and nursing, and master's degrees in service fields. Current spring 2004 enrolhnent is approximately 26,928 (fall 2003 enrolhnent was 28,375). Other higher education facilities located in Sacramento are the University of Phoenix, University of Southern California, McGeorge School of Law which is a branch of the University of the Pacific, University of San Francisco, University of California at Davis Extension, and the Medical Center of the University of California at Davis.

CERTAIN INFORMATION CONCERNING THE SACRAMENTO COUNTY EMPLOYEES' RETIREMENT SYSTEM

The following information concerning the Sacramento County Employees' Retirement System ("SCERS" or the "System") is excerpted from publicly available sources, which the County believes to be accurate. SCERS is not obligated in any manner for payment of debt service. on the Bonds, and the assets of the System are not available for such payment. ·

SCERS is the administrator of a multiple-employer, cost-sharing public employee retirement system which operates under the County Employees Retirement Law of 1937. SCERS was created by resolution of the Board of Supervisors on July I, 1941, to provide retirement, disability, and death benefits for qualified employees of Sacramento County and participating special districts. The Board of Retirement consists of nine members of which four are appointed by the County's Board of Supervisors, four are elected by the members of the System, and the County Director of Finance is an ex-officio member. SCERS is excluded from the reporting entity of the County and prepares its own financial statements, as· it is fiscally independent of the County and is governed by the Board of Retirement. The Board of Retirement has exclusive control of all System investments and is responsible for establishing investment objectives, strategies and policies.

At June 30, 2003, participating local government employers consisted of the County of Sacramento and 11 special districts.

The membership consists of the following categories:

A-35 Safetv First Tier-includes employees whose principal duties consist of law enforcement or fire suppression work or who occupy positions designated by law as safety positions who have a membership date prior to June 25, 1995.

Safety Second Tier-includes employees whose principal duties consist of law enforcement or fire suppression work or who occupy positions designated by law as safety positions who have a membership date on or after June 25, 1995.

Miscellaneous First Tier-includes all members other than safety who have a membership date prior to September 27, 1981.

Miscellaneous Second Tier-includes all members other than safety who have a membership date on or after September 27, 1981 and prior to June 27, 1993 who elected not to become members of miscellaneous third tier.

Miscellaneous Third Tier-includes all members other than safety who have a membership date on or after June 27, 1993 and those miscellaneous second tier members who elected to become members of this class.

At June 30, SCERS' membership (including county and special districts) consisted of:

2003 2002 RETIREES AND BENEFICIARIES CURRENTLY RECEMNG BENEFITS: Miscellaneous - Service 3,583 3,504 Miscellaneous - Beneficiary 814 789 Disability Miscellaneous - Ordinary 306 310 Disability Miscellaneous - Duty 185 182 Safety - Service 637 615 Safety - Beneficiary 169 160 Disability Safety - Ordinaty 19 21 Disability Safety - Duty _122 _ill TOTAL RETIRED 5,882 5,742 TERMINATED EMPLOYEES ENTITLED TO BENEFITS BUT NOT YET RECEMNG THEM: 1,885 1,994

CURRENT MEMBERS: VESTED Miscellaneous Tier 1 1,236 1,307 Miscellaneous Tier 2 415 433 Miscellaneous Tier 3 4,814 4,487 Safety Tier 1 1,059 1,089 Safety Tier 2 577 436 SUBTOTAL 8,101 7,752 NONVESTED Miscellaneous Tier 1 5 7 Miscellaneous Tier 3 5,226 5,384 Safety Tier 1 21 42 Safety Tier 2 _1fil1 ~ SUBTOTAL 6.032 ~ TOTAL CURRENT MEMBERS 14,133 14,033.

Source: SCERS' Comprehensive Annual Financial Report as of June 30, 2003.

A-36 lmpal:11: of Pension Benefits Enhancements

Effective June 29, 2003, enhanced retirement benefits became applicable for all SCERS service credits earned prospectively. The enhanced benefits include the applicability of Government Code Section 31664.1 for Safety plari service credits and Government Code Section 31676.14 for Miscellaneous service credits. In addition, members who meet certain criteria may purchase up to four years of public service credits. Under the enhanced benefit formulas, retirement benefits under each tier are as follows:

Safetv Tier 1. Members covered under Safety Tier 1 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, equal to 3.0% of their final-average salary for each year of credited service. This benefit includes a cost-of-living adjustment of up to 4.0% annually. Final-average salary is the member's average salary for the highest 12 consecutive months of credited service.

Safety Tier 2. Members covered under Safety Tier 2 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, equal to 3.0% of their final-average salary for each year of credited service. This benefit includes a cost-of-living adjustment of up to 2.0% annually. Final-average salary is the member's average salary for the highest 36 consecutive months of credited service.

Miscellaneous Tier 1. Members covered under Miscellaneous Tier 1 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, which is equal to 1.474% of their fmal-average salary for each year of credited service. It includes a cost-of-living adjustment ofup to 4.0% annually. Final-average salary is the member's average salary for the highest 12 consecutive months of credited service.

Miscellaneous Tier 2. Members covered under Miscellaneous Tier 2 who retire at age 50 are entitled to a retirement benefit, payable monthly for life, equal to 1.474% of their fmal-average salary for each year of credited service. There is no cost-of-living adjustment. Final-average salary is the member's average salary for the highest 36 consecutive months of credited service.

Miscellaneous Tier 3. Members covered under Miscellaneous Tier 3 who retire at age 50 are entitled to a re-tirement benefit, payable monthly for life, equal to 1.474% of their fmal-average salary for each year of credited service. It includes a cost-of-living adjustment of up to 2.0% annually. Final-average salary is the memb,~r' s average salary for the highest 3 6 consecutive months of credited service.

Contr:ibution Rates and Funding Status

The retirement benefits of Miscellaneous Tier 1, 2, and 3 members who retire after age 50 are increased by an age factor for each quarter year of age up to a maximum of 2.611 % of fmal-average salary for each year of credited service at age 62.

State legislation enacted in 1997 provided that effective July 1, 1997, financial rb~p:onsibility for State . operations was transferred' tb the State. This included r~quirements that the Court reimourse the County for wage and benefit costs ·attributable to Court operations. County Counsel of the County has provided an opinion to the Board and the County to the effect that, notwithstanding this statutory tra11sfer,to the State of · fmancial ·responsibility for pension plan payments for Court employees, the County: cot1t~nues to be legally · obligated pursuant to the 1937 County Employ~es Retirement Law to make the pensicm plan payments, whethe:r or not reimbursed 1,y the State. Accordingly, the required County contributions, UAAL and other amounts shown herein as being the responsibility of the County includes amounts attributable to the Court employees. · ·

The Sacramento County Board of Supervisors applied the new formulas for all SCERS members, including member districts, prospectively from June 29, 2003 and retroactively to county employees' service credits which precede that date. Iti accordance with applicable retirement law, each SCERS member district's governing body determined whether or not to apply the new formulas retroactively for service credits earned

A-37 prior to June 29, 2003 and to make the public service credit purchase provisions applicable to its employees. The enhancements .created a significant unfunded liability and also resulted in significant increases in future county contribution rates.

The following table shows the percentage of salary which the County was responsible for contributing to SCERS from Fiscal Year 1998/99 through Fiscal Year 2004/05 to satisfy its retirement funding obligations. The significant increase in Fiscal Year 2003/04 was primarily the result of the implementation of enhanced retirement benefits. The amount payable by the County in future fiscal years will depend on a variety of factors. See "Impact of Pension Benefit Enhancements" and "Impact of Investment Losses" herein.

SCHEDULE OF EMPLOYER CONTRIBUTION RATES COUNTY

Miscellaneous SafetI Tierl Tier2 TierJ Tierl Tier2 FISCAL YEAR Percent Percent Percent Percent Percent 1998/99* 6.43 3.40 5.02 17.96 13.42 1999/00* 5.85 2.91 4.55 14.57 10.30 2000/01 * 5.89 2.94 4.56 14.56 10.29 2001/02* 5.85 2.90 4.53 14.52 10.37 2002/03* 6.86 3.41 5.26 16.04 11.96 2003/04** 15.84 11.47 13.85 31.69 26.31 2004/05*** 13.49 9.16 11.32 24.39 20.24

*Source: SCERS' Comprehensive Annual Financial Report for the year ended June 30, 2003. **Source: SCERS' Actuarial Valuation Report as of June 30, 2003. ***Source: Mercer Human Resource Consulting, actuary to SCERS, dated May 21, 2004. Note: SCERS' Actuarial Valuation Reports contain current rates which pertain to the following fiscal year. For example, rates for the Fiscal Year 2003/04 were presented in the SCERS Actuarial Valuation Report as of June 30, 2003.

A six-year schedule of the funding progress of SCERS (for the County and special districts combined) is presented in the table below.

SCHEDULE OF FUNDING PROGRESS (Amounts Expressed in Thousands)

Actuarial Unfunded/ Accrued Unfunded/ (Over funded) Actuarial Actuarial Liability (Over Annual AALasa Valuation Value of (AAL)Enuy funded) Funded Covered Percentage of Date Assets Age AAL Ratio Payroll Covered Payroll June 30 (a) (b) (b-a) (alb) (c) [(b-a)/c] 1998 $2,600,547 $2,409,642 ($190,905) 107.9% $470,385 (40.6%) 1999 3,017,639 2,734,548 (283,091) ll0.4 502,325 (56.4) 2000 3,427,348 3,111,760 (315,588) 110.1 559,047 (56.5) 2001 3,718,198 3,451,864 (266,334) 107.7 634,798 (42.0) 2002 3,839,081 3,586,250 (252,831) 107.1 695,259 (36.4) 2003 3,864,400 4,108,294 243,894 94.1 733,296 33.3 Source: SCERS' Comprehensive Annual Fmanc1al Report for the year ended June 30, 2003.

As described herein, certain pension benefits enhancements have increased the accrued liability of SCERS. In addition, as described below under "Impact of Investment Losses," the actuarial value of the assets of the System has declined in recent years. As a result, the County anticipates that SCERS will have a

A-38 significant unfunded actuarial accrued liability as of June 30, 2004. (As described herein, the proceeds of the Series 2004 Pension Obligation Bonds will be used on July 1, 2004 to satisfy a significant portion of such unfunded actuarial accrued liability.)

Litig~lltion Regarding Retirement Plan

On October 1, 1997, the California Supreme Court decision in Ventura County Deputy Sheriff's Association et al. v. Board of Retirement of Ventura County Employees' Retirement Association, and County of Ventura (Ventura) became final. This decision changed the existing law regarding the definition of the term "compensation earnable." Compensation earnable is used in the County Employees' Retirement Law of 1937 (CERL) as a basis for calculating the pension of a retiree. Ventura required inclusion in the retirement allowm1ce calculation all elements of compensation payable in cash. In response to Ventura, all retirement systems began including all such elements in final compensation as of October 1, 1997.

Beginning in December 1997, lawsuits were filed against the County and SCERS and 17 other Counties seeking the inclusion of additional pay elements not addressed by Ventura such as terminal pay to be added to compensation earn.able. The lawsuits also sought a retroactive application of pay elements applied prospe:ctively as of October 1, 1997. On November 30, 2001, the trial court hearing all cases together determined that the additional elements need not be included but the decision in Ventura should be retroactively applied. SCERS' counsel estimated the probable liability exposure for the retroactive application at between $58.3 million and $75.3 million. Prior to the completion of the appeal process, the parties reached a settlement for an estimated $55.0 million. Court approval of that settlement is ongoing.

Impa<:t of Investment Losses; Potential Significant Unfunded Liability

In a letter dated May 19, 2004, Mercer estimated the impact of investment losses and gains over the last several years. Pursuant to SCERS policy, gains and losses in any given year are recognized (smoothed) over a five-year period with any resulting net losses amortized over a closed 30-year period. SCERS experi,~nced significant investment losses in the two fiscal years ended June 30, 2002, the aggregate amount of which is $401.7 million. SCERS experienced net investment gains of $100.8 million for the fiscal year ended June 30, 2003 (representing net investment gains of approximately 3.4%) and anticipates investment gains for the fiscal year ended June 30, 2004 greater than the assumed rate of return of 8.0%. As a result of the smoothing policy, the County anticipates that SCERS' unfunded actuarial accrued liability with respect to county employees will increase significantly over the next several years as losses from prior years are recognized. In a letter from Mercer dated May 19, 2004, Mercer made the following estimate of the County's unfunded actuarial liability through June 30, 2009:

Estimated Unfunded Actuarial Accrued ffiAAL} Liabili!l'.* (Amounts Exoressed in Millions) June 30, June 30, June 30, June 30, June 30, June 30, 2004 2005 2006 2007 2008 2009 $483.6 $699.6 $800.4 $801.5 $757.8 $767.4 .. Source: Letter from Mercer dated May 19, 2004, Subject: Projected Unfunded Actuartal Accrued Liability *County employees only; not including special districts.

The Mercer estimate assumes that the plan will earn 8.0% return on market value of assets for plan years starting July 1, 2004 and after. The actual amount of unfunded liability, if any, will depend on a variety of factors, including but not limited to future investment performance. The Mercer estimate of the UAAL does not take into account the use of approximately $420.0 million of the proceeds of the County's Series 2004 Pensiolll Obligation Bonds to reduce the UAAL on July I, 2004.

A-39 County Contributions

The following table shows actual county contributions to SCERS for Fiscal Years 1997/98 through 2002/03 and estimated county contributions for Fiscal Years 2003/04 and 2004/05. The actual amount required to be contributed by the County in future fiscal years will depend on a variety of factors, including then current retirement benefits and SCERS investment performance. However, there can be no assurances that the required county contribution will not increase significantly in future fiscal years as a result of retirement benefit enhancements and recognition of SCERS investment losses.

SCHEDULE OF COUNTY CONTRIBUTIONS (Amounts Expressed in Thousands)

Year Annual Ended Required Percentage June30 Contribution Contributed 1998* $41,470 100.0% 1999* 45,481 100.0 2000* 39,156 100.0 2001* 37,372 100.0 2002** 41,241 100.0 2003** 49,438 100.0 2004*** 112,582 100.0 2005**** 93,989 NIA

*Source: County's Comprehensive Annual Financial Report for respective years. **Source: SCERS' Comprehensive Annual Financial Report for the year ended June 30, 2003. ***Source: SCERS' Minutes of the Board of Retirement for July 17, 2003. The amount was estimated based on the County's Fiscal Year 2003/04 prepayment of employer contributions, which were paid in July 2003. ****Source: Letter from Mercer dated May 7, 2004, Subject: 2004/05 Prepayment. The amount was based on anticipated county payroll. It reflects the change in amortization of unfunded accrued actuarial liability to a 30-year period, assumes a prepayment of annual employer contributions in July 2004, and anticipates receiving the proceeds from the issuance of the Series 2004 Pension Obligation Bonds in July 2004.

Change in Actuary for SCERS

In response to SCERS' request for proposals (RFP) for actuarial services it received responses from seven firms. On May 20, 2004, The Segal Company was selected as SCERS new actuary to begin services on July 1, 2004. Mercer Human Resource Consulting has been performing the actuarial services under an existing agreement. Notwithstanding SCERS agreement with The Segal Company, Mercer will continue beyond July 1, 2004, to assist SCERS and Sacramento County relative to the work associated with the County's issuance of pension obligation bonds, proceeds from those sales, as well as contribution rates associated with those activities.

A-40 APPENDIXB

THE COUNTY OF SACRAMENTO AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2003

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Honorable Board of Supervisors County of Sacramento, California

INDEPENDENT AUDITOR'S REPORT

We have audited the accompanying financial statements of the governmental activities, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the County of Sacramento, California (County), as of and for the year ended June 30, 2003, which collectively comprise the County's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the County's management. Our responsibility is to express opinions on these financial statements based on our audit.

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 GovemmenfAuditing Standards, issued by the Comptroller General of the_ United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and discl0sures in th~ financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of the County, as of June 30, 2003, and the respective changes in financial position and cash flow, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As described in Note 1, the County adopted the provisions of Governmental Accounting Standards Board (GASB) Technical Bulletin No. 2003-1, Disclosure Requirements far Derivatives Not Reported at on the Statement ef Net Assetf and GASB Statement No. 40, Deposit and Investment .Risk Disclosures. Also, as discussed in Note 1, the County has changed its accounting for the prepayment made to Sacramento County Employees Retirement System and adopted the sole­ employer provisions of GASE Statements No. 27, Accountingfar Pensions qy State and Local Governmental Emplqyers.

Of±ices located throughont California

1 In accordance with Government Auditing Standards, we have also issued our report dated December 26, 2003 on our consideration of the County's internal control over financial reporting and our tests of its compliance with certain provisions oflaws, 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 on pages 3 through 18 are not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We 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 did not audit the information and express no opinion on it.

Our audit was performed for the purpose of forming opinions on the financial statements that collectively comprise the County's basic financial statements. The introductory section, combining and individual fund statements and schedules, and the statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The combining and individual fund statements and schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated, in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion .on them.

~.~· ; ~f""f. u..P Certified Public Accountants

Sacramento, California December 26, 2003 COMPREHENSIVE ANNUAL FINANCIAL REPORT

FINANCIAL SECTION

MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion and Analysis

This section of the County of Sacramento's (County) comprehensive annual financial report presents a discussion and analysis of the County's financial performance during the fiscal year ended June 30, 2003. Please read it in conjunction with the transmittal letter at the front of this report and the County's basic financial statements following this section. All dollar amounts are expressed in thousands unless otherwise indicated.

FINANCIAL HIGHLIGHTS

• The assets of the County exceeded liabilities at the close of the 2002-03 fiscal year by $2,933,630 (net assets), of this amount, $631,785 is restricted for specific purposes (restricted net assets), and $1,788,498 is invested in capital assets, net ofrelated debt. The government's total net assets increased by $179 ,3 91. • As of June 30, 2003, the County governmental funds reported combined fund balances of$812,471 for an increase of$47,184 in comparison with the prior year. Approximately 39 percent of the combined fund balances, $318,092 is available to meet the County's current and future needs (unreserved fund balance). • At the end of the fiscal year, unreserved fund balance for the General Fund was $114,666 or 7 .1 percent of total general fund expenditures. This entire amount is budgeted to be spent in the next fiscal year. • The County's investment in capital assets increased by $213,871 or 8.56 percent. • The County's total long-term obligations had a net increase of $155,335. This net increase was comprised of a gross increase of $361,582 and a gross decrease of$206,247. The decrease resulted primarily from scheduled principal retirements ofrevenue bonds, certificates of participation, Teeter notes, and pension obligation bonds of $68,334 and refunding of the main jail debt of $47,180. The increase resulted primarily from two new certificates of participation, one new Teeter note, and three new certificates of participation that amounted to $252,709.

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis are intended to serve as an introduction to the County's basic financial statements. The County's basic financial statements comprise three components 1) Government-wide financial statements; 2) Fund financial statements and 3) Notes to basic financial statements.

Government-wide Financial Statements are designed to provide readers with a broad overview of County finances, in a manner similar to a private-sector business.

The statement of net assets presents information on all County 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 County is improving or deteriorating.

The statement of activities presents information showing how 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 ofthe timing ofrelated cash flows. Thus, revenues and

3 expenses are reported in this statement for some items that will result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave).

Both of these government-wide financial statements distinguish functions of the County that are principally supported by taxes and intergovernmental revenues (governmental activities) from othei functions that are intended to recover aH or in part a portion of their costs through user fees and charges (business-type activities). The governmental activities of the County include general government, public protection, public ways and facilities, health and sanitation, public assistance, education, and recreation and culture. The business-type activities of the County include the Airport, Regional Sanitation District, Refuse, Sanitation District Number One, Parking Enterprise, Water Agencies and the County Transit.

Component units are included in our basic financial statements and consist of legally separate entities for which the County is financially accountable and that have substantially the same board as the County or provide services entirely to the County. Examples are County Service Area Number One, Water Agency, Sunrise and Mission Oaks Recreation and Park District, Sacramento Metropolitan Air Quality District, Regional Sanitation and County Transit. The Tobacco Authority of Northern California (Authority) is a public entity created by a Joint Exercise of Powers Agreement (Agreement) effective as of July 15, 2001 between Sacramento County (County) and San Diego County. The Authority is a public entity legally separate and apart from the County, and is considered a discretely presented component unit of the County due to the operational relationship between the Authority and the County. The debts and liabilities of the Authority belong solely to it, and neither the Counties of Sacramento or San Diego are any way responsible for those liabilities.

The government-wide financial statements can be found on pages 20-22 of this report.

Fund Financial Statements are groupings of related accounts that are used to maintain control over resources that have been segregated for specific activities or objectives. The County, like other state and local governments, uses fund accounting to ensure and demonstrate finance­ related legal compliance. All of the funds of the County 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.-lfowever, unlike the government-wide financial statements, governmental funds financial statements focus on near-term inflows and outflows ofspendable resources, as well as on balances ofspendable resources available at the end of the fiscal year. Such information may be useful in evaluating a county's near-term financing requirements.

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 funds with similar 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 County maintains 36 individual governmental 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. Data from the other 4 governmental funds are combined into a single, aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements elsewhere in this report.

The governmental funds financial statements can be found on pages 23-27 of this report.

Proprietary funds are maintained two ways. Enterprise funds are used to report the same functions presented as business-rype activities in the government-wide financial statements. The County uses enterprise funds to account for the Airport, Regional Sanitation District, Refuse, Sanitation District Number One, Parking Enterprise, Water Agencies and the County Transit operations. Internal service funds are an accounting device used to accumulate and allocate costs internally among the County's various functions. The County uses internal service funds to account for its liability/property self-insurance, telecommunication and information technology support, worker's compensation self­ insurance, self-insurance for dental and unemployment claims (Self-Insurance - Other), regional communications, special services provided by the Public Works Agency and centralized services provided by the Department of General Services. Because these services predominantly benefit governmental rather than business-type functions, they have been included within governmental activities in the government-wide financial statements.

Proprietary funds provide the same type of information as the government-wide financial statements, only in more detail. The Airport, Regional Sanitation District, Refuse and Sanitation District Number One operations are considered to be major funds of the County. The County's seven internal service funds are combined into a single, aggregated presentation in the proprietary funds financial statements. Individual fund data for the internal service funds is provided in the form of combining statements elsewhere in this report.

The proprietary funds financial statements can be found on pages 28-33 of this report.

Fiduciary funds are used to account for resources held for the benefit of parties outside the government. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the County1s own programs. The accounting used for fiduciary funds is much like that used for proprietary funds except for agency funds.

The fiduciary fund financial statements can be found on pages 34-35 of this report.

Notes to 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. The notes can be found on pages 37-96 of this report.

The combining and individual fund statements and schedules referred to earlier provide information for non-major governmental funds, enterprise and internal service funds, and can be found on pages 97-173 of this report.

GOVERNMENT-WIDE FINANCIAL ANALYSIS

As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the County, assets exceeded liabilities by $2,933,630 at the close of the most recent fiscal year.

,:;: Statement of Net Assets For the Year Ended June 30, 2003

Governmental Business-type Activities Activities Total 2003 2002 2003 2002 2003 2002 Other assets $ 2,113,587 2,025,835 1,147,649 1,020,048 3,261,236 3,045,883 Capital assets 1,116,742 1,050,333 1,597,069 1,449,607 2,713,811 2,499,940 Total assets $ 3,230,329 3,076,168 2,744,718 2,469,655 5,975,047 5,545,823

Other liabilities $ 858,853 791,986 105,011 72,535 963,864 864,521 Long-term debt obligations 12032,963 9831059 1,044,590 944 004 2,077,553 1,927,063 Total liabilities 1,891,816 1,775,0~ 1,149,601 1,016,539 3,041,417 -~721,584

Net assets: Invested in capital assets, net of related debt 798,416 763,070 990,082 893,543 1,788,498 1,656,613 Restricted net assets 516,881 503,532 114,904 99,202 631,785 602,734 Unrestricted net assets 23,216 34,5~ --· 490,Ll_L 460,371 513,347 494,892 Net assets 1!338,513 1,301,123 1,595!117 1,453,116 2,933,630 2,754,239 Liabilities and net assets $ 3J}0,329 3,076,168 2,744,718 2,469,655 5,975,047 5,545,823

The largest portion of the County's net assets of$1,788,498 (61 percent) reflects its investment in capital assets (e.g. land and easements, structures and improvements, infrastructure, and equipment), less any related debt used to acquire those assets that is still outstanding. The County uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the County's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities.

Another significant portion of the County's net assets of $631,785 (22 percent) represents resources that are subject to external restrictions on how they may be used..

The remaining balance of total net assets, $513 ,34 7, is unrestricted and may be used to meet the County's ongoing obligations to citizens and creditors. Unrestricted net assets increased $18,455 compared to the prior year.

The major restrictions on net assets are for debt service (4%), capital projects (36%), passenger facility charges (8%) and.other purposes (51 %) such as fixed asset acquisition and encumbrances. Restricted net assets increased by $29,051 from the prior year. This was due primarily to encumbering funds in the accumulated capital outlay fund for two large construction projects, Juvenile Courthouse and the Warren & Thorton expansion, which were awarded late in the fisct\l year.

6 At the end of the current fiscal year the County reported positive change of8.0% in net assets invested in capital assets, net of related debt. As discussed above, the County's net assets increased by 6.5% while unrestricted net assets increased by 3.7%. During the 2002-03 fiscal year the county as a whole, as well as for separate governmental activities, reported positive balances in all three categories of net assets.

The County's net assets increased by $179,391 during the current fiscal year, which accounts for 6 percent of total net assets. The increase in net assets invested in capital assets, net of related debt of $131,885, represents capital purchases net of depreciation plus the retirement of related long-term debt.

The increase in unrestricted net assets, $18,455, is due to ongoing revenues exceeding ongoing expenses.

Governmental activities. Governmental activities increased the County's net assets by $37,390, thereby accounting for 21 percent of the total growth in net assets of the County.

The table on the next page indicates the changes in net assets for governmental and business-type activities:

,., Statement of Activities For the Year Ended June 30, 2003 Governmental Business-type Activities Activities Total _.1Q0.3 2002 2003 2002 2003 2002 Revenues: Program revenues: Charges for services s 248,310 277,992 376,553 327,190 624,863 605,182 Operating grants and contributions 980,076 961,467 18,112 15,259 998,188 976,726 Capital grants and contributions, 23 ,892 18,629 40,247 5 1,6 82 64,139 70,311

General revenues: Taxes: Property 262,647 240,640 5 ,381 4,672 268,028 245,312 Sales I use 83,275 85,988 576 492 83 ,851 86,4 80 Transient 7,891 8,651 7 ,891 8,651 Unrestricted investment earnings 4 7 ,065 53,747 18 ,8 5 9 2 8,3 32 65 ,924 82,079 Grants and contributions not restricted to specific programs 293,767 297,805 2,850 2,528 296,617 300,333 Miscellaneous 93 ,23 9 101,582 2,064 2,827 95 ,303 104,409 Total revenues _b.04 _Q_,1_§1_ 2,046,50 l 464,642 432,982 2,504,804 2,479,483

Expenses: Gen era! government 110,633 134,660 110,633 134,660 Public assistance 708,491 715,351 708,491 715,351 Public protection 599,659 575,855 599,65 9 57 5,855 Hea,Jth and sanitation 393 ,57 5 317,558 393 ,57 5 317,558 Public ways and facilities 66 ,8 61 66,44 7 66,861 6 6,447 Recreation'-and c11liiire- 31,878 3,8,611 3 1,8 7 8 3 8,611 Education 26,951 29,637 26,951 29,637 Interest and- fiscal charges 64,724 5 8,667 64,724 5 8,667 Airport 88,445 8 0,794 88,445 80,794 Regional Sanitation District 105,620 , 107,357 105,620 107,357 Refuse 68,111 63,477 68,111 63,477 Sanitation District Number One 42,333 43,444 42,333 43,444 Parking Enterprise 3,188 3,231 3,188 3,231 Water Agency 14,188 13,171 14,188 13,171 County Transit 756 323 756 323 Total expenses 2,002,772 1,936,786 322,641 311,797 2,325,413 2,248,583 Excess of revenues over expenses before special item 37 ,390 109,715 142,00 l 121,185 179,391 230,900 Special item: Tobacco settlement proceeds 171,966 171,966 Change in net assets 37 ,390 281,681 142,00 I 121,185 179,391 402,866 Net assets, beginning of year 1,301,123 1,019,442 1,453,116 1,331,931 2,754,239 2,351,373 Net assets, end of year S 1,338,513 l,301,123 __1,5~ __ l ,453,l_l§_ 2,933,63 0 2,754,239 Total revenues for the County's governmental aGtivities decreased by $6,339 from the prior year.

Total expenses for governmental activities were $2,002,772, an increase of 3.4% or $65,986 from the prior year. As a service delivery entity the County's major cost component is salaries and benefits, which accounted for approximately 42% of total County expenditures. The average full time equivalent (FTE) employee count for the County (including business-type activities) increased from $12,967 in the prior year to $13,442 as of June 30, 2003. Total salaries and benefits expense increased by $95,875 or 14.9% from the prior year.

The total increase in expenses is attributable generally to the increase in salary and benefit costs.

8 Business-type activities. Business-type activities increased the County's net assets by $142,001 or 79 percent of the total growth in the government's net assets. This increase is primarily attributable to increases resulting from normal operations, operating income and capital contributions for Airports of $16,364, Regional Sanitation District of $55,403, Refuse of$7,200, County Sanitation District Number One of $21,661 and other nonma,jor enterprise funds of $32,203. Also, the consolidation oflntemal Service Fund activity related to business-type activities accounted for $9,170.

FINANCIAL ANALYSIS OF THE COUNTY'S FUNDS

As noted earlier, the County uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements.

Governmental funds. The general government functions are contained in the General, special revenue, debt service, and capital projects funds. Included in these funds are the special districts governed by the Board of Supervisors. The focus of the County's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the County's financing requirements. In particular, unreserved fund balance may serve as a useful measure of a government's net resources available for spending at the end of the fiscal year.

At June 30, 2003, the County's governmental funds reported combined fund balances of $812,471 an increase of $47,184 in comparison with the prior year. Approximately 39 percent of the combined fund balances, $318,092, constitutes unreserved fund balance, which is available to meet the County's current and future needs. The remainder of fund balance is reserved to indicate that it is not available for new spending because it has been committed: 1) to pay debt service ($122,668); 2) to reflect amounts set aside for future construction ($230,558); 3) to liquidate contractual commitments of the period ($101,898); 4) to acquire fixed assets ($18,190); 5) to reflect assets that are unavailable and do not represent available resources ($21,065).

The General Fund is the chief operating fund of the County. At June 30, 2003, unreserved fund balance of the general fund was $114,666 while total fund balance reached $155,865. 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 7.1 percent of total fund expenditures, while total fund balance represents 9 .6 percent of that same amount.

Revenues for governmental functions totaled $2, 049, 700 in fiscal year 2002-03, which represents an increase of 1.44 percent from fiscal year 2001-02.

The table on the next page presents the amount of revenues from various sources as well as increases or decreases from the prior year.

Q Revenues Classified by Source Governmental Funds ( amounts expressed in thousands)

FY2003 FY2002 lncrease/{Decrease l Percent of Percent of Percent of Revenues bi: Source Amount Total Amount Total Amount Change Taxes $ 353,813 17.26% 335,279 16.59% 18,534 5.53% Use of money and property 46,880 2.29% 53,433 2.64% (6,553) (12.26%) Licenses and permits · 49,686. 2.42% 53,652 2.66% (3,966) (7.39%) Intergovernmental 1,298,846 63.37% 1,275,495 63.12% 23,351 1.83% Charges for services 153,983 7.51% 177,646 8.79% (23,663) (13.32%). Fines, forfeiture_S,_and p~alties 33,853 1.65% 23,335 , 1.15% 10,518 45.07% Contributions and donations 249 0.01% (249) (100.00%)

Miscellaneous 1121639 5.50% 101,582 5.04% 11,057 10.88% Total $ 2,049,700 100.00% 2,020,671 100.00% 29,029 1.44%

The following provides an explanation of revenues by source that changed significantly over the prior year.:

• Charges for services - the reduction of $23,663 is due to the loss ofcontracts for public works services with the City of Elk Grove. The new City initially contracted with the County for road construction and maintenance services but contracted with other service providers for fiscal year 2002~03. · • Fines, forfeitures, and penalties - Increase of $10,518 is primarily due to Tobacco funding and Court Construction Trust Fund monies transferred for construction projects. In addition, tobacco monies were used to restore programs in Department of Health and Human Services, Probation and Department of Human Assistance.

10 Expenditures for governmental functions totaled $2,082,964 in fiscal year 2002-03, which represents an increase of2.91 % from fiscal year 2001-02.

The following table presents expenditures by function compared to prior year amounts.

Expenditures by Function Governmental Funds ( amounts expressed in thousands)

FY 2003 FY 2002 Increase/!D ecrease} Percent of Percent of Percent of Exeenditures bX Function Amount Total Amount Total Amount Chanse Current: General government $ 85,265 4.09% 119,803 5.92% (34,538) (28.83%) Public assistance 701,080 33.66% 708,598 35.01 % (7 ,518) (1.06%) Public protection 583,457 28.01% 558,193 27.58% 25,264 4.53% Health and sanitation 379,561 18.22% 308,869 15.26% 70,692 22.89% Public ways and facilities 82,695 3.97% 99,462 4.91% (16,767) (16.86%) Recreation and culture 37,211 1.79% 35,875 1.77% 1,336 3.72% Education 26,283 1.26% 28,619 1.41 % (2,336) (8.16%) Capital outlay 94,519 4.54% 83,492 4.12% 11,027 13.21% Debt service: . Principal 37,301 1.79% 35,235 1.74% 2,066 5.86% Advance refunding escrow 5,584 0.27% 5,584 100.00% Bond issuance costs 2,400 0.12% 2,400 100.00% Interest and fiscal charges 47,608 2.28% 45 948 2.28% 1 660 3.61% Total $ 2,082,964 100.00% 2,024,094 100.00% 58,870 2.91% The following provides an explanation of the expenditures by function that changed significantly over the prior year.

General government-Key factors for this decrease are a hiring freeze which was put into place in December 2001 which increased the number of vacant positions leading to a reduction in salaries and benefits expenditures. In addition, equipment purchases were deferred and expenditures on services and supplies were avoided where possible. Also, there was a decrease of $5,300 in TRANS interest expense.

Health and sanitation - the· increase of $70,692 was due to higher levels of state and federal funding and an increased match with local resources. State and federal actions made more intergovernmental revenue available for these programs. The County increased its allocation of local financing to these programs by approximately $15 million. This increasing match resulted in increased state and federal funding being made available for these programs.

Public ways and facilities - the reduction of $16, 767 is due to the City of Elk Grove canceling the contract relationship with the County for road construction and maintenance services.

l1 Capital outlay - increase of $11,027 is due primarily to a $10,390 capital lease that was entered into for the new Voter Registration I Sheriff building.

Other financing sources and uses are presented below to illustrate changes from the prior year:

Other Financing Sources (Uses) Governmental Funds (amounts expressed in thousands)

Increase/ (Decrease) FY2003 FY2002 Amount Percent Transfers in $ 80,108 94,836 (14,728) (15.53%) Transfers out (80,108) (94,836) 14,728 15.53% Capital leases 10,390 10,390 . NIA .Refunding certificates issued 43,790 43,790 NIA Premiums on debt issued 4,130 4,130 NIA Payment to refund bond escrow agent (45,308) (45,308) NIA Long-tenn obligation proceeds 67,446 19,976 ___4__ 7,'-4_70_ 237.64% Total other financing sources (uses) $ 80,448 191976 601472

• Transfers In/Out - the majority of the increase/decreas.e was due to a transfer between the General fund and the Economic Development fund, transfers for Transient Occupancy Tax and Teeter. • Long-term obligation proceeds - increase is due to issuance of certificates of participation for 2003 Public Facilities ADA Projects in the amount of $15,230, certificates of participation for Juvenile Courthouse Project in the amount of$36,I°50 and an increase in Teeter Notes of $14,924. This increase was offset by decreases in proceeds of $5,896 and $13,998 in Metro Air Quality and Teeter Plan, respectively.

12 The current year excess (deficiency) of revenues and other financing sources over (under) expenditures and other financing sources (uses) is presented below:

Statement of Revenues, Expenditures, and Changes in Fund Balances Govennnental Funds (amounts expressed in thousands)

Major Funds Nonmajor Funds Special Debt Capital General Revenue Service Projects Fund Fund Fund Funds Total Revenues $ 1,684,189 313,759 4,544 47,208 2,049,700 Expenditures (1,620,887) (316,897) (90,459) (54,721) (2,082,964) Other financing sources (uses), net {41,6222 {2,~ 80,947 43,789 80,448 Net change in fimd balance 21,680 (5,804) (4,968) 36,276 47,184 Fund balances - beginning 134,185 287,555 139,499 204,048 765,287 Fund balances -ending $ 155,865 281,751 134,531 . 2'1Q,324 812,471

The fund balance of the County's General Fund increased by $21,680 during the fiscal year. The key factor for this increase was d,ue to the. County taking measures to prepare for a large budget shortfall in fiscal year 2003-04. A hiring freeze was put into place December 2001, which increased the number of vacant positions leading to under expenditures in salaries and benefits. In addition, equipment purchases were deferred and expenditures on services and supplies were avoided where possible.

Proprietary funds. The County's proprietary funds provide the same type of information found in the government-wide financial statements, but in more detail. At the end of the fiscal year, the unrestricted net assets for the Airport were $106,312, Regional Sanitation $272,394, Refuse $28,035, Sanitation District Number One $8,413, Parking Enterprise $5,384, County Transit $94, and Water Agency $48,086. The internal service funds which are used to account for certain governmental activities had unrestricted net assets of $69,064. ·

11. The table below shows actual revenues, expenses and results of operations for the current fiscal year:

Statement of Revenues, Expenses and Changes in Fund Net Assets Proprietary Funds (::imonnt,<: P:vprp,;:,;:p,l in tho""?!ld")

Major Funds Sanitation Regional District Sanitation Number Airport District Refuse One Operating revenues $ 75,745 143,382 68,690 41,734 Operating expenses {77,415} {85,806} {66,6922 p9,3072 Operating income (loss) (l,670) 57,576 1,998 2;427 Non-operating revenues (expenses), net 13,514 (2,1732 2,790 {l,0522 Income (loss) before capital contributi.ons and transfers 11,844 55,403 4,788 1,375 Transfers (3,134) Capital contributions 4,520 2,412 23,420 Changes in net assets $ 16,364 55,403 7,200 21,661 = Non-Major Funds Internal Parking Water County Service Enterprise A~encies Transit Totals Funds Operating revenues $ 2,346 38,009 109 370,015 463,684 ~ -"~ Operating expenses {l,6052 {13,85~ {2832 {284,9642 {446,7762 Operating income (loss) 741 24,153 (174) 85,051 16,908 Non-operating revenues (expenses), net {l,4232 825 281 12,762 {4,045} Income (loss) before capital contributions and transfers (682) 24,978. 107 97,813 12,863 Transfers (3,134) 3,134 Capital contributions 7,800 38,152 Changes in net assets $ {682} 32,778 107 132,831 ~997

The income before capital contributions and transfers of enterprise funds of $97 ,813 resulted primarily from increases related to normal operations and operating income for Airports of$1l,844, Regional Sanitation District of $55,403, Refuse of $4,788, Sanitation District Number One $1,375 and other nonmajor enterprise funds of $24,403.

14 GENERAL FUND BUDGETARY HIGHLIGHTS

Differences between the Original Budget and the Final Budget resulted in an $98,988 increase in appropriations. The basic reason for the increases in appropriations is that additional financing was identified and included in the budget to support higher spending levels. New state and federal revenue was made available for county public safety, human services, and other programs. There was a successful mid-year tax election. There were mid-year fee and service charge increases. Most departmental budgets were increased during the year. The changes may be briefly summarized:

• Mid-year Tax Election - In November 2002 the county's utility user tax and a portion of the transient-occupancy tax were approved by the county's voters after having been originally approved by the Board of Supervisors without an election. Tax revenue from the election date to the end of the fiscal year was not included in the Final Adopted Budget. The estimated revenue for the utility user tax was increased by $8.9 million and for the transient-occupancy tax by $1.0 million. There were corresponding increases to appropriations in general fund departments. • During the fiscal year additional intergovernmental revenue became available to the County. Over $35.2 million in new revenue was added to the budget and resulted in a corresponding increase in appropriations. Intergovernmental revenue for the Sheriffs Department increased by $15 .9 million. There was a $9 .4 million increase for various health, mental health, and human services programs provided by the County's Department of Health and Human Services. The District Attorney received an additional $2.4 million in state funding, and the Probation Department an additional $1.1 million. • As additional $6.2 million in revenue and transfers in from other County funds were added to the budget in mid-year actions resulting in increases in appropriations.

In fiscal year 2002-03 it was necessary to use the contingency appropriation during the year. In mid-year actions the contingency appropriation was shifted to cover unbudgeted costs in the In Home Supportive Service, Medical Treatment, and Correctional Health programs.

During the year, actual revenues were $70,683 less than budgetary estimates. The under-collection of revenue was focused on intergovernmental revenues. Actual collections of revenue in other categories such as tax revenue and miscellaneous revenue exceeded budgetary estimates. This is largely a consequence of the increasing number of funded vacant positions during the year. There were large number of vacant positions in health and human assistance programs, and these programs are primarily funded with state and federal revenues. In addition, human assistance aid payments were less than budgeted which lead to reductions in budgeted state and federal revenues.

Actual expenditures were $167,643 less than appropriations. The County has a budgetary practice of both fully funding all authorized positions for an entire fiscal year and including full year estimates of revenues associated with the positions. During fiscal year 2002-03 the County took measures to prepare for a large budget shortfall for fiscal year 2003-04. A hiring freeze, which had been in place since December 2001, was made more restrictive. Departments were encouraged to under spend and lower net cost by being allowed to apply year end net savings to budget reductions at the start of fiscal year 2003-04. The increasing number of vacant positions lead to significant under expenditures in salaries and benefits. Human assistance caseloads were less than budgeted. Equipment purchases were deferred. Expenditures on supplies and services were avoided when possible.

u:: CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital assets

The County's investment in capitai assets for its governmental and business-type activities as of June 30, 2003, an1ounted to $2,713,811 (net of accumulated depreciation). This investment in capital assets includes land and easements, infrastructure, structures and improvements, equipment, and construction in progress. The total increase in the County's investment in capital assets for the current period was 8.56 percent.

Capital assets for the governmental and business-type activities are presented below to illustrate changes from the prior year:

Increase/ Governmental activities Business-type activities Total ------(Decrease) Percent 2003 2002 2003 2002 2003 2002 ofChan~e Land $ 90,067 81,293 79,230 78,392 169,297 159,685 6.02% Buildings and improvements 275,064 242,393 1,196,612 1,143,567 1,471,676 1,385,960 6.18% Infrastructure 619,075 588,333 38,855 27,904 657,930 616,237 6.77% Equipment 56,494 65,008 40,527 43,127 97,021 108,135 (10.28%) Construction in progress 76,042 73,306 241,845 156,617 317,887 229,923 38.26% Total $1,116,742 1,050,333 1,597,069 1,449,607 2,713,811 2,499,940 8.56%

The following provides an explanation of signifi9ant changes in capital assets:

Construction in progress - increased by $87,964 or 38.26 percent, due to new costs related to the construction of capital assets. Of the $87,964 increase $83,928 relates to increases in projects for Regional Sanitation, Airports, Refuse, and County Sanitation District Number One. The remaining $2, 736 increase relates to construction projects at Juvenile Hall and various Park locations. Additional information on the County's capital assets can be found in Note 6 on pages 58 - 59.

Debt Administration

At June 30, 2003, the County's governmental activities had long-term obligations, totaling $1.033 billion. County debt issued by the Public Facilities Financing Corporation included and currently outstanding, $44 million in Main Jail Refunding, $36 million in Juvenile Courthouse Project Certificates of Participation, $15 million of Certificates of Participation for 2003 ADA Projects, $8 million of Certificates of Participation for Cherry Island Gol:fCourse, $87 million of Certificates of Participation for implementation of the fixed asset financing program, $44 million of Certificates of Participation for the 1997 Public Facilities Project, $88 million in Certificates of Participation for construction of the Coroner/Crime Lab and a multipurpose building to house the County's Data Center, $82 million in crossover refunding of the 1994 Certificates of Participation for the Coroner/Crime Lab and Data Center, and $6 million in Certificates of Participation for the acquisition of a building and to finance certain clean air programs for the Air Quality Management District. In addition, compensated absences of the County amounted to $83 million and capital lease obligations of$13 million. 16 Other significant long-term obligations include $15 million in loan agreements to fund the alternative method of distributing property taxes (Teeter Plan), and $505 million in bonds issued to eliminate the unfunded pension obligation at July 5, 1995, existing between the County and the Sacramento County Employees' Retirement System. The remaining $3 million represents various other debt obligations.

Proprietary Funds had long-term obligations of approximately $1.049 billion. This includes $628 million of various bond issues and other debt of the Regional Sanitation District. Other debt includes $6 million of refunding certificates of participation for the construction of parking garages, $274 million of Airport System revenue bonds and other Airport debt, $34 million of Refuse Enterprise certificates of participation and other Refuse debt, $51 million of Sanitation District Number One revenue bonds, and Sacramento County Water Agency reimbursement agreements and usage fee totaling $56 million.

For the year ended June 30, 2003, the County's total long-term obligations had a net increase of $155,335. This net increase was comprised of a grossincrease of $361,582 and a gross decrease of$206,247. The decrease resulted primarily from scheduled principal retirements ofrevenue bonds, certificates of participation, Teeter notes, and pension obligation bonds of$68,334 and refunding of the main jail debt of $47,180. The increase result_ed primarily from two new certificates of participation, one new Teeter note, and three new certificates of participation that amounted to $252,709.

The County's current short-term ratings with Moody's Investors Services and Standard and Poor's are MIG-1 and SPl, respectively. The County currently has no long-term general obligations outstanding. The County does have various long-term (revenue-based) debt obligations, and the rating of each of these issues is specifically related to the security of the individual issues. Additional information regarding the County's long-term debt can be found in Note 9 on pages 67 - 81.

Economic Factors and Next Year's Budget and Rates

• Sacramento County faces significant budgetary challenges in fiscal year 2003-04 and beyond. There was a structural gap between on-going resources and expenditures of nearly $100 million due to the cumulative impact of local and state actions. • In California, counties are political subdivisions of the State and the largest sources of financing for county programs are state and federal revenues. The State of California is facing huge budget problems. • The state's budget problems impact the County through the allocation of funding to specific programs, particularly health and human assistance program. Due to its own budget problems, the County does not have to capacity to backfill lost state financing for programs. • The lowering of vehicle license fees (VLF or car tax) paid by vehicle owners has created a significant budget problem for cities and counties. When the VLF rates were reduced, to one-third the prior level, beginning in 1998, the State made up the difference for cities and counties with an appropriation in the state budget and revenue for local government. Due to its own budget problems, the State ceased the backfill, or makeup, payments at the end of fiscal year 2002-03. The VLF rates were returned to the original levels; however, the new Governor has reduced the VLF rates to the one-third level. There is no appropriation for backfill in the state's budget for fiscal year 2003- 04. It is not certain if or when there will be a state backfill for counties and cities in fiscal year 2003-04 and beyond. Consequently, the Board of Supervisors approved the loss of at least two months value of the State backfill portion of VLF "car tax" revenues, by making a mid-year budget adjustment (reduction) of $17.2 million to those budgeted revenues with the source of financing being the cancellation of

1 '7 the County's remaining general fund discretionary reserves and eliminating the centrally budgeted appropriation for terminal pay to retiring employees. • The County has agreed to enhance retirement benefits for employees effective the end of fiscal year 2002-03. This will result in new costs in the budget ($67 million in fiscal year 2003-04, $35 million net in the General Fund and a large unfunded liability in Sacramento County P-m in ·'Rp.f,irp•tvu::1nt Q-,,,~+t]l,'l'Y\ ,-.:Thir•J., ·nr~11 ..... ,ac,,-.1+ !- -h .. -+t..-~ _....,.._,.., !----(''"'!.-..'"'! ! ...... "'-.! ...... -J..a..a.A.p ...... _, yee ...... - ...... -.l..&.L'-".A...1.1,, "-' J \,H,\,,,IL.I..L' "".1..u.v.u. VY .I.U. .I. \.IOU..11,.. 111 1 U.J. t..-l.11.vl 1 a1.-i.;; 111~1 c;a~CiS 111 Lltl1ti, • The costs of certain mandated programs are increasing beyond the levels of revenue growth and are thus increasing stress on the budget. The In Home Supportive Services program costs have been increased by 10 to 15 percent per year for the past several years. Payments to medical treatment providers are increasing. The costs of providing medical services to jail inmates and juvenile detainees are increasing. • The County used approximately $25 million in one-time financing to support on-going program costs in the fiscal year 2002-03 budget. Budget reductions were avoided but the underlying structural budget problems were not resolved. • The voters in the community of Rancho Cordova approved an incorporation ballot measure in November 2002. The incorporation of the new City became effective atthe start of fiscal year 2003-04. There will be a one-time $9 million negative impact on the County in fiscal year 2003-04and an on-going impact of approximately $3 million per year in fiscal year 2004-05 and beyond.

Request for Information

This financial report is designed to provide a general overview of the County's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Departmeµt of Finance, 700 H Street Room 2720, Sacramento, CA 95814

Questions concerning any of the information provided in this report regarding the discretely presented component unit, Tobacco Securitization Authority of Northern California or requests for additional information should be addressed to the County of Sacramento, Department of Finance, 700 H Street'Room2720, Sacramento, CA 95814.

18 COMPREHENSIVE ANNUAL FINANCIAL REPORT

FINANCIAL SECTION

BASIC FINANCIAL STATEMENTS Intentionally Blank

19 COUNTY OF SACRAMENTO GOVERNMENT-WIDE STATEMENT OF NET ASSETS JUNE 30, 2003 (amounts expressed in thousands)

Page 1 of2 Component Primary Government Unit Tobacco Governmental Business-type Securitization Activities Activities Total Authority Assets: Current assets: Cash and investments $ 1,130,535 489,855 1,620,390 19,451 Receivables, net of allowance for uncollectibles: Billed 137,798 34,057 171,855 lnterest 170 170 lntergovenunental 119,770 4,155 123,925 Deposits with others 2,282 2,282 lnternal balances (16,556) 16,556 lnventories 2,815 3,214 6,029 Total current assets 1,374,532 550,119 1,924,651 19,451

Restricted current assets used to repay maturing debt 19,387 19,387

Noncurrent assets: Restricted assets 539,072 539,072 Long-tenn receivables 145,977 1,842 147,819 Water facility rights 5,087 5,087 Deferred charges 2,684 24,551 27,235 5,055 lnternal balances (7,591) 7,591 Tobacco settlement rights 165,611 Pension asset 597,985 597,985 Capital assets: Land and other nondepreciable assets 166,109 321,075 487,184 Facilities, infrastructure and equipment, net of depreciation 950,633 1,275,994 2,226,627 Total capital assets 1,116,742 1,597,069 2,713,811 Total noncurrent assets 1,855,797 2,175,212 4,031,009 170,666 Total assets $ 3,230,329 2,744,718 5,975,047 190,117

The notes to the basic financial statements are an integral part of this statement. COUNTY OF SACRAMENTO GOVERNMENT-WIDE STATEMENT OF NET ASSETS JUNE 30, 2003 (amounts expressed in thousands) Component Page 2 of2 Prim:!;!! Govenunent Unit Tobacco Governmental Business-type Securitization Activities Activities Total Authority Liabilities: Current liabilities: Warrants payable $ 27,242 7,121 34,363 Accrued liabilities 84,181 17,148 101,329 197 Tax and revenue anticipation notes 285,000 285,000 Current portion of accrued interest payable 4,482 2,442 6,924 792 Payable to extemal parties 2,622 139 2,761 Deposits.from others 4 4 Curienfporiion of insurance claims payable 24,791 24,791 Current portion oflong-term debt obligations 27,724 22,398 50,122 810 Current portion of estimated insurance liabilities 2,278 2,278 Deferred revenues 60,347 10,745 71,092 Total currenr liabilities 516,389 62,275 578,664 1,799 Current liabilities payable from restricted assets 19,387 ------19,387 Noncurrent liabilities: Intergovernmental payable 56,384 53 56,437 Accrued interest payable 121,261 121,261 Insurance cliilin.s p3:yii.1J!e 91,562 91,562 Long-tenn debt obligations 1,005,239 1,022,192 2,027,431 180,951 Estimated insurance liability 100,686 9,964 110,650 Matured bonds payable 78 78 Arbitrage r~bate payable 217 5,739 5,956 Landfill closure and postclosure care 28,309 28,309 Excess sewer capacity liability 1,682 1,682 Total noncurrent liabilities 1,375,427 1,067,939 2,443,366 180,951 Total liabilities 1,891,816 1,149,601 3,04L,417 182,750 Net assets: Investment in capital assets, nerof related debt 798,416 990,082 1,788,498 Restricted for: Ullldtilldosure 7,577 7,577 Debt service 26,276 26,276 7,367 Capital projects 194,924 32,654 227,578 Specific programs 261 261 Passenger facility charges 48,136 48,136 Other purposes 321,957 321,957 Unrestricted 23,216 490,131 513,347 Total net assets 1,338,513 1,595,117 2,933,630 7,367

Total liabilities and net assets $ 3,230,329 2_,244,71!_ 5,975,047 190,117

The notes to the basic financial statements are an integral part of this statement. 21 COUNTY OF SACRAMENTO GOVERNMENT-WIDE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Net (Expense) Revenue and Chanj!eS in Net Assets

Pro~ Revenues Prim:2! Government ComEonent Unit Charges Operating Capital Business- Tobacco for Gl'lllltsand Gl'llllts and Governmental Type Securitization Functions/Programs Expenses Services Contributions Contributions Activities Activities Total Authority Primary government: Governmental activities: General government $ 110,633 94,355 2,089 1,426 (12,763) (12,763) Public assistance 708,491 3,944 627,251 (77,296) (77,296) Public protection 599,659 83,624 72,574 1,667 (441,794) (441,794) Health and sanitation 393,575 36,200 255,244 2,961 (99,170) (99,170) Public ways and facilities 66,861 19,752 22,918 15,888 (8,303) (8,303) Recreation and culture 31,878 10,431 1,950 (19,497) (19,497) Education 26,951 4 (26,947) (26,947) Interest and fiscal charges 64,724 (64,724) (64,724) Total governmental activities 2,002,772 248,310 980,076 23,892 (750,494) (750,494) Business-type activities: Airport 88,445 75,936 17,622 4,520 9,633 9,633 Regional Sanitation District 105,620 146,688 41,068 41,068 Refuse 68,111 69,716 490 4,507 6,602 6,602 Sanitation District Number One 42,333 43,517 23,420 24,604 24,604 Parking Enterprise 3,188 2,350 (838) (838) Water Agency 14,188 38,009 7,800 31,621 31,621 County Transit 756 337 (419) (419) Total business-type activities 322,641 376,553 18,112 40,247 112,271 112,271 Total primary government $ 2,325,413 624,863 998,188 64,139 (750,494) 112,271 (638,223) Component unit: = Tobacco Securitization Authority $ 10,251 (10,251) = = ----·--- General revenues: Taxes: Property 262,647 5,381 268,028 Sales/use 83,275 576 83,851 Tl'llllsient 7,891 7,891 Unrestricted investment earnings 47,065 18,859 65,924 767 Grants and contributions not restricted to specific programs 293,767 2,850 296,617 Miscellaneous 93,239 2,064 95,303 Tobacco settlement proceeds 8,696 Total general revenues 787,884 29,730 817,614 9,463 Changes in net assets 37,390 142,001 179,391 (788) Net assets, beginning ofyear, restated 1,301,123 1,453,116 2,754,239 8,155 Net assets, end of year $ l,33_8,513 ___ _1_,595,117 2,933,6~(}__ 7,367

The notes to the basic financial statements are an integral part of this statement. COUNTY OF SACRAMENTO GOVERNMENTAL FUNDS BALANCE SHEET JUNE 30, 2003 (amounts expressed in tilousands)

Nonmajor Governmental General Funds ---Total Assets: Cash and investments $ 439,802 599,108 1,038,910 Receivables, net of allowance for uncollectibles: Billed 69,370 65,285 134,655 Interest 132 38 170 Intergovernmental 113,895 5,672 119,567 Due from other funds 20,259 22,911 43,170 Inventories 32 32 Long-term advances to other funds 34,380 34,380 Long:term receivables 16,916 12,400 29,316 Total assets $ 660,374 739,826 1,400,200

Liabilities and fund balances: Liabilities: Warrants payable $ 20,184 3,175 23,359 Accrued liabilities 62,175 9,847 72,022 Tax and revenue anticipation notes 285,000 285,000 Intergovernmental payable 40,795 15,491 56,286 Due to other funds 33,388 13,391 46,779 Deferred revenues 48,607 40,269 88,876 Matured bonds payable 78 78 Arbitrage rebate payable 217 217 Long-term advances from other funds 14,360 752 15,112 Total liabilities 504,509 83,220 587,729

Fund balances: Reserved for: Encumbrances 15,921 85,977 101,898 Fixed assetacquisitions 18,190 18,190 Assets not available 7,088 13,977 21,065 Debt service 122,668 122,668 Future construction 230,558 230,558 Unreserved, reported in: General Fund 114,666 114,666 Special revenue funds 244,638 244,638 Capital projects funds (41,212) (41,212) Total fund balances 155,865 656,606 812,471 Total liabilities and fund balances $ 660,374 739,826 1,400,200 The notes to the basic financial statements are an integral part of this statement. 23 COUNTY OF SACRAMENTO RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2003 (amounts expressed in thousands)

Fund balances - total governmental funds $ 812,471

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. 1,058,667

Pension asset of the governmental activities is not a financial resource and, therefore, is not reported in the funds. 597,985

Bond issuance costs of the governmental activities are not financial resources and, therefore are not reported in the funds. 2,641

Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds. (1,244,415)

Other long-term assets are not available to pay for current-period expenditures and, therefore, are deferred in the funds. 49,794

Internal service funds are used by management to charge the costs of fleet management, printing and mailing services, and information systems to individual funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net assets. 61,370

Net assets of governmental activities $ 1,338,513

The notes to the basic financial statements are an integral part of this statement. COUNTY OF SACRAMENTO GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES FOR THE\' EAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Nonmajor Governmental General Funds Total Revenues: Tax.es $ 257 ,364 96,449 353,813 Use of money and property 15,8 80 31,000 46,880 Licenses and permits 16,712 32,974 49,686 In tergo v ernm en tal 1,213,471 85,375 1,298,846 Clia;ges for saies and Ser.vices 68,363 85,620 153,983 F iii.es, forf~itures, arid pe~alties 19,830 14,023 33,853 Miscellaneous 92,569 20,070 112,639 Total revenues 1,684,18.2__ 365,511 2,049,700

Ex.pend iture s: Current: General government 25,070 60,195 85,265 Public assistance 678 ,002 23,07 8 701,080 Public protection 566,440 17,017 583,457 Health and sanitation 329,846 49,715 379,561 Public ways and facilities 67 82,628 82,695 Recreation and culture 9,668 27,543 37,211 Education 348 25,935 26,283 Capital outlay l 0,390 84,129 94,519 Debt service: Principal 819 36,482 37,3 01 Advance refunding escrow 5,584 5,584 Bond issuance costs 2,400 2,400 Interest and fiscal charges 237 47,371 47,608 Total ex.penditures 1,620,887 462,077 2,082,964 Ex.cess (deficiency) of revenues over (under) ex.penditures 63,302 (96,566) (33,264) Other financing sources (uses): Transfers in 11,256 68,852 80,l 08 Transfers out (63,268) (16,840) (80,108) Capital leases l 0,390 10,3 90 Refunding certificates issued 43,790 43,790 Premiums on debt issued 4,130 4,130 Payment to refund bond escrow agent (45,308) (45,308) Long-term obligation proceeds 67,446 67,446 Total other financing sources (uses) (41,622) 122,070 80,448 Net change in fund balances 21,680 25,504 47,184 Fund balances - beginning 134,185 631,102 765,287 Fund balances - ending $ 155,865 656,6~ _812,471

The notes to the basic financial statements are an integral part of this statement. 25 COUNTY OF SACRAMENTO RECONCILIATION OF THE STATEMENT OF REVENUES~ EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Net change in fund balances - total governmental funds $ 47,184 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 estim aied useful lives and reported as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. 5 9 ,5 7 4

Governmental funds report the effect of the pension asset when first paid, whereas the amount is deferred and amortized in the statement of activities. This is the amount amortized during the year. 4 ,43 5

The issuance of long-term debt provides current financial resources to governmental funds, while 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 trea tm en t of long-term debt and related items. (58,262)

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. (27,279)

Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 4 ,9 11

The net revenues of certain activities of internal service funds is reported with governmental activities. 6 ,8 27

Change in net assets of governmental activities $ 3 7 ,3 9 0

The notes to the basic financial statements are an integral part of this statement. COUNTY OF SACRAMENTO GENERAL FUND STATEMENT OF REVENUES AND EXPENDITURES BUDGET AND ACTUAL (ADJUSTED TO BUDGETARY BASIS) ~UK THE Y EAK ENDED JUNE 30, 2003 (amounts expressed in thousands) Variance with Final Budget­ Positive Original Budget Final Budget Actual (Neg_a.tive_} Revenues: Taxes $ 243,563 252,440 257,364 4,924 Use of money and property 18, 718 18,758 15;880 (2,878) Licenses and permits 16,197 16,197 16;712 515 Intergovernmental 1,281,521 1,328,089 1,213,471 (114,618) Charges for sales and services 73,298 74,609 68,363 (6,246) Fines, forfeitures, and penalties 20,213 20,380 19,830 (550) Miscellaneous 42,403 44!399 92!569 48!170 Total revenues 1,695,913 1,754,872 1,684,189 (70,683)

Expenditures: Current: General government 67,424 66,799 26,433 40,366 Public assistance 726,174 738,990 679,479 59,511 Public protection 574,664 607,738 577,648 30,090 Health and sanitation 327,486 368,974 331,621 37,353 Public ways and facilities 67 67 67 Recreation and culture 9,304 10,062 9,766 296 Education 344 375 348 27 Capital outlay 10,390 10,390 Debt service: Principal 819 819 Interest and fiscal charges 237 237 Total expenditures 1,705,463 1,804,451 1,636,808 1671643 Excess (deficiency) ofrevenues over (under) expenditures (9!550) (49,579) 47,381 96,960 Other financing sources (uses): Transfers in 11,084 11,084 11,256 172 Transfers out (20,917) (20,917) (63,268) (42,351) Capital leases 10,390 10,390 Total other financing sources (uses) {2,833) (9,833) ~41,622) (31,789) Net change in fund balance (budgetary basis) $ (19,383) (59,412) 5,759 65,171 Basis adjustments: Encumbrances 15,921 Net change in fund balance (GAAP basis) $ 21?680 The notes to the basic financial statements are an integral part of this statement. 27 COUNTY OF SACRAMENTO PROPRIETARY FUNDS STATEMENT OF NET ASSETS JUNE 30, 2003 (amounts expressed in thousands)

Page 1 of2 Business-~e Activities - En!S!rise Funds

Sanitation Governmental Regional District Norunajor Activities-Internal Airport Sanitation Refuse Number One ~rise Funds Total Service Funds Assets: Current assets: Cash and investments $ 113,904 267,863 50,235 6,331 51,522 489,855 91,625 Receivables, net of allowance for uncollectibles: Billed 5,465 14,053 8,102 4,209 2,228 34,057 3,143 Interest Intergovernmental 3,840 161 154 4,155 203 Deposits with others 2,282 2,282 Due from other funds 159 1,404 32 212 500 2,307 55,890 Inventories 18 3,196 3,214 2,783 Total CU1Tent assets 125,668 286,677 58,369 10,752 54,404 535,870 153,644 Restricted current assets used to repay maturing debt 19,387 19,387 Noncurrent assets: Restricted assets 165,035 280,370 6,735 33,356 53,576 539,072 Long-teim receivables 1,790 41 11 1,842 116,661 Water facility rights 5,087 5,087 Deferred charges 4,123 15,129 1,010 2,649 1,640 24,551 43 Long-tenn advances to other funds 10,478 8,289 18,767 3,618 Capital assets: Land and other nondepreciable assets 80,568 134,468 34,620 36,112 35,307 321,075 3,824 Facilities, infrastructure and equipment, net of depreciation 190,656 678,188 51,937 260,640 94,573 1,275,994 54,251 Total capital assets 271,224 812,656 86,557 296,752 129,880 1,597,069 58,075 Total noncurrent assets 440,382 1,120,423 941302 341,087 190 194 2,186,388 178,397 Total assets $ 585,437 ___l,_4~7.100 152,671 351,839 244,598 __2,141,6--1_5_ 332,041

The notes to the basic financial statements are an integral part of this statement. COUNTY OF SACRAMENTO PROPRIETARY FUNDS STATEMENT OF NET ASSETS JUNE 30, 2003 (amounts expressed in thousands)

Page 2 of2 ~/\divities-~Funds

Sanitaticn ~ Regiaml o.mct Nimmjor .Activities-Internal Airpat Sanitaticn Refuse Nmre:Ole Pnta:prire Funds Total ScviceFunds Uabilities: Ommt liabilities: Wunmts pay.lble $ 834 4,167 1,295 331 494 7,121 3,883 .Accrued liabilities 5,083 5,948 2,839 365 2,913 17,148 12,159 Dposits fiumothers 4 4 Ommt porticn ofacau:dintaest pty.ihle 2,216 226 2,442 nie to otm- funds 2,581 1,893 190 1,500 1,139 7,303 50,046 C1=t porticn ofinsurance claims pty.ihle 24,791 Ommt portim oflcng-tmndebt oolil§llims 2,131 15,352 3,173 865 877 22,398 ·llireni piitier liu:ility char!,>eS 48,136 48,136 Um:stricted 106,312 Tl2,394 28,035 8,413 53,564 468,718 69,064 Total net assets 282,731 731,234 94,196 288,394 177,149 1,573,704 82,783

Total liabilities and.net assets $ 585,437 1,4

AdjUSII=lt to reflect intemal St!Vice fund activities related to enterprise funls. 21,413 lli ams ofbJsiness..tweactivities $ 1,595,117 The notes to the basic financial statements are an integral part of this statement. 29 COUNTY OF SACRAMENTO PROPRIETARY FUNDS STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands) Business-type Activities - Ent~rise Funds Sanitation Governmental Regional District Norunajor Activities-Internal Airport Sanitation Refuse Number One Enterprise Funds Total Service Funds Operating revenues: Charges for sales and services $ 75,692 143,382 67,663 41,734 39,695 368,166 455,811 Other 53 1,027 769 1,849 7,873 Total operating revenues 75,745 143,382 68,690 41,734 40,464 370,015 463,684 Operating expenses: Salaries and benefits 22,883 19,259 22,028 537 64,707 181,844 Services and supplies 37,714 62,341 39,190 4,973 11,269 155,487 162,395 Cost of sales and services 627 627 7,524 Depreciation and amortization 15,145 23,465 8,243 12,306 3,938 63,097 22,787 Self-insurance 68,010 Other 1,046 1,046 4,216 Total operating expenses 77,415 85,806 66,692 39,307 15,744 284,964 446,776

Operating income (loss) (1,670) 57,576 1,998 2,427 24,720 85,051 16,908 Nonoperating revenues (expenses): Use of money and property 4,164 10,726 1,209 1,664 1,096 18,859 185 Intergovernmental 2,832 2,585 (1,111) (397) 3,909 1,089 Passenger facility use charge 17,622 17,622 Taxes: Property 5,381 5,381 Sales/use 576 576 Miscellaneous (299) Interest expense (11,023) (19,450) (1,570) (1,233) (917) (34,193) (3,211) Other !81) 1,170 566 !)72) !6752 608 !118092 Total nonoperating revenues (expenses) 13,514 \2,173) 2,790 p,052) !)172 12,762 ~4,045)

Income (loss) before capital contributions and transfers 11,844 55,403 4,788 1,375 24,403 97,813 12,863 Transfers in 3,134 Transfers out (3,134) (3,134) Capital contributions 4,520 2,412 23,420 7,800 38,152 Changes in net assets 16,364 55,403 7,200 21,661 32,203 132,831 15,997 Net assets, beginning of year 266,367 675,831 86,996 266,733 144,946 66,786 Net assets, end of year $ 282,731 94,196 177,149 731,234 -- 288,394 82,783

Adjustment to reflect internal service fund activities related to enterprise funds. 9,170 Change in net assets of business-type activities $ 142,001

The notes to the basic financial statements are an integral part of this statement. Intentionally Blank

31 COUNTY OF SACRAMENTO PROPRIETARY FUNDS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands) Page 1 of2 Business-~e Activities - Ent~rise Fnnds

Sanitation Governmental Regional District Nonmajor Activities-Internal Airport Sanitation Refuse Number One Enterprise Funds Total Service Funds CASH FLOWS FROM OPERATING ACTlVlTlES: Receipts from customers and users s 76,034 145,783 69,355 45,265 38,907 375,344 72,543 Receipts from interfund services provided 231 231 393,042 Payments to suppliers (17,424) (25,418) (32,166) (9,378) (12,887) (97,273) (230,109) Payments to employees (22,673) (19,100) (22,011) (530) (64,314) (179,244) Payments for interfund services used (15,169l (30,6232 (5,732l ~51,5242 (18,365) Net cash provided by operating activities __ 20,7~ 89,742 12,357 __14,107 25,490 162,464 37,867

CASH FLOWS FROM NONCAPlTAL FINANCING ACTlVlTlES: Transfer in 3,134 Receipt of payment on advance Advance from other funds 309 309 4,691 Transfer out (3,134) (3,134) Intergovernmental 2,831 2,5&5 (l,lll) 1,774 6,079 1,089 Payments on advance from other funds (l,810) (980) (2,790) Advance to other funds 608 134 742 Payment on advance to other fund (732) Net cash provided by (used for) noncapital iinancing activities 2,831 608 775 (5,091) 2,083 1,206 8,182

CASH FLOWS FROM CAPlTALAND RELATED FlN_(\NCING ACTlVlTlES: Proceeds from sale oflong-term obligations 75,777 55,188 130,965 Proceeds from internal loans Acquisition and construction of capital assets (41,031) (83,665) (6,971) (19,296) (17,564) (168,527) (25,625) Principal paid on long-term obligations (4,470) (13,735) (2,575) (830) (4,577) (26,187) (6,212) Interest paid on long-term obligation (10,323) (19,878) (l,527) (l,240) (910) (33,878) (3,145) Interest payments on capital debt (2,347) (4,818) (233) (1,302) (8,700) Repayment of obligation to City of Sacramento (11) (11) TIDles: Property 5,381 5,381 Proceeds from the sale of capital assets 48 74 625 20 767 139 Bond issuance costs (1,233) (14) (l,315) (2,562) Swap premium 9,087 9,087 Capital contributions 2,684 2,412 5,096 Passenger facility charges 17,621 17,621

Net cash provided by (used for) noncapital iinancing activities ---~ -·· _(_107,554) (_8,28n_ __ __(22,648) 30,822 (70,948) (34,843) CASH FLOWS FROM INVESTING ACTlVlTlES: interest received on cash and investments 6,756 14,277 1,799 1,837 1,596 26,265 2

Net increase (decrease) in cash and cash equivalents 67,070 (2,927) 6,648 (11,795) 59,991 118,987 11,208 Cash and cash equivalents, beginning of year 231,256 551,143 50,305 51,482 45,107 929,293 80,417 Cash and cash equivalents, end of year s 298,326 548,216 56,953 39,687 105,098 1,048,280 91,625 The notes to the basic financial statements are an integral part of this statement. COUNTY OF SACRAMENTO PROPRIETARY FUNDS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands) Page 2 of2

Business-type Activities - Enterprise Funds

Sanitation Governmental Regional District Nonmajor Activities-Internal Airport Sanitation Refuse Number One Enterprise Funds Total Service Funds RECONC:IT,JAJIQ;N OF CA.SH AND CASH EQUIVALENTS Cash and invesunents $ 113,904 267,863 50,235 6,331 51,522 489,855 91,625 Restricted current assets uqed to repay maturing debt 19,387 19,387 Restricted cash and cash equivalent.q (net of accrued interest) 165,035 280,353 6,718 33,356 53,576 539,038 Caqh and cash equivalent.q $ 298,326 548,216 56,953 39,687 105,098 1,048,280 91,625

RECONCILATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTMTIES Operating income (loss) $ {l,670} 57,576 1,998 2,427 24,720 ~~_8_5,051 16,908 Adjustments to reconcile.operating income-(loss) to net cash provided by opera_ri~g act~".ities: Depreciation and amortliation 15,145 23,465 8,243 12,306 3,938 63,097 22,787 Development 0fee,credit applied· (2,193) (2,193) Gain on disposal of capital asset.q Recoveries :ror uncollectibJe accounts 76 76 Other nonoperating revenue 93 2,148 266 214 2,721 2,695 Other nonoperating expense (372) (2,221) (2,593) (4,647) Changes ill .assets .and liabilitie.s: ReceivabJe.q···--···· (196) (2,825) 100 (505) 706 (2,720) (13,583) Due from oiher fimds 2,228 271 17 (420) 2,096 (3,906) Deposits with others (2,221) 679 (1,542) Inventorie.s (5) (394) (399) (1,006) Long-tenn receivable.s 850 1,366 2,216 297 Accnieifliiioilitie.~ --- 1,656 2,326 964 43 2,434 13,423 572 Warrants payable (236) 2,684 (346) (16) (708) 1,378 (3,294) Compensated absences 210 45 7 262 1,503 Due to other funds 123 36 (1,140) (1,059) (2,040) (1,902) Deposit.q from others (546) (546) Deferred revenues 316 (24) (61) 231 2,202 Estimated insurance liability 1,466 (558) 612 5 1,525 19,241 Purchase of excess sewer capacity (421) (421) Landfill closure and postclosure care 2,540 168 2,708 Prepaid expenses 134 134 Total aqjusunents 22,438 32,166 10,359 11,680 770 77,413 20,959 Net cash provided by operating activities $ 20,768 8J,742 ]2,357______!i,!07 25,~0 162,464 37,867 NONCASH INVESTING, CAPITAL AND FINANCING ACTNITlES: Book value on retired assets $ 50 50 Refunded debt 17,180 17,180 Contributed assets 23,420 7,800 31,220

The notes to the basic financial statements are an integral part of this statement. 33 COUNTY OF SACRAMENTO FIDUCIARY FUNDS STATEMENT OF FIDUCIARY NET ASSETS JUNE 30, 2003 (amounts expressed in thousands)

A,g;enc:r Investment Trust Total Assets: Cash and investments $ 156,266 1,268,214 1,424,480 Receivables, net of allowance for uncollectibles: Billed 2,272 2,272 Interest 4,370 4,370 Intergovernmental 2,250 2,250 Due from other funds 2,761 2,761 Long-term receivables 1,911 1,911 Total assets $ 169,830 1,268,214 1,438,044 Liabilities: Warrants payable $ 10,620 10,620 Accrued liabilities 9,397 9,397 Deferred revenues 152 152 Intergovernmental payable 149,661 1~9,661 Total liabilities 169,830 169,830 Net assets held in trust for pool participants 1,268,214 1,268,214 Total liabilities and net assets held in trust for pool participants $ 169,830 1,2682214 1,438,044

The notes to the basic financial statements are an integral part of this statement. COUNTY OF SACRAMENTO FIDUCIARY FUNDS STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS ...,,,..,,., ..... ,.....,...... ~ ~rwi, .f, .....,._ -r:-,-,.,,T.....,ir.,-...... -,rT...,Tir., "'K'l,,. ,...,n,..n,,... !IV.!\.. .!ll~ '!£iAK.!!Jl'OJJ.1,!J JUl"'l.!!, -'U, .l-UU,j (amounts expressed in thousands)

Investment Trust Additions: Contributions on pooled investments $ 5,806,169 Use of money and property 54,482

Total additions 5,860,651

Deductions: Distributions from pooled investments 5,694,632

Net increase in net assets 166,019

Net assets held in trust for pool participants, beginning of year 1,102,195

Net assets held in trust for pool participants, end of year $ 11268,214

The notes to the basic financial statements are an integral part of this statement. 35 Intentionally Blank COMPREHENSIVE ANNUAL FINANCIAL REPORT

FINANCIAL SECTION

NOTES TO BASIC FINANCIAL STATEMENTS COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTE 1 ~ REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the County of Sacramento (County) have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The Governmental Accounting Standards Board (GASB) is the standard-setting body for establishing GAAP for state and local government organizations. The County's significant accounting policies are described below.

Scope ofFinancial Reporting Entity The County reporting entity includes all significant organizations, departments, and agencies over which the County is considered to be financially accountable. The County is a political subdivision of the State· of California, and as such can exercise the powers specified by the Constitution and laws of the State of California. The County operates under a charter and is governed by a five-member Board of Supervisors. In addition, as required by GAAP, the financial statements present the financial position of the County and its component units (entities for which the County is considered to be financially responsible). Blended component units, although legally separate entities, are, in substance, part of the government's operations; therefore, data from these units are combined with data of the primary government. All of the blended components have June 30 year-ends. The special districts and agencies listed below. are fiscally dependent on the County, and the County Board of Supervisors is their governing board, or their governing boards are made up substantially of the Board of Supervisors. In addition, financial actions such as setting rates, adopting the annual budget, and determining the legal liability for the general obligation debt, if any, of most of the component units remain with the County. Audited financial statements for the sanitation enterprise funds component units are available and can be obtained by contacting the Sacramento County Department of Finance, Auditor-Controller Division.

Blended Component Units:

Lighting and Landscape Maintenance District Special Revenue Fund: Water Agencies Special Revenue Fund Enterprise Funds: County Service Area Number One Sanitation District Number One Sacramento County Landscape Maintenance District Library JP A Special Revenue Fund Regional Sanitation (including Sacramento County Sanitation District Financing Park Districts and Park Service Areas Special Revenue Fund: Authority) Del Norte Oaks Park Maintenance District Sacramento Metropolitan Air Quality Management Water Agency Mission Oaks Recreation and Park District District Special Revenue Fund Carmichael Recreation and Park District Sunrise Recreation and Park District County Service Area Number Three County Service Area Number Four County Service Area Number Nine

In addition, based upon the above criteria, the following is a brief review of additional potential component units addressed in defining the County's reporting entity:

Discretely Presented Component Unit:

The Tobacco Securitization Authority of Northern California, (Authority) is a public entity created by a Joint Exercise of Powers Agreement (Agreement) effective as of July 15, 2001 between Sacramento County (County) and San Diego County. A three-member board of directors, (Board) made up of two members of the Sacramento County Board of Supervisors and one member from San Diego County, governs it. The Authority was created for the purpose of empowering the ...... ,'-'"""""',.a _._ '-'...._. U.l:.1'-'..&.~..1.·.A.i:.Jl-"'11 .A.'-' NOTES TO BASIC FINANCIAL STATEMENTS ( continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Authority to finance the payments to be received hy the County of Sacramento from the nation-wide Tobacco Settlement Agreement {Payments) for such purposes, but not limited to, issuance, sale, execution and delivery of Bonds secured by those Payments or the lending of money based on thereof, or to securitize, sell, purchase or otherwise dispose, of some or all of such Payments of the County.

The Authority is a public. entity legally separate and apart from the County, and is considered a discretely presented component unit ofthe County due to the operational relationship between the Authority and the County. The debts and liabilities of the Authority belong solely to it, and neither the Counties of Sacramento or San Diego are any way responsible for those liabilities.

Included within the reporting entitv: The County has created the Public Facilities Financing Corporation for the purpose of facilitating the financing of public projects within the County. The Board of Supervisors appoints the governing board of the _corporation and is responsible for the fiscal and administrative activities of the entity. For financial reporting purposes, capitalized leases between the County and the corporation have been eliminated, and the financial data of the entity has been included within the County's reporting entity.

The Sacramento County Parking Authority is a public financing agency created by the County to provide parking facilities. The Board of Supervisors serves as the Parking Authority's governing board. For financial reporting purposes, the capitalized lease between the County's Parking Enterprise Fund and the Parking Authority has been eliminated.

Excluded from the reporting entitv: The Sacramento County Employees' Retirement System is excluded from the reporting entity, as it is fiscally independent of the County and is governed by a separate Board of Directors and not by the County Board of Supervisors.

The reporting entity excludes certain separate legal entities. Some of these entities may have "Sacramento" in their title or are required to keep their cash and investments with the County Treasurer or receive property tax apportionments from the County. Examples are school districts, community college districts, cities, joint powers agencies, the Sacramento Housing and Redevelopment Agency, and a variety of special-purpose independent districts for cemeteries, fire, recreation and parks, and reclamation. These entities are autonomous organizations with their own governmental powers and constituencies. The Board of Supervisors does not appoint a voting majority oftheir boards. Accordingly, they are not included in the accompanying combined financial statements.

Certain assets, principally cash and investments, of these separate legal entities held by the County in a custodial capacity are included in the investment trust funds.

Joint Power Authorities or Jointly Governed Organizations The County of Sacrani.et;1t()is a ~e:i;nber of several Joint Powers Agencies (JP A) and/or jointly managed agencies. These are:

AGENCY PURPOSE Sacramento Public Library JP A County library services Sacrame~to Are,a Council of Governments Regional planning (primarily transportation) Sac;ramen~~ Eiripfo~ent a:ndTr~ining Agency Coordination of Federal and State funding for job programs Sacramento Area Flood Control Agency Regional flood control issues Sacramento Cable Commission Administration of the franchising and licensing of cable TV services Sacramento Housing and Redevelopment Agency Housing/redevelopment projects Sacramento Port Authority Operation of the Port of Sacramento Sacramento Transportation Agency Administration of County-wide transportation projects 38 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Local Agency Formation Commission Formation of districts and cities within the County Sacramento/Placerville Transportation Acquisition of rail lines for a transportation corridor

The Sacramento County Director of Finance acts as the Auditor-Controller and as the Treasurer and depository for all the above agencies except for the Sacramento Public Library JPA, the Sacramento Housing and Redevelopment Agency and the Sacramento Port Authority. Funding, if any, for each of these agencies from the County is based on annual appropriations. The County has no continuing financial liability and does not expect any financial burden from its participation in any of these agencies. Separate financial statements of the JP As can be obtained by contacting the individual agencies or the County Department of Finance, Auditor­ Controller Division. Only the Sacramento Public Library JP A is considered a (blended) component unit under GASB 14 criteria, as its governing board is substantively the same as the County's; however, none of the others meet the criteria necessary to be considered a component unit.

Government-wide and fund financial statements presentation Government - wide Financial Statements: The Statement of Net Assets and the Statement of Activities display information about the primary government, the County and its component units. These statements include financial activities of the overall government, except for fiduciary activities. Eliminations have been made to minimize the double counting of internal activities. These statements distinguish between the governmental and business-type activities of the County and between the County and its discretely presented component unit. Government activities, which are normally supported by taxes and intergovernmental revenues, are reported separately from business­ type activities, which rely to a significant extent on fees charged to external parties.

The Statement of Activities presents a comparison between direct expenses and program revenues for each different identifiable activity of the County's business­ type activities and each function of the County's governmental activities. Direct expenses are those that are specifically associated with a program or function and; therefore, are clearly identifiable to a particular function. Program revenues include 1) charges paid by the recipients of goods or services offered by programs and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not properly included among program revenues are reported instead as general revenues.

Fund Financial Statements: The fund financial statements provide information about the County's funds, including fiduciary funds and blended component units. Separate statements for each fund category: governmental, proprietary and fiduciary are presented. The emphasis of fund financial statements is on major governmental and enterprise funds, each displayed in a separate column. All remaining governmental and proprietary funds are separately aggregated and reported as nonmajor funds

The County reports the following major governmental fund: The General fund is used to account for all financial resources except those required or designated by the Board to be accounted for in another fund.

The County reports the following major enterprise funds: The Airport fund is used to account for the facilities of the Airport Department, including the Metro, Executive, and Franklin Airports, and Mather Airfield. The Regional Sanitation District fund is used to account for the operations of the Regional Sanitation Utility System. The Refuse fund is used to account for the costs of the refuse collection business, including the refuse disposal site and transfer stations. The Sanitation District Number One fund is used to account for the operations of the Sanitation District Number One utility system. -'-'.._,..,.a ..a.. "_.. U-'-'1"'-"..a.~-Y..a...a...:.tJ., ..I..'-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

The County reports the following fund t-y!)es: Internal service funds are used to account for the financing of goods, services, or facilities provided by one department to other departments of the County, or to other governmental units, on a cost-reimbursement basis. Internal service funds include Public Works, General Services, Self-Insurance funds covering general liability and property damage, workers' compensation, dental and unemployment as Other, Regional Communication for emergency communications services, and Office of Communications and Information Technology.

Investment trust funds account for the assets oflegally separate entities that deposit cash with the County treasury. These entities include school districts, other independent special districts governed by local boards, regional boards and authorities, and pass through for property tax collections for cities. These funds represent assets, primarily cash and investments, held-by the County in trust for these participants. ·

Agency funds account for the assets held by the County as an agent for various individuals, private organizations and other governmental agencies. These include Law Enforcement, Unapportion:ed Tax Collection and Court Operations agencies.

Measurement focus iiifd basis ofaccoiintini- The government-wide, proprietary, investment trust arid agency fund financial statements are reported using economkresources measurement focus and accrual basis of accounting. Revenues are recorded when earned and expenses are recorded at the time the liabilities are incurred, regardless. of when the related cash flow takes place. Non~exchange transactions, in which the County gives or receives value without directly receiving ot giving equal value in exchange, include property and sales taxes, grants, entitlements and donations'. Revenues from sales tax are recognized when the underlying transactions take place. Revenues from grants, entitlements and donations are recognized in the fiscal year in which all eligibility requirements have been satisfied.

Governmental funds are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Under this method, revenues are recognized when measurable and available. Taxes, interest, certain state and federal grants, and charges for services are accrued when their receipt occurs within three hundred sixty five days of the end of the accounting period so as to be both measurable and available. Licenses, permits, fines, forfeitures and other revenues are recorded as revenues when received in cash because they are generally not measurable until actually received. Property taxes are accrued when their receipt occurs within sixty days of the end of the accounting period. Expenditures are generally recorded when the liability is incurred, as under accrual accounting. However, debt service expenditures as well as expenditures related to claims and judgments are recorded only when payment is due. General capital assets are reported as expenditures in governmental funds. Proceeds of general long-term debt and capital leases are reported as other financing sources.

Private-sector standards of accounting and financial reporting issued prior to December l, 1989, generally are followed in both government-wide arid proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. 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 government has elected not to follow subsequent private-sector guidance.

As a general rule the effect ofinterfund activity has been eliminated from the government-wide financial statements. Exceptions to this general rule are payments-in­ lieu of taxes and other charges between the government's water and sewer function and various other functions of the government. Elimination of these charges would distort the direct costs and ptogram 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. 40 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the County's enterprise funds are charges to customers for services including: water, sewer, refuse, airline fees and charges, parking fees, public transit fees. The principal operating revenues for the County's internal services funds are charges for customer services including: fleet operations, purchasing, printing services, central stores, mail services, building maintenance, surplus property disposal, telecommunications, water resources, special district formation, water quality, highways and bridges, real estate, surveyor, information and permits, self insurance for: liability and property damages, workers' compensation claims and dental and unemployment claims, emergency communication functions and telecommunication and data processing. Operating expenses for enterprise funds and internal services funds include cost of services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses.

When restricted assets become available, for their restricted purpose, they are used first, then unrestricted assets are used as they are needed.

Cash and Cash Equivalents For purposes of the statement of cash flows and statements ofnet assets/balance sheets, the County considers all short-term highly liquid investments (including restricted assets) to. be cash equivalents. Investments held in the County Treasurer's Pool are available on demand to individual entities, thus they are considered highly liquid and cash equivalents for purposes of the statements of cash flows.

Property Taxes The County is responsible for the assessment, collection, and apportionment of property taxes for all taxing jurisdictions within Sacramento County including the cities, school districts, and various special districts. Property taxes are payable in equal installments, November 1 and February 1. They become delinquent after December 10 and April 10, respectively. The assessment date for fiscal year 2002-03 is July 1 and the lien date is January 1 (unsecured property taxes are paid in one installment August 31): The tax collections are recorded in the Unapportioned Tax Collection Agency fund prior to apportionment.

Beginning in fiscal year 1993-94, the County Board of Supervisors adopted a resolution authorizing the "Alternative Method of Property Tax Apportionment" (Teeter Plan), under which the County converted to an accrual method of apportioning secured property taxes. Under the Teeter Plan, the County purchases the annual delinquent secured property taxes from the local taxing entities and selected special assessment districts in Sacramento County. The financing of the purchase of the delinquent secured property taxes under the Teeter Plan has been accomplished by five-year legal, secured medium-term note obligations of the County which have been purchased by the Treasurer's Pool. The terms of the notes include a variable interest rate, adjusted on a quarterly basis, equal to the rate of interest on the Constant U.S. Treasury Note for the number of years corresponding to the remaining term of each note.

For financial reporting purposes, a debt service fund was created to account for the proceeds, subsequent purchase of delinquent taxes of the taxing entities, and the accumulation of financial resources to be used to repay the notes. Collections on the delinquent secured taxes purchased from the various taxing entities will be the primary funding source. The delinquent secur~d taxes are recorded as a long-term receivable in the debt service fund.

A description of the debt related to the Teeter Plan can be found in Note 9. "-'...... _, V.i..-, .& ..&. ,._,...... U.rJL"""'..a.~,-.&..a..:.l.l ',i .a '-.I NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Inte;govemmental Revenue$_ Federal and state governments reimburse fhe County for costs incurred on certain fixed asset construction projects under capital grant agreements. Amounts claimed under such grants are credited to intergovernmental revenues if the project is being administered by a capital projects fund or to capital contributions revenue if administered by a proprietary fund. Additionally, the County receives reimbursement from federal and state governments for other programs, such as public assistance, administered by the County. These reimbursements are recorded in the fund administering the program as intergovernmental revenues with the related program costs included in expenditures.

The respective grant agreements generally require the County to maintain accounting records and substantiating evidence sufficient to determine if all costs incurred and claimed are proper and that the County is in substantial compliance with other terms of the grant agreements. These records are subject to audit by the appropriate government agency. Any amounts disallowed will reduce future claims or be directly recovered from the County.

Interfund Transactions Interfund transactions are reflected as either loans, services provided, reimbursements or transfers. Loans are reported as receivables and payables as appropriate, are subject to elimination upon consolidation and are referred to as either due to/from other funds or advances to/from other funds. Any remaining balances outstanding between the governmental activities and business..:type activities are reported in the government-wide financial statements as internal balances. Advances between funds, as reported in the fund statements, are offset by a fund balance reserve account in the applicable governmental funds to indicate that they are not available for appropriation and are not available financial resourc~s.

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 presentation.

Inventories Inventories of prop~ietary funds are recorded at the lower of cost computed by the weighted average method or market value. Inventory purchases made by governmental funds are recorded as expenditures at the time of purchase.

Restricted Assets Certain proceeds of proprietary fund obligations, as well as certain other resources set aside for obligation repayment and future construction or acquisition of assets, are classified as restricted assets on the statement ofnetassets. These amounts are restricted as their use is limited by applicable bond covenants. or other external requirements.

42 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Capital Assets Capital assets, which include land, structures and improvements, machinery and equipment, and infrastructure assets, are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. Capital assets are defined as assets with an initial individual cost of more than $5 and an estimated useful life in excess of five years except for computer and peripheral equipment which have an estimated useful life of three years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. Capital outlay is recorded as expenditures of the General, special revenue, and capital projects funds and as assets in the government-wide financial statements to the extent the County's capitalization threshold is met. Interest incurred during the construction phase of the capital assets of business-type activities is reflected in the capitalized value of the asset constructed, net of interest earned on the invested proceeds over the same period. Amortization of assets acquired under capital lease is included in depreciation and amortization. Structures and improvements, infrastructure and equipment of the primary government, as well as the component units, are depreciated using the straight line method over the following estimated used lives:

Assets Years Structures and Improvements 15 to 50 Infrastructure 30 Equipment 3 to 40

Compensated Absences County employees are granted vacation in varying amounts based on classification and length of service. Additionally, certain employees are allowed compensated time-offin lieu of overtime compensation and/or for working on holidays.

Governmental Funds - Governmental funds record expenditures for compensated absences as they are taken by employees. A year-end accrual for compensated absences has not been made in the governmental funds as of June 30, 2003, because the County does not believe any of the available year-end resources will be required to fund the year-end compensated absences liability.

Proprietary Funds - Proprietary funds accrue a liability for unused compensated absences earned through year-end. An expense is recognized for the increase in liability from the prior year.

Sick leave is earned by regular, full-time employees. Any sick leave hours not used during the period are carried forward to future years, with no limit to the number of hours that can be accumulated. Any sick leave hours unused at the time of an employee's retirement are added to the actual period of service when computing retirement benefits. The County does not pay accumulated sick leave to employees who terminate prior to retirement. It is the policy of the County to pay certain employees a portion of their sick leave at retirement. The amount of the liability has been accrued in accordance with GASB Statement 16, Accounting for Compensated Absences.

The County accrues for compensated absences in the government-wide and proprietary fund statement for which they are liable to make payment. The liquidation of compensated absences occurs in the fund where the employee resides when the hours are used or upon retirement or termination from the County.

Long-term obligations In the government-wide financial statements, and proprietary funds 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 and discounts, as well '-"'-''-'J..11..a. .a. '-'.a.' 1,J.C'Jl..'-'..&.'-l""Ll.Y.&...l.:.J.l..,.A.'-.1 NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 ( amounts expressed in thousands) as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt.

In the fund financials, governmental fund types recognize bond premiums and discounts as well as bond issuance costs, during the current period. The face amount of debt issued is 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.

Fund equity In the fund financials, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change.

Change in Accounting Principle In July 1995, the County issued $533,034 in taxable Pension Obligation Bonds (POB). The Bonds were issued to fund the accrued actuarial liability of the County to Sacramento County Employee Retirement System (SCERS) at June 30, 1995. For the fiscal year ended June 30, 2003, the County has elected to change its accounting treatment of the pre-payment that was made to the SCERS in July 1995, in accordance with Governmental Accounting Board Standard No. 27, "Accounting for Pensions by State and Local Governmental Employers," which encourages those governments whose contributions substantially make up the total contributions to the plan to consider the plan a sole-employer plan, for purposes of County financial statements and as such, record a pension asset. See Note 19 for effect.

New Pronouncements Governmental Accounting Standards Board Statement No. 40 - For the fiscal year ended June 30, 2003, the County implemented GASB Statement No. 40, Deposit and Risk Disclosures (an amendment to GASB Statement No.3-Deposits with Financial Institutions, Investments (including Repurchase Agreements) and Reverse Repurchase Agreements). This statement addresses common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk and foreign currency risk. As an element of interest rate risk, this Statement requires certain disclosures of investments that have fair values that are highly sensitive to changes in interest rates. Deposit and investment policies related to the risks identified in this statement also should be disclosed.

Governmental Accounting Standards Board Technical Bulletin No. 2003-01 - The County adopted the provisions of GASB Technical Bulletin No. 2003-1, Disclosure Requirements for Derivatives Not Reported.at Fair Value on the Statement of Net Assets. This Technical Bulletin supersedes Technical Bulletin 94-1 and clarifies guidance on disclosures, pending the results of the GASB's project on reporting and measurement of derivatives and hedging activities. This Technical Bulletin applies to derivatives that are not reported at fair value on the statement of net assets. It provides an updated definition of derivatives; it also provides disclosure requirements for the government's objective for entering into the derivative and the derivative's terms, fair value, and risk exposures. These disclosure requirements are intended to provide information to financial statement users that will enhance their understanding of the significance of derivatives to a government's net assets and will assist them in assessing the amounts, timing, and uncertainty of future cash flows. See Note 10 Derivitives - interest rate swap.

Purchase ofExcess Sewer Capacity During fiscal year 1994-95,the Regional Sanitation District entered into an agreement with Blue Diamond Growers Exchange (Blue Diamond) to purchase excess sewer capacity and provide economic and other incentives to Blue Diamond to remain in Sacramento. The approximately $6,000 agreement calls for payment to be made and sewer credits to be given to Blue Diamond over a 15-year period. Approximately $3,300 represents an incentive credit to Blue Diamond and is payable in full should Blue Diamond remain in Sacramento and maintain minimum employment levels until August 1, 2010. However, the remaining balance of approximately $1,682 represents a vested credit and is payable regardless of whether Blue Diamond remains in Sacramento. The sewer credits will reduce Blue Diamond's monthly 44 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands) sewer invoices by fifty percent through June 2010. These reductions are applied to the vested credit and the incentive credit in the proportion each credit bears to the total liability. During fiscal year ended June 30, 2003, approximately $27 was applied to the vested credit, and approximately $32 was applied to the incentive credit, both of which are reflected as current year expenses. Also under terms of this agreement, the Regional Sanitation District paid Blue Diamond approximately $1,918 on August 1, 2000. Additionally, cash payments will be made on August 1, 2005, and 2010 for one-half of the remaining outstanding balance at the date of each payment.

Use ofEstimates in the Preparation ofFinancial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. · .

Accumulated Capital Outlay Deficit Fund Balance Available The accumulated capital outlay fund typically budgets projects based on anticipated expenditures. Often the design and engineering is not completed within a single fiscal year after the project is authorized. Iflarge construction projects are awarded late in the fiscal year, the contracts encumber funds in the Capital Construction Fund. Those encumbered funds have a significant effect on the fund balance. When a large project is financed, Capital Construction typically provides the financing for the expenditures and subsequently, receives reimbursement for those expenditures. Since the revenue from grants and debt proceeds is received, subsequent to incurring the expenditure, the revenue is not recorded when the encumbrance for the contract is recorded. This created a negative fund balance available of $41,212 at June 30, 2003.

In fiscal year 2002-03, two significant projects were awarded late in the fiscal year, the Juvenile Courthouse and Visitor Center ($27.1 million), and the Warren E. Thornton Youth Center Expansion project ($7.8 million). As a result of these project awards and other encumbrances, the Accumulated Capital Outlay Fund ended the year with a large encumbrance of$43.8 million that resulted in a negative unreserved I undesignated fund balance of $41,212. The 2003-04 Final Budget has been adjusted to account for the rollover of these encumbrances. ---.-.~- - -- ,.., ...... "-' ... """" ...... ,&,JJ."I.&.'-' NOTES TO BASIC FINANCIAL STATEMENTS(continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTE2-RECONCILIATIONOFGOV~1lMJENT-WIDEANDFUNDFINANCiAT.,'iTA.TR1Y.fRNTS Total fund balances of the County's governmental funds, $812,4 71 differs from net assets of governmental activities, $1,338,513, reported in the statement of net assets. The difference primarily results fromthe long-term economic focus in the statement of net assets versus the current financial resources focus in the governmental fund balance sheets.

Balance Sheet/Statement of Net Assets Page 1 of2 Total Long-term Internal Reclassifications Governmental Assets, Service and Statement of Funds Liabilities ( 1) Funds(2) eliminations Net Assets Assets: Current assets: Cash and investments $ 1,038,910 91,625 1,130,535 Receivables, net of allowance for uncollectibles: ' --.. -. ; ~;.': Billed 134,655 3,143 137,798 Interest 170 170 In terg overnm en tal 119 ,567 203 119,770 Due from other fu.n-ds,/.in tern al -balances 43,170 34,477 (94,203) ( 16,556) Inventories 32 2,783 2,815

Total current assets 1,336,504 132,231 {CJ4,2031 1,374,532

Noncurrent assets: Long-term receivables 29,316 116,661 145,977 Deferred charges 2,641 43 2,684 Long-term advances to other funds I internal balances 34,380 3,618 (45,5 89) (7,591) Pension asset 597,985 597,985 Capital assets: Land and other ncindepreciable assets 162,285 3,824 166,109 Facilities, infrastructure and eq~ipment, net of depreciation 896,382 54,251 950,633 Total capital ll,Ssets 1,058,66 7 58,075 1,116,742 Total noncurrent assets 63,696 1,659,293 178,397 {_4 5__2._8 92 1,855,797 Total assets $ 1,400,200 1,659,293 310,628 (139,7922. 3,230,329

46 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Page 2of2

Total Long-term Internal Reclassifications Governmental Assets, Service and Statement of Funds Liabilities ( 1l Funds (2) eliminations Net Assets Current liabilities: Warrants payable $ 23,359 3,883 27,242 Accrued liabilities 72,022 12,159 84,181 Tax and revenue anticipation notes 285,000 285,000 Current portion of accrued interest payable 4,482 4,482 Due to other funds I payable to external parties 46,779 50,046 (94,203) 2,622 Current portion of insurance claims payable 24,791 24,791 Current portion of long-term debt obligations 27,724 27,724 Deferred revenues 88,876 po.no~ 2,191 60,347 Total current liabilities 516,036 1,486 93,070 (94,JQ}~ 5!~,389

Noncurrent liabilities: Intergovernmental payable 56,286 98 56,384 Accrued interest payable 121,261 121,261 Compensated absences Insurance claims payable 91,562 91,562 Long-term debt obligations 988,246 16,993 1,005,239 Long-term advances from other funds 15,112 30,477 (45,589) Estimated insurance liability 83,628 17,058 100,686 Matured bonds payable 78 78 Arbitrage rebate payable 217 217 Total noncurrent liabilities 71,693 1,193,135 156;188 (45,589) 1,375,427 Total liabilities 587,729 1,194,621 249,258 (139,792) 1,891,816

Fund balance I net assets: Reserved for: Encumbrances 101,898 (101,898) Fixed asset acquisitions 18,190 (18,190) Assets not available 21,065 (21,065) Debt service 122,668 (122,668) Future construction 230,558 (230,558) Unreserved: Designated 114,666 (114,666) Undesignated 203,426 (203,426) Investment in capital assets, net ofrelated debt 784,697 13,719 798,416 Restricted Debt service (236,341) 236,341 Capital projects (42,773) 237,697 194,924 Other purposes 42,303 279,654 321,957 Unrestricted (83,214~ 47,651 58,779 23,216 Total fund balance I net assets 812,471 464,672 61,370 1,338,513 Total liabilities and fund balance I net assets $ 1,400,200_ 1,659,293 . 310,628 (139,792) 3,230,329 - ---~ ~ ...... -. --- _..._ __ ...... , .... .a...i1 ..... , .& .....-. NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

(a) Explanation of cert.ain differences bet'.veen the governmental fonds balance sheet and the govero..ment-wirle statement ofnet assets

(1) When capital assets (land, infrastructure, building, and equipment) that are to be used in governmental activities are purchased or constructed, the costs of those assets are reported as expenditures in governmental funds. However, the statement of net assets includes those capital assets among the assets of the County as a whole. Cost of capital assets $ 2,745,432 Accumulated depreciation (1,686,765) 1,058,667

Pension asset of the governmental activities is not a financial resource and, therefore, is not reported in the funds. 597,985

Bond issuance costs are expended in governmental funds when paid, and are capitalized and amortized over the life of the corresponding bonds for purposes of the statement of net assets. 2,641

Long-term liabilities applicable to the County's governmental activities are not due and payable in the current period and accordingly are not reported as fund liabilities. All liabilities, both current and long-term, are reported in the statement of net assets. Compensated absences (66,314) Estimated insurance liability (83,628) Accrued interest (125,743) Bonds, loans, capital leases, and other payables (949,656) Unamortized swap premium _Cl?' 0_14) Q,244,415)

Because the focus of governmental funds is on short-term financing, some assets will not be available to pay for certain period expenditures. Those assets (for example, receivables) are offset by deferred revenues in the governmental funds and thus are not included in fund balance. Deferred revenue 49,794

Total $ 464,672

(2) Internal service funds are used by management to charge the costs of certain activities, such as equipment maintenance, printing and mailing services, and telecommunications, to individual funds. The assets and liabilities of certain internal service funds are included in governmental activities in the statement of net assets. $ 61,370

48 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (am.ounts expressed in thousands)

The net change in fund balances for governmental funds, $47, 184, differs from the change in net assets for governmental activities, $37 ,390, reported in the statement of activities. The differences arise primarily from the long-term economic focus in the statement of activities versus the current financial resources focus in the governmental funds. The effect of the differences is illustrated below. · ·

Statement of Revenues, Expenditures, and Changes in Fund Balances/Statement of Activities

Total Capital· Long-tenn Internal Reclassifications Governmental Related Revenues, Service and Statement of Funds Items (3) Exeenses (4) Funds (5) Eliminations Activities Revenues: Taxes: Property $ 262,647 262,647 Sales/use 83,275 83,275 Transient occupancy 7,891 7,891 Use of money and property 46,880 185 47 ,065 Licenses and permits 49,686 (49,686) lntergovernmenta 1 1,298,846 1,089 (1,299, 935) Operating grants and contributions 14,626 965,450 980,076 Capital grants and contributions 23,892 23,892 Grants and contributions not restricted to specific programs 293,767 293,767 Charges for services 153,983 (9,715) 3,677 100,365 248,310 Fines, forfeitures, and penalties 33,853 (33,853) Contributions and donations Miscellaneous 112,639 (19,400) 93,239 Total revenues 2,049,700 (14,489) 4,951 2,040,162 Expenditures: Current: General government 85,265 24,687 867 (186) 110,633 Public assistance 701,080 5,131 2,677 (397) · 708,491 Public protection 583,457 14,148 3,281 (1,227) 599,659 Health and sanitation 379,561 12,611 1,827 (424) 393,575 Public ways and facilities 82,695 (16,601) 292 475 66,861 Recreation and culture 37,211 (5,420) 191 (104) · 31,878 Education 26,283 389 292 (13) 26,951 Capital outlay 94,519 (94,519) Debt service: Principal 37,301 (37 ,301) Advance refunding escrow 5,584 (5,584) Bond issuance costs 2,400 (2,400) Interest and fiscal charges 47,608 17,116 64,724 Total expenditures 2,082,964 (59,574) (18,742) (1,876) 2,002,772 Excess (deficiency) of revenues over (under) expenditures (33,264) 59,574. 4,253 - 6,827 _ ---~3_7,_390 Other financing sour~es (uses): Transfers in 80,108 (80,)08) Transfers out (80,108) 80,108 Capital leases 10,390 (10,390) Refunding certificates issued 43,790 (43,790) Premiums on debt issmid 4,130 (4,130) Payment to refund bond escrow agent (45,308) 45,308 Long-term obligation proceeds 67,446 !67,446) Total other financing sources (uses) 80.448. '(80,448) Net change in fund balance 47.184 59,574 (76, 195) 6,827 37,390 Net assets, beginning of year 765,287 999,093 (517;sooi 54,543 1.301,123 Net assets, end of year $ 812,471 1,058,667 (593,995) 61,370 1,338_,513 '--"'-' v~ ~ ... .a ...,.._. ur11..v.a.'-l"'IU,-.1..J.:J1., .1. '-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

(b) Explanation of certain differences between the governmental fonds statement of revenues, expenditures, and changes in fond balances and the government-wide statement of activities. ·

(3) When capital assets that an to be used in governmental activities are purchased or constructed, the resources expended for those assets are reported as expenditures· in governmental funds. However, in the statement of activities, the cost of tho~e assets is allocated over their estimated useful lives and reported as depreciation expense. As a result, fund 'balance decreases by the amount of financial resources expended, whereas net assets decrease by the amount of depreciation expense charged for the year, and the loss on disposal of capital assets. · Cap ital expenditures $ 114,834 Depr~ciation expen~e (55,260) $ 59,574

(4) Gove~nmental funds report the effect of the pension asset when first paid, whereas the amouint is deferred and amortized in the statement of activities. This is the amount amortized during the year. $ 4,435

Bond issuance costs are expended in gQvernmental funds when paid, and are capitalized and amortized over the life of the corresponding bonds for purposes of the statement of activities. This amount is the net between bond issuance costs ($2,400) incurred and deferred ($3 0) during the year. 2,370 Repayment of bond prindpal is reported as an expenditure in governmental funds and, thus, has the effect of reducing fund balance because_ current financial resources have been used. For the County as a whole, however, the principal payments -reduce the liabilities in the statement of net assets and do not result in an expense in the statement of activities. The County's bonded debt was reduced because principal paymems were made to bond holders. 84,524 Bond proceeds are reported as financing sources in governmental funds and thus contribute to the change in fund balance. In the government-wide statements, however, issuing debt increases long-term liabilities in the statement of net assets and does not affect the statem_ent of activities. Proceeds were received from: Teeter notes (14,924) Certificates o,f participation (95,170) Other long term debt (1,142) Capital lease (10,390) . ~ Bond premium (4,130) Swap premium (19,400) !J45,156) (58,262)

Interest expense in the statement of activities differs from the amount reported in governmental funds because additional accrued interest was calculated for bonds and notes payable, and additional interest expense was recognized on the amortization of bo:11.d discounts anci premiums, including the swap premium, which are expended within the funds statements. (13 ,417) 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. Change in estimated insurance liability (6,693) Change in compensated absences ~ (13 ,862) (27,279)

Some revenue reported in the governmental funds are not_considered "available" to pay current period expenditures. The deferred revenues. are not reported in· the statement of net assets and, therefore, the related revenue is not reported in the statement of activities. 4,911.

Total $ Q6,im (5) Internal service funds are used by management to charge the costs of certain activities, such as equipment maintenance, printing and mailing services, and telecommunications, to. individual funds. The adjustments for internal service funds close those funds by charging additional amounts to participating governmental activities to colllpletely cover the internal .service funds' costs for the year. $ 6,827

50 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTE 3-BUDGETARY PRINCIPLES As required by the laws of the State of California, the County prepares and legally adopts a final balanced operating budget on or before August 30 of each fiscal year. The Board may, by resolution, extend on a permanent basis or for a limited period, the date from August 30 to October 2. The final budget for fiscal year 2002-03 was adopted on September 24, 2002. Until the adoption of a final balanced budget, operations were governed by the proposed budget approved by the Board of Supervisors on June 20, 2002. Public hearings were conducted on the proposed final budget to review all appropriations and the sources of financing. Because the final budget must be balanced, any shortfall in revenue requires an equal reduction in financing requirements.

Operating budgets are adopted for the General fund, special revenue funds, debt service funds, and capital projects funds on the modified accrual basis of accounting except as explained below. Budgetary control and the legal level of control are at the budget unit and object level, which classifies expenditures by organizational unit, and by type of goods purchased and services obtained. The statement/schedules of revenues and expenditures - budget and actual (adjusted to the budgetary basis) presents revenues at the source level and expenditures at the function level.

It is not feasible to compare budget to actual data at the object level in this report. Therefore, this information is contained in a separate report prepared by the Department of Finance, Auditor-Controller Division, titled "Countywide Expenditure Status Report." Significant amendments, appropriation transfers between departments or funds, and transfers from contingencies must be approved by the County Board of Supervisors. Supplemental appropriations financed by unanticipated revenues also must be approved by the Board.

During fiscal year 2002-03, the original adopted budget was amended by the Board of Supervisors. The final budget data contained in the financial statements reflects the effect of all approved budget amendments. During fiscal year 2002-03, the appropriation limit for the fiscal year 2002-03 budget year was reviewed and determined to be calculated in accordance with Article XIIIB of the California Constitution.

Encumbrances, which are commitments related to the future purchase of goods or services, are recorded in General fund, special revenue funds, debt service funds, and capital projects funds. For budgetary purposes, encumbrances outstanding at year-end are recorded as expenditures. For financial reporting purposes, encumbrances outstanding at year-end do not constitute expenditures or liabilities. Unencumbered appropriations lapse at year-end and encumbrances outstanding at that time are reported as reservations of fund balance for subsequent-year expenditures.

The County budget for govermnental funds is prepared on the modified accrual basis of accounting, except that encumbrances represent expenditures on a budgetary basis. Encumbrances not liquidated in the current year are added to the subsequent-year budget for reporting and control purposes.

NOTE 4- CASH, INVESTMENTS, AND RESTRICTED ASSETS All investments are reported on the statement of net assets/balance sheet in accordance with GASB Statement No. 31, at fair value. The County maintains two cash and investment pools. The primary cash and investment pool (Treasurer's Pool) is available for use by all funds. The portion of this pool applicable to each fund type is displayed on the statements of net assets/balance sheets as "Cash and investments." The share of each fund in the pooled cash account is separately accounted for and interest earned, net of related expenses, is apportioned quarterly and at the end of the fiscal year based on the relationship of its average daily cash balance to the total of the pooled cash and investments. The apportionment due to the internal service funds and certain agency funds accrues to the benefit of the General fund. The County, acting in a fiduciary capacity, established a separate cash and investment pool (Fiscal Agent Pool) to segregate and invest monies in accordance with long-term obligation covenants. The County periodically distributes interest earned by these pools to the funds. The pools are accounted for on an amortized cost basis during the year. The Treasurer's and Fiscal Agent Pools are subject to oversight by the Treasury Oversight Committee. The value of pool shares that may be withdrawn is determined on an amortized cost basis, which differs from fair value. The County has not provided or obtained any legally binding guarantees during the fiscal year to support the value of pool shares. The County does not permit any voluntary participation in the Treasurer's Pool. "-"''-' VJ.. '1 A ..L '-'..A.' U.c1'-'..l..'-£"1..l.T.I..I.!ll .,- .I..'-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 ( amounts expressed in thousands)

Cash and investments held by fiscal agents is restricted as to its use. It includes funds for the construction/acquisition of plant and equipment (see Note 6) and funds designated by debt agreements as reserve funds and for servicing debt during the construction/acquisition of plant and equipment (see Note 9). At June 30, 2003, all cash held by fiscal agents was covered by federal depository insurance or by collateral held by the County's financial institutions in the County's name.

Investments and GASB 40 Presentation The County has chosen to implement GASB Statement 40, Deposit and Risk Disclosures, which is an amendment to GASB Statement No. 3, this fiscal year.

Investments by the County Treasurer are restricted per Government Code Section 53600 et. Seq. This Code requires that the investments be made with the prudent investor standard, that is, when investing, reinvesting, purchasing, acquiring, exchanging selling or managing public funds, the trustee (Treasurer and staff) will act with care, skill, prudence, and diligence under the circumstances then prevailing.

The Government Code also requires that when following the investing actions cited above, that the primary objective of the trustee be to safeguard the principal, secondarily meet the liquidity needs of depositors, and then achieve a return on the funds under the trustee's control. Further, the intent of the Government Code is to minimize risk of loss on County held investments from:

a. Credit risk b. Custodial credit risk c. Concentration of credit risk d. Interest rate risk

Specific restrictions· of investment are noted below:

Section 53601 lists the investments in which the Treasurer may purchase. These include bonds issued by the County; United States Treasury notes, bonds, bills or certificates of indebtedness; registered state warrants, treasury notes, or bonds of the State of California; bonds, notes, warrants or other forms of indebtedness of any local agency within California; obligations issued by banks for cooperatives, federal land banks federal home loan banks, the Federal Home Loan Bank Board or other instruments of, or issued by, a federal agency or United States, government sponsored enterprise; Bankers Acceptances (not over 180 days maturity, not to exceed 40% of the total portfolio); Commercial Paper of "prime quality'' (the highest ranking provided by either Moody's Investor Services or Standards and Poor Corporation) and these investments are further restricted as to capacity and credit rating of the Company and are restricted as to a percentage of the whole portfolio and the dollar­ weighted average maturity is also restricted; negotiable certificates of deposit issued by a approved banks, not to exceed 3 0% of the total portfolio; repurchase and reverse repurchase agreements are permitted investments but are subject to stringent rules regarding term, value and timing, all put in place to minimize risk of loss; medium term notes, carry a maturity of no more than five years and rated "A" or better by a nationally recognized rating service, not to exceed 30% of the portfolio; shares of beneficial interest issued by a diversified management company subject certain limitations; notes, bonds and other obligations that are at all times secured by a valid first priority security interest in securities of rules cited in Government Code Section 53 651; mortgage pass-through securities and other mortgage and consumer receivable backed bonds, not to exceed a maturity of five years, subject to the credit rating of the issuer and not to exceed 20% of the portfolio.

In addition to the restrictions and guidelines cited in the Government Code, the County Board of Supervisors annually adopts an "Investment Policy for the Pooled Investment Fund" (The Policy). The Policy is prepared by Department of Finance and is based on criteria cited in the Government Code. The Policy adds further specificity to investments permitted, reducing concentration within most permitted investment types and reducing concentration of investments with any broker, dealer or issuer.

52 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS ( continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

The County was in full compliance with its own more restrictive policy, and therefore was also in compliance with the above cited Government Code sections. Accordingly, the County believes it is not at measurable risk as to the four risk areas cited above.

Interest rate risk-This is the risk ofloss due to the fair value of an investment falling due to interest rates rising. Of the County's $3.375 billion portfolio, over 68% of the investments have a maturity of six months or less. Of the remainder, only 2.9% have a maturity of more than 5 years.

Credit Risk - The County is permitted to hold investments of issuers with a short term rating of superior capacity and a minimum long term rating of upper medium grade by the top two nationally recognized statistical rating organizations (rating agencies). For short-term rating, the issuers' rating must be A-1 and P-1, and the long­ term rating must be A- and A3, respectively by the rating agencies. In addition, the County is pennitted to invest in the State's Local Agency Investment Fund, collateralized certificates of deposits and notes issued by the County that are non-rated. ·

Custodial Credit Risk - At year-end, the County did not participate in any repurchase agreements or securities lending that would result in any possible risk in this area.

Concentration of Credit Risk- Nearly 55% ofthe County's investments at year-end are in U.S. Government or Agencies issues. There is no limitation on amounts invested in these types of issues. Of the 30% of the portfolio invested in commercial paper or investment agreements, no investment in a single issuer exceeds 5%.

The schedule on the following page indicates the credit and interest rate risk at June 30, 2003. The credit ratings listed are for Standard and Poor' s and Moody's Investor Services, respectively. The unrated municipal bonds are Teeter Notes, which were described in Note 1 under Property taxes. Certain investments such as obligations, which are backed by the full faith and credit of the United States Treasuzy, are not subjected to credit rating. ~"'-'..i...... '-'.a" ~..C-...'-"..&.~.1,..a...a.:.J.L...... '-' NOTES _TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Maturity Credit Under30 31-180 180-365 1-5 Over5 Rating Days Days Days Years Years Carrying Value

Imprest cash $ 596

Cash in banks 5,076

In cu.'ltody ofTreasurer: Cash and cash deposits: Cashon hand 12 Cash in bank.~ 7,634

Total cash and cash deposits 7,646

Investments held by Treastirer: Treasury Bonds NIA $ 7,876 7,876 Treasury Strips NIA 219 219 Federal Fann Credit Bonds AaaJAAA 5,000 20,900 40,000 65,900 Federal Home Loan Bank.~ AaaJAAA 5,000 89,575 61,460 195,210 351,245 Federal National Mortgage Aqsociation AaaJAAA 11,573 62,050 103,312 176,935 Government Agency Notes AaaJAAA 1,584 1,584 Federal National Mortgage Aqsociation Di~count Notes AaaJAAA 115,530 496,171 15,070 626,771 FFCB Discount Notes AaaJAAA 3,991 3,991 HILB Disco,mt.Notes AaaJAAA 21,682 77,348 99,030 FHLMC Discount Notes AaaJAAA 55,344 409,863 10,096 475,303 FHLMC AaaJAAA 20,000 60,000 90,000 60,000 230,000 Commercial paper A-1/P-l 226,695 296,436 523,131 Negotiable certificates of participation NIA 5,000 5,299 200 10,499 Other assets held by TreasutQ' (primarily Teeter Plan notes) Not rated 480 14,493 14,973 Local Agency Inve_!ltlnent Ftmd Not rated 178,473 178,473 Mutualfimd~ MAm 126,158 126,158 Guaranteed investment contracts Jw;JAAA 287,895 108,350 87,188 483,433

Total investmaits held by Treasurer 758,882_ 1,759,531 238,876_ 51_1,365 96;§__6_7 3,375,521

Total in cu.'ltody ofTreasurer 3,383,167

Investments held by fiscal agents: Treasury Notes !wt/AAA or NIA 36,699 47,216 83,915 City of Sacramento investment pool Not rated 5,348 5,348 Mutual funds MAm 1 Guaranteed investment contracts AaalAAA 121,953 3,239 125,192

Total investments held by fiscal agents -··-~_9 36,699 __ _47,216_ 121,953 3,239 214,456

Total investments $ 764,231 1,796,230 286,092 643,318 100,106

Total cash, investments, and restricted assets $ 3,603,295

54 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

The County did not participate in any security lending transactions or enter into any reverse repurchase agreements during 2002-03. The County's investment with the State's Local Agency Investment Fund (LAIF) is $178,473, this investment is included in the State's Pooled Money Investment Account. The total amount invested by all public agencies in the State's Pooled Money Investment Account is $4 7.8 billion. Of that $55.4 billion managed by the State Treasurer, 97. 7 percent is invested in non-derivative financial products and 2.3 percent is invested in derivative financial products. The Local Investment Advisory Board (Board) has oversight responsibility for LAIF. The Board consists of five members as designated by state statute. The value of the pool shares in LAIF, which may be withdrawn, is determined on an amortized cost basis, which is different than the fair value of the County's portion in the pool.

Cash, investments, and restricted assets as shown on the basic financial statements at June 30, 2003, are as follows: Government-wide statement of net assets: Cash and, investments $ 1,620,390 Restricted current assets used to repay maturing debt 19,387 Restricted assets 539,072 Fiduciary funds statement of net assets: 1,424,480

Total cash, investments, and restricted assets per basic financial statements 3,603,329 Less interest receivable included in restricted assets (34)

Total cash, investments, and restricted assets per summary of County cash deposits and investments $ 3,603,295

The following are condensed statements of net assets and changes in net assets for the Treasurer's Pool and Fiscal Agent Pool at June 3 0, 2003:

Statement of net assets Treasurer's Fiscal Agent Pool Pool Total

Net assets held for pool participants $ 2,443,520 939,647 3,383,167

Equity of internal pool participants $ 1,483,422 631,531 2,114,953 Equity of external pool participants 960,098-- 308,116 1,268,214 Total equity $ 2,443,520 939,647 3,383,167

Statement of changes in net assets Net assets at July 1, 2002 $ 2,301,810 653,651 2,955,461 Net changes in investments by pool participants 141,710 285,996 427,706

Net Assets at June 30, 2003 $ 2,443,520 939,647 3,383,167 '-" '7 v .1.. , .a -... -- ".a· ur:a...'-'.1..'-C"I..J.'Y.A..&.:.1.J.. ~ ..a'-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

A summary of the investments held by the Treasurer's Pool is a.s follows:

Interest Rate Maturity Carrying Value Cost Range(%) Range

Government securities $ 2,038,854 2,036,586 .88- 8.6 7/03-2/26 Conunercial paper 523,l31 524,959 .88 -1.3 7/03-12/03 Negotiable certificates of participation 10,499 10,499 .9-2.0 10/03-4/04 Other assets held by Treasurer (primarily Teeter Plan notes) 14,973 14,973 1.9-2.9 8/03-8/07 Local Agency Investment Fund 178,473 178,473 1.8 7/03 Mutuat funds 126,158 126,158 .8 - 1.1 7/03 Guaranteed, investment contracts 483,433 483,433 1.1 - 8.1 8/03-12/34

Total investments held by Treasurer $ 3,375,521 3,375,081

At year-end, the Tobacco Securitization Authority of Northern California cash and investment balances were as follows:

Maturity Credit Under 30 31-180 180-365 1-5 Over S Rating Days Days Days Years Years Carrying Vah1e

Mutual funds AAArn $ 5,445 5,445

Guaranteed investment contracts AJJ..a/AAA 13,569 13,569

Total investments $ 5,445 13,569 19,014

Cash in banks 437

Total cash and investments $ 19,451

56 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS ( continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTE 5 -LONG-TERM RECEWABLES Governmental funds report deferred revenues in connection with receivables for revenues not considered available to liquidate liabilities of the current period. Governmental and enterprise funds also defer revenue recognition in connection with resources that have been received as of year-end, but not yet earned.

At June 30, 2003, the various components oflong-tenn receivables were as follows: Nonmajor Total General Govennental Governmental Fund Funds Funds Long-term receivables Deferred revenues $ 16,133 16,133

Fund balances: reserved for assets not available 783 122400 131183 Total long-term receivables $ 16,916 12,400 29,316 Long-term advances to other funds Deferred revenues $ 33,661 33,661 Fund balances: reserved for assets not available 719 719 Total advances to other funds $ 34,380 34,380

Deferred revenue and unearned revenue reported were as follows:

.!!!!!vailable Unearned Total Governmental Activities: General Fund Intergovernmental receivable $ 16,133 16,133 Planning department pending projects 2,128 2,128 Advances 30,312 30,312 Other receivables 34 34 Total General Fund _____l,2.133 32,474 48,607 Nomnajor Funds: Charges for services 33,661 33,661 Library JPA 677 677 Advances 2,911 2,911

Other receivables 31020 31020 40269 Total Nonmajor Funds 331661 6 608 Total Governmental Funds 49,794 39,082 88,876 Reconciling items: Unavailable (49,794) (49,794) Internal Service Funds 2,191 2,191 Swap premiums 19 074 19 074 Total Governmental Activities ___(iQ,347 60,347 Business-type activities: Airport 1,397 1,397 Regional Sanitataion 8,774 8,774 County Sanitation District Number One 574 574 Total Business-type activities 10,745 10,745 Total Entity Wide $ "71,092 71,092

... .,.' __ , ,).. ... - - ..... - ...... ,....._, ""'""' 1 ..& ....._ "\.I.L" U..L.""]l,..'-"'..&."""1.LY.A...a:.JJ. ... .&. '-'" NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTE 6. - CAPITAL ASSETS Capital assets activity for the year ended June 30, 2003, is as follows: Balance Balance

~2002 Additions Deletions June 301 2003 Governmental activities: Capital assets, not being depreciated: Land $ 81,293 8,783 (9) 90,067 Construction in progress 73,306 31,548 (28,8_12) 761042 Total capital assets , not being depreciated 154,599 40,331 (28,~!) 166)09 Capital assets, being depreciated: Buildings and improvements 448,265 46,310 494,575 Infrastructure 1,982,248 65,764 2,048,012 Equipment 226,783 16,866 (191027) 2241552 Total capital assets, being depreciated 2,657,296 128,940 (19,097) 2,767,139 Less accumulated depreciation for: Buildings and improvements (205,873) (13,638) . (219,511) Infrastructure (1,393,915) (35,022) (1,428,937) Equipment (161,774) ~..(25,250L~.. 18,966(168,058). Total accumulated depreciation (1,761,562) (73,910) 18,966 (1,816,506)

Total capital assets, being depreciated, net 8951734 55,030 (111) 9501633 Sub-total governmental activities $ lz950,333 95,361 (28,952) 1,116,742

Business-type activities: Capital assets, not being depreciated: Land $ 78,392 908 (70) 79,230 Construction in progress 156,617 168,368 {8311~0) 241,845 Total capital assets, not being depreciated 235,009 169,276 @,210) 3211075 Capital assets, being depreciated: Buildings and.improvements 1,650,938 103,054 1,753,992 Infrastructure 31,355 12,012 43,367 Equipment 249,729 9,438 (41431) 2541736 Total capital ~sets, being depreciated 1,932,022 124,504 (4,431) 2,052,095 Less accumulated depreciation for: Buildings and improvements (507,371) (50,009) (557,380) Infrastructure (3,451) (1,061) (4,512) Equipment (~_Q6,602) (11,631) 4,0M.__ _ __ill4,209) Total accumulated depreciation (717,424) (62,701) 4,024 (776,101)

Total capital assets, being depreciated, nyt 1,21.4,598 61,803 (4Q_7) ... ~- 1,275.1994 Sub-total business-type activities $ 1,449,607 231,079 (83,617) 1,597,069 58 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Depreciation expense was charged to functions/programs of the primary government as follows:

Depreciation Governmental activities: Expense General government $ 8,530 Public assistance 405 Public protection 7,132 Health and sanitation 790 Public ways and facilities 35,124 Recreation and culture 2,345 Education 934 Capital assets held by the County's internal service funds are charged to the various functions based on their usage of the assets 18,650 Total depreciation expense - governmental activities $ --71,910

. Business-type activities: Airports $ 15,145 Regional sanitation 23,359 Refuse 8,147 Sanitation District Number One 12,281 Parking 303 Water Agency 3,341 County Transit 125 Total depreciation expense - business-type activities $ 62!701 '-"''-''-'.i.,'.a ..IL '-' .... a.J'..c ...... a::'-C"s..1.,...a.A.:.J.1.'111 ..1..'-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTT? 7 - ll'{Tl?RFUND TRANSACTIONS The following summarizes interfund receivables and payables, advances to I from other funds, and transfers as of and for the year ended June 30, 2003:

Due From I To Other Funds

Receivable Fund Payable Fund Amount Receivable Fund Payable Fund Amount

General Nonmajor governmental $ 3,359 Sanitation District Number One General 183 Airport 332 Nonmajor governmental Regional Sanitation District 143 Internal service 28 Nonmajor enterprise 53 212 Internal service 16,372 20,259 Nonmajor enterprise General 498 Internal service 2 Nonmajor governmental General 2,788 500 Nonriiajor governmental 550 Airport 2 Internal service General 26,436 Regional Sanitation District 1 Nonmajor governmental 9,171 Internal service 19,570 Airport 2,178 22z2.!..!._ Refuse 187 Regional Sanitation District 1,687 Airport General 53 Sanitation District Number One 1,500 Internal service 106 Nonmajor enterprise 1,075 159 Internal service 13,656 55,890 Regional Sanitation District General 1,072 Nonmajor governmental 76 Agency General 2,350 Nonmajor enterprise 1 Nonmajor governmental 225 Internal service 255 Airport 68 ····- -- 1,404 Refuse 3 Regional Sanitation District 58 Refuse General 8 Nonmajor enterprise 10 Nonmajor governmental 9 Internal service 47 Airport 1 2,761 Regional Sanitation District 4 Internal service 10 Total $ 104,128 -32

60 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Amounts due the General Fund are related to: 1) principal and interest due from Public Facilities Fixed Asset Financing Program (nonmajor governmental), 2) Sheriff security & Department of Environmental Review and Assessment services provided to the Airports, and 3) Reimbursement due from Property Liability Internal Service fund for the final quarter of the fiscal year ending June 30, 2003.

Amounts due the nonmajor governmental funds are a result of l) Current portion of Public Facilities Fixed Asset Financing Program contracts due from Office of Communications and Information Technology (OCIT) (internal service fund), Regional Corrmmnications (internal service fund), and General Services (internal service fund), and 2) transactions to repay the Public Facilities Fixed Asset Financing Program for year end purchases.

Amounts due Regional Sanitation District are a result of Amounts due from Public Works (internal service fund) for services provided.

Amounts due the internal service funds are a result of 1) Self-insurance funds owed costs of premiums for property insurance, workers' compensation claims, dental insurance costs and unemployment insurance from all funds, 2) General Services work requests for mailings, technical services, building design, and water quality work, 3) Services provided by Public Works-MIS unit to other internal service funds, 4) General Service facility management site work for other internal service fund departments, 5) County Transit (nonmajor enterprise) purchase of buses due Public Works, and 6) Public Works water quality labor rate reimbursement

Amounts due agency funds: 1) Countywide cost plan allocation, 2) Property tax allocation.

Advances To/From Other Funds Receivable Fund Payable Fund Amount Nonmajor governmental General $ 14,360 Nonmajor governmental 719 Refuse 2,264 Internal service 17,037 34,380

Regional Sanitation District Sanitation District Number One 6,000 Internal service 4,478 10,478

Sanitation District Number One Internal Service 8,289

Internal service Nonmajor governmental 33 Sanitation District Number One 2,603 Nonmajor enterprise 309 Internal service 673 3,618 Total $ 561765

··-~~ ~-~ ---·-·- -·- ~~·------...... , '-' Oil;..I ..L "i ...._ ..._ ....,..Iii. "'-'.J.. &.'--'i."-L JL..LT"JI.Jl.:.JJ. "'I .a'-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Amounts advanced from non..tnajor govern.mental fonds are related to the Fixed i\sset Financing Program which has financed $32,628 for major capital projects, including an upgrade of the financial and human resource systems (General Fund), capital projects for Refuse, and major bulk automobile purchases (internal service funds).

Advance from Economic Development fund (nonmajor governmental) to Accumulated Capital Outlay Capital Project Fund (nonmajor governmental) to remodel building at Mather $719.

The advance from Regional Sanitation District to County Sanitation District Number One of $6,000 was a loan secured by real property to be repaid upon sale of the property.

Regional Sanitation District also gave an advance to County Utility Billing (Public Works Internal Service Fund) for $4,478 for the utility billing system.

Sanitation District Number One advanced to General Services and Public Works (internal service) for $2,363 and $5,786, respectively, for prior year acquisition of North County Corporate Yard property that has been capitalized.

Public Works (internal service) made an advance to Water Quality, which represents the first year payment made of $1,952. In addition, the advance of $183 to General Services Internal Service Fund was for the scanning center.

Balance of internal service fund advances to relate to the Mather building loan from Public Works Internal Service Fund to General Services (internal service), that then collects from the other user divisions.

All other remaining balances resulted from the time lag between dates that 1) interfund goods and services were provided or reimbursable expenditures occur, 2) transactions are recorded in the accounting system, and 3) payments between funds.

62 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR fflE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Transfers From/ To Other Funds

Transfer From Transfer To Amount

General Nonmajorgovernmental $ 63,268 Transfer to cover debt service payments, economic development and community development programs.

Nonmajor governmental General 11,256 · Transfers for Transient Occupancy Tax and Teeter Property Tax

Nonmajor governmental Nonmajorgovernmental 5,584 Transfer to cover debt service payments and for library services

Sanitation District Number One Internal service 3,134 Capital expenses incurred in the Sanitation District Number One that were capitalized in the Public Works Internal Service Fund.

Total $ 83,242 - - - ..... ' ...... _ .... "'-'--'-.&."-" ..... '-LA.1...... JL....,..1.. 'II .... '-" NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTE 8 - LEASES Lease Obligations During the year ended June 30, 2003, the County of Sacramento entered into a capital lease agreement for facilities in the amount of $10,390

During the year ended June 30, 2002, the Library Authority entered into a capital lease for computer equipment in the amount of $82. The terms of the lease agreement provide for monthly payments of $2 until November 2004, at which time the lease will be paid in full. The lease agreement provides for an interest rate of 4.66 percent.

During the year ended June 30, 2001, the County of Sacramento entered into a capital lease agreement for facilities in the amount of $3,150 with an interest rate of 12.0 percent per annum or the maximum legal rate and semi-annual lease payments of $166 through December 2015.

During the year ended June 30, 2001, the Library Authority entered into a capital lease for computer equipment in the amount of $785. The terms of the lease agreement provide for monthly payments of $23 until September 2003, at which time the lease will be paid in full. The lease agreement provides for an interest rate of 6.16 percent.

As of June 30, 2003, the future minimum lease payments under capital leases are as follows: CapitiLLease _Agreements Libr~ry Year ending June 30 County Authority Totals 2004 $ 1,454 101 1,555 2005 1,482 10 1,492 2006 1,511 1,511 2007 1,540 1,540 2008 1,570 1,570 2009-2013 8,333 8,333 2014-2018 8,382 8,382 2019-2023 8,545 8,545 Total minimum lease payments 32,817 111 32,928 Less amount representing interest (19,616) (2) {19,618) Net Present value of minimum lease payments $ 13,201 109 13,310

the following is a schedule of capital assets under capital leases by major classes at June 30, 2003:

Governmental Activities Structures and hnprovements $ 13,540 Equipment 867 Less: Accumulated depreciation (672} Total $ 13,735

64 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMEN':l'S (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

The County also leases buildings and equipment under operating leases, some of which contain escalation clauses. Future minimum non-cancelable operating lease payments for governmental and proprietary fund types as of June 30, 2003, are as follows:

Operating Leases Commitment Year Ending June 30 Governmental Proprietary 2004 $ 25,985 2,751 2005 24,471 2,411 2006 22,464 2,088 2007 20,584 1,126 2008 20,409 685 2009-2013 94,793 910 2014-2018 75,371 2019-2003 241799 $ 308,876 . 9,971

Operating leases may be terminated without substantial penalty ifthe Board of Supervisors determines that funds are not available for appropriation in the County budget.

Total rental payments for operating leases recorded in the governmental funds, the enterprise funds, and the internal service funds for the year ended June 30, 2003, were $39,300, $1,405, and $6,942 respectively. '-"''-' '111,,..1..&. ~ .& ..a. "-I.a t.J..L Jt,..'-"..a..'-C'll..J..Y..A..JL!I.J.. "II .a.'-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Lease Income and Receivabies The County Department of Airports (Department) derives a substantial portion of its revenue from charges to air carriers and concessionaires. Substantially all of the capital assets of the Airport Enterprise fund are held by the Department for the purpose of rental or related use. The Department, acting as a lessor, leases land, buildings, and tenninal space to air carriers and concessionaires on a fixed-fee as well as a contingent basis. All leases of the Department are treated as operating leases for accounting purposes. Most of the leases provide for an annual review and redetennination of the rental amounts.

The table below is a schedule of future minimum rentals receivable by the Department on non-cancelable operating leases as of June 30, 2003:

Future Minimum Year Ending June 30 Rents 2004 $ 13,078 2005 11,912 2006 10,680 2007 9,996 2008 9,922 2009-2013 39,028 2014-2018 10,570 2019-2023 1,351 2024-2028 609 2029-2033 475 Total future minimum rentals receivable $ 107,621

The Department received $3,440 in fiscal year 2002-03 for contingent rental payments in excess of stated minimums.

66 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressedin thousands)

NOTE 9-LONG-TERM OBLIGATIONS

The following is a summazy oflong-term obligation transactions for the year ended June 30, 2003: Amounts Balance Balance Due Within July 1, 2002 Additions Retirements June 30, 2003 One Year Governmental activities: . Compensated absences $ 74,635 87,420 (78,748) 83,307 3,495 Certificates of participation 369,315 95,170 (54,395) 410,090 7,625 Teeter notes 17,239 14,924 (17,189) 14,974 481 Pension obligation bonds 515,125 (10,425) 504,700 13,060 Other long-term debt 3,134 1,142 (1,841) 2,435 1,422 Capital lease obligations 3,550 10,390 (630) 13,310 l,375 Deferred amounts For issuance premiums 61 4,130 (44) 4,147 266 Total governmental activities - long-term obligations $ 983,059 213,176 (163,272) 1,032,963 27,724

Business-type activities: Compensated absences $ 3,347 261 3,608 3,559 General obligation refunding bonds 21,945 (4,355) 17,590 4,550 Revenue bonds 816,955 142,615 (30,320) 929,250 14,525 PFC and subordinate revenue bonds 55,625 (1,155) 54,470 1,210 Certificates of participation 41,360 (2,030) 39,330 2,215 Reimbursement agreements 11,132 1,564 (4,128) 8,568 393 Usage fee - City 3,302 (379) 2,923 407 Judgement payable 1,000 (1,000) Deferred amounts For issuance premiums 415 4,724 (166) 4,973 88 For issuance discounts (8,804) 321 359 (8,124) (116) On refunding (2,273) (1,079) 199 (3,153) 412 Total business-type activities - long-term obligations ____$__ 944,004 148,406 __H2,975) 1,049,435 27_.243 NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Internal service fhnds predominately serve die governmental funds. Accordingly, long-term. liabilities for them are included as part of the above totals for governmental activities. At year-end, $16,866 of internal services funds compensated absences are included in the above amounts. Also for the governmental activities, claims and judgments (if applicable) and compensated absences are liquidated by the general fund.

The government-wide statement of net assets includes $19,387 of the long-term liabilities due within one year for business-type activities in liabilities payable from restricted assets. Of this amount, $4,845 represents current portion oflong-term debt obligations.

Individual issues of bonds, notes and certificates of participation outstanding at June 30, 2003 are as follows:

Governmental Activities:

Certificates of parti.r.;ipation: County of Sacramento Refunding Certificates of Participation, Main Jail Detention Facility, issued April 24, 2003, to advance refund $47,180 of outstanding debt for 1993 Refunding Certificates of Participation (Sacramento Main Detention Facility). Annual payments are due June 1, 2004, through the year 2015, escalating from $1,635 to $5,315, with interest ranging from 2.0 percent to 5.0 percent.

The government issued $43, 790 of Certificates of Participation refunding bonds to provide resources ($45,308) to purchase U.S. Government State and Local Government Series securities along with $5,584 from balances held in Debt Service, placed in an irrevocable trust forthe purpose of generating resources to provide for all future debt service payments of$47,180 of 1993 Refunding Certificates of Participation. As a result, the refunded certificates are considered to be defeased and the liability has been removed from the governmental activities column of the statement of net assets. This advance refunding was undertaken to reduce total debt service payments over the next 20 years by $8,301 and resulted in an economic gain of $2,474. $43,790

County of Sacramento 2003 Certificates of Participation (2003 Public Facilities Projects-ADA Improvements) issued April 24, 2003. Principal payments are due June 1, 2005, through the year 2034, escalating from $280 to $829, with interest rates ranging from 2.0 percent to 5. 0 percent. 15,230

County of Sacramento 2003 Certificates of Participation (Juvenile Courthouse Project) issued June 19, 2003. Principal payments are due December 1, 2004, through the year 2034, escalating from $680 to $2,160, with interest rates ranging from 2.0 percent to 5.0 percent. 36,150

County of Sacramento, 1999 Refunding Certificate of Participation (1991 Refunding Certificates of Participation, Series B for Cheny Island Golf Course Project) issued December 14, 1999, to advance refund and defease $8,900 of outstanding debt for County of Sacramento 1991 Refunding Certificates of Participation, Series B for Cherry Island Golf Course Project and finance certain improvements to golf courses owned by the County. Principal payments are due July 15, 2003, through the year 2019, escalating from $355 to $730, with interest rates ranging from 4.1 percent to 5.75 percent. A lump-sum payment of $3,830 is due July 15, 2018. 8,155

68 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

County of Sacramento Certificates of Participation (Administration Center and Courthouse Project) issued October 4, 1990, for the implementation of the County's fixed asset financing program. This program provides long-tenn financing to County departments for the acquisition and construction of capital assets. Principal payments are due June 1, 2004, through the year 2020, escalating from $2,830 to $8,355, with a variable interest rate that averaged 1.5 percent in fiscal year 2002-03 and was 1.2 percent at June 30, 2003. The certificates are collateralized by the County Administration and Main Jail Detention Facility, and secured by a letter of credit in the amount of $110,817. See Note 10 - Derivatives - Interest Rate Swap. 87,305

County of Sacramento 1997 Refunding Certificates of Participation (1994 Public Facilities Project- Coroner/Crime Lab and Data Center) issued January 1, 1998, to defease $89,500 of outstanding debt for the County of Sacramento Certificates of Participation (1994 Public Facilities Project). Principal payments are due October 1, 2005, through the year 2023, escalating from $2,180 to $6,170, with interest rates ranging from 4.3 percentto 5.0 percent Lump-sum payments of$17,495 and $50,295 are due October 1, 2017, and October 1, 2027, respectively. 88,360

County of Sacramento Certificates of Participation (Coroner/Crime Lab and Data Center) issued October 1, 1994, for the construction of a Coroner/Crime Lab building and the construction of a multi-purpose building that houses the County's Data Center and other departments. Principal payments are due October 1, 2003, through the year 2024, escalating from $1,820 to $6,680, with interest rates ranging from 5.3 percent to 6.4 percent. 81,700

County of Sacramento Certificates of Participation (1997 Public Facilities Project) issued February I, 1997, for the acquisition and construction of a dormitory jail and other improvements at the Rio Cosumnes Correctional Center, and defeasance of $36,355 of outstanding debt: $2,265 for California Counties Lease Financing Program Certificates of Participation and $34,090 of outstanding debt for County of Sacramento Certificates of Participation (1990 Public Facilities Project). Principal payments are due February 1 of each year through 2019, escalating from $1,485 to $4,070 with interest ranging from 3.7 percent to 5.7 percent A lump-sum payment of $13,420 is due February I, 2019. 43,705

County of Sacramento Certificates of Participation (California Special Districts Finance Program) issued December l, 2001, for the acquisition of a building and to finance certain clean air programs of the Sacramento Metropolitan Air Quality Management District. Principal payments are due December I, 2002, through the year 2026, escalating from $140 to $400, with interest rates ranging from 1.5 percent to 5.1 percent. 5 695 Total certificates of participation 410,090 Add: deferred amount for issuance premium 4 147 $ 414 237 NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Teeter notes: County of Sacramento, 199 8 Teeter Loan Agreement Note, dated August 25, 1998, to purchase the delinquent property taxes receivable as of June 30, 1998. Annual payments of principal and interest are due August 1 of each year, and ending in 2003. The amount of principal each year shall be the full amount of the County's share of the principal of delinquent tax collections received in the prior year. The unpaid principal shall be due and payable on August 1, 2003. Interest payments will be at a variable rate that averaged 1.86 percent in fiscal year 2002-03 and was 1.3 percent at June 30, 2003. 481

County of Sacramento, 1999 Teeter Loan Agreement Note, dated September 15, 1999, to purchase the delinquent secured property taxes receivable as of June 30, 1999. Annual payments of principal and interest are due August 1 of each year and ending in 2004. The amount of principal each year shall be the full amount of the County's share of the principal of delinquent tax collections received in the prior year. The unpaid principal shall be due and payable on August 1, 2004. Interest payments will be at a variable rate that averaged 2.2 percent in fiscal year 2002-03 and was 1.6 percent at June 30, 2003. 881

County of Sacramento, 2000 Teeter Loan Agreement Note, dated September 1, 2000, to purchase the delinquent secured property taxes receivable as of June 30, 2000. Annual payments of principal and interest are due August 1 of each year and ending in 2005. The amount of principal each year shall be the full amount of the County's share of the principal of delinquent tax collections received in the prior year. The unpaid principal shall be due and payable on August 1, 2005. Interest payments will be at a variable rate that averaged 2.5 percent in fiscal year 2002-03 and was 2.1 percent at June 30, 2003. 1,911

County of Sacramento, 2001 Teeter Loan Agreement Note, dated August 27, 2001, to purchase the delinquent property taxes receivable as of June 30, 2001. Annual payments of principal and interest are due August 1 of each year and ending in 2006. The amount of principal each year shall be the full amount of the County's share of the principal of delinquent tax collections received in the prior year. The unpaid principal shall be due and payable on August 1, 2006. Interest payments will be at a variable rate that averaged 2.9 percent in fiscal year 2002-03 and was 2.5 percent at June 30, 2003. 4,390

County of Sacramento, 2002 Teeter Loan Agreement Note, dated September 20, 2002, to purchase the delinquent property taxes receivable as of June 30, 2002. Annual payments of principal and interest are due August 1 of each year and ending in 2007. The amount of principal each year shall be the full amount of the County's share of the principal of delinquent tax collections received in the prior year. The unpaid principal shall be due and payable on August 1, 2007. Interest payments will be at a variable rate that averaged 2.9 percent in fiscal year 2002-03 and was 2.9 percent at June 30~ 2003. 7,311 Total Teeternotes $ 14,974

70 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Pension obligation bonds: County of Sacramento Pension Obligation Bonds issued July 5, 1995, $538,060 of Series 1995 Taxable Pension Funding Bonds to fund the accrued actuarial liability of the County to the Retirement System. The issue is composed of $404,060 of Series 1995A Fixed Rate Bonds, $67,000 of Series 19958 Variable Rate Bonds, and $67,000 of Series 1995C Variable Rate Bonds. Principal payments on the fixed rate bonds are due commencing August 15, 1998, through August 15, 2021, escalating from $13,060 to $78,879. Principal payments on the variable rate bonds are due commencing July 1, 2019, through July 1, 2022, with equal payments of $33,500. Rates on the fixed rate bonds range from 6.2 percent to 7 .68 percent. The variable rate bonds bad an initial rate of 6.1 percent through July 1, 1998. Thereafter, the variable rate will be determined by the Remarketing Agent as explained below.

Interest on the Series 1995AFixedRateBondswill be payable on February 15 and August 15 of each year commencing August 15, 1995. The Series 19958 Variable Rate Bonds and the Series 1995C Variable Rate Bonds will initially be issued in the Multi.annual Mode (the interest rate will be determined by the Remarketing Agent to remain in effect for a rate period of one year or any multiple of one year) with the initial rate period ending on July 1, 1998, and interest payable semiannually on each January 1 and July 1 during the rate period commencing on January 1, 1996. For periods after July 1, 1998, the County has executed an agreement :fixing the variable interest rate at 5.935 percent. See Note 10- Derivatives - Interest Rate Swap. Total pension obligation bonds $ 504 700

Other long-term debt: California Health Facilities Financing Program-An agreement entered into on March 6, 1989, to finance the construction of a new mental health center with a variable interest rate that averaged 3.9% for fiscal year 2002-03. A final principal payment of $205 is due in fiscal year 2003-04. 205

Sacramento County Water Agency reimbursement agreements with interest at net County Treasury Pool Rate to be paid on unpaid balance after County acceptance of project completion, unless paid within 60 days of acceptance and maturities ranging from 30 days to 5 years to be repaid from drainage permit revenues in the Water Agencies Special Revenue Fund. 1, 142

Sacramento County Water Agency Zone 11 - State Revolving Fund Loan for Detention Basins for Stoim Water Runoff Project. As of June 30, 2003, $1,606 was borrowed against a maximum loan amount of$7,461 that was to be expended by February 1, 1999, with repayment in 20 annual installments beginning one year after the first disbursement. In June 2002, Zone 11 made a principal payment of $70. Interest of 3 .4 percent accrues as of the date of each disbursement. 1,088 Total other long-term debt $ 2,435 NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Long-term debt obligation maturities of governmental activities are summarized beiow. The amounts representing interest for variable rate obligations have been based on the debt's interest rate at June 30, 2003.

Certificates of Participation Teeter Plan Year ending June 30 Principal Interest Principal Interest .. 2004. $ 7,625 17,652 481 415 2005 10,660 17 ,280 881 406 2006 15,015 16,884 1,911 387 2007 15,785 16,330 4,390 339 2008 16,485 15,721 7,311 212 2009 - 2013 97,300 67,988 2014 - 2018 101,540 46,146 · 2019 - 2023 76,300 26,825 2024 - 2028 53,118 10,113 2029- 2033 13,273 3,042 2034- 2038 22989 338 $ 410,090 238,319 14,974 1,759

Pension Obligation Other Year ending June 30 Principal Interest Princieal Interest 2004 $ 13,060 29,475 1,422 40 2005 15,975 28,510 78 34 2006 19,185 27,336 80 32 2007 22,710 25,943 83 29 2008 26,600 24,276 86 26 2009 - 2013 79,906 211,498 474 86 2014 - 2018 57,342 306,755 212 11 2019-2023 269,922 85,985 $ 504,700 739,778 22435 258

72 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 ( amounts expressed in thousands)

Swap Payments and Associated Debt: Using the rates as of June 3 0, 2003, debt service requirements of the variable rate debt and the net swap payments, assuming current interest rates remain the same for their term, were as follows. As rates vary, variable-rate bond interest payments and net swap payments will vary.

Pension Obligation Bonds Series B & C Variable -Rate Interest Rate Year endins; June 30 PrinciEal Interest SwaEs, Net Total 2004 $ 1,380 7,330 8,710 2005 1,380 7,330 8,710 2006 1,380 7,330 8,710 2007 1,380 7,330 8,710 2008 1,380 7,330 8,710 2009-2013 6,901 36,649 43,550 2014 - 2018 6,901 36,649 43,550 2019-2023 134,000 6,211 32,984 173,195 $ 134,000 26,2_1] 1_42,931 303,844

1990 COP Variable -Rate Bonds Interest Rate Year enclins; June 30 PrinciEal Interest SwaES, Net Total 2004 $ 2,830 845 2,985 6,660 2005 3,030 814 2,878 6,723 2006 3,240 782 2,764 6,786 2007 3,470 747 2,641 6,858 2008 3,710 710 2,510 6,930 2009-2013 22,835 2,897 10,238 35,970 2014 -2018 32,025 1,492 5,273 38,790 2019-2020 16,165 84 295 16,544 $ 87,305 8,371 29,585 125,261 - -.._, ...... ,.&. ~ AL ..&...... _ ,._,.,,., ..._...._...... _ .A...i.. T..iL.L..,,.&. '1 .a. -...... ,. NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Business-type Activities:

General obligation refunding bonds: 1998 General Obligation Refunding Bonds (Regional Sanitation District), issued March 1, 1998 in the amount of$35,765 with an average interest rate of 4.6 percent to advance refund $12,475 of the District's outstanding 1974 Series A Bonds and $23,195 of the outstanding 1974 Series B Bonds. The District's debt service on the 1998 General Obligation Refunding Bonds is funded through the levy of a uniform ad valorem tax upon all tax.al:,le pr()perty within the District. The bonds are general obligations of the District due serially through 2006. $ 17 ,590 Less: Deferred amount on refunding ( 62) Add: Deferred amount for issuance premium 327 $ 17 855

Revenue bonds: Series 1992 Airport System Revenue Bonds - Issued December 9, 1992, with interest rates ranging from 5.6 percent to 6.0 percent, payable January 1 and July L Annual principal payments ranging from $370 to $1,380 are due July 1, 2003, through 2024. The bonds are secured by the pledge of net revenues derived by the Department of Airports from the operations of the airport system. The bonds are subject to call and redemption at the Airport's option prior to their respective maturity dates as a whole on any date or in part on any interest payment date on or after July 1, 2002, at a price equal to the principal amount plus a premium ranging up to 1 percent. In September 1998, $19,070 was refunded and in August 2002 $10,220 was refunded. The series 1992 bonds are issued in parity with the outstanding principal balance of the Series 1989 bonds. The bonds are secured by the pledge of net revenues of the airport system. 6,290

Series 1996 A&B Airport System Revenue Bonds - Issued July 2, 1996, with interest rates ranging from 5.1 percent to 6.0 percent, payable January 1 and July l. Annual principal payments ranging from $2,020 to $6,830 are due July 1, 2003, through 2024. The bonds are secured by the pledge ofnet revenues derived by the Department of Airports from the operations of the airport system. The bonds are subject to call and redemption at the Airport's option prior to their respective maturity dates as a whole on any date or in part on any interest payment date on or after July 1, 2006, at a price equal to the principal amount plus a premium ranging up to 2 percent. 88,430

On September 3, 1998, the County issued $42,510 of Airport System Revenue Refunding Bonds, Series 1998A, and $45,620 of Airport System PFC and Suborclinated Revenue Refunding Bonds, Series 19988 (Series 1998 Bonds). The Series 1998 Bonds were issued to advance refund a portion of the principal amount of Series 1989 Senior Bonds, Series 1992 Senior Bonds, Series 1996 Senior Bonds, and Series 1996 PFC Bonds. The Airport System Revenue Refunding Bonds are secured by the pledge of future net revenues of the Airport System. The PFC and Subordinated Revenue Refunding Bonds are secured by the net proceeds of a Passenger Facility Charge approved by the Federal Aviation Administration in addition to net revenues of the Airport System subordinate. and junior to the lien of the outstanding senior revenue bonds (including the Series 1998 Senior Revenue Bonds) and any additional senior revenue bonds which may be issued in the future. The interest rate on the bonds range from 4.0 to 5.0 percent and the final maturity is on July 1, 2026. 41,315

74 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 ( amounts expressed in thousands)

2001 Refunding Series Revenue Bonds (Sacramento County Sanitation District Financing Authority), with interest rates ranging from 4.0 percent to 5.5 percent, due serially commencing in 2006 through 2027, issued to i) provide for the payment ofinterest on these bonds until the Crossover Date of December 1, 2005 and ii) refund a portion of the 2000 Series A Revenue Bonds on the Crossover Date. 124,010

2000 Series A Revenue Bonds (Sacramento County Sanitation District Financing Authority), with interest rates ranging from 4.6 percent to 6.0 percent, due serially through 2020, issued to i) refund the outstanding principal of the 1993 and 1995 Revenue Bonds and ii) to finance the cost of acquisition and construction ofnew facilities, secured by a pledge and first lien on net revenues ofthe District, subject to optional redemption commencing in 2005 and 2010. 374,330

2000 Series B Taxable Revenue Bonds (Sacramento County Sanitation District Financing Authority}, with interest rates ranging from 7 .5 percent to 7;6 percent due serially through 2003, issued to i) refund the outstanding principal of the 1993 and 1995 Revenue Bonds and ii) to finance the cost of acquisition and construction of new facilities, secured by a pledge and first lien on net revenues of the District. 1,090

2000 Series C Subordinate Lien Revenue Bonds (Sacramento County Sanitation District Financing Authority), with a variable interest rate determined weekly, due serially commencing in 2027 to 2030, issued to finance the cost of acquisition and construction of new facilities, secured by a pledge on net revenues ofthe District subordinate to the 2000 Series A and Series B Revenue Bonds, subject to optional redemption provisions. See Note IO - Derivatives - Interest Rate Swap. 100,000

On July 26, 2002, the County issued $74,015 of Airport System Revenue Bonds, Series 2002A. The Series 2002A Revenue Bonds were issued to finance primarily a multi-level parking garage of Sacramento International Arrport. The bonds are payable from, and secured by, future Net Revenues of the Arrport. The interest rate on the bonds range from 3.0-5.0 percent and the final maturity is on July 1, 2022.

The advance refunding resulted in a $1,079 difference between the reacquisition price and the net carrying amount of the old debt. The difference will be amortized over the life of the refunded debt in accordance with GASB 23. The transaction resulted in future cash flow savings of $2, 145 through July 2024 and an economic gain of $2,074. The refunded bonds are considered to be defeased and the liability has been removed from the statement of net assets. 74,015

On July 26, 2002, the C~unty issued $17 ,805 of Airport System Revenue Refunding Bonds, Series 2002B. The Series 2002B Revenue Refunding Bonds were issued to refund all of the outstanding Series 1989 Revenue Bonds and a portion of the outstanding series 1992A Revenue Bonds. The Bonds are payable from, and secured by, future Net Revenues of the Airport. The interest rate on the bonds range from 3.0- 5.0 percent and the final maturity is on July 1, 2022. 17,805

On June 22, 2000, Sacramento County Sanitation District Financing Authority issued Revenue Bonds in the amount of $52,000, with interest rates ranging from 4.1 percent to 5.5 percent due serially through December 1, 2020, with term bonds of $27 ,335 due in 2030, net of unamortized discount of $559. 51,170 NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 ( amounts expressed in thousands)

On June 12, 2003, Sacramento County Water Financing Authority issued $23,850 of 2003 serial 2003 series and $26,945 of term series 2003 Revenue bonds. The interest rates on the serial bonds range from 2.0 percent to 5.0 percent, the term series bonds interest rate are 4.75 and 5.0 percent. 50,795 Total revenue bonds 929 ,250 Less: deferred amount for issuance discounts (6,526) Add: deferred amount for issuance premiums 4,646 Add: deferred amount on refunding 1,087 $ 928.457

PFC and subordinate revenue bonds: Series 1996 C&D PFC and Subordinated Airport System Revenue Bonds -Issued July 2, 1996, with interest rates ranging from 5.1 percent to 5.9 percent, payable January 1 and July 1. Annual principal payments ranging from $605 to $1,500 are due July 1, 2003, through 2010. The bonds are secured by the pledge of net revenues derived by the Department of Airports from the operations of the airport system. The bonds are subject to call and redemption at the Airport's option prior to their respective maturity dates as a whole on any date or in part on any interest payment date on or after July l, 2006, at a price equal to the principal amount plus a premium ranging up to 2 percent 9,615

On September 3, 1998, the County issued $42,510 of Airport System Revenue Refunding Bonds, Series 1998A, and $45,620 of Airport System PFC and Subordinated Revenue Refunding Bonds, Series 19988 (Series 1998 Bonds). The Series 1998 Bonds were issued to advance refund a portion of the principal amount of Series 1989 Senior Bonds, Series 1992 Senior Bonds, Series 1996 Senior Bonds, and Series 1996 PFC Bonds. The Airport System Revenue Refunding Bonds are secured by the pledge of future net revenues of the Airport System. The PFC and Subordinated Revenue Refunding Bonds are secured by the net proceeds of a Passenger Facility Charge approved by the Federal Aviation Administration in addition to net revenues of the Airport System subordinate and junior to the lien of the outstanding senior revenue bonds (including the Series 1998 Senior Revenue Bonds) and any additional senior revenue bonds which may be issued in the future. The interest rate on the bonds range from 4.0 to 5.0 percent and the final maturity is on July 1, 2026. 44.855 Total PFC and subordinate revenue bonds 54,470 Less: deferred amounts for issuance discounts (1,017) Less: deferred amount on refunding (3,861) $ 49 592

76 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Certificates of Participation: County of Sacramento Certificates of Participation, 1997 Public Facilities Project (Solid Waste Facilities)-Issued January 16, 1997, for the acquisition and construction of certain improvements to the County's solid waste collection, transfer, disposal, and processing system. Principal payments are due December 1 of each year through 2010, escalating from$850 to $1,735, with interest rates ranging from4.7 percent to 5.3 percent A lump-sum payment of $9,165 is due December 1, 2016. 18,138

County of Sacramento Certificates of Participation, 1998 Public Facilities Project (Gas to Energy Facilities)- Issued September 1, 1998, for the acquisition and installation of three stationary internal combustion engines used for the production of electrical energy as well as ancillary buildings and equipment. Principal payments are due December 1 of each year through 2014, escalating from $640 to $1,065, with interest rates ranging from 4;0 percent to 4.5 percent. 9,797

County of Sacramento Certificates of Participation, 2002 Public Facilities Project (Solid Waste Facilities)- Issued December 1, 2002, for the acquisition of Kiefer Landfill real property. Principal payments are due December 1 of each year through 2012, escalating from $85 to $400, with interest rates ranging from 3.0 percent to 5.0 percent. A lump-sum payment of $2,975 is due December l, 2021. 5,090

County of Sacramento, 1999 Reftmding Certificate of Participation (1991 Refunding Certificates of Participation, Series A for Parking Enterprise) issued December 14, 1999, to advance refimd and defease $7,545 of outstanding debt for County of Sacramento 1991 Refunding Certificates of Participation, Series A for Parking Enterprise. Principal payments are due July 15, 2002, through the year 2012, escalating from $455 to $695, with interest rates ranging from 4.0 percentto 5.1 percent The County advance refunded Series 1991 Refimding Certificates of Participation, Series A for Parking Enterprise. 6,305 Total certificates of participation 39,330 Less: deferred amounts for issuance discount (581) Less: deferred amounts on refunding (317) $ 38 432

Reimbursement agreements: Under the tenns of a cost sharing agreement with the City of Sacramento, a contributing agency of the Regional Sanitation District, the District agreed to reimburse the City for certain improvements made to the City's sewer delivery network. During 2002-03, the District paid a lump-sum amount of $1,505 to the City and incurred a long-term obligation of $9,094 under this agreement These amounts were capitalized· in deferred charges and will be amortized over the useful life of the underlying improvement. At June 30, 2003, deferred charges related to this asset were $10,334, net of accumulated amortization of $265. The long-term obligation will be repaid over a twenty-year period ending in fiscal year 2020-21 Total reimbursement agreements$ 8 568

Usage fee - City: The Water Agency has agreed to pay the City of Sacramento for use of Sacramento River water treatment plant facilities for diverting, treating and, conveying surface water. The long-term obligation will be repaid over a ten-year period ending fiscal year 2008-09. $ 2,923 '-"'-'"-'J. ~ ..a ..a '-1..a' U.L""1'-'.a'-C1.Lf..l....&:./l. 'II ..A. '-.I NOTES TO BASIC FINANCIAL STATEMENTS ( continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Long-term debt obligation maturities of business-type activities are summarized below. The amounts representing interest forviui.able rate obligations have been based on the debt's interest rate at June 30, 2003.

PFC and Subordinate COP Revenue Bonds Revenue Bonds Year ending June 30 Principal Interest Principal Interest Princi2al Interest 2004 $ 2,215 1,948 14,525 47,923 1,210 2,737 2005 2,315 1,840 17,680 47, 703 1,275 2,676 2.006 2,430 1,726 18,480 46,898 1,340 2,612 .,2007 2,550 1,603 19,530 46,039 . 1,410 2,542 2008 2,685 1,471 20,445 45,124 1,480 2,468 2009 - 2013 15,650 5,055 118,565 209,266 8,670 11,062 2014 - 2018 10,000 1,356 148,960 173,853 11,025 8,713 2019 - 2023 1,485 153 185,420 127,905 14,060 5,677 2024- 2028 259,485 63,992 14,000 1,792 2029 - 2032 123,080 12,372 2033 - 2038 31080 154 $ 391330 151152 929,250_ -- 8llz229 54i70 401279

Reimbursement Agreements Useage fee - City General Obligation Year ending June 30 Princip_al Interest Principal Interest Princip_al Interest 2004 $ 393 188 407 191 4,550 704 2005 402 180 436 161 4,785 471 2006 410 171 467 130 5,045 248 2007 420 162 501 97 3,210 72 2008 429 153 .537 61 2009 - 2013 2,290 618 575 22 2014 - 2018 2,553 350 2019 - 2023 1,671 74 $ 8,568 1,896 21923 662 17,590 _ 1,495

78 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Swap Payments and Associated Debt: Using the rates as of June 30, 2003, debt service requirements of the variable rate debt and the net swap payments, assuming current interest rates remain the same for their term, were as follows. As rates vary, variable-rate bond interest payments and net swap payments will vary.

2000 Series C Subordinate Lien Revenue Bonds Interest Rate Year ending June 30 · Princi)?al Interest Swaesz Net Total 2004 $ 950 3,077 4,027 2005 950 3,077 4,027 2006 950 3,077 4,027 2007 950 3,077 4,027 2008 950 3,077 4,027 2009-2013 4,750 15,385 20,135 2014-2018 4,750 15,385 20,135 2019 - 2023 4,750 15,385 20,135 2024-2028 21,100 4,550 14,736 40,385

2029- 2031 78 900 772 21502 82,174 $ 100,000 24,322 78,778 203,099

Component unit activities:

Long-term obligations: Series A Bonds - Tobacco Securitization Authority of Northern California, the first Series A Tenn Bonds for $25,410 were issued at 98% of par with an interest rate of 5.25%, fmal early (Turbo) redemption date on June 1, 2015, with a due date June 1, 2031. The second Series A Term Bond for $96,205 issued at 97.5% of par with an interest rate of 5.375%, final Turbo redemption on June l, 2021, with a due date of June l, 2041. $ 121,615

Series 2001B Bonds -Tobacco Securitization Authority of Northern California, including $16,585 in serial bonds, issued with prices from 101.22 to 99.41%, interest rates ranging from 3% to 4.8% with maturities that commence June l, 2003 through June l, 2014. The second Series B Bonds include two Series B Term Bonds. The first was for $61,420 issued at 99.01%, with an interest rate of 4.375%, with a final · Turbo redemption date of June 1, 2007, and due on June l, 2021. The Series B Term Bonds were issued for $36,260 at 98%, an interest rate of 5.0%, final includeredetription date of June l, 2013, due date of June 1, 2028. A bond discount of$3,604 was recorded net of proceeds; Accumulated amortization of the bond discount was $165 at June 30, 2003. 63.585 185,200 Bond discount (3,439) Total$ 181.761 NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Long-term debt obligation maturities of component unit activities are summa..-rized below.

Tobacco Settlement Debt Year ending June 3 0 Principal Interest 2004 $ 810 9,504 2005 870 9,478 2006 945 9,443 2007 910 9,407 2008 1,660 9,372 2009 - 2013 8,665 45,779 2014-2018 1,815 44,226 2019 - 2023 11,650 43,119 2024-2028 36,260 41,590 2029 -2033 25,410 . 29,857 2034 - 2038 25,855 2039 - 2041 961205 15i513 $ 185,200 293)43

The following summarizes the component unit long-term debt obligation activity during the year:

Balance Balance Due Within Jutx 1, 2002 Additions Retirements June 30, 2003 One Year Bonds Payable $ 191,555 6,355 185,200 810 Less discount p,5292 {90} {3,439} $ 188,026 -·· -··- 6,265 181,761 810

, 80 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS ( continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

The various debt indentures contain significant limitations and restrictions on annual debt service requirements, maintenance of and flow of monies through various restricted accounts, and minimum amounts to be maintained in various sinking funds. The County was in compliance with all such significant financial limitations and restrictions for fiscal year 2002-03.

Maturities for capital lease obligations are disclosed in Note 8. Debt service requirements for compensated absences have not been disclosed, as this information cannot be predicted. .

At June 30, 2003, the County's debt limit for general obligation bonds and legal debt margin was $815,359.

NOTE JO-DERIVATIVES-INTEREST RATE SWAP 1990 Certificates ofParticipation (COP) Objective of the interest rate swap: As a means to stabilize its variable rate borrowing costs during a historically low fixed-rate interest environment, the County entered into an interest rate swap in connection with its $105, 750, 1990 Certificates of Participation. The intention of the swap was to effectively change the County's variable interest rate on the certificates to a synthetic fixed rate of 4.534%.

Terms: The certificates and the related swap agreement mature on June 1, 2020, and the swap's original notionalamount of $89,950 matched the $89,950 variable-rate certificates. The swap's current notional amount is $87,305. During January l, 2007 through January 1, 2020, the counterparty has the option of ending the swap arrangement and no payments will be made to either party on the fixed and variable rate payment dates, nor will there be a termination payment. Ifthe counterparty exercises this option, it will not constitute an early termination. The swap was entered into on October 9, 2002 with an effective date of January 2, 2003. Starting in fiscal year 2003-04, the notional value of the swap and the principal amount of the associated debt began to decline. Under the swap, the County pays the counterparty a fixed payment of 4.534% and receives a variable payment computed as 67% of the 1-month London Interbank Offered Rate (LIBOR). The certificates' variable rate payments are based on the Weekly Rate provided by Lehman Brothers, the remarketing agent.

Fair value: The swap had a negative fair value of$l 7,435 at June 30, 2003. The fair value was estimated using the zero- method. This method calculates the future net settlement payments required by the swap, assuming that the current forward rates implied by the correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. Because the payments on the County's variable-rate certificates adjust to changing interest rates, the certificates do not have a corresponding fair value increase.

Credit risk: As of June 3 0, 2003, the County was not exposed to credit risk resulting from a failure of the counterparty to perfonn because the swap had a negative fair value. However, should interest rates change and the fair value of the swap becomes positive, the County would be exposed to the credit risk of the counterparty in the amount of the derivative's fair value. The swap counterparty was rated AA by Fitch Ratings, AA- by Standard & Poor's and Aa 1 by Moody's Investors Services as of June 30, 2003. - - ..... J. ~ ...... ,, .... t,J,£ --"-"'..&.'-L a...J..".&--..:.J.i.., .L '-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Basis risk The swap exposes the County to basis risk. The effect of the difference in ba&i& behveen 67% of 1-Month LIBOR and the \Veekly Rate is indicated by the difference between the intended synthetic rate (4534%) and the synthetic rate (4.650%) as ofJune 30, 2003. As a result of the actual synthetic rate being greater than the synthetic rate by O.116%, the County is incurring additional cost and thus the negative fair value of the agreement has increased to include the additional basis points cost. As of June 30, 2003, the Weekly Rate was 1.000%, whereas 67% of 1-Month LIBOR was .884%.

Tennination risk: The County or the counterparty may terminate the swap if the other party fails to perform under the terms of the contract. If the swap is tenninated, the variable-rate certificates would no longer carry a synthetic interest rate. Ifthe swap is tenninated, other than by the counterparty exercising its option under the agreement, and at the time of tennination, the swap has a negative fair value, the County would be liable to the counterparty for a payment·equal to the swap's fair value.

One-time premium: As part of the swap agreement, the County received a one-time premium payment equal to the negative value of the swap agreement on January 2, 2003, totaling $11,3 00 from the counterparty. The County has recorded this amount in the County's Statement of Net Assets as deferred revenue to be amortized over the term of the agreement. At June 30, 2003, the unamortized premium totaled $10,982.

Pension Obligation Bonds Objective of the interest rate swap: As a means to stabilize its variable rate borrowing costs, the County entered into an interest rate swap in connection with its $134,000 County of Sacramento Taxable Pension Funding Bonds, Series 1995 Series Band C Variable Rate Bonds. The intention of the swap was to effectively change the County's variable interest rate on the bonds to a synthetic fixed rate of 5 .935%.

Terms: The bonds and the related swap agreement mature on July 1, 2022, and the swap's original notional amount of$134 million matched the $134 million variable-rate bonds. The swap originated on July 1, 1998 with a tennination date of July 1, 2002, and the option for the counterparty to extend the agreement at the same original synthetic fixed rate of 5.935%.

On April 5, 2000, the swap arrangement with the original counterparty was transferred to another counterparty, who also served as the remarketing agent for the variable rate bonds, with a new option for the counterparty to extend the term from June 30, 2002 to June 30, 2009. On July 1, 2002, the counterparty executed its option to extend to June 30, 2009 with the same original synthetic fixed rate of 5.935%.

On June 18, 2003, effective June 23, 2003, the County sold the counterparty an option to terminate the swap on any June 30 or December 30 from June 30, 2009 to December 30, 2014. The County received a one-time premium of $8, 100 for the option. If the counterparty exercises this option, it will not constitute an early tennination.

Starting in fiscal year 2019-20, the notional value of the swap and the principal amount of the associated debt begin to decline. Under the swap, the County pays the counterparty a fixed payment of 5.935% and receives a variable payment equal to the rate of interest (Weekly Rate) determined by the counterparty. The bonds' variable rate payments are also based on the Weekly Rate provided by the remarketing agent.

Fair value: The swap had a negative fair value of $35,520 at June 30, 2003. The fair value was estimated using the zero-coupon method. This method calculates the future net settlement payments required by the swap, 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

82 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands) settlement on the swap. Because the payments on the County's variable-rate bonds adjust to changing interest rates, the bonds do not have a corresponding fair value increase.

Credit risk: As of June 30, 2003, the County was not exposed to credit risk resulting from a failure of the counterparty to perform because the swap had a negative fair value. However, should interest rates change and the fair value of the swap become positive, the County would be exposed to the credit risk of the counterparty in the amount of the derivative's fair value. In that event, because of the counterparty' s current credit ratings, the counterparty is required to delivery collateral to the County. The swap counterparty was rated A+ by Fitch Ratings, A by Standard & Poor's and Al by Moody's Investors Services as of June 30, 2003.

Basis risk: The swap does not expose the County to basis risk As there is no difference in basis between the Weekly Rate of the intended synthetic rate ( 4.534%) and the actual synthetic rate (4.534%) as of June 30, 2003. As ofJune 30, 2003, the Weekly Rate was 1.030%.

Termination risk: The County or the counterparty may terminate the swap if the other party fails to perform under the terms of the contract. If the swap is ternrinated, the variable-rate bonds would no longer carry a synthetic interest rate. Ifthe swap is ternrinated, other than by the counterparty exercising its option under the agreement, and at the time of termination, the swap has a negative fair value, the County would be liable to the counterparty for a payment equal to the swap's fair value.

One-time premium: As part of the extended terms negotiated on June 23, 2003, the County received a one-time premium payment equal to the negative value of the swap agreement totaling $8,100 from the counterparty. The County has recorded this amount in the County's Statement of Net Assets as deferred revenue to be amortized over the term of the agreement. At June 30, 2003, the unamortized premium totaled $8,092.

2000 Series C Subordinate Lien Variable Rate Revenue Bonds Objective of the interest rate swap: As a means to lower its borrowing costs, when compared against fixed-rate bonds at the time of issuance in June 2000, the District entered into an interest rate swap in connection with its $100 million 2000 Series C Subordinate Lien Variable Rate Revenue Bonds. The intention of the swap was to effectively change the District's variable interest rate on the bonds to a synthetic fixed rate of3.74%.

Terms: The bonds and the related swap agreement mature on December 1, 2030, and the swap's notional amount of $100 million matches the $100 million variable­ rate bonds. However, the counterparty has the option of ending the swap arrangement on the first day of June and December of each year commencing on December 1, 2005. If the counterparty exercises this option, it will not constitute an Early Termination. The swap was entered into on December 4, 2002 with an effective date of January 2, 2003. Starting in fiscal year 2027-28, the notional value of the swap and the principal amount of the associated debt begins to decline. Under the swap, the District pays the counterparty a fixed payment of 3. 74% and receives a variable payment computed as 65% of the I-month Loridon Interbank Offered Rate (LIBOR). The bond's variable rates are based on The Weekly Rate.

Fair value: Because interest rates have declined since the execution of the swap, the swap had a negative fair value of$17,989 at June 30, 2003 as compared to a negative value of$9,087 on January 2, 2003, which is the effective date of the swap agreement. The swap's negative fair value may be countered by a reduction in total interest payments required under the variable-rate bond, creating a lower synthetic interest rate. Because the District's variable-'rate bonds adjust to changing interest rates, the bonds do not have a corresponding fair value increase. The fair value was estimated using the zero-coupon method. This method calculates the future net settlement payments required by the swap, assuming that the current forward rates implied by the yield curve correctly anticipate future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for hypothetical zero-coupon bonds due on the date of each future net settlement on the swap. NOTES TO BASIC FINANCIAL STATEMENTS ( continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Credit risk: As of June 30, 2003, the District was not exposed to credit risk because the swap had a negative fair value. However, should interest rates change and the fair value of the swap become positive, the District would be exposed to credit risk in the amount of the derivative's fair value if there was an Early Termination. The swap counterparty was rated AAA by Fitch Ratings and Standard & Po or's and Aaa by Moody1s Investors Services as of June 30, 2003.

Basis risk: The swap exposes the District to basis risk. The effect of this difference in basis between 1-month LIBOR and The Weekly Rate is indicated by the difference between the intended synthetic rate (3.74%) and the synthetic rate as of June 30, 2003 (4.027%). As a result of the actual synthetic rate being greater than the intended synthetic rate, the District is not realizing any cost savings and thus the negative fair value of the agreement is increasing. As of June 30, 2003, The Weekly Rate was .95%, whereas 65% of 1-month LIBOR was .663%.

Termination risk: The District or the counterparty may tenninate the swap if the other party fails to perform under the terms of the contract. Ifthe swap is terminated, the variable-rate bonds would no longer carry a synthetic interest rate. If the swap is terminated, other than by the counterparty exercising its option under the agreement, and at the time of termination, the swap has a negative fair value, the District would be liable to the counterparty for a payment equal to the swap's fair value.

One-time premium: As part of the swap agreement, the District received a one-time premium payment from the counterparty equal to the negative value of the swap agreement on January 2, 2003 totaling $9,087, which was restricted for funding certain future specific programs. As such, this amount has been included in restricted assets of the District's Statements ofNetAssets. The District also recorded this amount as deferred revenue to be amortized over the term of the agreement. At June 30, 2003, the unamortized premium totaled $8,774 and net assets restricted for specific programs totaled $261.

NOTE 11 - SPECIAL ASSESSMENT DEBTAND RELATED ACTIVITIES At June 30, 2003, special assessment improvement bonds outstanding for all assessment districts totaled $77,201. Since the County is not obligated in any manner for special assessment bonds, the debt is not recorded in these financial statements. However, construction of special assessment projects and the related debt obligation proceeds are accounted for in t~-.C-£lgitf_t_lJ'rojects_Fll11_ds.,_Since the County acts as an agent for the property owners in collecting assessments and forwarding such funds to the bondholders, this activity is reported in the Agency Funds.

On October 30, 2002, the Laguna Community Facilities District issued $9,480 of Series 2002 Special Tax Refunding Bonds with an average interest rate of3 .50 percent that were used to defease the Series 1992 Special Tax Bonds with an average interest rate of 5.46 percent. As of June 30, 2003, none of the Series 1992 Special Tax Bonds remain outstanding. The Laguna Community Facilities District has been authorized to issue $47 ,855 of Special Tax Bonds by Board of Supervisors' Resolution No. 87-794, dated June 9, 1987. The Series 1987 Bonds in the original aggregate principal amount of$35,700 are the only bonds that have been issued that are counted under such authorization. The outstanding balance at June 30, 2003, was $11,924. As of June 30, 2003, $12,155 of these authorized bonds remains unissued. On August 1, 1997, the Laguna Creek Ranch/Elliott Ranch Community Facilities District No. 1 issued $21,415 of 1997 Refunding Bonds with an average interest rate of 5.52 percent that were used to defease the outstanding 1991 Bonds with an average interest rate of7.82 percent. In addition, on December 30, 1997, the Laguna Creek Ranch/Elliott Ranch Community Facilities District No. 1 issued $31,980 of 1997 Refunding Bonds with an average interest rate of 5 .08 percent, the proceeds of which were used to defease the outstanding 1990 Bonds with an average interest rate of7.83 percent. Board Resolution No. 90M2101, dated December 5, 1990, authorized the Laguna Creek Ranch/Elliott Ranch Community Facilities District No. 1 to issue $63,500 in Special Tax Bonds. The defeased 1990 bonds in original aggregate principal amount of$34,000 and the defeased 1991 bonds in original aggregate principal amount of$24,155 are the only bonds that have been issued under such authorization. At June 30, 2003, $5,345 of these bonds remains authorized but unissued. At June 30, 2003, the outstanding balance for the 1990 defeased bonds was $27,555 and $18,925 for the defeased 1991 bonds. 84 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

The Metro.Air Park Community Facilities District has been authorized to issue $7,250 of Special Tax Bonds. On November 10, 1998, the Metro Air Park Community Facilities District issued $5,310 of special tax bonds with an interest rate of 7.0 percent. These bonds constitute the entire bonded indebtedness as of June 30, 2003. Thus, as of June 30, 2003, $1,940 of authorized special tax bonds remains unissued. The outstanding balance at June 30, 2003, was $5,065.

Laguna Stonelake Community Facilities District has been authorized to issue $13,025 of Special Tax Bonds by Board of Supervisors Resolution 99-1277. On October 8, 1999, Laguna Stonelake Community Facilities District issued $13,025 of special tax bonds with an interest rate of 6.3 percent. These bonds constitute the entire bonded indebtedness as of June 30, 2003. The outstanding balance at June 30, 2003, was $12,675.

The Park Meadows Community Facilities District No. 1 has been authorized to issue $1, 122 of Special Tax Bonds by Board of Supervisors Resolutions No. 2000-0648, 2000:-0649, and 2000-0650. On June 28, 2000, Park Meadows issued Current Interest Bonds in the amount of$230 at the interest rate of 7.75 percent:, and Convertible Capital Appreciation Bonds :in the original principal amount of$892 at the interest rate of 8.25 percent. These bonds constitute the entire bonded indebtedness as of June 30, 2003. AtJune.30, 2003, the outstanding balance was $1,057.

NOTE 12 -INTEREST COSTS The County's total interest costs relating to outstanding debt excluding interest costs on interfund advances (see Note 7) for the year ended June 30, 2003, is as follows:

General fund $ 237 Total interest capitalized $ 8,700 Debt service funds 47,371 Enterprise funds 42,893 Internal service funds 3,211 Total interest charged to expense/expenditures 85,012 $ 931712 $ 93,712

During fiscal year 2002-03, interest costs of $8, 700 relating to bonds issued for the construction of projects were capitalized for enterprise funds. '-"'" ...... ,.1., ...... _ "..a· .._,r...... ,..a.."-Cltt.i't'.a.~.1.., ..a.'-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTH i 3 - cn_MMTTMRNTS: The County has entered into several agreements related to the construction of capital projects, the expansion of the airport, the development of a regional sanitation system, and other activities.

Airport -The Department of Airports had approxim~tely $34,448 in outstanding construction contract commitments at June 30, 2003.

Regional Sanitation District - The Region has entered into contracts for the construction of certain projects. At June 30, 2003, the unexpended balance of the contract commitments was approximately $135,633.

Refuse Enterprise Fund - Refuse has entered into equipment and construction agreements totaling $4,015 at June 30, 2003.

County Sanitation District No. 1 -The District has entered into equipment and construction agreements totaling $6,358 at June 30, 2003.

Water Agency-The Agency has entered into contracts for the construction of certain projects totaling $3,012 at June 30, 2003.

NOTE 14 - CLOSURE AND POSTCLOSURE CARE COST The County uses GASB Statement No. 18, "Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs". This statement is based on state and federal laws and regulations that place specific requirements on the County regarding closure and postclosure maintenance and monitoring functions for the Refuse Department for 30 years after closure and the Regional Sanitation District's (Region) grit and screening landfill site, solid storage basins (SSBs), and dedicated land disposal sites (DLDs) for 15 years after closure.

The California Regional Water Quality Control Board has oversight responsibility for the County's adherence to the laws and regulations. Although closure and postclosure care costs will be paid only near or after the date that the site is closed, the County reports a portion of these closure and postclosure care costs as an operating expense in each period. The entire amount of the estimated liability for the landfill site was recognized June 30, 1994, as it reached its capacity. Due to the nature of the operation of the SSBs and DLDs, management determined that capacity is rarely fully utilized in the operation of these sites; however, an indefinite life methodology is not a valid basis for recognizing closure and postclosure care -costs. Instead, these costs will be amortized over the estimated useful life of the sites (15 and 60 years) in accordance with GASB Statement No. 18.

The Region reported closure and postclosure care liabilities at June 30, 2003, as follows:

Region (Enterprise Funq) $ 16.544

Management has deemed the capacity of the Refuse's landfill will be the basis of recognizing costs of its closure and postclosure care costs. Refuse reported closure and postclosure care liabilities at June 30, 2003, as follows:

Refuse (Enterprise Fund) $ 11.765

Refuse will recognize Kiefer landfill costs of $21,837 as the remaining capacity in the landfill is used in future years. Refuse included Kiefer landfill postclosure care liabilities at June 30, 2003, as $8,048. At June 30, 2003, the capacity of the landfill used to date was 27 percent and the estimated remaining landfill life is 33 years. 86 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Refuse included Elk Grove landfill postclosure care liabilities at June 30, 2003, as $3, 717. The landfill is 100 percent full and the postclosure 30-year liability period runs through June 2024. At June 30, 2003, the reported liabilities represent postclosure costs for the remaining 21 years.

These future closure and postclosure costs are based on what it would cost to perform all closure and postclosure care in 2003. Actual costs may be higher due to inflation, changes in technology, and/or changes in regulations.

The County is required by state and federal laws and regulations to provide financial assurance that appropriate resources will be available to finance closure and postclosure care costs in the future. For both the Region and Refuse, management has reserved a portion of retained earnings to comply with the laws and regulations. The County will increase these reserved retained earnings annually as the closure of the sites approaches. Management expects that any changes to future closure and postclosure costs (due to changes in technology or applicable laws or regulations, for example) will be paid from charges to future users.

NOTE 15 -RETIREMENT PLAN Plan Description All County full-time and part-time employees participate in the Sacramento County Employees' Retirement System (System), a multiple-employer cost-sharing public employee retirement system· For purposes of County financial statements, SCERS is considered a sole employer plan because the County's contributions substantially make up the total contributions of the plan. Membership in the System primarily consists of employees of the County. The System provides retirement, disability, and death benefits based on the employee's years of service, age and final compensation. Employees vest after 5 years of service and may receive retirement benefits. at age 50. A summary of System membership at June 30, 2003 is available in the System's Comprehensive Annual Financial Report for the fiscal year ended June 30, 2003. A separate audit of the financial statements of the System is available by contacting the System or the County's Department of Finance.

Funding· Policy Contributions to the plan are made pursuant to Section 31584 of the County Employee Retirement Law of 1937. The System's funding policy provides for periodic contributions at actuarially-determined rates that, expressed as percentages of annual covered payroll, are sufficient to accumulate adequate assets to pay benefits when due. Members of the System are required to contribute between 2.99% and 11.97% of their annual covered salary. The County is obligated by state law to make all required contributions to the plan, ranging from 3.37% .to 26.60% of covered payroll. The required contributions include current service cost and amortization of prior service cost over an initial amortization period of 30 years. At June 30, 2003, there are 19 years remaining in the amortization period of prior service cost.

Employer contribution rates are determined using the entry age normal funding method based on a level percentage of payroll. The System also uses this actuarial method to amortize the unfunded liability, if applicable.

Contributions for the year ending June 30, 2003 totaled $96,541. Included in this total are employer contributions of $52,841 and member contributions of $43, 700. All contributions were made in accordance with actuarially-determined contribution requirements based on actuarial valuations performed at June 30, 2001.

Annual Pension Cost The County's annual pension cost and required and actual contributions were determined as part of the June 30, 2001 actuarial valuation using the entry age normal actuarial cost method. The actuarial assumptions included (a) 8.00% investment rate of return (net of administrative expenses), (b) projected annual salary increases of 5.75% (includes wage inflation of 4.25% and merit and longevity adjustment of 1.50%), and (c) 0% per year cost"-of-living adjustments. The actuarial value of SCERS '-"'-'...,J...,..& ..a.'-""..& .._,..L-...._...&.-...i.A...LY.&~J. ... A'-' NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands) assets was detennined using techniques that 8mooth the effects of short-term volatility in the market value cf investments over a five-year period (smoot.1.ed fair value). SCERS overfunded actuarial accrued liability is being amortized as a level percentage of projected payroll on a closed basis.

The County's annual pension cost and pension assets for the year ended June 30, 2003, were as follows:

Annual required contribution $40,818 . Interest on beginning net pension asset (45,728) Adjustment to the annual required contribution 41,293 Annual pension cost 36,383 Contributions made 40!818 Increase in net pension asset 4,435 Netpension asset, beginning of year 593,550 · Net pension asset, end of year $5971985

The County's contributions to the plan in the fiscal year ended June 30, 1996 included $538,060 from the proceeds of the Pension Obligation Bonds, Series 1995. The County's contributionsinsubsequent years were equal to the annual required contribution, which were less than the annual pension cost as a result of the pension obligation transaction.

Three-year trend information:

Annual Percentage Net Fiscal year Pension OfAPC Pension Ended Cost{APC} Contribution Contributed Asset 6/30/01 $30,338 $37,372 123% $587,727 6/30/02 35,418 41,241 116% 593,550 6/30/03 36,383 40,818 112% 597,985

88 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Schedule of funding progress for SCERS:

Unfunded/ (Over Actuarial funded) Accrued Unfunded/ AALasa Actuarial Liability (Over Annual Percentage Valuation Value of (AAL) funded) Funded Covered of Covered Date Assets Entry Age AAL Ratio Payroll Payroll 6/30/01 $3,718,198 $3,451,864 ($266,334) 107.7% $634,798 (42.0)% 6/30/02 3,839,081 3,586,250 (252,831) 107.1% 695,259 (36.4)% 6/30/03 3,864,400 4,108,294 243,894 94.1% 733,296 33.3%

Enhanced benfits adopted by SCERS and the County effected the accrued actuarial liability at June 30, 2003.

NOTE 16 -SELF-INSURANCE The County self-insures for property damage, general liability, workers' compensation, unemployment, and dental insurance claims. Self-insurance programs are accounted for in internal service funds, and interfund premium charges are treated as interfund services. lnterfund premiums are based primarily upon the insured funds' claims experience and are adjusted for any excess or deficit retained earnings within the self-insurance funds. At June 30, 2003, governmental and proprietary funds owed premium charges to the Liability/Property and Workers' Compensation Self-Insurance funds. It is the County's policy to fund the governmental funds' liability for premium charges by making provisions in budgets of succeeding years. Since this amount will not be paid from available financial resources, the liability due by the governmental funds has not been recorded in the governmental funds. Proprietary fund premium charges are charged to expense in the year incurred and a current or long-term liability, as appropriate, is recognized in the corresponding fund.

The Liability/Property and the Workers' Compensation Self-Insurance funds' estimated claim liabilities are actuarially based and include claims incurred but not reported. The estimated liabilities include provisions for allocated claims adjustment expenses, including administrative, attorney, and other associated expenses. Proceeds received for salvage and subrogation are recognized as nwenm~ in the year of receipt, and therefore are not included in the estimated liabilities. NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Reconclli::Jtion ofr'.1::Jim~ l .i::ihiiitiP"l

Worker's Dental& Liability/Property Compensation UnemplQyment 2003 2002 2003 2002 2003 2002 Unpaid claims and claim adjustment expenses at beginning of the fiscal year Current portion $ 13,160 8,733 9,870 10,874 608 Noncurrent 16,910 22,297 61,180 50,556 Total beginning balance 30,070 31,030 71,050 61,430 608

Incurred claims and claim adjustment expenses: Provision for ins.ured events for current year 8,557 11,700 21,916 19,540 14,956 10,489 Increase (decrease) in provision for insured events of prior fiscal years 2,589 (1,165) 19,992 11,056 Total incurred claims and claim adjustment expenses 11,146 10,535 41,908 30,596 14,956 10,489

Payments: Claims and claim adjustment expenses attributable to insured events of current fiscal year 1,198 . 1,544 2,981 2,931 14,956 10,489 Claims and claim adjustment expenses attributable to insured events of prior fiscal years 11,918 9,951 21,724 18,045 608 Total payments 13,116 11,495 24,705 20,976 14,956 11,097

Total unpaid claims and claim adjustment expenses at end of the fiscal year __1____~~} 00_ _JQ,070 88,253 71,050

90 COUNTYOFSACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Coverage for specific perils required under the terms of certain debt issues and County policies obtained from outside carriers is as follows:

Coveras:e Amount Deductible Provision Airport Liability & Hangarkeepers $ 500,000 $25/$100 Each occurrence I Aggregate Property Program: Property Insurance (All) 1,350,000 50 Each occurrence Flood 600,000 2% I 500 minimum Per Building I Each occurrence Earthquake 145,000 5% I 500 minimum Per building I Each occurrence Sheriff Vehicle Physical Damage 26,075 10 Each vehicle Boiler/Machinery 100,000 5 Each occurrence Crime: Faithful Performance 10,000 5 Each occurrence Employee Dishonesty 10,000 5 Each occurrence Forgery/Money/Computer Fraud 10,000 5 Each occurrence Hefo;:opter/Airplane Liability 25,000 None Not applicable Hull (Physical Damage) 5,560 Various 5% In-motion I $1 not-in-motion Fiduciary Retirement Liability 10,000 25 Each claim General Liability (Excess) 25,000 2,000 Self-insured retention Workers' Compensation (Excess) 50,000 2,000 Self-insured retention Employers' Liability 10,000 2,000 Self-insured retention

During the last several years, there have been no settlements in excess of insurance coverage limits. Effective March 31, 2001, earthquake coverage under the property policy was reduced at any one location/building from $200,000 to $75,000. This is due to capacity changes in the insurance marketplace.

NOTE 17-NETASSETS/FUND BALANCES The government-wide and proprietary fund financial statements utilize a net assets presentation. Net assets are categorized as invested capital assets (net of related debt), restricted and unrestricted.

• Invested In Capital Assets, Net ofRelated Debt-This category groups all capital assets, including infrastructure, 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 presents external restrictions imposed by creditors, grantors, contributors or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

• Unrestricted Net Assets - This category represents net assets of the County, not restricted for any project or other purpose.

In the fund financial statements, reserves and designations segregate portions of fund balance that are either not available or have been earmarked for specific purposes. The various reserves and designations are established by actions of the Board and management and can be increased, reduced or eliminated by similar actions.

As of June 30, 2003, reservations offund balance are described below:

• Encumbrances - to reflect the outstanding contractual obligations for which goods and services have not been received.

• Fixed asset acquisitions - to reflect amounts that are restricted due to debt covenants requiring that the expenditures only be used for fixed asset acquisition and management of the program.

• Teeter plan tax loss - to cover losses in the event that a shortfall may occur as a result of the sale of tax-defaulted property.

• TRANS interest - to cover accrued interest on Tax and Revenue Anticipation Notes not payable from current year appropriation.

• Teeter plan delinquencies - to cover long-term delinquent taxes when the final note payment is made.

• Imprest cash - to reflect the funds held by departments for imprest cash expenditures. Such amounts do not represent available spendable resources.

• Advances to other funds and loans - to reflect the amount due from other funds and loans that are long-term in nature. Such amounts do not represent available spendable resources.

• Assessment district carryover - to reflect assessment district funds held for specific services.

• Trust obligations - to reflect funds held in trust for a specific purpose.

• Debt service ~ to reflect the funds held by trustees or fiscal agents for future payment of bond principal and interest. These funds are not available for general operations.

• Future construction - to reflect management's intent to expend these funds solely for planned capital projects.

Portions ofunreserved fund balance may be designated to indicate tentative plans for financial resource utilization in a future period, such as for general contingencies or capital projects. Such plans or intent are subject to change and have not been legally authorized or may not result in expenditures. Fund balance designations include:

• General uses - to reflect management's intent to fund County operations and to improve cash reserves.

92 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

• Cash flow - to reflect the impact on cash flows of budget uncertainties.

• Teeter plan notes - to reflect an amount equal to the amount of the final payment on the Teeter note.

• Future realignment costs - to reflect management's intent to provide for future shortfalls in realignment funding.

• Mather Community Center - to reflect management's intent to fund the future construction of Mather Community Center.

• Future environmental managements costs - to reflect management's intent to provide funds for rate stabilization for Environmental Management.

• Rate stabilization - to reflect management's intent to stabilize various billing rates.

• Future services - to reflect management's intent to provide funding for unspecified services and capital projects.

• Future construction - to reflect management's intent to expend these funds on unspecified future capital projects. NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

NOTE 18- FUND BALANCES Fund balances, which are not available for appropriation or are not considered "expendable available financial resources" are reserved. Unreserved fund balances that have been earmarked by the Board of Supervisors for specified purposes are considered designated. Such reserved and designated fund balances at June· 30, 2003 are as follows: Nornnajor Total Govennnental Governmental General Fund Fllllds Funds Reserved Encumbrances $ 15,921 85,977 101,898 Fixed asset acquisitions 18,190 18,190 Assets not available: · Teeterj)larfi:axloss 3,758 3,758 TRANS interest 750 750 Teeter plan delinquencies 1,500 1,500 Jinprest cash 297 40 337 · Advances to other funds and loans 783 13,119 13,902 Assessment district carryover 559 559 Trust obligations 259 259 Debt service · 122,668 122,668 Future construction 189!346 189!346

Total Reserved Fund Balances 41,199 411,968 453,167 Unreserved/Designated General uses 8,478 12,362 20,840 Cash flow 15,000 15,000 Teeter plan notes . 3,155 3,155 Future realignment costs 2,000 2,000 Mather Corrnnunity Center 600 600 Future environmental management costs 1,191 1,191 Rate stabilization 641 641 Future services 8,769 8,769 Future construction -- 24,169 24,169 Total Unreserved/Designated Fund Balances 30,424 45,941 76,365 Total Unreserved/Undesignated Fund Balances 84,242 198,697 282!939 Total Unreserved 114,666 -- 244,638 359,304

Total Fund Balances $ 155,86~ 656,606 8121471 ----

As not all long-term assets are reserved, see Note 5 for the allocation,between reserved fund balance and deferred revenue as Note 1 discloses as being the policy of the County.

94 COUNTY OF SACRAMENTO NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 ( amounts expressed in thousands)

NOTE 19-RESTATEMENT OF NET ASSETS The effect of the change in accounting principle, mentioned m Note 1, is reflected in the net assets beginning of the year for govennnental activities in the statement of activities and is summarized as follows:

Net Assets at June 30, 2002, as previously reported $ 707,573 Adjustment/Reclassification-Pension Asset 593,550 Net Assets at July 1, 2002 $ l 301 J23

NOTE 20- CONTINGENCIES The County is a defendant m various lawsuits related to self-insurance programs and for other claims, including construction. property tax assessments, and claims arising from audits of federal- and state-funded programs. Anticipated costs related to such claims and litigation are accrued in the Self-Insurance funds where appropriate. Although the final outcome ofthese matters cannot be predicted, the County believes that these accruals are adequate to provide for its estimated future obligations in these matters, and that any amounts in excess of such accruals will not be significant to the County.

NOTE 21-SUBSEOUENT EVENTS Tax and Revenue Anticipation Notes On July 1, 2003, the County issued $280,000 in 2003 Tax and Revenue Anticipation Notes, $280,000 at a rate of 2.00 percent to mature on July 30, 2004. The notes are issued to supplement County cash flows until taxes and other revenues are collected. On August 1, 2003, the 2002 Tax and Revenue Anticipation notes in the amount of $285,000 matured and were redeemed.

Teeter Plan On September 20, 2003, the County issued its eleventh Teeter Note (2003 Teeter Note) and purchased under the Teeter Plan the delinquent secured property tax receivables at June 30, 2003, in the amount of$15,980 from the local taxing entities and selected special assessment districts in Sacramento County. The financing of this purchase was accomplished by a five-year legal, secured medium-term note obligation of the County that was purchased by the Treasurer's Pool. The terms of the note include a variable interest rate, adjusted on a quarterly basis, equal to the rate ofmterest on the Constant Maturity U.S. Treasury Note for the number of years corresponding to the remaining term of the note. The County agreed to make principal and interest payments on the note annually on or before August 1 each year, commencing August 1, 2004. Such payments may be made more frequently, but not more often than quarterly. The note matures August 1, 2008.

Note 1 (Property Taxes) and Note 9 further describe the Teeter Note issues.

Taxable Pension Refunding Bonds On July 1, 2003, the county issued $54,879 of Taxable Pension Refunding Bonds (Capital Appreciation Bonds), Series 2003A and $97 ,442 of Taxable Pension Refunding Bonds (Convertible Capital Appreciation bonds), Series 20038. The bonds were issued to defease to maturity a portion of the County's outstanding Taxable Pension Funding Bonds, Series 1995, and to pay for the cost of financing. The final maturity date on the Series A bonds is August 15, 2008, and for the Series 20038 bonds is August 15, 2023. The true mterestcost on the entire Series 2003 bonds issue of $152,32lis 5.53 percent. NOTES TO BASIC FINANCIAL STATEMENTS (continued) FOR THE YEAR ENDED JUNE 30, 2003 (amounts expressed in thousands)

Litil!ation - Ventura decision SCERS and other retirement systems were sued in a statewide litigation seeking inclusion of additional pay to be included in final compensation and retroactive application of increases in final compensation mandated by Ventura County Deputy Sheriffs Association et al. v. Board ofRetirement (1997) 16 Cal. 4th 483. That case is now finally detennined. See In re Retirement Cases (2003) 110 Cal. App. 4th 426. Under that decision, SCERS liability has been actuarially estimated at $59 million.

Shortly before the decision was rendered, SCERS agreed to settle the litigation for an actuarially estimated $55 million. That settlement limiting SCERS liability to $55 million was approved by the court on December 19, 2003. Of this amount, $25 ,870 was accrued by SCERS in their financial statements as of June 30, 2003, which represents the lump sum and retroactive portion of the settlement, including attorneys' fees. The remaining $29, 13 0 will be paid out as increased retirement allowances, which will be paid out after January 2004.

96 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXC

DTC AND THE BOOK-ENTRY ONLY SYSTEM

The information in this Appendix concerning The Depository Trust Company ("DTC"), New York, New York, and DTC's book-entry system has been obtained from DTC and the County takes no responsibility for the completeness or accuracy thereof The County cannot and does not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Holders (a) payments of interest, principal or premium, if any, with respect to the Bonds, (b) certificates representing ownership interest in or other confirmation or ownership interest in the Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix. The current "Rules" applicable to DTC are on.file with the Securities and Exchange Commission and the current "Procedures" ofDTC to be followed in dealing with DTC Participants are on file with DTC.

The DTC will act as securiti~s depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered security certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "cleruing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 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 eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (''DTCC"). DTCC, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (respectively, '"NSCC," "GSCC," "MBSCC," and ':'EMCC," also subsidiaries of DTCC), as well as by the New York Stock Exchimge, Inc., the American Stock !E~change LLC, and the National Association of Securities. Dealers, Inc.

Access to the DTC system is also. atailableI,, I to o.thers such as both U.S. and. non-U.S. securities brokers and dealers, banks, trust companies,· and : dearing 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 Exch,mge Commission. More inform~ti6n about DTC can be found at www.dtcc.com.

! : 1, I. : ; Purchases of the Bonds up.de;r the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds ori. iDTC's records. The. ownership interest of each actual purchaser of each Securilty ("Beneficial Holder") is iri ltnm to be recorded on the Direct and Indirect Participants' records. Beneficial Holders will not receive J~i.tt~n confirmation from DTC of their purchase. Beneficial Holders are, however, expected to receive wtjtten.l confirmations providing details of the transaction, as well as periodic statements of their holdings, from the· Direct or Indirect Participant through which the Beneficial Holder entered into the transaction. Transfei~ of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Holders. Beneficial Holders will not receive certificates representing their ownership interests in the Bonds, except in the event that mie of the book-entry system for the Bonds is discontinued.

C-1 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 the Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Holders 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 the Beneficial Holders. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Holders will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Holders of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Holders of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Holders. In the alternative, Beneficial Holders may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to DTC. The conveyance of notices and other communications by DTC to DTC Participants, by DTC Participants to Indirect Participants and by DTC Participants and Indirect Participants to Beneficial Holders will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Any failure of DTC to advise aiiy DTC Participant, or of any DTC Participant or Indirect Participant to notify a Beneficial Holder, of any such notice and its content or effect will not affect the validity of the redemption of the Bonds called for redemption or of any other action premised on such notice. Redemption of portions of the Bonds by the County will reduce the outstanding principal amount of Bonds held by DTC. In such event, DTC will implement, through its book­ entry system, a redemption by lot of interests in the Bonds held for the account of DTC Participants in accordance with its own rules or other agreements with DTC Participants and then DTC Participants and Indirect Participants will implement a redemption of the Bonds for the Beneficial Holders. Any such selection of Bonds to be redeemed will not be governed by the Indenture and will not be conducted by the County or the Trustee.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. 's consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Payments of principal of, premium, if any, and interest evidenced by the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the County or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Holders will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC (nor its nominee), the Trustee, or the County, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal of, premium, if any, and interest evidenced by the Bonds to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the County or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and .disbursement of such payments to the Beneficial Holders will be the responsibility of Direct and Indirect Participants.

C-2 NEITHER THE COUNTY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL HOLDERS WITH RESPECT TO THE PAYMENTS OR THE PROVIDING OF NOTICE TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL HOLDERS OR THE SELECTION OF BONDS FOR PREPAYMENT.

None of the County or the Trustee can give any assurances that DTC, DTC Participants, Indirect Participants or others will distribute payments of principal of, premium, if any, and interest on the Bonds paid to DTC or its nominee, as the registered Holder, or any redemption or other notice, to the Beneficial Holders or that they will do so on a timely basis or that DTC will serve and act in a manner described in this Official Statement.

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the County or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, security certificates are required to be printed and delivered.

The County 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.

In the event that the book-entry system is discontinued as described above, the requirements of the Indenture will apply. The foregoing information concerning DTC concerning and DTC's book-entry system has been provided by DTC, and none of the County or the Trustee take any responsibility for the accuracy thereof.

None of the County or the Underwriters can and do not give any assurances that DTC, the Participants or others will distribute payments of principal, interest or premium, if any, evidenced by the Bonds paid to DTC or its nominee as the registered' .owner, or will distribute any redemption notices or other notices, to the Beneficial Holders, or that they will ao so on a timely basis or will serve and act in the manner described in this Official Statement. None of the County or the Underwriters are responsible or liable for the failure of DTC or any Participant to make any payment or give any notice to a Beneficial Holder with respect to the Bonds or an error or delay relating thereto. GLOBAL CLEARANCE PROCEDURES

The information that follows is based solely on information provided by the Euroclear Operator. No representation is made as to the completeness or the accuracy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof. !l Clearstream International and Ciddtream ' '' i. : ' ,, j, : Clearstre~ International is tr~ product of the merger of Deutsche Borse and Cedel International, the European intern~tional clearing depbsitory founded in 1970, and a number of its subsidiaries including Cedelbank. Clearstteam Internation~ lis registered in Luxembourg and has two subsidiaries: Clearstream Banking and Clearstream, Services. l!dearstream Banking ("Clearstream") contains the core clearing and settlement busine~·s and consists. of C~eirrstream Banking Luxemborg, Clearstream Banking Frankfurt and six regional offices in Dubai, Hong Kcint London, New York, Sao Paulo and Tokyo. Clearstream holds securities for its participating organizations ("Clearstream Participants") and facilitates the clearance and settlement of securities transactions between Clearstream Participants through electronic book-entry changes in accounts of Clearstream Participants, thereby eliminating the need for physical movement of certificates. As a professional depository, Clearstream is subject to regulation by the Luxembourg Monetary Institute. Indirect access to Clearstream is also avaifable to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream Participant, either directly or indirectly.

C-3 Euroclear System

The Euroclear System ("Euroclear") was created in 1968 to hold securities for its participants and to clear and settle transactions between its participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. The Euroclear System is owned Euroclear plc and operated through a license agreement by Euroclear Bank S.A./N.V., a bank incorporated under the laws of the Kingdom of Belgium (the "Euroclear Operator").

The Euroclear Operator holds securities and book-entry interests in secunties for participating organizations and facilitates the clearance and settlement of securities transactions between Euroclear Participants, and between Euroclear Participants and Participants of certain other securities intermediaries through electronic book-entry changes in accounts of such Participants or other securities intermediaries.

The Euroclear Operator provides Euroclear Participants, among other things, with safekeeping, administration, clearance and settlement, securities lending and borrowing, and related services.

Non-Participants of Euroclear may hold and transfer book-entry interests in the Securities through accounts with a direct Participant of Euroclear or any other securities intermediary that holds a book-entry interest in the Securities through one or more securities :intermediaries standing between such other securities intermediary and the Euroclear Operator

The Euroclear Operator is regulated and examined by the Belgian Banking and Finance Commission and the National Bank of Belgium.

Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the ''Terms and Conditions"). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with Persons holding through Euroclear participants.

Distribution of the Bonds through Clearstream or Euroclear

Distributions with respect to the Bonds held through Clearstream or Euroclear are to be credited to the cash accounts of Clearstream Participants or Euroclear Participants, as applicable, in accordance with the relevant system's rules and procedures, to the extent received by its Depository ( as defmed below). Such distributions will be subject to tax reporting in accordance with relevant United States tax laws and regulations. Clearstream or the Euroclear Operator, as the case may be, will take any other action permitted to be taken by an Owner of the Bonds under the Indenture on behalf of a Clearstream Participant or Euroclear Participant only in accordance with the relevant rules and procedures and subject to the relevant Depositary's ability to effect such actions on its behalf through DTC. Owners of the Bonds may hold their Bonds through DTC (in the United States) or Clearstream or Euroclear (in Europe) if they are participants of such systems, or indirectly through organizations which are participants in such systems.

The Bonds will initially be registered in the name of Cede & Co., the nominee of DTC. Clearstream and Euroclear may hold omnibus positions on behalf of their participants through customers' securities accounts in Clearstream's and Euroclear's names on the books of their respective depositaries which in tum are to hold such positions in customers' securities accounts in the depositaries' names on the books of DTC. Citibank, N .A. acts as depositary for Clearstream and the Euroclear Operator acts as depositary for Euroclear (in such capacities, individually, the ''Depositary" and, collectively, the "Depositaries").

C-4 Transfers of the Bonds between DTC Participants are to occur in accordance with DTC Rules. Transfers between Clearstream Participants and Euroclear Participants are to occur in accordance with their respe,ctive rules and operating procedures. Because of time-zone differences, credits of securities received in Clearstream or Euroclear as a result of a transaction with a Participant may be made during subsequent secmities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in such securities settled during such processing would be reported to the relevant Euroclear or Clearstream Participants on such business day. Cash received in Clearstream or Euroclear as a result of sales of securities by or through a Clearstream Participant or Euroclear Participant to a Participant are to be received with value on the DTC settlement date but will be available in the relevant Clearstream or Euroclear cash account only as of the business day following settlements in DTC.

Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Clearstream Participants or Euroclear Participants, on the other, are to be effeclted in DTC in accordance with DTC Rules on behalf of the relevant European international clearing system by its Depositary; however, such cross-market transactions require delivery of instructions to the relev,mt European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system if the transaction meets its settlement requirements, is to deliver instructions to its Depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Clearstream Participants and Euroclear Participants may not deliver instructions to the Depositaries.

THE COUNTY AND THE TRUSTEE CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC, DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS OF DTC, CLEARSTREAM, CLEARSTREAM PARTICIPANTS, EUROCLEAR OR EUROCLEAR PARTICIPANTS WILL DIS1RIBUTE TO THE BENEFICIAL OWNERS OF THE BONDS (I) PAYMENTS OF PRINCIPAL OF OR INTEREST ON THE BONDS (II) CONFIRMATIONS OF THEIR OWNERSHIP INTERESTS IN 1HE BONDS OR (III) OTHER NOTICES SENT TO DTC OR CEDE & CO., ITS PARTNERSHIP NOMINEE, AS THE REGISTERED OWNER OF THE BONDS, OR THAT THEY WILL DO SO ON A TIMELY BASIS, OR THAT OTC, DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS, CLEARSTREAM, CLEARSTREAM PARTICIPANTS, EUROCLEAR OR EUROCLEAR PARTICIPANTS WILL SERVE AND ACT IN THE MANNER DESCRIBED IN THIS OFFICIAL STA'TEMENT.

NEITHER THE COUNTY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO DTC, THE DIRECT PARTICIPANTS, THE INDIRECT PARTICIPANTS OF DTC, CLEAR.STREAM, CLEARSTREAM PARTICIPANTS, EUROCLEAR EUROCLEAR PARTICIPANTS OR THE BENEFICIAL OWNERS WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS OF DTC, CLEARSTREAM, CLEARSTREAM PARTICIPANTS, EUROCLEAR OR EUROCLEAR PARTICIPANTS; (2) THE PAYMENT BY DTC OR ANY DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS OF DTC, CLEARSTREAM, CLEARSTREAM PARTICIPANTS, EUROCLEAR OR EUROCLEAR PARTICIPANTS OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OF OR INTEREST ON BONDS; (3) THE DELIVERY BY DTC OR ANY DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS OF DTC, CLEARSTREAM, CLEARSTREAM PARTICIPANTS, EUROCLEAR OR EUROCLEAR PARTICIPANTS OF ANY NOTICE TO ANY BENEFICIAL OWNER THAT IS REQUIRED OR PERMITTED TO BE GIVEN TO OWNERS UNDER THE TERMS OF THE INDENTURE; OR (4) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS OWNER OF THE BONDS.

C-5 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXD

SUMMARY OF THE INDENTURE

Ihe following is a brief summary of certain provisions of the Indenture, dated as of July .l, 2004, authorizing the issuance of the Bonds. The summary does not purport to be comprehensive or definitive and is qualified in its entirety by reference to the full terms of the Indenture, and all capitalized terms not otherwise defined herein have the meaning specified in the Indenture.

DEFINITIONS

"'AA' Financial Commercial Paper Rate," on any date of determination for any Auction Rate Period, means:

(i) (A) for any Standard Auction Rate Period of 35 days or any Special Auction Rate Period of fewer than 49 days, the interest equivalent of the 30-day rate, and (B) for any Special Auction Rate Period of: (1) 49 or more but fewer than 70 days, the interest equivalent of the 60-day rate; (2) 70 or more but fewer than 85 days, the arithmetic average of the interest equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 days, the interest equivalent of the 90-day rate; (4) 99 or more but fewer than 120 days, the arithmetic average of the interest equivalent of the 90-day and the 120-day rates; (5) 120 or more but fewer than 141 days, the interest equivalent of the 120-day rate; (6) 141 or more but fewer than 162 days, the arithmetic average of the interest equivalent of the 120-day and 180-day rates; and (7) 162 or more but fewer than 183 days, the interest equivalent of the 180-day rate, in each case on commercial paper placed on behalf of entities whose corporate bonds are rated "Aa" by Moody's and "AA'" by S&P or Fitch, or the equivalent of such rating by Moody's, S&P or Fitch or another rating agenc:y, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date of determination; or

(ii) if the Federal Reserve Bank of New York does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise, by the Commercial Paper Dealers to the Auction Agent for the close of business on the Business Day immediately preceding such date of determination;

provided, that if any Commercial Paper Dealer does not quote a commercial paper rate required in.order to make the foregoing determinations, the "AA" Financial Commercial Paper Rate shall be determined on the basis of such quotations as may be furnished by a substitute Commercial Paper Dealer or Dealers selected by the County. For the purpose of this definition, the "interest equivalent" means the equivalent yield of an interest-bearing security on a 360-day basis or a rate stated on a discount basis (a "discount rate") for commercial paper of a given number of days maturity shall be equal to the product of (A) 100, times (B) the quotient (roUllded upwards to the next higher one-thousandth (0.001) of 1% of ((x) the discount rate (expressed in decimals) diyided by (y) the difference between (1) 1.0 and (2) a fraction, the numerator of whiyh shall be the. product of the discount rate ( expressed in decimals) times the number of days in which such commercial paper matures, and the denominator of which shall be 360).

"Accreted Value" means, with respect to any Capital Appreciation Bond or Convertible Auction Rate Security, as of any date of calculation, the sum of the Principal Amount thereof and the interest accrued thereon to such date of calculation,' compounded from the date of initial issuance at, (i) in the case of Capital Appreciation Bonds, the stated thereof a~d (ii) in the case of Conv,~rtible Auction Rate Securities, the stated yield to the Full Accretion_ Date, on the Interest Accrual Dates indicated in the Indenture, assuming in any such semiannual period that such Accreted Value increases in equal daily amounts on the basis of a 360-day year comprised of twelve 30-day months.

D-1 "Act'' means Articles 10 and 11 (commencing with Section 53570) of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State.

"Administrative Expense Account" means the account by that name established pursuant to the Indenture.

"Auction Rate Securities" means all Bonds, including Convertible Auction Rate Securities, issued in such Mode prior to their Fixed Rate Conversion Date, if any, in any one or more . Unless otherwise indicated, all references herein to Auction Rate Securities shall include Convertible Auction Rate Securities.

"Bond Insurer" means MBIA Insurance Corporation, as issuer of the Insurance Policy on the Bonds, but only so long as the Insurance Policy is then in effect.

"Bonds" means the bonds designated the "County of Sacramento Taxable Pension Funding Bonds, Series 2004" authorized to be issued under the Indenture and at any time Outstanding under the Indenture that are executed, authenticated and delivered in accordance with the Indenture.

"Business Day" means any day other than (i) a Saturday or a Sunday, (ii) a day on which banking institutions in the city in which the Corporate Trust Office of the Trustee is located or banking institutions in New York, New York, are authorized or required by law to be closed, or (iii) a day on which the New York Stock Exchange is closed.

"Certificate of the County" means an instrument in writing signed by the Director of Finance or the Chief Financial Officer, or by any other officer of the County duly authorized by the Board of Supervisors of the County for that purpose, and attested by the Clerk of the Board of Supervisors, with the seal of the County affixed thereto.

"Chief Financial Officer" means the Chief Financial Officer of the County.

"Closing Date" means the date on which the Bonds are initially delivered to the Purchasers against payment by the Purchasers to the Trustee of the purchase price thereof.

"Convertible Auction Rate Securities'' means all Bonds issued as Auction Rate Securities, which by their terms accrete interest on a compounded basis through the Full Accretion Date and, thereafter, bear interest at a rate which will be established in accordance with the provisions of the Indenture, payable, together with their Accreted Value, solely at maturity or on a Redemption Date, if any, prior to their Fixed Rate Conversion Date, if any.

"Corporate Trust Office" means the principal corporate trust office of the Trustee in San Francisco, California; provided, that the Trustee may designate in writing to the County and the Holders such other office or agency from time to time for purposes of registration, transfer, exchange, payment or redemption of any of the Bonds.

"Debt Service· Fund" means the County of Sacramento Taxable Pension Funding Bonds, Series 2004 Debt Service Fund· established by the Director of Finance and maintained by such officer in the treasury of the County under the Indenture.

"Director of Finance" means the Director of Finance of the County.

D-2 "Event of Bankruptcy" means the filing of a petition in bankruptcy or the commencement of a proceeding under the United States Bankruptcy Code or any other applicable law concerning insolvency, reorganization or bankruptcy by or against the County.

"Event of Default" means an event described as such in the Indenture.

"Federal Securities" means A. U.S. Treasury Certificates, Notes and Bonds (including State and Local Government Series) B. Direct obligations of the Treasury which have been stripped by the Treasury itself, CATS, TIGRS and similar securities C. Resolution Funding Corp. (REFCORP) Only the interest component of REFCORP strips which have been stripped by request to the Federal Reserve Bank of New York in book entry form. D. Pre-refunded m;u;nicipal bonds rated "Aaa" by Moody's and "AAA" by S&P. If however, 'the isslite is only rated by S&P (i.e., there is no Moody's rating), then the pre-refunded bonds must have been pre-refunded with cash, direct U.S. or U.S. guaranteed obligations, or AAA rated pre-refunded municipals. E. Obligations issued by the following agencies which are backed by the full faith and creditofthe U.S. 1. U.S. Export-:lmport Bank (Eximbank) 2. Farmers Home Administration (FmHA)

! • 3. Federal Financing Bank

! 4. Genei+al Services Administration 5. U.S. Maritirrie Administration

I ' 6. U.S. Department of Housing and Urban Development

"Fiscal Year" means the twelve month period terminating on June 30 of each year, or any other annual accounting period designa~ed by the County as its Fiscal Year under applicable law.

. . i ' I, ,i "Holder" means any pirsori who shall be the registered owner of any Outstanding Bond, 1 as shown on the registration books maimtained by the Trustee under the Indenture. I • .

i • i "Full Accretion! Pate'.'iimeans the date, initially as set forth in the Indenture, that each Convertible Auction Rate Securjity shall reach its stated Maturity Amount, assuming in any semiannual period that the value increases in equ~l daily amounts on the basis of a 360-day year of twelve 30-day

months. !

I .: :: :· ! • ."Independent Cbrtifi;d ·Public Accountant" means. any individual or firm of .certified public accountants duly -licenseµ and entitled to practice and practicing as such under the laws of the State, appointed and paid by the :County, and who or each of whom --

(1) is in fact independent and not under the domination of the County;

(2) does not have a substantial financial interest, direct or indirect, in the operations of the County; and

D-3 (3) is not connected with the County as a member of the Board of Supervisors, officer or employee of the County, but which individual or firm may be regularly retained to audit the accounting records of and make reports thereon to the County.

"Information Services" means Financial Information, Inc., Daily Called Bond Service, 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Mergent/FIS, Inc., 5250 77 Center Drive, Suite 150, Charlotte, NC 28217. Attn: Called Bond Department; and Standard & Poor's J.J. Kenny Drake, Inc., 55 Water Street, New York, NY 10041-0001, Attention: Notification Department; or, in accordance with then current guidelines of the Securities and Exchange Commission, any other service providing information with respect to called bonds that the County may designate in a Certificate of the County delivered to the Trustee.

"Interest Payment Date" means each date upon which interest is due on the Bonds (excepting Capital Appreciation Bonds and Convertible Auction Rate Securities prior to the Full Accretion Date), as initially set forth in the Indenture.

"Interest Rate Period" means any designated period during which a Series of Bonds are Outstanding in the form of Auction Rate Securities or bear interest at the Index Rate.

"Insurance Policy" means the Financial Guaranty Insurance Policy issued by the Bond Insurer.

"LIBOR" on any date of determination for any Auction Rate Period, means:

(i) subject to clause (ii) below, (A) for any Standard Auction Rate Period or any Special Auction Rate period of fewer than 49 days, the offered rate for deposits in U.S. dollars for a one­ month period which appears on Telerate Page 3750 at approximately 11 :00 a.m., London time, on such date, or if such date is not a London Business Day, then on the next preceding London Business day (the "calculation date") and (b) for any Special Auction Rate period of (i) 49 or more but fewer than 70 days, such rates for deposits in U.S. dollars for a two-month period; (ii) 70 or more but fewer than 85 days, the arithmetic average of such rates for deposits in U.S. dollars for two- and three-month periods; (iii) 85 or more but fewer than 120 days, such rate for deposits in U.S. dollars for a three-month period; (iv) 120 or more but fewer than 148 days, the arithmetic average of such rates for deposits in U.S. dollars for three­ and six-month periods; (v) 148 or more but fewer than 180 days, such rate for deposits in U.S. dollars for a six-month period; (vi) 180 or more but fewer than 225 days, the arithmetic average of such rates for deposits in U.S. dollars for six- and nine-month periods; (vii) 225 or more but fewer than 290 days, such rate for deposits in U.S. dollars for a nine-month period; (viii) 290 or more but fewer than 325 days, the arithmetic average of such rates for deposits in U.S. dollars for nine-month and one-year periods; and (ix) 325 days or more, such rate for deposits in U.S. dollars for a one-year period; or

(ii) if, on any calculation date, no rate appears on Telerate Page 3750 as specified in clause (i) above, the arithmetic average of the offered quotations of four major banks in the London interbank market, selected by the Auction Agent for deposits in U.S. dollars for the respective periods specified in clause (i) above to prime banks in the London interbank market at approximately 11 :00 a.m., London time, on such calculation date and in a principal amount of not less than $1,000,000 that is representative of a single transaction in such market at such time, unless fewer than two such quotations are provided, in which case, the arithmetic average of the rates quoted at approximately 11:00 a.m., New York time, on the date next preceding such calculation date by three major banks in the City of New York, selected by the Auction Agent, for loans in U.S. dollars to leading European banks in a principal amount of not less than $1, 000,000 that is representative of a single transaction in such market at such time.

D-4 "LIBOR Spread" means the percentage of LIB OR established on the Closing Date for the affected Bonds, as provided in the Indenture.

"London Business Day" means a day that is a Business Day and a day on which dealings in deposits in U.S. dollars are transacted, or with respect to any future date, are expected to be transacted, in the London, U .K., interbank: market.

"Maturity Amount" means (i) the Accreted Value of any Capital Appreciation Bond on its maturity date and (ii) the Accreted Value of any Convertible Auction Rate Security as of the Full Accretion Date.

"Mode" means the Principal Amount, Authorized Denomination, interest rate and pay1nent structure, including any methodology for the reset thereof, for any Series of Bonds. This Indenture authorizes the issuance of Bonds in the following Modes: Fixed Rate Bonds, Listed Securities, Auction Rate Securities, Capital Appreciation Bonds, Index Bonds and any other Mode as set forth in a Supplemental Indenture.

"Moody's" means Moody's Investors Service, a corporation duly organized and existing under the laws of the State of Delaware, and its successors and assigns, except that if such entity shall be dissolved or liquidated or shall no longer perform the services of a municipal securities rating agency, then the term "Moody's" shall be deemed to refer to any other nationally recognized municipal securities rating agency selected by the County and satisfactory to and approved by the Bond Insurer.

"Opinion of Counsel" means a written opinion of counsel of recognized national standing in the field of law relating to municipal bonds, appointed and paid by the County and satisfactory to and approved by the Trustee and the Bond Insurer (neither of whom shall be under any liability by reason of such approval).

"Outstanding," when used as of any particular time with reference to any Bonds, means (su~ji~ct to the provisions of the Indenture) all Bonds executed by the County and authenticated by the Trust,ee thereunder except:

(1) Bonds theretofore cancelled and destroyed by the Trustee. or surrendered to the Trustee for cancellation and destruction under the Indenture;

(2) Bonds paid or deemed to have been paid under the Indenture; and ·•, .,, '' (3) Bonds in.·lieu, o.f,9r'.in. subs.titution for which. other Bonds shall have been executed by the County and authenticated and delivered b,y the Trusi(ly under the Indenture.

"Payment Date" means any Interest Payment Date, any Principal Payment Date or any

Redemption Date. 1 •

"Permitted Investments" means any of the following obligations if and to the extent that, at the time of making the investment, they are permitted bflaw:

(1) Direct obligations. of the United States of America (including obligations issued or held in book-entry form ort the· books ofthe Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally,guaranteed by the United States of America.

D-5 (2). Bonds, , notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself):

A. U.S. Export-Import Bank (Eximbank) Direct obligations or fully guaranteed certificates of beneficial ownership

B. Farmers Home Administration (FmHA) Certificates of beneficial ownership

C. Federal Financing Bank

D. Federal Housing Administration Debentures (FHA)

E. General Services Administration Participation certificates

F. Government National Mortgage Association (GNMA or "Ginnie Mae") GNMA - guaranteed mortgage-backed bonds GNMA - guaranteed pass-through obligations G. U.S. Maritime Administration Guaranteed Title XI financing

H. U.S. Department of Housing and Urban Development (HUD) Project Notes Local Authority Bonds New Communities Debentures • U.S. government guaranteed debentures U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds

(3). Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities are only permitted if they have been stripped by the agency itself):

A. Federal Home Loan Bank System obligations

B. Federal Home Loan Mortgage Comoration (FHLMC or "") Participation Certificates Senior debt obligations

C. Federal National Mortgage Association (FNMA or "Fannie Mae") Mortgage-backed securities and senior debt obligations

D. Student Loan Marketing Association (SLMA or "S~llie Mae") Senior debt obligations

E. Resolution Funding Cor.p. (REFCORP) obligations

F. Farm Credit System Consolidated systemwide bonds and notes

D-6 (4). Money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAArn-G; AAA-m; or AA-m and ifrated by Moody's rated Aaa, Aal or Aa2.

(5). Certificates of deposit secured at all times by collateral described in (A) and/or (B) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks. The collateral must be held by a third party and the bondholders must have a perfected first security interest in the collateral.

(6). Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF.

(7). Investment Agreements, including GIC's, Forward Purchase Agreements and Reserve Fund Put Agreements acceptable to MBIA.

(8). Commercial paper rated, at the time of purchase, "Prime - 1" by Moody's and "A- 1" or better by S&P.

(9). Bonds or notes issued by any state or municipality which are rated by Moody's and S&P in one of the two highest rating categories assigned by such agencies.

(10). Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - I" or "A3" or better by Moody's and "A-1" or "A" or better by S&P.

(11 ). Repurchase Agreements for 30 days or less must follow the following criteria. Repurchase Agreements which exceed 30 days must be acceptable to MBIA.

A. Repos must be between the municipal entity and a dealer bank or securities firm I. Primary dealers on the Federal Reserve reporting dealer list which are rated A or better by Standard & Poor's Corporation and Moody's Investor Services, or 2. Banks rated "A" or above by Standard & Poor's Corporation and Moody's Investor Services.

B. The written repo contract must includethe following: 1. Securities ~hich are acceptable fot transfer are: a. Direct U.S. governments, or b. Federal agencies backed by the full faith and credit of the U.S. governrnent(and FNMA & FHLMC) 2. The term of the repo may be up to 30 days 3. The collateral must be delivered to the municipal entity, trustee (if trustee is not supplying ·the collateral) or third party acting as agent for the trustee (if the trustee is s\lpplying the collateral) before/simultaneous with payment (perfection by possession of certificated securities). 4. Valuation of Collateral a. The securities must be valued weekly, marked-to-market at current market price plus accrued interest (i) The value of collateral must be equal to 104% of the amount of cash

D-7 transferred by the municipal entity to the dealer bank or security firm under the repo plus· accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by municipality~ then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. C. Legal opinion which must be delivered to the municipal entity: 1. Repo meets guidelines under state law for legal investment of public funds.; and

(12) Any state administered pool investment fund in which the County is statutorily permitted or required to invest.

(13) Investment Agreements approved by the Bond Insurer (except that if the Insurance Policy is no longer in effect, then any other legally authorized investments approved by the Rating Agencies).

"Principal Account" means the account by that name established pursuant to the Indenture.

"Principal Amount" means (a) as to any Fixed R.ate Bond, Auction Rate Security or Index Bond, the principal amount thereof; or· (b) as to any Capital Appreciation Bond or Convertible Auction Rate Security, the Maturity Amount thereof. ·

"Principal Payment Date" means a date on which principal is due on the Bonds as set forth in the Indenture.

"Purchasers" means the underwriters named in the bond purchase contract for the Bonds, as original purchasers of the Bonds.

"Qualified Swap Agreement" or "Swap Agreement" means (i) any ISDA Master Swap Agreement, by and between the County and a Qualified Swap Provider, which includes Schedule A thereto and the applicable Commitment, (a) that is entered into by the County with an entity that is a Qualified Swap Provider at the time the arrangement is entered into; (b) which provides that the County shall pay to such entity an amount based on the interest accruing at a Fixed Rate on an amount equal to the Principal Amount of Outstanding Bonds covered by such Swap Agreement, if any, and that such entity shall pay to the County an amount based on the interest accruing on a principal amount equal to the then-Outstanding Principal Amount of the affected Bonds, at a variable rate of interest computed according to a formula set forth in the Swap Agreement (which need not be the same formula by which the Auction Rate, if applicable, is calculated) or that one shall pay to the other any net amount due under such arrangement; and (c) which has been designated in writing to the Trustee in a Certificate of the County as a Qualified Swap Agreement with respect to the affected Bonds. Any Qualified Swap Agreement shall be subject to the prior written approval of the Bond Insurer and the County shall have notified each Rating Agency of the proposed Swap Agreement and shall have determined that the execution of the Swap Agreement would not cause the reduction or withdrawal of the current rating from such Rating Agencies on the Bonds.

"Qualified Swap Provider'' means with respect to the counterparty under any other Swap Agreement meeting the requirements of the definition thereof, a financial institution approved by the County and the Bond Insurer, and (A) the long-term, unsecured and unsubordinated obligations of which are rated at the time of execution of the related Qualified Swap Agreement by at least two Rating

D-8 Agencies as: (i) at least "A3" by Moody's, "A-" by S&P or "A-" by Fitch; or (B) the obligations of which under the particular Qualified Swap Agreement and any Swap Policy related thereto are unconditionally guaranteed by a bank or non-bank financial institution, the long-term, unsecured and unsubordinated obligations of which are rated at the time of execution of the Qualified Swap Agreement by at least two Rating Agencies as: (i) at least "A3" by Moody's, "A-" by S&P or "A-" by Fitch.

"Rating Agencies" means Fitch, Moody's and Standard & Poor's, but in each case only to the: extent that any of them is then rating the Bonds at the request of the County.

"Record Date" means the date set forth as such in the Indenture or as set forth in a Supp:lemental Indenture.

"Redemption Date" means a date on which any of the Bonds is called for redemption prior to the Principal Payment Date of such Bonds.

"Redemption Fund" means the County of Sacramento Taxable Pension Funding Bonds, Series 2004 Redemption Fund established by the Director of Finance and maintained by the Trustee under the Indenture.

"Refunding Fund" means the County of Sacramento 2004 Pension Obligation Debenture Refunding Fund established and maintained by the Director of Finance under the Indenture.

"Reimbursement Agreement" means the Reimbursement and Indemnity Agreement dated as of.July 1, 2004, between the County and the Insurer.

"Reported Rate" means the rate that appears on Telerate Page 3750 or a successor reporter of such rates, selected by the Calculation Agent and acceptable to the County.

"Representation Letter'' means the letter of representation to The Depository Trust Company from the County and the Trustee relating to the Bonds.

"Series" means all of the Bonds designated as being within a certain series, as indicated in the Indenture, regardless of variations in maturity date, interest rate (but within the same Mode), redemption and other provisions, and any Bonds thereafter issued in transfer or exchange for such Bonds pursuant to the Indenture.

"Series 2004 S:inking Fund Account" means the Sinking Fund Account established for the Series 2004 Borids pur~ant to the Indenture. . .

"Sinking Fund Account" means any subaccount established for the Term Bonds of any Series and maturity within the Principal Account, as more particularly designated as provided in the Indenture.

"Sinking Fund Account Payment Date" means any date on which any Sinking Fund Account Payments for the Term Bonds of any Series and maturity are required to be deposited in the Sinking Fund Account for the Bonds of such Series and maturity.

"Standard & Poor's" or "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., a corporation duly organized and existing under the laws of the State of New York, and its successors or assigns, except that if such entity shall be dissolved or liquidated or shall :t10 longer perform the functions of a municipal securities rating agency, then the term "Standard &

D-9 Poor' s" shall be deemed to refer to any other nationally recognized municipal securities rating agency selected by the County and satisfactory to and approved by the Bond Insurer.

"State" means the State of California.

"Supplemental Indenture" means any Indenture then in full force and effect, which has been duly executed and delivered by the Trustee and the County amendatory of the Indenture or supplemental thereto, but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture.

"System" means the Sacramento County Employees' Retirement System.

"Swap Payments" means any of the periodic payments due from the County pursuant to the terms of a Qualified Swap Agreement.

"Telerate Page 3750" means the display designated on page 3750 on Moneyline Telerate, Inc. (or such other page as may subsequently replace the 3750 page on that service or such other service as may be nominated by the British Banker's Association for the purpose of displaying London interbank offered rates for U.S. dollar deposits).

''" means the designated portion of a Series of Bonds sharing a particular Mode, and other characteristics, designated as such in the Indenture. Each Tranche of Bonds within a Series of Bonds must be within the same Mode.

"Treasury Note Rate" means (a) the bond equivalent yield, calculated in accordance with prevailing industry conventions, of the rate on the most recently auctioned direct obligation of the United States Government having a remaining maturity closest to the length of the applicable Auction Rate Period, as quoted in The Wall Street Journal on such date for the Business Day next preceding such date; or (b) in the event that such rate is not published in The Wall Street Journal, then the bond equivalent yield, calculated in accordance with prevailing industry conventions, as calculated by reference to the arithmetic average of the bid price quotations of the most recently auctioned direct obligation of the United States Government having a remaining maturity closest to the length of the applicable Auction Rate Period, based on bid price quotations on such date obtained by the Auction Agent from the U.S. Government Securities Dealers.

"Written Request of the County" means an instrument in writing signed by the Director of Finance or the Chief Financial Officer, or by any other officer of the County duly authorized by the Board of Supervisors of the County for that purpose.

THE INDENTURE

Equal Security

In consideration of the acceptance of the Bonds by. the Holders thereof, the Indenture shall be deemed to be and shall constitute a contract by and among the County, the Trustee and the Holders from time to time ·of all Bonds authorized, executed, authenticated and delivered under the Indenture and then Outstanding to provide for the payment of the principal, Accreted Value or redemption price of and the interest on all Bonds which may from time to time be authorized, executed, authenticated and delivered under the Indenture, subject to the agreements, conditions, covenants and provisions contained in the Indenture; and all agreements and covenants set forth therein required to be

D-10 performed by or on behalf of the County shall be for the equal and proportionate benefit, protection and security of all Holders of the Bonds without distinction, preference or priority as to security or otherwise of any Bonds over any other Bonds by reason of the number or date thereof or the time of authorization, execution, authentication or delivery thereof or for any cause whatsoever, except as expressly provided in the Indenture or therein.

Issuance of Additional Bonds

The County may at any time issue Additional Bonds on a parity with the Bonds, but only subje,ct to the following specific conditions, which are conditions precedent to the issuance of any such Addi1ional Bonds.

(a) The County shall be in compliance with all agreements and covenants contained in the Indenture.

(b) The issuance of such Additional Bonds shall have been authorized pursuant to the Act and shall have been provided for by a Supplemental Indenture which shall specify the following:

(i) The purpose for which such Additional Bonds are to be issued; provided, that such Additional Bonds shall be applied solely for (i) the purpose of satisfying any obligation to make payments to the System pursuant to the Act relating to pension benefits accruing to the System's members and their beneficiaries, and/or for payment of all costs incidental to or connected with the issuance of Additional Bonds for such purpose (including funded interest), and/or (ii) the purpose of refunding any Bonds then Outstanding, including payment of all costs incidental to. or connected with such refunding (including funded interest);

(ii) The authorized principal amount and designation of such Additional Bonds;

(iii) The interest payment dates and principal payment dates for such Additional Bonds;

(iv) Whether such Additional Bonds are fixed rate bonds, variable rate bonds, index-ed notes, current interest bonds, deferred interest bonds, capital appreciation bonds, convertible capital appreciation bonds, embedded cap bonds, equity participation bonds or synthetic or hedged fixed rate bonds or such other Mode as may be set forth in a Supplemental Indenture;

(v) The denomination or denominations of and method of numbering such Additional Bonds;

(vi) The redemption premiums, if any, and the redemption terms, if any, for such Additional Bonds;

(vii) The amount, if any, to be deposited from the proceeds of sale of such Additional Bonds in the Interest Account; and

(viii) Such other prov1S1ons (including the requirements of a book entry Bond registiration system, if any) as are necessary or appropriate and not inconsistent with the Indenture.

D-11 Deposits into the Debt Service Fund and into the Redemption Fund

The County agrees and covenants that, not later than July 31 of each Fiscal Year, it will transfer to and deposit in the "County of Sacramento Taxable Pension Funding Bonds, Series 2004 Debt Service Fund" (which fund is established and shall be maintained by the Director of Finance in the treasury of the County so long as any Bonds are Outstanding) the amount of the County's obligations on the Bonds maturing or required to be redeemed in such Fiscal Year. On the last Business Day immediately preceding each Payment Date, the Director of Finance shall withdraw from the Debt Service Fund and deposit with the Trustee in immediately available funds an amount of money equal to the County's obligations on the Bonds on such date, and all amounts payable by the Director of Finance to the Trustee under the Indenture shall be promptly deposited by the Trustee upon receipt thereof in the "County of Sacramento Taxable Pension Funding Bonds, Series 2004 Redemption Fund" (which fund is established and will be maintained in trust by the Trustee so long as any Bonds are Outstanding).

Allocation of Money in the Redemption Fund

On each Interest Payment Date, the Trustee shall transfer from the Redemption Fund, in immediately available funds, for deposit into the following respective accounts established under the Indenture, the following amounts in the following order of priority, the requirements of each such account (including the making up of any deficiencies in any such account resulting from lack of funds sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any deposit is made to any account subsequent in priority: ·

First: Interest Account,

Second:Principal Account, and

Third: Administrative Expense Account.

All money in each of such accounts will be held in trust by the Trustee and will be applied, used and withdrawn only for the purposes authorized in the Indenture. .

(a) Interest Account. On each Interest Payment Date, the Trustee will set aside from the Redemption Fund and deposit in the Interest Account that amount of money which is equal to the amount of interest becoming due and payable on all Outstanding Bonds on such Interest Payment Date.

No deposit need be made in the Interest Account if the amount contained therein is at least equal to the aggregate amount of interest becoming due and payable on all Outstanding Bonds on such Interest Payment Date.

All money in the Interest Account shall be used and withdrawn by the Trustee solely for the purpose of paying the interest on the Bonds as it shall become due and payable (including accrued interest on any Bonds purchased or redeemed prior to maturity).

(b) Principal Account. On each Principal Payment Date, the Trustee will set aside from the Redemption Fund and deposit (i) in the Principal Account an amount of money equal to the Principal Amount of all Outstanding Serial Bonds maturing on such Principal Payment Date and (ii) into the respective Sinking Fund Accounts for all Outstanding Term Bonds ( established below) the amount of all Sinking Fund Account Payments required to be made on such Sinking Fund Account Payment Date .

D-12 No deposit need be made in the Principal Account if the amount contained therein is at least equal to the aggregate amount of the principal of all Outstanding Serial Bonds maturing by their terms. on such Principal Payment Date plus the aggregate amount of all Sinking Fund Account Payments required to be made on such Sinking Fund AccoU.ilt Payment Date for all Outstanding Term Bonds.

All money in the Principal Account shall be used and withdrawn by the Trustee solely for the purpose of paying the principal, Accreted Value or redemption price of the Bonds as they shall become due and payable, whether at maturity or prior redemption, except that any money in any Sinking Fund Account shall be used and withdrawn by the Trustee only to purchase or to redeem or to pay Term Bonds for which such Sinking Fund Account was created.

(c) Administrative. Expense Account. Following the deposits set forth above, any money remaining in the Redemption Fm.id shall be deposited by the Trustee in the Administrative Expense Account. All money depqsited in the Administrative Expense Account will be transferred by the Trustee to or upon the order ofthejCounty,ias specified in a Written Request of the County, on each date provided therefor in the Auction Agent Agreement and the Broker-Dealer Agreement, for payment of the fees then due to the Auction Agent and the Broker-Dealer, as set forth therein, provided all of the County's obligations under the Indenture are then otherwise satisfied.

Deposit and Investments of Money in Accounts and Funds

All money held by the Trustee in any of the accounts or funds established pursuant to the Indenture will be invested in Permitted Investments at the Written Request of the County. If no Written Request of the County is received, the Trustee will invest funds held by it in Permitted Investments described in clause (8) of the definition thereof. Such investments shall, as nearly as practicable, mature on or before the dates on which such money is anticipated to be needed for disbursement hereunder. All interest or profits received on any money so invested will be deposited in the Redemption Fund.

EstaMishment of Deposit Fund and Transfers Therefrom

In the event the County were to elect to enter into a Qualified Swap Agreement, with the consent of the Bond Insurer, the Trustee will establish a special fund designated as the "County of Sacramento Deposit Fund, Series 2004" (the "Deposit Fund"). The Deposit Fund will be funded and applied solely in accordance with the Indenture; it is intended for the proper matching of debt service ·payments on the Auction Rate Securities ~~ct.Index Bonds, if any, that are covered by Qualified Swap ·Agreements, with the related SwaplPaymen1s and the required netting of such payments in order to assure full and timely payments to the Holqers.offheAuction Rate Securities and Index Bonds affected by such Qualified Swap Agreements ( collectively, ;"Swapped Bonds"). In the absence of any Qualified Swap Agreements, the Deposit Fund will remain unfunded.

On or before the date thaLis two (2) Business Days prior to each Interest Payment Date or such other date that may be established for Swapped Bonds, the Trustee shall transfer into the Deposit Fun:d the portion of the County's Debt Service Prepayment Obligation on deposit in the Redemption Fund that is necessary in order to make Swap Paytnents for all Swapped Bonds.

Extension of Payment of the Bonds

The County will not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time of payment of any claims for interest by the purchase of such

D-13 Bonds or by any other arrangement, and in case the maturity of any of the Bonds or the time of payment of any such claims for interest shall be extended, such Bonds or claims for interest shall not be entitled, in case of any Event of Default under the Indenture, to the benefits thereof except subject to the prior payment in full of the principal, Accreted Value or redemption price of and the interest due on all Bonds then Outstanding; provided, that nothing in this section shall be deemed to limit the right of the County to issue bonds for the purpose of refunding any Outstanding Bonds, and such issuance shall not be deemed to constitute an extension of maturity of the Bonds.

Obligation of the Director of Finance

In the event the County fails to deposit with the Trustee the full amount of money required to pay the principal, Accreted Value or redemption price of and the interest on the Bonds by any Payment Date, the County is obligated to satisfy its obligations under the Bonds from any money lawfully available in any fund in the County treasury, and the Director of Finance is obligated to transfer from any money lawfully available in any fund in the County treasury amounts necessary to make such payments to the Trustee to pay the principal, Accreted Value or redemption price of and the interest on the Bonds on such Payment Date.

Accounting Records and Reports

The County will keep or cause to be kept proper books of record and accounts in which complete and correct entries shall be made of all transactions relating to the receipts, disbursements, allocation and application of all money on deposit in the funds established under the Indenture, which such books shall be available for inspection by the Trustee and the Bond Insurer upon reasonable notice at reasonable times and under reasonable conditions. Not more than two hundred ten (210) days after the close of each Fiscal Year, the County shall furnish to the Trustee and the Bond Insurer copies of the audited fmancial statements of the County for such Fiscal Year, including a balance sheet as of the end of such Fiscal Year and such accompanying statements for such Fiscal Year as are required by generally accepted accounting principles, with each such statement and balance sheet prepared in accordance with generally accepted accounting principles consistently applied and audited by a firm of Independent Certified Public Accountants; provided, that the Trustee shall have no duty to review or examine any such financial statements.

Prosecution and Defense of Suits

The County will defend against every suit, action or proceeding at any time brought against the Trustee upon any claim to the extent involving the failure of the County to fulfill its obligations under the Indenture; provided, that the Trustee or any Holder at its election may appear in and defend any such suit, action or proceeding.

Continuing Disclosure

The County will comply with and carry out all of the provisions of the Continuing Disclosure Certificate executed by the County and dated the Closing Date, as originally ·executed and as it may be amended from time to time in accordance with the terms thereof, and notwithstanding any other provision of the Indenture, failure of the County to comply with such Continuing Disclosure Certificate shall not be considered an Event of Default under the Indenture; provided, that any Holder may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the County to comply with its obligations thereunder.

D-14 Waiver of Laws

The County shall not at any time insist upon or plead in any manner whatsoever, or claim or take the benefit or advantage of, any stay or extension law now or at any time hereafter in force that may affect the agreements and covenants contained in the Indenture or in the Bonds, and all benefit or advantage of any such law or laws is expressly waived by the County to the extent permitted by law.

Further Assurances

Whenever and so often as reasonably requested to do so by the Trustee, the Bond Insurer or any Holder, the County will promptly execute and deliver or cause to be executed and delivered all such other and further assurances, documents or instruments, and promptly do or cause to be done all such other and further things as may be necessary or reasonably required in order to further and more fully vest in the Trustee, the Bond Insurer and the Holders all rights, interests, powers, benefits, privileges and advantages conferred or intended to be conferred upon them.

The Trustee

Deutsche Bank National Trust Company is appointed the Trustee for the Bonds issued under the Indenture and for the purpose of receiving all money which the County is required to deposit with the Trustee thereunder and for the purpose of allocating, applying and using such money as provided in the Indenture, with the rights and obligations provided therein, and the County agrees that it will at all times so long as any Bonds are Outstanding maintain a Trustee having the qualifications required.

The County, with the prior written consent of the Bond Insurer, may at any time (unless there exists any Event of Default under the Indenture) remove the Trustee initially appointed and any successor thereto and may appoint a successor or successors thereto by an instrument in writing; prov!_ckg, that any such successor shall be a state or national bank or corporation with trust powers or a trust company having ( or in the case of a corporation, bank or trust company included in a bank holding company system, the related bank holding company shall have) a combined capital (exclusive of borrowed capital) and surplus of at least one hundred million dollars ($100,000,000) and shall be subject to supervision or examination by federal or state authority; and if such bank, corporation or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purpose of this section the combined capital and surplus of such bank, corporation or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee may· at any time resign by giving written notice of such resignation to the County and the Bond Insurer and by mailing notice of such resignation under the Indenture to the Holders, and upon receiving such notice of resignation, the County, shall promptly appoint · a successor T111~tee by an instnmJ.eilt in· writmg. Any removal or resignation of a Trustee and appointment. of ~ :successor Trustee shall b~come effective only after a successor Trustee acceptable to the Bond fusurer shall have been appointed and upon the acceptance of appointment by such successor Trustee; provided, that if, withill" thirty (30) days after notice of the removal or resignation of the Trustee no successor Trustee shall have been· appointed and shall have accepted such appointment, the removed or resigning. Trustee may petition any court of competent jurisdiction for. the appointment of a successor T~tee, which court may thereupon, .after such notice, if any, 8lS it may deem proper and prescriby}fld a~.rnay be ~equired by iaw, appointa successor Trustee having the qualifications required by the Indenture:' The Trustee may be removed at any time, at the request of the Bond Insurer, for any breach of its obligations and duties set forth in the Indenture.

Any bank, corporation or trust company into which the Trustee may be merged or converted or with which it may be consolidated or any bank, corporation or trust company resulting from

D-15 any merger, conversion or consolidation to which it shall be a party or any bank, corporation or trust company to which the Trustee may sell or transfer all or substantially all of its corporate trust business shall become the successor Trustee without the execution or filing of any paper or any further act, anything in the Indenture to the contrary notwithstanding; provided, that such bank, corporation or trust company shall be eligible under this section.

The Trustee is authorized to pay the principal, Accreted Value or redemption price of the Bonds when duly presented for payment on their Principal Payment Dates or their Redemption Dates as provided in the Indenture and to pay the interest on the Bonds on their Interest Payment Dates as provided in the Indenture. The Trustee shall cancel all Bonds upon payment thereof on their Principal Payment Date or on their Redemption Date or upon the surrender thereof to the Trustee by the County, and the Trustee shall destroy all such cancelled Bonds and shall deliver a certificate of destruction to the. County and shall keep accurate records of all Bonds paid and discharged and cancelled and destroyed by it.

The Trustee shall, prior to an Event of Default, and after the curing of all Events of Default that may have occurred under the Indenture, perform such duties, and only such duties, as are specifically set forth in the Indenture, and no implied duties or obligations shall be read in the Indenture. The Trustee shall, during the existence of any Event of Default under the Indenture that has not been cured, exercise such of the rights and powers vested in it, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. ·

Liability of the Trustee

The recitals of facts, agreements and covenants contained in the Indenture and in the Bonds shall be taken as recitals of facts, agreements and covenants of the County, and the Trustee shall not assume any responsibility for the correctness of the same and does not make any representation as to the sufficiency, validity or priority of the Indenture or of the Bonds, and shall not incur any responsibility in respect thereof other than in connection with the rights or obligations assigned to or imposed upon it in the Indenture, in the Bonds or in law or equity. The Trustee shall not be liable in connection with the performance of its duties under the Indenture except for its own negligence or willful misconduct, and the Trustee shall not be liable for any error ofjudgment made in good faith unless it shall be proved that the Trustee was negligent in ascertaining the relevant facts.

The Trustee shall not be bound to recognize any person as the Holder of a Bond unless and until such Bond is submitted for inspection, if required, and such Holder's title thereto satisfactorily established, if disputed.

The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in aggregate principal amount of all Outstanding Bonds or the Bond Insurer relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or the exercise of any trust or power conferred upon the Trustee under the Indenture.

The Trustee shall be under no obligation to exercise any of the rights or powers vested in it at the request, order or direction of any of the Holders or the Bond Insurer pursuant to the provisions of the Indenture unless such Holders or the Bond Insurer shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby. The Trustee shall have no obligation or liability to the Holders for the payment of the principal, Accreted Value or redemption price of or the interest on the Bonds from its own funds; but rather the Trustee's obligations shall be limited solely to the performance of its duties under the Indenture.

D-16 The Trustee shall not be deemed to have knowledge of any Event of Default under the Indenture unless and until an officer of the Trustee at its Corporate· Trust Office responsible for the administration of its duties under the Indenture shall have actual kno~ledge thereof or shall have received written notice thereof, and the Trustee shall not be bound to ascertain or inquire as to the performance or observance of any of the agreements, conditions, covenants or tentis contained in the Indenture or of any of thie documents executed in connection with the Bonds, or as to the existence of an Event of Default under the Indenture but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the County, personally or by agent or attorney.

The Trustee may execute any of the trusts or powers 'under the Indenture or perform any duties under the Indenture either directly or by or through attorneys in fact, agents or receivers, and shall not b,e answerable for the negligence or misconduct of any such attorney in fact, agent or receiver, if such attorney-in-fact, agent or receiver was selected by the Trustee with due care. The Trustee shall be entitled to advice of counsel and other professionals concerning all matters of trust and its duty under the Indenture, but the Trustee shall not be answerable for the professional malpractice of any attorney at law or certified public accountant in connection with the rendering of his professional advice in accordance with the terms of the Indenture if such attorney at law or certified public accountant was selected by the Trustee with due care.

The Trustee shall not be concerned with or accountable to anyone for the subsequent use or application of any money or securities which shall be released to the County in accordance with the provisions of the Indenture.

Whether or not therein expressly so provided, every provision of the Indenture or of any related documents relating to the conduct or affecting the liability of or affording protection to the Trustee shall he subject to the provisions of this article.

The Trustee shall be protected in acting upon any bond, certificate (including any Certificate of the County), consent, email or facsimile transmission, notice, opinion, order, report, request (including any Written Request of the County), requisition, resolution or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trnstee may consult with counsel, who may be counsel of or to the County, with regard to legal questions, and the opinion of such counsel shall be full and complete authorization and protection in respe,;t of any action taken or suffered by it under the Indenture: li1 good faith and in accordance therewith. · ! Whenever in the administration of its rights and obligations under the Indenture the Trustee shall deem it necessary or desirable that a matter be establis~ed or proved prior to taking or suffering any action under the Indenture, such matter (unless o~ij~\ evidence in respect thereof be

1 specifically prescribed in the Indenture) may, in the absence of bad ! f~th on the part of the Trustee, be deemed to be conclusively proved and e~tablished by a Certificate o~l#e. Co~1:1ty, which certificate shall be full warrant to the Trustee for any action taken or suffered under the :proV1s10ns of the Indenture upon the faith thereof, but in its discretion the Trustee may in lieu thereof~¢c¢pt other evidence of such matter

1

or may require such additional :e1den:ce as it may deem reasonable. : • ; :

No provision of the Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance or exercise of any of its duties under the Indenture, or in the exercise of its rights or powers.

D-17 The Trustee shall have no responsibility, op1mon, or liability with respect to any information, statements or recital in any offering memorandum or other disclosure material prepared or distributed with respect to the issuance of the Bonds.

The Trustee shall not be considered in breach of or in default with respect to any obligation created under the Indenture in the event of any enforced delay in the performance of such obligation due to unforeseeable causes beyond its control and without its fault or negligence, including, but not limited to, acts of God, or of the public enemy, acts of a government, acts of the County, fires, floods, epidemics, quarantine restrictions, strikes, freight embargoes, earthquakes, explosion, mob violence, riot, inability to procure or general sabotage or rationing of labor, equipment, facilities, sources of energy, material or supplies in the open market, litigation or arbitration involving a party or others relating to zoning or other governmental action or inaction, malicious mischief, condemnation, and unusually severe weather or delays of supplies or subcontractors due to such causes or any similar event and/or occurrences beyond the control of the Trustee.

No permissive power, right or remedy conferred upon the Trustee under the Indenture shall be construed to impose a duty to exercise such power, right or remedy.

All moneys received by the Trustee, until used or applied or invested as provided in the Indenture, shall be held in trust and such moneys need not be segregated from other moneys except to the extent required by law or as provided in the Indenture. The Trustee shall not otherwise be under liability for interest on any moneys received under the Indenture except such as may be agreed upon.

The Trustee may become the Holder of Bonds with the same rights it would have if it were not Trustee and, to the extent permitted by law, may act as depositary for and permit any of its offices or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Holders, whether or not such committee shall represent the Holders of a majority in principal amount of the Bonds then Outstanding.

Compensation and Indemnification of the Trustee

The County covenants to pay to the Trustee from time to time, and the Trustee shall be entitled to, receive reasonable compensation for all services rendered by it in the exercise and performance of any of the powers and duties under the Indenture, and the County will pay or reimburse the Trustee upon its request for all expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of the Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance that may arise from its negligence or willful misconduct, including the negligence or willful misconduct of any of its directors, officers or employees. The County, to the extent permitted by law, shall indemnify, defend and hold harmless the Trustee, including its directors, officers and employees, against any loss, damages, liability or expense incurred without negligence or willful misconduct on the part of the Trustee arising out of or in connection with the acceptance or administration of the trusts created, including costs and expenses (including attorneys' fees) of defending itself against any claim or liability in connection with the exercise or performance of any of its powers under the Indenture; provideg, that the Trustee shall make payments on the Bonds when due, shall cause the acceleration of the Bonds and shall cause the mandatory redemption of the Bonds in accordance with prior to seeking any indemnity under the Indenture. The rights of the Trustee and the obligations of the County under this section shall survive the discharge of the Bonds and the Indenture and the resignation or removal of the Trustee.

D-18 Amendment of the Indenture

Amendment with Written Consent of Holders. The · Indenture and the rights and obligations of the County and of the Holders may be amended at any time (with the prior written consent of the Bond Insurer and after one .Cl) week's prior written notice to the Rating Agencies without the County receiving any objection thereto) by a Supplemental Indenture which shall become binding when the v.rritten consents of the Holders of a majority in aggregate principal amount of the Outstanding Bonds, exclusive of Bonds disqualified as provided in the Indenture, are filed with the Trustee ( except that so long as the Insurance Policy is in effect, only the consent of the Bond Insurer shall be required to any such amendment) and after receipt of an approving Opinion of Counsel that such amendment is authorized under the Indenture. No such amendment shall (1) extend the maturity of or reduce the interest rate on or amount of interest on or principal, Accreted Value or redemption price of any Bond without the express written consent of the Holder of such Bond, or (2) reduce the percentage of Bonds required for the written consent to any such amendment.

Amendment without Written Consent of Holders. The Indenture. and the rights and obligations of the County and of the Holders may also be amended at any time for any purpose that will not matetj.ally adversely affect the interests of the Holders (with the prior written consent of the Bond Insurer and after one (1) week' & prior written notice to the Rating Agencies without the County receiving any objection thereto) by a Supplemental Indenture which shall become binding without the consent of any Holders, but only to the extent permitted by law and after receipt of an approving Opinion of Counsel that any such amendment is authorized under the Indenture, including (without limitation) for any one or more of the following purposes --

(a) to add to the agreements and covenants required in the Indenture to be performed by the County other agreements and covenants thereafter to be performed by the County, to pledge or assigt1 additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved in Indenture to or conferred therein on the County;

(b) to make such provisions for the purpose of curing any ambiguity or of correcting, curing or supplementing any defective provision contained in the Indenture and in any Supplemental Indenture or in regard to questions arising under the Indenture which the County may deem desirable or necessary and not inconsistent herewith;

(c) to modify, amend or add . to the proV1s1ons in the Indenture or in any Supplemental Indenture to permit the qualification of the Indenture or thereof under the Trust Indenture Act of 1939, as amended, or any similar federal statutes hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by such statute or any similar statute;

,, ; ~ ( d) to modify, amend or add to the provisions herein to provide for the establishment of different interest rate modes, tender :Or purchase provisions in connectitjn wit4 the Bonds;

(e) to modify, an;iencf or add to the provisions herein ,to prqvide for credit facilities, liquidity facilities· or other finanpial products. a.greements in conne.ction with the Boilds; or

(f) to make any amendments :O:ecessary or appropriate to preserve or protect the exemption ofinterest on the Bonds from State personal income taxes. . ·

The Trustee ·shall not be required to enter into or consent to· the execution of any Supplemental Indenture which, in the sole judgment of the Trustee, might adversely affect the rights, obligations, powers, privileges, indemnities, or immunities provided the Trustee in the Indenture.

D-19 Disqualified Bonds

Bonds owned or held. by or for the account of the County shall not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Bonds provided in this article, and shall not be entitled to consent to or take any other action provided in this article; provideg, that the Trustee shall not be deemed to have knowledge that the County owns any such Bonds unless the County is a Holder or the Trustee has received written notice that the County is a Holder.

Endorsement or Replacement of Bonds Mter Amendment

After the effective date of any action taken as provided in the Indenture, the County may determine that the Bonds may bear a notation by endorsement (in a form approved by the. County) as to such action, and in that case upon demand of the Holder of any Outstanding Bond and presentation of his Bond for such purpose at the Corporate Trust Office a suitable notation as to such action shall be made on such Bond; provided, that if the County shall so determine, new Bonds so modified as, in the opinion of the County, shall be necessary to conform to such action shall be prepared and executed, and in that case upon demand of the Holder of any Outstanding Bond a new Bond or Bonds shall be exchanged at the Corporate Trust Office without cost to each Holder for his Bond or Bonds then Outstanding upon surrender of such Outstanding Bond or Bonds.

Amendment by Mutual Consent

The provisions of this article shall not prevent any Holder from accepting any amendment as to the particular Bonds held by such Holder, provided that due notation thereof is made on such Bonds.

Events of Default

If any of the following events occur, they shall constitute Events of Default under the Indenture, namely:

(a) If default shall be made by the County in the due and punctual payment of interest due on any Bond when and as the same shall become due and payable;

(b) If default shall be made by the County in the due and punctual payment of the principal, Accreted Value or redemption price of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed or by proceedings for redemption;

( c) If default shall be made by the County in the performance of any ·of the agreements or covenants required in the Indenture to be performed by the County, and such default shall have continued for a period of thirty (30) days after the County shall have been given notice in writing of such default by the Trustee or the Bond Insurer or the Holders of not less than twenty-five per cent (25%) in aggregate Principal Amount of the Outstanding Bonds, specifying such default and requiring the same to be remedied; provided, if the default stated in the notice can be corrected, but not within the applicable period, the Trustee and such Holders shall not unreasonably withhold their consent to an extension of such time if corrective action is instituted by the County within the applicable period and diligently pursued until the default is corrected; or

D-20 ( d) If an Event of Bankruptcy shall occur, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction shall assume custody or control of the County or of the whole or any substantial part of its property.

Remedies for Events of Default

If an Event of Default occurs under the Indenture and is continuing, the Trustee shall (upon the written direction of the Bond Insurer), by written notice to the County, declare the Principal Amount of all Bonds then Outstanding and the interest accrued thereon to be due and payable i1rum1diately, whereupon the same shall become immediately due and payaqle without any further action or notice; provided, that if at any time after such acceleration and before any judgment or decree for the payment of money with respect thereto has been entered all amounts payable to the Trustee under the Indenture on the Bonds subject to acceleration under this paragraph (except the principal or Accreted Value or the interest on the Bonds which is due solely by reason of such acceleration) shall have been paid or payment shall have been duly provided for by deposit with the Trustee and all existing Events of Default under the Indenture shall have been cured or waived, then the Bond Insurer may annul such acceleration and its consequences by written notice to the County and the Trustee, which such annulment shall be binding upon the County and the Trustee and all of the Holders, but no such annulment shall extend. to or affect any subsequent Event of Default under the Indenture or impair any right or remedy consequent thereon.

Appllication of Funds Upon Acceleration

All money in the funds provided in the Indenture upon the date of the declaration of acceleration by the Trustee as provided in the Indenture. and any amounts thereafter received by the County under the Indenture shall be transmitted to the Trustee and shall be applied by the Trustee in the following order --

First, to the payment of the costs and expenses of the Trustee, if any, in carrying out the provisions of this article, including_payment of reasonable compensation to. its accountants and counsel and ,my outstanding fees and expenses of the Trustee, and then to the payment of the costs and expenses of the Holders in providing for the declaration of such event of default, including reasonable compensation to their accountants and counsel;

Second, upon presentation of the several Bonds, and th~,, suµp.ping thereon of the amount of th1e payment if only partially paid or upon the surrender thereof if :fully :paid> to the payment of the whol,e amount then owing and unpaid upon the Bonds for the principal pr Accreted Value thereof and the interest thereon, with interest on the overdue principal, Accreted Value or redemption price and interest thereon at the rate borne by such Bonds, and in case such money shall be insufficient to pay in full the whok amount so owing and.unpaid upon the Bonds, then to the payment of such principal or Accreted Value, interest and (to thy extent permitted by law} interest on overdue: principal or Accreted Value and internst without preference or priority among.such principal or Accrete~ Value, interest and interest on

overdue principal or Accreted 1Value andcinterest ratably to the aggregate of such principal or Accreted Value, interest and interest on overdue principal or Accreted Value and interest

Institution of Legal Proceedings by the Trustee

I'·' I If an Event of Default under the Indenture shall happen and be continuing, the Trustee may, and upon the written request of the Holders of a majority in Principal Amount of the Outstanding Bonds, and upon being indemnified to its satisfaction therefor, shall (with the prior written consent of the Bond Insurer) proceed to protect or enforce its rights or the rights of the Holders of the Bonds under the

D-21 Indenture by a suit in equity or action at law, either for the specific performance of any agreement or covenant contained in the Indenture, or in aid of the execution of any power therein granted, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee shall deem most effectual in support of any of its rights and duties under the Indenture.

Non Waiver

Nothing in this article or in any other provision of the Indenture or in the Bonds shall affect or impair the obligation of the County, which is absolute and unconditional, to pay the principal, Accreted Value or redemption price of and the interest on the Bonds to the respective Holders of the Bonds on the respective Payment Dates as provided in the Indenture, or shall affect or impair the right of such Holders, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied in the Indenture and in the Bonds.

A waiver of any default or breach of duty or contract by the Trustee or any Holder shall not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Trustee or any Holder to exercise any right or remedy accruing upon any default or breach of duty or contract shall impair any such right or remedy or shall be construed to be a waiver of any such default or breach of duty or contract or an acquiescence therein, and every right or remedy conferred upon the Holders by the Act or by this article may be enforced and exercised from time to time and as often as shall be deemed expedient by the Trustee or the Holders.

If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned, the Trustee, the County, the Bond Insurer and any Holder shall be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken.

Actions by the Trustee as Attorney in Fact

Any action, proceeding or suit which any Holder shall have the right to bring to enforce any right or remedy under the Indenture may be brought by the Trustee for the equal benefit and protection of all Holders, whether or not the Trustee is a Holder, and the Trustee is appointed (and the successive Holders, by taking and holding the Bonds issued under the Indenture, shall be conclusively deemed to have so appointed it) the true and lawful attorney in fact of the Holders for the purpose of bringing any such action, proceeding or suit and for the purpose of doing and performing any and all acts and things for and on behalf of the Holders as a class or classes as may be advisable or necessary in the opinion of the Trustee as such attorney in fact.

Remedies Not Exclusive

. No remedy in the Indenture conferred upon or reserved to the Holders is intended to be exclusive of any other remedy, and each such remedy shall be cumulative and shall be in addition to every .other remedy given under the Indenture or now or hereafter existing at law or in equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by the Act or by any other law.

Limitation on Holders' Right to Sue

No Holder of any Bond shall have the right to institute any suit, action or proceedings, at law or equity, for any remedy under the Indenture unless (a) such Holder shall have previously given to the Trustee written notice of the occurrence of an Event of Default; (b) the Holders of at least a majority

D-22 in aggregate Principal Amount of all Outstanding Bonds and the Bond Insurer shall have made written request upon the Trustee to exercise the powers granted in the Indenture or to institute such suit, action or proceeding in its own name; ( c) such Holders shall have tendered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities to be incurred by it in compliance with such request; and (d) the Trustee shall have refused or omitted to comply with such;request for a period of sixty (60) days after such request shall have been received by, and such tender of indemnity shall have been made to, the Trustee; provided, that this limitation shall not apply to the Bond Jnsurer.

Such notification, request, tender of indemnity an,d refusal or omission are declared, in every case, to be conditions precedent to the exercise by any Holder of Bonds of any remedy under the Indenture; it being understood and intended that no one or more Holders of Bonds shall have any right in any manner whatever by his or their action to enforce any right under the Indenture except mthe manner provided in the Indenture, and that all proceedmgs at law or in equity to enforce any provision thereof shall be instituted and maintained in the manner provided in the Indenture and for the equal benefit of the Holders of all Outstanding Bonds.

Absolute Obligation of the County

Nothing contained in the Indenture or in the Bonds shall affect or impair the obligation of the County, which is absolute and unconditional, to pay the principal, Aqcreted Value or redemption price of and the interest on the Bonds to the respective Holders of the Bonds on their respective Payment Dates.

Rights of the Bond Insurer

Anything in the Indenture to the contrary notwithstanding, upon the occurrence and . continuation of an Event of Default, the Bond Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted hereunder to the Holders', or to the Trustee for the benefit of the Holders, including but not limited to rights and remedies described under the headings "Institution of Legal Proceedings by the Trustee" and "Limitation on Holders' Right to Sue" and including but not limited to the right to approve all waivers of any Events of Default. The rights granted to the Bond Insurer under the Indenture shall be deemed terminated and shall not be exercisable by the Bond Insurer during any period during which the Bond Insurer shall be in default under the Insurance Policy.

Discharge of the Bonds

(a) If the County shall pay or cause to be paid!orjthfr~ shall otherwise be paid to the Holders of all OutstandiniBonds the principal, Accreted Value or iedemption price of and the interest on such Bonds at the times and in the manner stipulated in the Inde:ritute ~n~ therein, then· all agreements, covenants and other obligations of the County to the Holders of ~uqh 1 ~tjnds under the Ind.enture shall there:upon cease, terminate and become void and be discharged land '~aijisfied, and in such event the Trustee shall execute and deliver to the County all such instruments «:tS µui'y be necessary or desirable to evid1~nce such discharge and satisfaction, ~nd the Trustee shall ~a~ oyef or deliver• to the •County aU money or securities held by it pursuant to the Indenture which ar~ not! required for the payment of the principal, Accreted Value or redemption price of and the interest du¢ on sudh Bonds. . ...

(b) Any Outstanding Bonds shall prior to the Payment Dates or Redemption Dates there:of be deemed to have been paid within the meaning of and with the effect expressed msubsection (a) of this section if (1) there shall have been deposited with the Trustee either (A) money or (B) Federal Securities which are not subject to redemption prior to maturity (including any such Federal Securities issued or held in book entry form on the books of the Treasury of the United States of America), the

D-23 interest on and principal of which when paid will provide money, which, together with other money, if any, deposited with the Trustee at the same time, shall be sufficient, in the opinion of an Independent Certified Public Accountant, to pay when due the principal, Accreted Value or redemption price of and the interest on such Bonds on and prior to the Payment Dates thereof, as the case may be, and (2) the · County shall have given the Trustee in form satisfactory to it irrevocable instructions to mail to the Holders in accordance with the Indenture and to the Information Services notice that the deposit required by clause (I) above has been made with the Trustee and that such Bonds are deemed to have been paid in accordance with this section and stating the Payment Dates or Redemption Dates on which money is to be available for the payment of the principal, Accreted Value or redemption price of and the interest due on such Bonds.

Unclaimed Money

Anything contained in the Indenture to the contrary notwithstanding, any money held by the Trustee in trust for the payment and discharge of the Bonds or the interest thereon which remains unclaimed for two (2) years after the date when such Bonds or interest thereon shall have become due and payable, if such money was held by the Trustee at such date, or for .two (2) years after the date of deposit of such money if deposited with the Trustee after the date when such Bonds and interest shall have become due and payable, shall be repaid by the Trustee to the County as its absolute property free from trust, and the Trustee shall thereupon be released and discharged with respect thereto and the Holders shall not look to the Trustee for the payment of such Bonds; provided, that before being required to make any such payment to the County, the Trustee may, and at the request of the County shall, at the expense of the County, mail to the Holders in accordance with the Indenture and to the Information Services a notice that such money remains unclaimed and that, after a date named in such notice, which date shall not be less than thirty (30) days after the date of mailing such notice, the balance of such money then unclaimed will be returned to the County.

Benefits of the Indenture Limited to Parties

Nothing contained in the Indenture, expressed or implied, is intended to give to any person other than the Trustee, the County, the Holders and the Bond Insurer any right, remedy or claim under or by reason of the Indenture, and any agreement, condition, covenant or term contained in the Indenture required to be observed or performed by or on behalf of the County or any officer or employee thereof shall be for the sole and exclusive benefit of the Trustee, the Holders and the Bond Insurer, and to the extent that the Indenture confers upon or gives or grants to the Bond Insurer any right, remedy or claim under or by reason of the Indenture, the Bond Insurer is explicitiy recognized as being a third party beneficiary under the Indenture and may enforce any such right, remedy or claim conferred, given or granted thereunder.

Execution of Documents by Holders

Any declaration, request or other instrument which is permitted or required in the Indenture to be executed by Holders may be in one or more instruments of similar tenor and may be executed by Holders in person or by their attorneys appointed in writing. The fact and date of the execution by any Holder or such Holder's attorney of any declaration, request or other instrument or of any writing appointing such attorney may be proved by the certificate of any notary public or other officer authorized to make acknowledgments of deeds to be recorded in the state or territory in which such person purports to act that the person signing such declaration, request or other instrument or writing acknowledged to such person the execution thereof, or by an affidavit of a witness of such execution duly sworn to before such notary public or other officer. The ownership of any Bonds and the amount,

D-24 maturity, number and date of holding the same may be proved by the registration books for the Bonds maintained by the Trustee under the Indenture.

Any declaration, request, consent or other instrument or writing of the Holder of any Bond shall bind all future Holders of such Bond with respect to anything done or suffered to be done by the Trustee or the County in good faith and in accordance therewith.

Waiver of Personal Liability

' . No officer of the County shall be individually or personally liable for the payment of the principal, Accreted Value or redemption price of or the interest on the Bonds by reason of their issuance, but nothing contained in the Indenture shall relieve any officer of the County from the performance of any official duty provided by the Act or any other applicable provisions of law or thereby.

Insuirer Provisions

Pavments under the Insurance Policy. At least three (3) days prior to each Payment Date the County will determine, taking into account the right of the County to transfer funds to the Trustee for deposit in the Redemption Fund on the Business Day prior to each Payment Date and in reliance on the covenant of the County contained in the Indenture, whether there will be sufficient funds in the Debt Service Fund of the County to pay the principal or Accreted Value of or interest on the Bonds on such Payment Date. If the County determines that there will be insufficient funds in the Debt Service Fund of the County, the County shall so notify the Trustee and the Bond Insurer. Such notice shall specify the amount of the anticipated deficiency, the Bonds to which such deficiency is applicable and whether such Bonds will be deficient as to principal or Accreted Value or interest, or both. In the event that, on the Business Day prior to the Payment Date on the Bonds, the Trustee has not received sufficient moneys to pay a.ll principal or Accreted Value of and interest on the Bonds due on the following Business Day, the Trustee shall immediately notify the Bond Insurer or its designee on the same Business Day by telephone or telegraph, confinned in writing by registered or certified mail, of the amount of the deficiency. If the defktency is made up in whole or in part on the Payment Date, the Trustee shall so notify the Bond Insur,er or its designee. In addition, if the Trustee has notice that any Holder has been required to disgorge payments of principal or Accreted Value of or interest on the B6nds to a trustee in bankruptcy or creditors or others pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes a voidable preference to such Holder within the meaning of :@ly applicable bankruptcy laws, then the Trustee shall notify the Bond Insurer or its designee of such ract by telephone or telegraphic

1 notice, confirmed in writing by registered or certified mail. \! ! •

The Trustee is hereby irrevocably designated, appointed,: directed and authorized to act as attorney-in-fact for Holders of the Bonds as follows: ,

If and to the extent there is a deficiency in ami>unts required to pay interest on the Bonds, the Trustee shall (a) execute and deliver to U.S. Bank Trust National Association, or its successors under the Insurance Policy (the "Insurance Paying Agent"), in form satisfactory to the Insurance Paying Agent, an instrument appointing the Bond Insurer as agent for such Holders in any legal proceeding related to the payment of such interest and an assignment to the Bond Insurer of t:he claims for interest to which such deficiency relates! ;md which are paid by the Bond Insurer, (b) receive as designee of the respective Holders (and not as Trustee) in accordance with the tenor of the Insurance Policy payment from the Insurance Paying Agent with respect to the claims for interest so assigned, and (c) disburse the same to such respective Holders; and

D-25 If and· to the extent of a deficiency in amounts required to pay principal or Accreted Value of the Bonds, the Trustee shall (a) execute and deliver to the Insurance Paying Agent in form satisfactory to the Insurance Paying Agent an instrument appointing the Bond Insurer as agent for such Holder in any legal proceeding relating to the payment of such principal and an assignment to the Bond Insurer of any of the Bonds surrendered to the Insurance Paying Agent of so much of the principal amount thereof as has -not previously been paid or for which moneys are not held by the Trustee and available for such payment (but such assignment shall be delivered only if payment from the Insurance Paying Agent is received), (b) receive as designee of the respective Holders (and not as Trustee) in accordance with the tenor of the Insurance Policy payment therefor from the Insurance Paying Agent, and (c) disburse the same to such Holders.

Payments with respect to claims for interest on and principal or Accreted Value of Bonds disbursed by the Trustee from proceeds of the Insurance Policy shall not be considered to discharge the obligation of the County with respect to such Bonds, and the Bond Insurer shall become the owner of such unpaid Bond and claims for the interest in accordance with the tenor of the assignment made to it under the provisions of the Indenture or otherwise. -

Irrespective of whether any such assignment is executed and delivered, the County and the Trustee hereby agree for the benefit of the Bond Insurer that:

They recognize that to the extent the Bond Insurer makes payments, directly or indirectly (as by paying through the Trustee), on account of principal or Accreted Value of or interest on the Bonds, the Bond Insurer will be subrogated to the rights of such Holders to receive the amount of such principal or Accreted Value and interest from the County, with interest thereon as provided and solely from the sources stated in the Indenture and the Bonds; and

They will accordingly pay to the Bond Insurer the amount of such principal and interest (including principal and interest recovered under subparagraph (ii) of the first paragraph of the Insurance Policy, which principal and interest shall be deemed past due and not to have been paid), with interest thereon as provided in the Indenture and the Bond, but only from the sources and in the manner provided herein for the payment of principal or Accreted Value of and interest on the Bonds to Holders, and will otherwise treat the Bond Insurer as the owner of such rights to the amount of such principal or Accreted Value and interest.

Notice to the Insurer. Any- notices required to be given by any party shall also be given to the Bond Insurer at the address provided in the Indenture, Attn: Insured Portfolio Management.

Amendments. The Bond Insurer shall be given notice of any amendment of the Indenture for the purpose of curing any ambiguity, correcting formal defects or adding to the security of the financing. Any amendment in which bondholder consent is a prerequisite shall require the consent of the Bond Insurer. Copies of any amendments to such documents which are consented to by the Bond Insurer shall be sent to Standard & Poor's.

Supplemental Indenture. The consent of the Bond Insurer shall be obtained prior to the execution of any Supplemental Indenture entered into for reasons other than (1) a refunding to obtain savings; or (2) the issuance of Additional Bonds pursuant to the terms of the Indenture.

Remedies upon Default. The Bond Insurer, acting alone, shall have the right to direct all remedies in the event of a default. The Bond Insurer shall be recognized as the registered owner of each bond which it insures for the purposes of exercising all rights and privileges available to bondholders.

D-26 For bonds which it insures, the Bond Insurer shall have the right to institute any suit, action, or proceeding at law or in equity under the same terms as a bondholder in accordance with applicable provisions of the governing documents. Other than with respect to the redemption provisions contained in the Indenture, any acceleration of principal payments must be subject to the Bond Insurer's prior written consent.

Defeasance. The Bond Insurer shall be provided with an opinion of counsel acceptable to the Bond Insurer that the Bonds have been legally defeased and that the escrow agreement establishing such defeasance operates to legally defease the Bonds within the meaning of the Indenture and any Supplemental Indenture relating to the Bonds. In addition, the Bond Insurer will be entitled to receive (i) 15 business days notice of any advance refunding of the Bonds and (ii) an accountant's report with respect to the sufficiency of the amounts deposited in escrow to defease the Bonds.

Agents. The Trustee, tender agent, if any, and paying agent, if any, must be commercial banks with trust powers. The Remarketing Agent, if any, responsible for holding moneys or receiving Bonds must have trust powers.

D-27 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXE PROPOSED FORM OF OPINION OF BOND COUNSEL

[Delivery Date]

Board of Supervisors Cowrty of Sacramento Sacramento, California

County of Sacramento Taxable Pension Funding Bonds, Series 2004 (Final Opinion)

Ladies and Gentlemen:

We have acted as bond counsel in connection with the issuance by the County of Sacramento (the "County") of $426,131,120.25 aggregate principal amount of its County of Sacramento Taxable Pension Funding Bonds, Series 2004 (the "Bonds") pursuant to Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the Government Code of the State of California (the "Act") and an Indenture executed and entered into as of July 1, 2004 (the "Indenture") by and between Deutsche Bank National Trust Company, as Trustee (the ''Trustee"), and the County and all capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. ·

In such connection, we have reviewed the Indenture, opinions of counsel to the County and the Trustee with respect to the County and the Trustee, certifications of the County and the Trusitee and such other documents, opinions and matters to the ext~nt we deemed necessary to render the opinions set forth herein. Cert~n agreements, requireme~ts and procedures contained or referred to in the Indenture and other relevant documents may be ichanged and certain actions (including, without limitation, defeasance of the Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents, and no opinion is expressed herein as to any Bond if any such change dccurs or action is taken or omitted upon the advice or approval of any counsel other than ourselves.

The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof, and we have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all

E-1 documents and signatures presented to us (whether· as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the County and we have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture.

In addition, we call attention to the fact that the rights and obligations under the Indenture and the Bonds and their enforceability may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against counties in the State of California. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum or waiver provisions contained in the foregoing documents. Furthermore, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement dated June 24, 2004, or other offering material relating to the Bonds and express no opinion relating thereto.

Based on and subject to the foregoing and the default judgment rendered on May 4, 2004, by the Superior Court of the County of Sacramento in the action entitled County of Sacramento v. All Persons Interested, etc., No. 04AS00388, and in reliance thereon, as of the date hereof, we are of the following opinions:

1. The County is a political subdivision duly organized and existing under and by virtue of the Constitution and laws of the State of California, and the Bonds constitute valid and binding obligations of the County.

2. The Indenture has been duly authorized, executed and delivered by the County and constitutes a valid and binding obligation of the County.

3. The Bonds do not constitute a debt of the County or the State of California or any political subdivision thereof within the meaning of any constitutional or statutory debt limit, and do not constitute an obligation for which the County or the State of California is obligated to levy or pledge any form of taxation or for which the County or the State of California has levied or pledged any form of taxation.

E-2 4. Interest on the Bonds is included in gross income for federal income taxes purposes, but is exempt from State of California personal income taxes. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds.

Faithfully yours,

ORRICK, HERRINGTON & SUTCLIFFE LLP

per

E-3 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXF

FINANCIAL GUARANTY INSURANCE POLICY

F-1 (THIS PAGE INTENTIONALLY LEFT BLANK) FINANCIAL GUARANTY INSURANCE POLICY MBIA Insurance Corporation Armonk, New York 10504 Policy No. [NUMBER] MBIA Insurance Cotp0ration (the "Insurer''), ill consideration of the payment of the premiwn anl subject to the tenns of this policy, hereby unconditionally and irrevocably guarantees to any owner, as hereinafter defined, of the follovving described obligations, the full and complete payment required to be made by oron behalf of the Issuer to LPA YING AGENT/TRUSTEE] or its successor (the "Paying Agent'') of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pmsuant to a mandatoiy sinking furn payment) and interest on, the Obligations (as lthat tennis defined below) as such payments shall become due but shall not be so paid (except that ill the event of any acceleration of the due date of such principal by reason of mandat01y or optional redemption or acceleration resulting fiom defauh or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fimd payment, the payments guaranteed hereby shall be made ill such amounts and at such times as such payments of priiriµtl would have been due had there not been any such acceleration); and (ii) the reimbursement of a such payment which is subsequently recovered fiom any owner pmsuant to a final judgment by a comt of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law. The amounts referred to in cJauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "Insured Amounts." "Obligations" shall mean:

[PAR) [LEGAL NAME OF ISSUE]

Upon receipt oftelephonic or telegraphic no1ice, such mtice subsequently confinned in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of an Obligation the payment of anlrnured Amount for which is then due, that such required payment has not beenmade, the Imureron the due date of such payment or within one business day after receipt ofnotice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New Yo:tk, New Yotk, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and smre:rrler of such Obligations or presentment of such other proof of ownership of the Obligations, together with any appropriate ~nts of a&signment to evidence the assignment of the Insured Amounts due on the Obligations as are paid by the Insurer, and appropriate :instruments to effect the appointment of the Insurer as agent :for such owners ofthe Obligations in any legal proceeding related to payment ofInsured Amounts on the Obligations, such instruments being ill a fonn satisfactory to U.S. Bank Trust National Association, U.S. Bank Trust National Association shall diIDurse to such owners, or the Paying Agent payment ofthe Insured Amounts due on such Obligations, less any amount held by the Paying Agent for the payment of such Insured Amounts and legally available therefor. This policy does not insure against loss of any prepayment premiwn which may at any time be payable with respect to any Obligation As used herein, the tenn "owner'' shall mean the registered owner of any Obligation as indicated ill the books maintained by the Paying Agent, the Issuer, or any desigree of the lsmJer for such putp0se. The tenn owner shall not include the Issuer or any paI1y whose agreement with the Issuer constitutes the underlying secmity for the Obligations. Any service of proce.5.5 on the Insurer may be made to tre Insurer at its offices located at 113 King Stree,-, Annonk, New Yolk 10504 and such service ofprocess shall be valid and binding. This policy is mn-cancellable for any reason The premium on this policy is not re:futxtable for any reason including the payment prior to maturity of the Obligations. !; [ In the event the J[nsurer were to become illsolvent, any claims arising under a policy of financial guarantyiinsurance are excluded fiom coverage by the California Insurance Guaranty Association, established pmsuant to Article 14.2 (commencing with seqon 1063) of Chapter I of Part 2 ofDivision I ofthe California Insurance Code. ' IN WITNESS WHEREOF, the Insurer has caused this policy to be executed in facsimile on its beha1f~ its duly authorized officeis, this [DAY] day of [MONTH, YEAR].

MBIA Insurance Corporation

Attest Assistant Secretaty SID-R-CA-6 4/95 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXG

AUCTION AND SETTLEMENT PROCEDURES

The following are briefsummaries ofcertain provisions of the Indenture, dated as ofJuly 1, 2004 and the Auction Agent Agreement, dated as ofJuly 1, 2004, governing the interest rate, payment and settlement procedures ofthe Bonds issued as Auction Rate Securities. The summaries do not purport to be comprehensive or definitive and are qualified in their entirety by reference to the fall terms ofthe applicable document, and all capitalized terms not otherwise de.fined herein have the meaning specified in the applicable document.

DEFINITIONS

"All-Hold Rate" means, on any date of determination, the interest rate per annum equal to 85% of LIBOR on such date; provided that in no event shall the All-Hold Rate be more than the Maximum Auction Rate.

"Applicable Auction Rate" means the rate per annum at which interest accrues with respect to the Auction Rate Securities of each Tranche for any Auction Rate Period.

"Auction" means the implementation of the Auction Procedures on an Auction Date.

"Auction Agent Agreement" means each initial Auction Agent Agreement for Auction Rate Securities identified on Schedule I to the Indenture, unless and until a substitute auction agent agreement acceptable to the applicable Broker-Dealer and the Bond Insurer is entered into, after which "Auction Agent Agreement" shall mean each such substitute auction agent agreement in each case as from time to time amended or supplemented.

"Auction Agent" means the initial Auction Agent for the Auction Rate Securities identified on Schedule I to the Indenture, unless and until a substitute Auction Agent Agreement, acceptable to the Broker-Dealers and the Bond Insurer, becomes effective, after which "Auction Agent" shall mean the subs1itute Auction Agent.

"Auction Agent Fee" means the fee set forth in each Auction Agent Agreement.

"Auction Date" means the Business Day immediately preceding the first day of each Auction Rate Period for each Tranche of Auction Rate Securities, other than:

(a) each Auction Rate Period for each Tranche commencing after the ownership of the Auction Rate Securities is no longer maintained in book-entry form by the Securities Depository; or

(b) each Auction Rate Period commencing after the occurrence and during the continuance of a Payment Default; or

(c) any Auction Rate Period commencing less than two Business Days after the cure or waiver of a Payment Default.

"Auction Documents" means, collectively, the Auction Agent Agreement and each Broker-Dealer Agreement, in each case, as supplemented or amended from time to time.

G-1 "Auction Period Adjustment" means an adjustment to the length of an Auction Rate Period implemented by the County pursuant to the Indenture.

"Auction Procedures" means the Auction and Settlement Procedures set forth in the Indenture and in the Auction Agent Agreement.

"Auction Rate" means, as to the interest rate with respect to the applicable Tranche of Auction Rate Securities, the rate of interest per annum that results from implementation of the Auction Procedures with respect to such Tranche of Auction Rate Securities, and determined as described in the Indenture; provided, that the Auction Rate shall not exceed 17% per annum or the Maximum Auction Rate, ifless than 17%.

"Auction Rate Period" means the Initial Auction Rate Period and any Subsequent Auction Rate Period and, more specifically, means, as to the applicable Auction Rate Securities of a Tranche, each period during which a specific Auction Rate is in effect, as a result of an Auction, for such Tranche of Auction Rate Securities, which Auction Rate Period may be a Standard Auction Rate Period or a Special Auction Rate Period as may be designated from time to time by the County pursuant to an Auction Period Adjustment for a Tranche of Auction Rate Securities, each Auction Rate Period running from, and including, the Rate Adjustment Date and ending on, and including, the day immediately preceding the next succeeding Rate Adjustment Date.

"Broker-Dealer" means any broker or dealer (each as defined in the Securities Exchange Act of 1934), commercial bank or other entity permitted by law to perform the functions required of a Broker­ Dealer set forth in the Auction Procedures which is an "Authorized Broker-Dealer" under the Broker­ Dealer Agreement and which:

(a) is a Securities Depository System Participant (or an affiliate of a Securities Depository System Participant);

(b) has been appointed as such by the County and approved by the Bond Insurer pursuant to the Indenture; and

(c) has entered into a Broker-Dealer Agreement that is in effect on the date of reference.

When used herein at a time when more than one Broker-Dealer is acting under the Indenture, the term "the Broker-Dealer" shall mean, as the context dictates, either all such Broker-Dealers collectively, or only each Broker-Dealer acting with respect to the applicable Auction Rate Securities.

"Broker-Dealer Agreement" means each agreement between the Auction Agent and the applicable Broker-Dealer relating to the Auction Rate Securities pursuant to which the Broker-Dealer agrees to participate in Auctions as set forth in the Auction Procedures, as from time to time amended or supplemented, with the consent of the Bond Insurer.

''Broker-Dealer Fee" means the fee set forth in the applicable Broker-Dealer Agreement.

"Catastrophic Event" means an unexpected event that interferes with the normal conduct of business, e.g. an event resulting in the suspension of trading on one or more exchanges, or where one or more exchanges and/or banks are authorized to be closed, severe weather, regional power/communication interruption, physical attack and unexpected events of a limited nature that affect the Auction Agent's and/or Broker Dealers' ability to conduct an Auction including, without limitation, acts of God;

G-2 earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruptions, loss or malfunctions of utilities, computer (hardware or software) or commuriications service; accidents; labor disputes; terrorist acts; or acts of civil or military authority or governmental actions.

"Date of Interest Accrual" means the first day of any Auction Rate Period for Auction Rate Securities.

''Existing Owners" means, with respect to Auction Rate Securities, those registered owners of such Auction Rate Securities as of the day prior to each Auction Date.

''Existing Owners Registry" means, with respect to each Tranche of Auction Rate Securities, the registry of Persons who are Existing Owners of the related Tranche of Auction Rate Securities, maintained by the Auction Agent as provided in the applicable Auction Agent Agreement.

''Fixed Rate Conversion" means the conversion ofthe interest rate mode for the Bonds issued as Auction Rate Securities to a Fixed Rate.

''Fixed Rate Conversion Date" means the date upon which a Fixed Rate Conversion occurs.

"Initial Auction Rate Period" means with respect to Auction Rate Securities, the period from and including the Closing Date to but excluding the Initial Interest Payment Date for such Auction Rate Secwrities.

"Initial Interest Payment Date," with respect to Auction Rate Securities, refers to the initial Interest Payment Date for such Auction Rate Securities set forth in the Indenture.

"Interest Payment Date" as used in this Appendix G with respect to Auction Rate Securities, other than Convertible Auction Rate Securities during the Initial Auction Rate Period, means (i) for each Auction Rate Period of360 days or less, the next Business Day after an Auction Date; (ii) for any other Auction Rate Period, each January IO and February IO; and (iii) each Principal Payment Date for the Auction Rate Securities, whether that date be the Stated Maturity Date, redemption date or otherwise and whether or not an Interest Payment Date.

'"Maximum Auction Rate," on any date of determination for any Auction Rate Period, means 17% per annum, or the maximum rate, if any, established under the laws of the State for obligations of public agencies such as the County ifless than 17%; provided, that any change in the method of calculating the Maximum Auction Rate shall be approved by the Bond Insurer. ·

''Minimum Auction Rate," on any date of determinatio~ means the rate per annum equal to 80% of the greater of (a) LIBOR, or (b) the applicable Reference Rate in effect 01Fthe applicable Auction Date; provided, that in no event shall such Minimum Auction Rate exceed the Maximum Auction Rate.

''Non-Payment Rate" means, for Auction Rate Securities of each Tranche, on any date of detennination, the Maximum Auction Rate.

''Notice of Cure of Payment Default" means a written notice as to cure of a payment default of Auction Rate Securities.

''Notice of Payment Default" means a written notice as to a payment default of Auction Rate Secmities.

G-3 "Overdue Rate" means, as to any Auction Rate Securities, on any date of determination and for any Standard Auction Rate Period, the interest rate per annum equal to the Maximum Auction Rate, and for any Special Auction Rate Period, the interest rate per annum equal to 265% ofLIBOR equal in length to the then-ending Special Auction Rate Period; provided that in no event shall the Overdue Rate exceed the Maximum Auction Rate; provided, that any change in the method of calculating the Overdue Rate shall be approved by the Bond Insurer. ·

''Payment Default" means the default of the County in the due and punctual payment of (a) any installment of interest on the Bonds or (b) any principal or Accreted Value of, premium, if any, or interest on, the Bonds at their maturity (whether on the Stated Maturity Date, prior redemption or otherwise), which default shall continue for a period of two Business Days and which, in either case, is followed by the failure of the applicable Bond Insurer to make, in accordance with the related Insurance Policy, due and punctual payments to or on behalf of the Holders of the Bonds of such installments or payments described in clause (a) or (b), if so required under such Insurance Policy.

''Potential Beneficial Owner" shall mean a customer of a Broker-Dealer that is not a Beneficial Owner of Auction Rate Securities but that wishes to purchase Auction Rate Securities, or that is a Beneficial Owner of Auction Rate Securities that wishes to purchase an additional Principal Amount of Auction Rate Securities.

"Potential Owner" shall mean a Broker-Dealer (or any such other person as may be permitted by the County) that is not an Existing Owner or that is an Existing Owner that wishes to become the Existing Owner of an additional Principal Amount of Auction Rate Securities.

''Rate Adjustment Date" means with respect to each Tranche ofthe Auction Rate Securities, the date on which a new interest rate becomes effective with respect to such Tranche of Auction Rate Securities, and shall mean the first Business Day following each Rate Determination Date (which, until an Auction Period Adjustment, generally is each fourth Wednesday, or the next Business Day if such Wednesday is not a Business Day).

"Rate Determination Date" means, initially, those dates set forth for the Tranches of Auction Rate Securities on Schedule I to the Indenture, and thereafter, the Business Day immediately preceding the first day of each related Auction Rate Period, other than: (i) each Auction Rate Period commencing after the ownership of Auction Rate Securities is no longer maintained in Book-Entry Form; (ii) each Auction Rate Period commencing after and during the continuance of a Payment Default; or (iii) an Auction Rate Period commencing less than two Business Days after the cure or waiver of a Payment Default. Subject to adjustment as provided in the Indenture .

. ''Rate Period" means that period commencing on a Date of Interest Accrual and ending on the earlier of the Fixed Rate Conversion Date or the Stated Maturity Date of the affected Auction Rate Security.

"Rate Period Days" means for any Auction Rate Period the number of days that would constitute such Auction Rate Period, subject to adjustment as provided in the Indenture.

''Reference Rate" means (i) fora Standard Auction Rate Period or any Special Auction Rate. Period of fewer than 180 Rate Period Days, the "AA" Financial Commercial Paper Rate or LIBOR for such Auction Rate Period, whichever is less; and (ii) for an Auction Rate Period of more than 180 Rate Period Days, the Treasury Note Rate for such Auction Rate Period.

G-4 "Regular Record Date" means, with respect to Auction Rate Securities, the second Business Day immediately preceding each Interest Payment Date.

"Sell Order" has the meaning given to such term in the Auction Procedures.

"Special Auction Rate Period" means a Subsequent Auction Rate Period, other than a Standard Aucltion Rate Period, designated pursuant to the Indenture, that consists of a specified number of Rate Period Days not fewer than 42 and not more than 1,820 and evenly divisible by seven, subject to adjustment as provided in said Section, provided that the consent ofthe Bond Insurer shall be required for the e,stablishment of any Auction Rate Period which exceeds 42 days.

"Standard Auction Rate Period" means any Auction Rate Period consisting of 7, 14, 21, 28 or 35 Rate Period Days, or such other period as may be designated from time to time by the County with the consent ofthe Bond Insurer.

"Stated Maturity Date" means the date given as the stated maturity date on each Bond.

"Submission Deadline" means 1:00 p.m., New York time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders) to the Auction Agent, as specified by the Auction Agent from time to time.

"Subsequent Auction Rate Period" means the period from and including the Initial Interest Payment Date for Auction Rate Securities to but excluding the next Interest Payment Date for Auction Rate Securities and each period thereafter from and including one Interest Payment Date to but excluding the next succeeding Interest Payment Date; provided that if any Subsequent Auction Rate Period is a Special Auction Rate Period consisting of more than 91 days, such term shall mean the period commencing on the first day of such Special Auction Rate Period and ending on the last day of the last Auction Rate Period thereof; provided, further, that the Subsequent Auction Rate Period shall normally begin on the respective Interest Payment Date after the end of such Special Auction Rate Period, and the Auction therefor shall normally be held on the preceding Business Day.

"Substitute Commercial Paper Dealer" means Lehman Brothers, Inc., or their affiliates or successors, if such affiliate or successor is a commercial paper dealer, provided that neither such person nor any of its affiliates or successors shall be a Commercial Paper Dealer.

"Tender Price" means the price at which Auction Rate Securities are tendered for purchase upon conversion to Fixed Rate Bonds, comprised of the Principal Amount thereof, plus interest, if any, accrued to th1~ date of purchase, being payable solely from the proceeds of remarketing of said Auction Rate Securities in the form of Fixed Rate Bonds. ·

AUCTION PROVISIONS

Auction Procedures. Subject to the provisions of subsection (b) ofthis section, Auctions shall be conducted on each Auction Date in the following manner:

(a) (i) Prior to the Submission Deadline on each Auction Date:

(A) each Beneficial Owner of Auction Rate Securities may submit to a Broker-Dealer by telephone or facsimile transmission information as to:

(I) the Principal Amount of Outstanding Auction Rate Securities, if

G-5 any, held by such Beneficial Owner which such Beneficial Owner desires to continue to hold, without regard to 'the Auction Rate for the next succeeding Auction Rate Period;

(11) the Principal Amount of Outstanding Auction Rate Securities, if any, which such Beneficial Owner offers to sell, if the Auction Rate for the next succeeding Auction Rate Period shall be less than the rate per annum specified by such Beneficial Owner; and/or

(III) the Principal Amount of Outstanding Auction Rate Securities, if any, held by such Beneficial Owner which such Beneficial Owner offers to sell, without regard to the Auction Rate that may be set for the next succeeding Auction Rate Period; and

(B) one or more Broker-Dealers may contact Potential Beneficial Owners to determine the Principal Amount of Auction Rate Securities which each such Potential Beneficial Owner offers to purchase if the Auction Rate for the next succeeding Auction Rate Period shall not be less than the rate per annum specified by such Potential Beneficial Owner.

For the purposes hereof, the commwiication to a Broker-Dealer of infonnation referred to in paragraphs (A) or (B) of this clause is hereinafter referred to as an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing an Order is hereinafter referred to as a "Bidder;" an Order containing the information referred to (x) in paragraph (A)(I) hereof is hereinafter referred to as a "Hold Order," (y) in paragraph (A)(II) or (B) hereofis hereinafter referred to as a ''Bid," and (z) in paragraph (A)(III) hereof is hereinafter referred to as a "Sell Order." The submission by a Broker-Dealer of an Order to the Auction Agent shall likewise be referred to herein as an "Order," and an Existing Owner or Potential Owner who places an Order with the Auction Agent or on whose behalf an Order is Placed with the Auction Agent shall likewise be referred to herein as a ''Bidder."

(ii) (A) Subject to the provisions of subsection (b) of this section, a Bid by a Beneficial Owner or an Existing Owner shall constitute an irrevocable offer to sell:

(I) the Principal Amount of Outstanding Auction Rate Securities specified in such Bid if the Auction Rate determined as provided in this section shall be less than the rate specified therein; or

(II) such Principal Amount or a lesser Principal Amount of Outstanding Auction Rate Securities to be determined as set forth in subsection (d)(i)(D) of this section if the Auction Rate determined as provided in this section shall be equal to the rate specified therein; or

(III) such Principal Amount of Outstanding Auction Rate Securities if the rate specified therein shall be higher than the Maximum Auction Rate, or such Principal Amount or a lesser Principal Amo:unt of Outstanding Auction Rate Securities to be determined as set forth in subsection (d)(ii)(C) of this section ifthe rate specified therein shall be higher than the Maximum Auction Rate and Sufficient Clearing Bids do not exist.

(B) Subject to the provisions of subsection (b) of this section, a Sell Order by a Beneficial Owner shall constitute an irrevocable offer to sell:

G-6 (I) the Principal Amount of Outstanding Auction Rate Securities specified in such Sell Order if Sufficient Clearing Bids exist; or

(II) such Principal Amount or a lesser Principal Amount of Outstanding Auction Rate Securities as set forth in subsection (d)(ii)(C) of this section if Sufficient Clearing Bids do not exist.

(C) Subjectto the provisions of subsection (b) of this section, a Bid by a Potential Beneficial Owner or a Potential Owner shall constitute an irrevocable offer to purchase:

(I) the Principal Amount of Outstanding Auction Rate Securities specified in such Bid if the Auction Rate determined as provided in this section shall be higher than the rate specified therein; or

(II) such Principal Amount or a lesser Principal Amount of Outstanding Auction Rate Securities as set forth in subsection (d)(i)(E) of this section if the Auction Rate determined as provided in this section shall be equal to the rate specified therein.

(b) (i) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by .such Broker-Dealer, designating itself (unless otherwise permitted by the County) as an Existing Owner in respect of the Principal Amount of Auction Rate Securities subject to Orders submitted or deemed submitted to it by Beneficial Owners or by Potential Beneficial Owners, and shall specify with respect to each such Order:

(A) the name of the Bidder placing such Order (which shall be the Broker- Dealer, unless otherwise permitted by the County);

(B) the aggregate Principal Amount of Auction Rate Securities that are the subject of such Order;

(C) to the extent that such Bidder is an Existing Owner:

(I) the Principal Amount of Auction Rate Securities, if any, subject to any Hold Order placed by such Existing Owner;

(II) the Principal Amount of Auction Rate Securities, if any, subject to any Bid placed by such Existing Owner and the rateispecified in such Bid; and · j .1 .: l (III) the Principal Amount of Au~fon Rate Securities, if any, subject to any Sell Order placed by such Existing Owner; and ,: . .

(D) to the extent such Bidder is a Potential Owner, the rate specified in such Potential Owner Bid.

(ii) Ifany rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth (.001) of 1 %.

(iii) If an Order or Orders covering all Outstanding Auction Rate Securities held by

G-7 any Existing Owner is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall. deem a Hold Order to have been submitted on behalf of such Existing Owner covering the Principal Amount of Outstanding Auction Rate Securities held by such Existing Owner and not subject to an Order submitted to the Auction Agent.

(iv) None ofthe County, the Trustee or the Auction Agent shall be responsible for any failure of a Broker-Dealer to submit an Order to the Auction Agent on behalf of any Existing Owner, Beneficial Owner, Potential Owner or Potential Beneficial Owner, nor shall any such party be responsible for failure by a Securities Depository to effect any transfer or to provide the Auction Agent with current information regarding registration oftransfers.

(v) If any Existing Owner submits to the Auction Agent, through a Broker- Dealer, one or more Orders covering in the aggregate more than the Principal Amount of Outstanding Auction Rate Securities held by such Existing Owner, such Orders shall be considered valid as follows and in the following order of priority:

(A) all Hold Orders shall be considered valid, but only up to and including in the aggregate the Principal Amount of Auction Rate Securities held by such Existing Owner, and if the aggregate Principal Amount of Auction Rate Securities subject to such Hold Orders exceeds the aggregate Principal Amount of Outstanding Auction Rate Securities held by such Existing Owner, the aggregate Principal Amount of Auction Rate Securities subject to each such Hold Order shall be reduced pro rata to cover the aggregate Principal Amount of Outstanding Auction Rate Securities held by such Existing Owner;

(B) (I) any Bid shall be considered valid up to and including the excess of the Principal Amount of Outstanding Auction Rate Securities held by such Existing Owner over the aggregate Principal Amount of Auction Rate Securities subject to any Hold Orders referred to in clause (A) ofthis paragraph (v);

(II) subject to subclause (I) of this clause (B), if more than one Bid with the same rate is submitted on behalf of such Existing Owner and the aggregate Principal Amount of Outstanding Auction Rate Securities subject to such Bids is greater than such excess, such Bids shall be considered valid up to and including the amount of such excess, and the Principal Amount of Auction Rate Securities subject to each Bid with the same rate shall be reduced pro rata to cover the Principal Amount of Auction Rate Securities equal to such excess;

(III) subject to subclause (I) and (II) of this clause (B), if more than one Bid with different rates is submitted on behalf of such Existing Owner, such Bids shall be considered valid first in the ascending order of their respective rates until the highest rate is reached at which such excess exists and then at such rate up to and including the amount of such excess; and

(IV) . in any such event, the aggregate Principal Amount of Outstanding Auction Rate Securities, if any, subject to Bids not valid under this clause (B) shall be treated as the subject of a Bid by a Potential Owner at the rate therein · specified; and

(C) all Sell Orders shall be considered valid up to and including the excess of the. Principal Amount of Outstanding Auction Rate Securities held by such

G-8 Existing Owner over the aggregate Principal Amount of Auction Rate Securities subject to Hold Orders referred to in clause (A) of this paragraph and valid Bids referred to in clause (B) of this paragraph.

(vi) Ifmore than one Bid for Auction Rate Securities is submitted by or on behalf of any Potential Owner, each Bid submitted shall be a separate Bid with the rate and Principal Amount therein specified. ·

(vii) Any Bid or Sell Order submitted by an Existing Owner covering an aggregate Principal Amount of Auction Rate Securities not equal to $25,000 or an integral multiple thereof shall be rejected and shall be deemed a Hold Order. Any Bid submitted by a Potential Owner covering an aggregate Principal Amount of Auction Rate Securities not equal to $25,000 or an integral multiple thereof shall be rejected.

(viii) Any Bid specifying a rate higher than the Maximum Auction Rate will be treated as a Sell Order if submitted by an Existing Owner and will not be accepted if submitted by a Potential Owner. Any Bid submitted by an Existing Owner or a Potential Owner specifying a rate lower than the Minimum Auction Rate shall be treated as a Bid specifying the Minimum Auction Rate.

( c) (i) Not earlier than the Submission Deadline on each Auction Date, the Aucition Agent shall assemble all valid Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order") and shall determine:

(A) the excess of the total Principal Amount of Outstanding Auction Rate Securities over the sum ofthe aggregate Principal Amount of Outstanding Auction Rate Securities subject to Submitted Hold Orders (such excess being hereinafter referred to as the "Available Auction Rate Securities"); and

(B) from the Submitted Orders whether:

(I) the aggregate Principal Amount of Outstanding Auction Rate Securities subject to Submitted Bids by Potential Owners specifying one or more rates equal to or lower than the Auction Rate Securities Maximum Auction Rate; I ' ' 1 . exceeds or is equal to the sum of:

(II) the aggregate Principal Amopnt of Outstanding Auction Rate Securities subject to Submitted Bids by Existing Ownerfspecifying one or more rates higher than the Maximum Auction Rate; and

(III) the aggregate Principal Amount of Outstanding Auction Rate Securities subject to Submitted Sell Orders ' : i (in the event such excess or such eqliality exists (other than because the sum ofthe Principal Amounts of Auction Rate Securities in subclauses (II) and (HI) above is zero because all of the Outstanding Auction Rate Securities are subject to Submitted Hold Orders), such Submitted Bids in subclause (n above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and

G-9 (C) if Sufficient Clearing Bids exist, the lowest rate specified in such Submitted Bids (the "Winning Bid Rate") which if:

(I) (aa) each such Submitted Bid from Existing Owners specifying such lowest rate and (bb) all other Submitted Bids from Existing Owners specifying lower rates were rejected, thus entitling such Existing Owners to continue to hold the Principal Amount of Auction Rate Securities subject to such Submitted Bids; and

(II) (aa) each such Submitted Bid from Potential Owners specifying such lowest rate and (bb) all other Submitted Bids from Potential Owners specifying lower rates were accepted,

would result in such Existing Owners described in clause (C)(I) above continuing to hold an aggregate Principal Amount of Outstanding Auction Rate Securities which, when added to the aggregate Principal Amount of Outstanding Auction Rate Securities to be purchased by such Potential Owners described in clause (C)(II) above, would equal not less than the Available Auction Rate Securities.

(ii) Promptly after the Auction Agent has made the determinations pursuant to subsection (c)(i) hereof, the Auction Agent, by telecopy confirmed in writing, shall advise the County and the Trustee of the Maximum Auction Rate, the Minimum Auction Rate and the All­ Hold Rate and the components thereof on the Auction Date and, based on such determinations, the Auction Rate for the next succeeding Auction Rate Period as follows:

(A) if Sufficient Clearing Bids exist, that the Auction Rate for the next succeeding Auction Rate Period shall be equal to the Winning Bid Rate so determined;

(B) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding Auction Rate Securities are subject to Submitted Hold Orders), that the Auction Rate for the next succeeding Auction Rate Period shall be equal to the Maximum Auction Rate, which succeeding Auction Rate Period shall be 7 Rate Period Days; or

(C) if all Outstanding Auction Rate Securities are subject to Submitted Hold Orders, that the Auction Rate for the next succeeding Auction Rate Period shall be equal to the All-Hold Rate on such Auction Date.

(d) Existing Owners shall continue to hold the Principal Amount of Auction Rate Securities that are subject to Submitted Hold Orders, and, based on the determinations made pursuant to subsection (c)(i) ofthis section, Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below:

(i) If Sufficient Clearing Bids have been made, all Submitted Sell Orders shall be accepted and, subject to the provisions of subsection ( d)(iv) and (v) hereof, Submitted Bids shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected:

(A) Any Existing .Owner's Submitted Bids. specifying any rate that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing

G-10 Owner to sell the aggregate Principal Amount of Auction Rate Securities subject to such Submitted Bids;

(B) Any Existing Owner's Submitted Bids specifying any rate that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Owner to continue to hold the aggregate Principal Amount of Auction Rate Securities subject to such Submitted Bids;

(C) Any Potential Owner's Submitted Bids specifying any rate that is lower than the Winning Bid Rate shall be accepted, thus requiring each such Potential Owner to purchase the aggregate Principal Amount of Auction Rate Securities subject to · • such Submitted Bids;

(D) Any Existing Owner's Submitted Bid specifying a rate that is equal to the Winning Bid Rate shall be rejected, thus entitling such Existing Owner to continue to hold the aggregate Principal Amount of Auction Rate Securities subject to such Submitted Bid, unless the aggregate Principal Amount of Outstanding Auction Rate Securities subject to all such Submitted Bids shall be greater than the Principal Amount of Auction Rate Securities (the "remaining Principal Amount") equal to the excess of the Available Auction Rate Securities over the aggregate Principal Amount of Auction Rate Securities subject to Submitted Bids described in clauses (B) and (C) of this paragraph (i), in which event such Submitted Bid of such Existing Owner shall be rejected in part, and such Existing Owner shall be entitled to continue to hold the Principal Amount of Auction Rate Securities subject to such Submitted Bid, but only in an amount equal to the aggregate Principal Amount of Auction Rate Securities obtained by multiplying the remaining Principal Amount by a fraction, the numerator of which shall be the Principal Amount of Outstanding Auction Rate Securities held by such Existing Owners subject to such Submitted Bid and the denominator of which shall be the sum of the Principal Amount of Outstanding Auction Rate Securities subject to such Submitted Bids made by all such Existing Owners that specified a rate equal to the Winning Bid Rate; and

(E) Each Potential Owner's Submitted Bid specifying a rate that is equal to the Winning Bid Rate shall be accepted but only' in an amount equal to the Principal Amount of Auction Rate Securities obtained by multiplying the excess of the aggregate Principal Amount of Available Auction Rate Securities over the aggregate Principal Amount of Auction Rate Securities subject to Submitted Bids described in clauses (B), (C) a:nd (D) of this paragraph by a fraction, tp.e numerator of which shall be the aggregate Prirtcipal Amount of Outstanding Auction Rate Securities subject to such Submitted Bids aha the denominator of which shall be the sum of the Principal Amount of Outstanding Auction Rate Securities subject to Submitted Bids made by all such Potential Owners ithat specified a rate equal to the Winni~g Bid Rate.

! ' (ii) If Sufficient Clearing Bids have not bee~ made ( other than because all of .the Outstanding Auction ~te Securities are Subject to Submitted! Hold !Orders), subject to the provisions of paragraph (~v) of this subsection, Submitted Orders[ shall be accepted or rejected as follows in the following qrder of priority and all other Submitted ·Bids shall be rejected:

1 (A) Any Existing Owner's Submitted Bids specifying any rate that is equal to or lower than the Maximum Auction Rate shall be rejected, thus entitling such · Existing Owners to continue to hold the aggregate Principal Amount of Auction Rate Securities subject to such Submitted Bids;

G-11 (B) Any Potential Owner's Submitted Bids specifying any rate that is equal to or lower than the Maximum Auction Rate shall be accepted and any rate that is higher than the Maximum Auction Rate shall be rejected, thus requiring such Potential Owners to purchase the aggregate Principal Amount of Auction Rate Securities subject to such Submitted Bids; and

(C) Each Existing Owner's Submitted Bid specifying any rate that is higher than the Maximum Auction Rate and the Submitted Sell Order of each Existing Owner shall be accepted, thus entitling each Existing Owner that submitted any such Submitted Bid or Submitted Sell Order to sell the Auction Rate Securities subject to such Submitted Bid or Submitted Sell Order, but in both cases only in an amount equal to the aggregate Principal Amount of Auction Rate Securities obtained by multiplying the aggregate Principal Amount of Auction Rate Securities subject to Submitted Bids described in clause (B) ofthis paragraph by a fraction, the numerator of which shall be the aggregate Principal Amount of Outstanding Auction Rate Securities held by such Existing Owner subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the aggregate Principal Amount of Outstanding Auction Rate Securities subject to all such Submitted Bids and Submitted Sell Orders.

(iii) If all Outstanding Auction Rate Securities are subject to Submitted Hold Orders, all Submitted Bids shall be rejected.

(iv) If, as a result of the procedures described in paragraphs (i) or (ii) of this subsection, any Existing Owner would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a Principal Amount of Auction Rate Securities that is not equal to $25 ,000 or an integral multiple thereof the Auction Agent shall, in such manner as, in its sole discretion, it shall determine, round up or down the· Principal Amount of Auction Rate Securities to be purchased or sold by any Existing Owner or Potential Owner so that the Principal Amount of Auction Rate Securities purchased or sold by each Existing Owner or Potential Owner shall be equal to $25,000 or an integral multiple thereof.

(v) If, as a result of the procedures described in paragraph (ii) of this subsection, any Potential Owner would be entitled or required to purchase less than $25,000 Principal Amount or an integral multiple thereof of Auction Rate Securities, the Auction Agent shall, in such manner as, in its sole discretion, it shall determine, allocate Auction Rate Securities for purchase among Potential Owners so that only Auction Rate Securities in Principal Amounts of $25, 000 or an integral multiple thereof are purchased by any Potential Owner, even if such allocation results in one or more of such Potential Owners not purchasing any Auction Rate Securities.

(e) Based on the results of each Auction, and in accordance with the Settlement Procedures set forth in the applicable Auction Agent Agreement, the Auction Agent shall determine the aggregate Principal Amount of Auction Rate Securities to be purchased and the aggregate Principal Amount of Auction Rate Securities to be sold by Potential Owners and Existing Owners and, with respect to each Potential Owner and Existing Owner, to the extent that such aggregate Principal Amount of Auction Rate Securities to be sold differs from such aggregate Principal Amount of Auction Rate Securities to be purchased, determine to which other Potential Owner(s) or Existing Owner(s) they shall deliver, or from which other Potential Owner(s) or Existing Owner(s) they shall receive, as the case may be, Auction Rate Securities.

G-12 Deposit and Application of Interest Payments. The following times and dates are modified as required by the terms of any Insurance Policy applicable to the Bonds at the time payments of interest are required to be made to the respective Holders thereof The Trustee is instructed to comply with the particular terms of the Insurance Policy in order to insure timely and full payment of interest on the Bonds covered thereby.

(a) The Trustee shall calculate the amount of interest due and payable on each Interest Payment Date by 10: 00 A.M., New York time, on the third Business Day next preceding such Interest Payment Date or date set for purchase, as the case may be and shall immediately notify the County of such amount. In preparing such calculation, the Trustee may rely on calculations or other services provided by the Auction Agent, the County or any person or persons selected by the Trustee in its discretion including, without limitation, the information set forth in the Indenture.

(b) During any period while Auction Rate Securities are Outstanding, the County shall pay to the Trustee not later than 5:00 P.M., New York time, on the Business Day next preceding each Interest Payment Date an aggregate amount of funds available on such Interest Payment Date in New York equal to the aggregate amount of interest payable on the Auction Rate Securities on such Interest Payment Date.

(c) Not later than 12: 15 P .M., New York time, on each Interest Payment Date that is immediately preceded by an Auction Date, the Trustee shall determine the payment ( or nonpayment, as the case may be) ofthe aggregate amount of interest payable on the Auction Rate Securities on such Interest Payment Date. So long as no Payment Default with respect to the Auction Rate Securities has previously occurred and is continuing and the ownership of the Auction Rate Securities is maintained in book-entry form by the Securities Depository, (i) if the Trustee determines that a Payment Default has occurred, the Trustee shall immediately send a Notice of Payment Default to the Auction Agent and to the Holders of the Auction Rate Securities by telecopy or similar means, and (ii) if all such nonpayments are cured prior to 1:00 P .M., New York time, on such Interest Payment Date, the Trustee shall immediately send a Notice of Cure of Payment Default to the Auction Agent and to the Holders of the Auction Rate Securities by telecopy or similar means.

Calculation of Maximum Auction Rate, Minimum Auction Rate, All-Hold Rate and Overdue Rate During Auction Rate Period. The Auction Agent shall calculate the Maximum Auction Rate, the AU-Hold Rate and the Minimum Auction Rate on each Auction Date. If a Payment Default shall have occurred, the Auction Agent shall calculate the Overdue Rate (i) as ofthe first day of the Subsequent Auction Rate Period commencing after the occurrence of and during the continuance ofsuch Payment Default, (ii) on the date ofthe occurrence of a Payment Default during a Special Auction Rate Period consisting of more than 364 Rate Period Days and (iii) as ofthe first day of any Subsequent Auction Rate Period commencing after the occurrence of 3.Paym:ent Default to and including the Subsequent Auction Rate Period, if any, commencing less thari two Busiliess Days after all such Payment Defaults are cured.

Notification of Payment Dates. Promptly after the Date of Interest Accrual and each Interest Payment Date and in any event at least 10 Bt1siness Days prior (unless the then current Auction Rate Period is a Standard Auction Rate Period of 7 Rate Period Days, in which case, at least 6 days prior) to the next Interest Payment Date following the Date of Interest Accrual or such Interest Payment Date, as the case may be, the Auction Agent shall advise the Trustee and any Paying Agent, so long as no Payment Default has occurred and is continuing and the ownership of the Auction Rate Securities is maintained in book-entry form by DTC, ofsuch next succeeding Interest Payment Date. In the event that any day that is scheduled to be an Interest Payment Date shall be changed after the Auction Agent shall have given the notice referred to in the preceding sentence, not later than 9: 15 A.M., New York time, on the Business Day next preceding the earlier of the new Interest Payment Date or the previous Interest Payment Date,

G-13 the Auction Agent will, by such means as the Auction Agent deems practicable, give notice of such change to the Trustee and to any Paying Agent, so long as no Payment Default has occurred and is continuing and the ownership of the Auction Rate Securities is maintained in book-:-entry form by DTC.

Change in Standard Auction Rate Period.

(a) While any Auction Rate Securities are Outstanding, the County, at its option, with the consent of the Bond Insurer, may from time to time on the Business Day immediately following the end of the Auction Rate Period for such Bonds, change the length of the Standard Auction Rate Period on all or a portion of any Auction Rate Securities from one period to another in order to accommodate economic and financial factors that may affect or be relevant to the length ofthe Standard Auction Rate Period and the interest rate borne by such Auction Rate Securities. The County shall initiate the change in the length of a Standard Auction Rate Period by giving written notice to the Trustee, the Auction Agent, the Broker-Dealers, the Bond Insurer and the Securities Depository, at least ten Business Days prior to the Auction Date for such Standard Auction Rate Period, that the Standard Auction Rate Period will change if the conditions described below are satisfied, the proposed effective date of the change, and that such Auction Rate Securities are subject to mandatory tender for purchase on the Business Day immediately following the Auction Date on which there has been a successful Auction of such Auction Rate Securities.

(b) The change in the length of a Standard Auction Rate Period shall not be allowed unless Sufficient Clearing Bids existed at both the Auction before the date which the notice of the proposed change was given as provided in (a) above and the Auction immediately preceding the proposed change.

(c) The change in length of a Standard Auction Rate Period shall take effect only if (A) the Trustee and the Auction Agent receive by 11 :00 a.m., New York time, on the Business Day before the Auction Date for the first such Standard Auction Rate Period, a certificate from the County Representative, authorizing the change in the length ofthe Standard Auction Rate Period specified in such certificate, and (B) Sufficient Clearing Bids exist at the Auction on the Auction Date for such first Standard Auction Rate Period. Ifthe condition referred to in (A) above is not met, the Auction Rate for the next Auction Rate Period shall be determined pursuant to the Auction Procedures and the Auction Rate Period shall be the Auction Rate Period determined without reference to the proposed change. Ifthe condition referred to in (B) above is not met, the Auction Rate for the next Auction Rate Period shall equal the Maximum Auction Rate on the proposed date of such change in length of the Standard Auction Rate Period, and the Standard Auction Rate Period shall be 7 Rate Period Days.

( d) Any Auction Rate Securities for which the Standard Auction Rate Period is changed shall be subject to mandatory tender for purchase on the Business Day immediately following the Auction Date on which there has been a successful Auction of such Auction Rate Securities (subject to the availability of funds sufficient to pay the Tender Price of such Auction Rate Securities having been provided to the Trustee through the remarketing of such Auction Rate Securities) at a price equal to the Principal Amount being tendered and accrued interest thereon.

Designation of Special Auction Rate Periods.

(a) The County, at its option, with the consent of the Bond Insurer, may designate any succeeding Subsequent Auction Rate Period as a Special Auction Rate Period. A designation of a Special Auction Rate Period shall be effective only if (i) notice thereof shall have been given in accordance with subsection (c) and subsection (d)(i) of this section, (ii) an Auction shall have been held on the Auction Date for such Special Auction Rate Period and Sufficient Clearing Bids shall have existed

G-14 in such Auction, and (iii) if any notice of redemption shall have been mailed by the Trustee, the related redemption price shall be on deposit with the Trustee.

(b) In the event the County wishes to designate a Subsequent Auction Rate Period as a Special Auction Rate Period, the last day of any such Special Auction Rate Period must be followed by a Thursday that is a Business Day.

(c) Ifthe.County proposes to designate any succeeding Subsequent Auction Rate Period as a Special Auction Rate Period pursuant to subsection (a) of this section, not less than 20 (or such lesser number of days as may be agreed to from time to time by the Auction Agent and the Bond Insurer) nor more than 30 days prior to the.date the County proposes to designate as the first day of such Special Auction Rate Period (which shall be the day that would otherwise be the first day of the next succeeding Auction Rate Period), the County shall give written notice thereof to the Trustee, the Bond Insurer, the Auction Agent and the Securities Depository. Each such notice shall state (i) that the County may exercise its option to designate a succeeding Subsequent Auction Rate Period as a Special Auction Rate Period, specifying the first and last days thereof, and the conditions thereto and (ii) that the County will, by 11 :00 A.M., New York time, on the second Business Day next preceding the first day of such proposed Special Auction Rate Period (or by such later time or date, or both, as may be agreed to by the Auction Agent) notify the Auction Agent of either (x) its determination, to exercise such option, in which case,. the County Representative shall specify the Special Auction Rate Period designated, or (y) its detennination not to exercise such option.

( d) No later than 11 :00 A.M., New York time, on the second Business Day next preceding the first day of any proposed Special Auction Rate Period as to which notice has been given as set forth in subsection ( c) ofthis section ( or such later time or date, or both, as may be agreed to by the Auction Agent), the County Representative shall deliver to the Auction Agent either:

(i) (A) a notice stating (I) that the County has determined to designate the next succeeding Auction Rate Period as a Special Auction Rate Period, specifying the same and the first day thereof, (2) the Auction Date immediately prior to the first day of such Special Auction Rate Period, (3) that such Special Auction Rate Period shall not commence if (x) an Auction shall not be held on such Auction Date for any reason or (y) an Auction shall be held on such Auction Date but Sufficient Clearing Bids shall not exist in such Auction, and (4) the Interest Payment Dates during such Special Auction Rate Period and (B) an opinion of Bond Counsel to.the effect that such designation ofa Special Auction Rate Period is authorized by the Indenture; or I

(ii) a n;otice stating that the County has determined not to exercise its option to designate a Special Auction Rate Period and that the next succeeding Auction Rate Period shall be a Standard Auction Ratel Period.

I, , . (e) Ifthe Co~ty fails to deliver either of the noti~es orithe opinion described in subsection (d)(i) or (ii) of this ~ection with respect to any designation of any proposed Special Auction Rate Period to the Auction Ag~nt by 11 :00 A.M., New York time, on !Q.e sbcond Business Day next precc:ding the first day of such proppsed Special Auction Rate Period (or by such later time or date, or both, as may be agreed to by the Auction Agent), the County shall be deemed to have delivered a notice to the Auction Agent with respect t6 such Special Auction Rate Period· to the effect set forth in paragraph (ii) of subsection (d) of this section.

Conversion of Auction Rate Securities to Fixed Interest Rate Bonds. (a) Atthe option of the County, with the prior written consent of the Bond Insurer and the Qualified Swap Provider (ifthe

G.:.15 affected Auction Rate Securities are covered by a Qualified Swap Agreement), all but not less than all of any Series of Bonds may be converted from Auction Rate Securities to Fixed Rate Bonds as follows:

(i) The Fixed Rate Conversion Date for a Series of Auction Rate Securities shall be the Business Day immediately following the end of the Auction Rate Period for such Bonds

(ii) The County shall give written notice of any such conversion to the Trustee, the applicable Auction Agent, the Bond Insurer, the Qualified Swap Provider (if applicable) and the applicable Broker-Dealer not less than fifteen (15) days nor more than thirty (30) days prior to the date on which the Trustee is required to notify the affected Holders of the conversion of the applicable Tranche or Series pursuant to subparagraph (iii) immediately below. Such notice shall specify the proposed Fixed Rate Conversion Date ofthe applicable Tranche and the Principal Amount of Auction Rate Securities to be converted to Fixed Rate Bonds. Together with such notice, the County shall file with the applicable Broker-Dealer and the Trustee a form of Opinion of Counsel addressed to the Broker-Dealer, the Trustee, the County and the Bond Insurer to the effect that the conversion of the Auction Rate Securities of the applicable Tranche to fixed interest rates will not adversely affect the validity of the Fixed Rate Bonds under State law. No conversion shall become effective unless on or before the proposed Fixed Rate Conversion Date, the County shall also file with the Trustee an Opinion of Counsel addressed to the Trustee, the County and the Bond Insurer substantially in the form described in the immediately preceding sentence, dated the Fixed Rate Conversion Date, and subject to the availability of funds sufficient to pay the Tender Price of such Auction Rate Securities having been provided to the Trustee through the remarketing of such Auction Rate Securities.

(iii) Not fewer than forty (40) days prior to the Fixed Rate Conversion Date established for the applicable Series or Tranche, the Trustee shall mail a written notice of the conversion to the Holders of all Auction Rate Securities (with a copy to the Bond Insurer and the Auction Agent) of the applicable Series or Tranche to be converted, which notice shall:

(1) specify the Fixed Rate Conversion Date established for the applicable Bonds;

(2) notify such Holders that the Auction Rate Securities of the applicable Series or Tranche to be converted will be subject to mandatory tender for purchase on such Fixed Rate Conversion Date at a price equal to 100% of the Principal Amount of such Auction Rate Securities, plus interest accrued and unpaid with respect thereto, if any, to but not including the Fixed Rate Conversion Date;

(3) notify such Holders that in the event of a failed conversion, or in the event the County exercises its right of election to revoke the conversion pursuant to subparagraph (v) below, such Auction Rate Securities will not be subject to mandatory tender, will be returned to their Holders, will automatically convert to the Auction Rate Period in effect immediately prior to the Fixed Rate Conversion Date and will bear interest at the Maximum Auction Rate;

(4) set forth the time, the place and the manner for tendering such Auction Rate Securities for purchase; and

(5) set forth any other matters required to be stated pursuant to this paragraph.

G-16 · (iv) Not later than 12:00 noon, New York time, on the Business Day immediately preceding the Fixed Rate Conversion Date established for the applicable Series or Tranche, at the direction ofthe County, the applicable Broker-Dealer. shall determine, by offering for sale and using at least its·best efforts to find purchasers for the Tranches of Auction Rate Securities which are to be converted to Fixed Rate Bonds:

(1) the Fixed Rate(s) applicable to such Bonds after such Fixed Rate Conversion Date;

(2) the allocation of such Bonds between Serial Bonds and Term Bonds, which allocation shall be made in such manner as shall:

A. produce the lowest aggregate interest payable with respect to the Auction Rate Securities to be converted to Fixed Rate Bonds;

B. establish mandatory Redemption Dates and related Principal Amounts for Serial Bonds, if any, and establish mandatory redemption dates and related Principal Amounts for Term.Bonds other than Serial Bonds, if any, which are consistent, on a pro rata basis, with the principal of such Bonds prior to such Fixed Rate Conversion Date;

C. permit Bond Counsel to render the opinion described in subparagraph (ii) above;

provided, that if Bond Counsel is unable to render such opinion because ofthe allocation procedures set forth in this subparagraph (iv), all such converted Bonds shall be redesignated as .Serial Bonds with mandatory redemption dates and related Principal Amounts which are consistent, on a pro rata basis, with the applicable principal of such Bonds prior to the Fixed Rate Conversion Date, subject to the Bond Insurer's approval of the new redemption dates and Principal Amounts.

Such determination shall be conclusive and binding upon the County, the Trustee and the Holders ofthe Auction Rate Securities ofthe applicable Series or Tranche to be converted to which such rate or rates will be applicable. Not later than 5;00 p.m., New York time, on the date of determination of the fixed interest rate(s), as provided in the first sentence of this subparagraph, the applicable Broker-Deal~r shall notify the County and the Trustee of the following by facsimile notice:

1i,J, I I (3) .. the aggregate Principal Amountofthe B~mds :bearing interest at Fixed

Rates as a re,sult of such Fixed Rate Conv~rsion; ! 1 1 1;', ,·.!, 1

( 4 ). . , a s~lledule of the mandatory redemption pate~ and related Principal 1 Amounts of.converted Bonds which the Cpuntyhas r¢designated as Serial Bonds and wl}.ich.the Bqnd Insurer has approved; and

' ' (5) ,·I. a schedule of the mandatory reden:iptioll. date~ and related Principal Amo~ts ofconverted Bonds which are to be Term Bonds, if any, and which the Bond Insurer has approved.

G-17 If necessary or appropriate in the Opinion of Counsel, the County shall execute and deliver a supplement to the Indenture setting forth, among other things, the terms of the Fixed Rate Bonds;.

(v) The County may revoke its election to effect a conversion of the applicable Series or Tranche of the Auction Rate Securities to Fixed Rate Bonds by giving written notice of such revocation to the Trustee, the Bond Insurer, the Qualified Swap Provider (if applicable), the Swap Policy Provider (if applicable), and the applicable Broker-Dealer and at any time prior to the Business Day immediately preceding the Fixed Rate Conversion Date.

(vi) Auction Rate Securities of the applicable Series or Tranche which are to be converted to Fixed Rate Bonds shall be subject to mandatory tender for purchase on a proposed Fixed Rate Conversion Date (subject to the availability of funds sufficient to pay the Tender Price of such Auction Rate Securities having been provided to the Trustee through the remarketing of such Bonds) at a price equal to 100% of the Principal Amount of such Auction Rate Securities plus interest accrued and unpaid with respect thereto, if any, to, but not including, the Fixed Rate Conversion Date.

(vii) If on a proposed Fixed Rate Conversion Date, any condition precedent to such conversion required under this paragraph shall not be satisfied, the Trustee shall give written notice by first-class mail, postage prepaid, or by facsimile or overnight delivery, as soon as practicable and in any event not later than the next succeeding Business Day to the Holders of the applicable Series or Tranche to be converted that such conversion has n:ot occurred, that the particular Auction Rate Securities to be converted shall not be purchased on the failed Fixed Rate Conversion Date, that the Auction Agent shall continue to implement the Auction Procedures on the Auction Dates with respect to the Auction Rate Securities which otherwise would have been converted, excluding, however, the Auction Date falling on the Business Day next preceding the failed Fixed Rate Conversion Date, and that the interest rate with respect to the affected Bonds shall continue to be the Applicable Auction Rate; provided, that the interest rate on the Auction Rate Securities during the Auction Rate Period commencing on such failed Fixed Rate Conversion Date shall be the Maximum Auction Rate for a Rate Period of 7 Rate Period Days.

(b) Purchase ofAuction Rate Securities.

(1) Mandatory Tender for Purchase Upon Conversion to Fixed Interest . Rates. The Auction Rate Securities shall be subject to mandatory tender for purchase if at any time the Trustee gives written notice mailed to the Holders of the affected Auction Rate Securities, in accordance with the procedures set forth in subsection (2) immediately below, that, at the option of the County, particular Auction Rate Securities are to be converted to a Fixed Rate pursuant to the provisions oftlie Indenture; subject to the availability of funds sufficient to pay the Tender Price of such Auction Rate Securities having been provided to the Trustee through the remarketing of such Auction Rate Securities. The Auction Rate Securities of such Series or Tranche subject to mandatory tender shall be purchased or deemed purchased at the Tender Price.

(2) Notice of Mandatory Tender for Purchase. In connection with any mandatory tender for purchase of any Auction Rate Securities of any Series or

G-18 Tranche in accordance with the immediately preceding paragraphs, the Trustee shall give written notice to the affected Holders and to the Auction Agent by facsimile transmission, to be received no later than 2:00 p.m. New York time, on the day the notice is sent:

A.. that the Tender Price of any Auction Rate Security subject to mandatory tender for purchase shall be payable only upon surrender of that Auction Rate Security to the Trustee, accompanied by an instrument of transfer, in form satisfactory to the Trustee, executed in blank by the duly authorized attorney for such Holder or Holders, with such signature guaranteed in the manner set forth in the form attached to the Auction Rate Securities;

B. that, provided that moneys sufficient to effect such purchase have been provided to the Trustee through the remarketing of such Auction Rate Securities by the applicable Broker-Dealer, and provided that the County has not exercised its right of election to revoke the conversion pursuant to paragraph (a)(v) of this section, Auction Rate Securities subject to mandatory tender for purchase shall be purchased on the proposed Fixed Rate Conversion Date;

C. that if any Holder of an Auction Rate Security subject to mandatory tender for purchase does not in fact surrender such Auction Rate Security to the Trustee for purchase on the proposed Fixed Rate Conversion Date, then such Auction Rate Security, on and after such date, shall be deemed to be an Undelivered Auction Rate Security, that no interest shall accrue with respect to such Auction Rate Security on and after such date and that the Auction Rate Security shall have no rights under the Indenture other than to receive payment of the Tender Price; and

D. that, in the event moneys sufficient to pay the Tender Price of such Auction Rate Securities have not been provided to the Trustee through the remarketing of such Auction Rate Securities, such Auction Rate Securities shall not be purchased or. deemed purchased and shall continue to have interest accrue with respect thereto as if such failed purchase had not.occurred.

lfthe .circumstances described in subparagraph D above should occur, ~en the affected Auction Rate Securities shall not be purchased or d¢emed purchased .and shall continue to have interest accrue thereon as described in subparagr.wh D above. The Insurance Policy may not be drawn upon to purchase any Auction Rate Securities hereunder.

(3) Undelivered Auction Rate Securities. The following provisions shall apply to an Auction Rate Security not delivered .by a date established for its surrender, properly endorsed by its Holder (each, an "Undelive1;edAuction Rate Security"):

A. The Trustee may refuse to accept delivery of any Undelivered Auction Rate Security for which a proper instrument of transfer has not

G-19 been: provided; provided, that such refusal shall not affect the validity of · the purchase of such Undelivered Auction Rate Security.

B. If funds in the amount of the purchase price of the Undelivered Auction Rate Security are available for payment to the Holders thereof on the Proposed Fixed Rate Conversion Date and at the time specified, then, from and after such date and'time of such requir@'cl delivery:

(1) such Undelivered Auction Rate Security shall be deemed to be purchased and shall no longer be deemed to be Outstanding under the Indenture;

(2) interest shall no longer accrue with respect to such Undelivered Auction Rate Security; and

(3) funds in the amount of the purchase price of the Undelivered Auction Rate Security shall be held uninvested by the Trustee for the benefit of the Holder thereof (provided that such Auction Rate Security shall have no right to any investment proceeds derived from such funds), to be paid on delivery (and proper endorsement) of such Undelivered Auction Rate Security to the Trustee. Any money which the Trustee segregates and holds in trust for the payment of the Tender Price of any Auction Rate Security which remains unclaimed for two years after the date of purchase shall be paid to the County. After the payment of such unclaimed money to the County, the former Holder of such Auction Rate Security shall look only to the County for the payment of the Tender Price. The County shall not be liable for any interest on unclaimed money and shall not be regarded as a trustee of such money.

(c) Determination by Trustee; Notice of Tender. For purposes of this section, the Trustee shall determine timely and proper delivery of Auction Rate Securities and the proper endorsement of Auction Rate Securities delivered. Such determination shall be binding on the Holders of such Auction Rate Securities, the County, and the Broker-Dealer, absent manifest error.

Transfer and Exchange of Auction Rate·Securities.

(a) The registration of any Auction Rate Security may, in accordance with its terms, be transferred upon the Registration Books by the Person in whose name it is registered, in Person or by his attorney duly authorized in writing upon surrender of such Auction Rate Security for cancellation at the office ofthe Trustee, accompanied by delivery of a written instrument of transfer in a form acceptable to the Trustee, duly executed. Whenever any Auction Rate Security shall be surrendered for registration of transfer, the Trustee shall execute and deliver a new Auction Rate Security or Auction Rate Securities for a like aggregate Principal Amount in authorized denominations. The Trustee· shall require the payment by the Auction Rate Security Holders requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer. The cost of printing any' Auction Rate Securities and any services rendered or any expenses incurred by the Trustee in connection with any transfer shall be paid by the County. The Trustee shall not be required to transfer:

G-20 (i) any Auction Rate Securities during the period between the date fifteen (15) days prior to the date of selection of Auction Rate Securities for redemption and such date of selection, or

(ii) · any Auction Rate Securities selected for redemption.·

(b) Auction Rate St::curities may be exchanged, upon surrender thereof, at the Office of the Trustee for a like aggregate Principal Amount of Auction Rate Securities of other Authorized Denominations of the same maturity. Whenever any Auction Rate Security or Auction.Rate Securities shaJµ be surrendered for exchange, the Trustee shall execute and deliver a new Auction Rate Security or Auction Rate Securities for like aggregate Principal Amount in Authorized Denominations. The Trustee shall require the payment by the Auction Rate Security Holders requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. The cost of printing any Auction Rate Securities and any services rendered or any expenses incurred by the Trustee in connection with any exchange shall be paid by thp County. The Trustee shall not be required to exchange:

(i) any Auction Rate Securities during the period between the date fifteen (15) days prior to the date of selection of Auction Rate Securities for redemption and such date of selection, or ·

(ii) any Auction Rate Securities selected for redemption.

Auction Agent.

. (a) The County ~thorizes and expressly directs the Trustee, as agent for the Beneficial Owners ofthe Auction Rate Securities, to enter into an Auction Agent Agreement relating to Auction Rate Securities with a designated Auction Agent, including any Auction Agent for Auction Rate Securities as may be appointed on Schedule I to the Indenture. Any Auction Agent shall be:

(i) subject to the written approval ofthe applicable Broker-Dealer and the Bond Insurer; and either: ·

(A) a bank or trust company duly organized under the laws of the United States of America or any state or territory thereof having its principal place of business in New York, New Y oi:k, or such other location as approved by the Trustee in writing and having a combined capital stock or surplus of at least $15,000,000; or

(B) , . : . ame:qiberofth.~ N~q~1alAssociation of Secµrities Dealers,foc·., having a capitalizatio~ of at le~t $15,000,000, and, in either case, au1homed by law to . perform all the duties in:J,posed, upon ii tinder the applicable Auction Agent Agreement · and the Indenture. The Auction Agent may at any time resign and be discharged of its . duties as Auction Agent and obligations. under the Auction Agent Agreement by giving at least 90 days' prior notice to the. Truste(?, the County, the Bond Insurer anq any Qualified Swap Provider. The Auction Agent may be removed at any time by a request of the Trustee or the Bond ~surer (with a copy to the Trustee and the County) and upon 30 days' 11otice to the Auction ,A.gent or upon the written direction of the County or, :with the prior written consent of the Bond.Insurer, any Qualified Swap Provider (if applicable), the Beneficial Owners of at least two-thirds of the aggregate Principal Amount of the Auction Rate Securities then Outstanding, by an instrument signed by such Beneficial Owners or their attorneys and filed with the Auction Agent, the applicable Broker-Dealer, the Trustee, the Bond Insurer, and any Qualified Swap Provider (if applicable) upon at

G-21 least 30 days' prior notice. Neither resignation nor removal of the Auction Agent pursuant to the provisions of the preceding two sentences shall be effective until and unless a Substitute Auction Agent has been appointed and has accepted such · appointment. A substitute Auction Agent Agreement shall be entered into with any substitute Auction Agent. Notwithstanding the foregoing, the Auction Agent may terminate the Auction Agent Agreement if, within 30 days after notifying the Trustee, the applicable Broker-Dealer, the County and the Bond Insurer in writingthat it has not received paymentof any Auction Agent Fee due it in accordance with the terms of the Auction.Agent Agreement, the Auction Agent does not receive such payment. The Trustee shall not be liable for any action taken, suffered or omitted by the Auction Agent.

(b) The periodic fees ofthe Auction Agent shall be invoiced to the Trustee, with a copy to the County, and paid from the Administrative Expense Account.

(c) Ifthe Auction Agent shall resign or be removed or be dissolved, or if the property or affairs of the Auction Agent shall be taken under the control of any state or federal court or administrative body because of bankruptcy or insolvency, or for any other reason, the Trustee, at the direction of the County, with the consent of the Bond Insurer and the Qualified Swap Provider (if applicable), shall use its best efforts to appoint a substitute Auction Agent for such Series of Bonds.

(d) The Auction Agent is acting solely as a non-fiduciary agent ofthe Trustee in connection with Auctions. In the absence of bad faith, grossly negligent failure to act or gross negligence on its part, the applicable Auction Agent shall not be liable for any action taken, suffered or omitted or any error ofjudgment made by it in the performance of its duties under the Auction Agent Agreement and shall not be liable for any error ofjudgment made in good faith unless the Auction Agent shall have been guilty of gross negligence in ascertaining ( or failing to ascertain) the pertinent facts.

(e) Notwithstanding the provisions of paragraph (a) of this section, the Auction Agent may be removed at any time, at the request ofthe County, with the consent of the Bond Insurer and the Qualified Swap Provider (if applicable), for any breach of its obligations under the Indenture or under the related Auction Agent Agreement.

Broker-Dealers.

(a) The Auction Agent will enter into a Broker-Dealer Agreement with a Broker- Dealer for the Auction Rate Securities, including any Broker-Dealer Agreement with a Broker-Dealer appointed on Schedule I to the Indenture. The County may, from time to time, with the consent ofthe Bond Insurer approve one or more additional Persons to Serve as Broker-Dealers under Broker-Dealer Agreements and shall be responsible for providing such Broker-Dealer Agreements to the Trustee and the applicable Auction Agent, promptly following the execution thereof. ·

(b) The periodic fees of the Broker-Dealer shall be invoiced to the Trustee, with a copy to the County, and paid from the Administrative Expense Account. ·

(c) · Any Broker-Dealer may be removed at any time, at the request of the County, for any breach of is obligations hereunder or under the Broker-Dealer Agreement and any Broker-Dealer may at any time resign and be discharged of the duties and obligations hereunder and under the Broker-Dealer Agreement by giving at least ninety (90) days written notice to the County and the Trustee provided that, in each case, at least one Broker-Dealer Agreement must be in effect immediately following such removal.

G-22 No County or Trustee Liability for Auction Failures. Neither the County, the Trustee or the Auction Agent shall be responsible for any failure of a Broker-Dealer to submit an Order to the Auction Agent on behalf of any Holders or prospective Holders, nor shall the County nor the Trustee be responsible for failure by any Securities Depository to effect any transfer or to provide the Auction Agent with current information regarding registration of transfers. The County shall have no liability if there are not Sufficient Clearing Bids (as such term is defined in the applicable Auction Agent Agreement) from time to time pursuant to the Auction Procedures.

[Remainder ofthe Page Intentionally Left Blank]

G-23 SETILEMENT PROCEDURES

Definitions. Capitalized terms used herein shall have the meanings given such terms in the Indenture or, if not defined therein, in the Auction Agreement. · Settlement Procedures. So long as the ownership of the Convertible Auction Rate Securities) 8 (CARS M) is maintained in book-entry form by the Securities Depository, an Existing Owner may sell, transfer or otherwise dispose of CARS only pursuant to a Bid or Sell Order placed in an Auction or through a Broker-Dealer, provided that, in the case of all transfers other than pursuant to Auctions of the CARS, such Existing Owner, its Broker-Dealer or its Participant advises the Auction Agent of such transfer. Subject to the provisions of the Indenture, Auctions of the CARS shall be conducted on each Auction Date, ifthere is an Auction Agent on such Auction Date, in the following manner: (a) Not later than 1:00 p.m. in the case of a 7-day Auction Rate Period but in no event later than 3:00 p.m., New York time, on each Auction Date, the Auction Agent shall notify, by telephone, the Broker-Dealer that participated in the Auction held on such Auction Date and submitted an Order on behalf of an Existing Owner or Potential Owner of: (i) the Auction Rate determined for the next Auction Rate Period; (ii) whether Sufficient Clearing Bids existed for the determination of the Winning Bid Rate; (iii) if the Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid or a Sell Order on behalf of an Existing Owner, whether such Bid or Sell Order was accepted or rejected, in whole or in part, and the Principal Amount of CARS, if any, to be sold by such Existing Owner; (iv) ifthe Broker-Dealer (a ''Buyer's Broker-Dealer") submitted a Bid on behalf of a Potential Owner, whether such Bid was accepted or rejected, in whole or in part, and the Principal Amount of CARS, if any, to be purchased by such Potential Owner; (v) if the aggregate amount of CARS to be sold by all Existing Owners on whose behalf the Broker-Dealer submitted a Bid or a Sell Order is different from the aggregate Principal Amount of such CARS to be purchased by all Potential Owners on whose behalf such Broker­ Dealer submitted a Bid, the name or names of one or more Buyer's Broker-Dealers or Seller's Broker-Dealers (and the name of the Agent Member, if any, of each such Buyer's Broker-Dealer or Seller's Broker-Dealer) and the Principal Amount of CARS to be (A) purchased from one or more Existing Owners on whose behalf such Broker-Dealers submitted Bids or Sell Orders or (B) sold to one or more Potential Owners on whose behalf such Broker-Dealers submitted Bids; (vi) ifthe Principal Amount of CARS to be purchased by all Potential Owners on whose behalf such Broker-Dealer submitted a Bid exceeds the amount of CARS to be sold by all Existing Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the name or names of one or more Seller's Broker-Dealers (and the name of the Participant, if any, of each such Seller's Broker-Dealer) acting for one or more sellers of such excess Principal Amount of CARS and the Principal Amount of CARS to be sold to one or more Potential Owners on whose behalf such Broker-Dealer acted by one or more Existing Owners on whose behalf each of such Seller's Broker-Dealers acted; and (vii) the Auction Date for the next succeeding Auction.

SM A servicemark of Lehman Brothers Inc.

G-24 (b) On each Auction Date, each Broker-Dealer that submitted an Order on behalf of any Existing Owner or Potential Owner shall: (i) advise each Existing Owner and Potential Owner on whose behalf such Broker- Dealer submitted an Order as to: (A) the Auction Rate determined on such Auction Date; (B) whether any Bid or Sell Order submitted on behalf of each such Owner was accepted or rejected; and (C) the immediately succeeding Auction Date; (ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer, instruct each Potential Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Existing Owner's Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the Principal Amount of CARS to be purchased pursuant to such Bid (including, with respect to CARS in a daily Auction Rate Period, accrued interest if the purchase date is not an Interest Payment Date for such CARS) against receipt of such CARS; and (iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer, instruct each Existing Owner on whose behalf such Broker-Dealer submitted a Sell Order that was accepted or a Bid that was accepted, in whole or in part, to instruct such Existing Owner's Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities Depository the Principal Amount of CARS to be sold pursuant to such Order against payment therefor; (c) On the basis of the information provided to it pursuant to paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order in an Auction is required to allocate any funds received by it in connection with such Auction pursuant to paragraph (b )(ii) above, and any CARS received by it in connection with such Auction pursuant to paragraph (b)(iii) above among the Potential Owners, if any, on whose behalf such Broker-Dealer submitted Bids, the Existing Owners, if any on whose behalf such Broker-Dealer submitted Bids or Sell Orders in such Auction, and any Broker-Dealers identified to it by the Auction Agent following such Auction pursuant to paragraph (a)(v) or (a)(vi) above. (d) On each Auction Date: each Potential Owner and Existing Owner with an Order in the Auction on such Auction Date shall instruct its Agent Member as provided in (b )(ii) or (b )(iii) above, as the case may be; (e) On the Business Day following each Auction Date: each Agent Member for a Bidder in the Auction on such Auction Date referred to in (b )(i) above shall instruct the Securities Depository to execute the transactions described under (b )(ii) or (b )(iii) above for such Auction, and the Securities Depository shall execute such transactions. (f) If an Existing Owner selling CARS in an Auction fails to deliver such CARS (by authorized book-entry), a Broker-Dealer may deliver to the Potential Owner on behalf of which it submitted a Bid that was accepted a Principal Amount of CARS that is less than the Principal Amount of CARS that otherwise was to be purchased by such Potential Owner. In such event, the Principal Amount of CARS to be so delivered shall be determined solely by such Broker-Dealer. Delivery of such lesser Principal Amount of CARS shall constitute good delivery. Notwithstanding the foregoing terms of this paragraph (f), any delivery or nondelivery of CARS which shall represent any departure from the results of an Auction, as determined by the Auction Agent, shall be of no effect unless and until the Auction Agent shall have been notified of such delivery or nondelivery in accordance with the provisions of the Auction Agreement and the Broker-Dealer Agreements.

G-25 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIXH

TABLE OF ACCRETED VALUES

Series 2004C-1 Series 2004C-2 Series 2004C-3 Bonds* Bonds* Bonds* 3.4225% 4.6110% 5.6275%

7/1/04 $ 23,339.50 $ 19,881.75 $ 14,332.00 7/10/04 23,359.50 19,904.25 14,352.00 1/10/05 23,759.25 20,363.25 14,755.75 7/10/05 24,165.75 20,832.75 15,171.00 1/10/06 24,579.25 21,313.00 15,598.00 7/10/06 25,000.00 21,804.25 16,036.75 1/10/07 22,307.00 16,488.00 7/10/07 22,821.25 16,952.00 1/10/08 23,347.50 17,429.00 7/10/08 23,885.75 17,919.25 1/10/09 24,436.50 18,423.50 7/10/09 25,000.00 18,942.00 1/10/10 19,475.00 7/10/10 20,023.00 1/10/11 20,586.25 7/10/11 21,165.50 1/10/12 21,761.25 7/10/12 22,373.50 1/10/13 23,003.00 7/10/13 23,650.25 1/10/14 24,315.75 7/10/14 25,000.00

* Per $25,000 Maturity Amount.

H-1 (THIS PAGE INTENTIONALLY LEFT BLANK) APPENDIX I

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (the ''Disclosure Certificate") is executed and delivered by the County of Sacramento (the "County'') in connection with the issuance ofits $426,131,120.25 aggregate principal amount of Taxable Pension Funding Bonds, Series 2004C (the "Bonds"), which Bonds are being issm:d pursuant to an Indenture executed and entered into as of July 1, 2004 (the "Indenture") by and benveen the County and Deutsche Bank National Trust Company, as trustee (the "Trustee"). In connection therewith the County covenants and agrees as follows:

SECTION 1. Puroose of this Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the County for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Underwriter (as defined herein) in complying with SEC {as defined herein) Rule 15c2- 12(b)(5).

SECTION 2. Definitions. In addition to the definitions set forth above and in the Indenture, which apply to any capitalized term used in this Disclosure Certificate. unless otherwise defined in this section, the following capitalized terms shall have the following meanings:

"Annual Report" shall mean any Annual Report provided by the County pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

''Beneficial Owner" shall mean any person who has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nomiinees, depositories or other intermediaries).

''Listed Event" shall mean any of the events.listed in Section 5(a) of this Disclosure Certificate.

"National Repository'' shall mean, at any time, a then-existing Nationally Recognized Municipal Securities Information Repository as recognized from time to time by the SEC for the purposes referred to in the Rule (hereinafter defined). The National Repositories are identified on the SEC website at http://www.sec.gov/consumer/nrmisir.htm.

"Repository" shall mean each National Repository and each State Repository.

''Rule" shall mean Rule 15c2-12(b)(5) adopted by the SEC under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"SEC" shall mean the United States Securities and Exchange Com:inission.

"State" shall mean the State of California I I

"State Repository'' shall mean any public or private repository or entiiy] ~esignated by the State as a state teppsitory for the purpose of the Rule and recognized as such by thei:S~C. As of the date oHhis Discllosure Certificate, there is no State Repository. ·· : '· .. ·• i: · . ·

~'Underwriter" shall mean Lehman Brothers and any of the original un:d¢rwriters of the Bonds listed on th.e cover page of the Official Statement required to comply with the Rule in connection with offering of the Bonds.

I-1 SECTION 3. Provision of Annual Reports.

(a) The County shall, not later than 210 days after the end of the County's Fiscal Year (presently June 30), commencing with the report for the 2003-2004 Fiscal Year, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the County may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the County'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 County is unable to provide to the Repositories an Annual Report by the date required in subsection (a), the County shall send to the Municipal Securities Rulemaking Board and to each Repository a notice in substantially the form attached hereto as Exhibit A

( c) The County shall determine each year prior to the date for providing the Annual Report the name and address of each National Repository and the State Repository, if any.

SECTION 4. Content of Annual Reports. The County's Annual Report shall contain or include by reference the following:

(a) The audited fmancial statements of the County for the prior Fiscal Year, prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board; provided, that if the County's audited fmancial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the fmancial statements contained in the fmal Official Statement, and the audited fmancial statements shall be filed in the same manner as the Annual Report when they become available.

(b) An annual updating of the following tables contained on the following pages of Appendix A to the Official Statement for the Bonds, dated June 24, 2004:

1. The County Investment Pool Table (page A-1).

2. The General Fund Table (page A-6).

3. The Assessed Valuation Table (page A-12).

4. The History of Assessed Valuations Table (pageA-12).

5. The Tax Levy Table (page A-14).

Any or all of the items listed above may be included by specific reference ·to other documents, including official statements of debt issues of the County or related public entities, which have been submitted to each of the Repositories or the SEC; provided, that if any document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board; and provided further, that the County shall clearly identify each such other document so included by reference.

SECTION 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this section, the County shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material:

1-2 1. Principal or interest payment delinquencies.

2. Non-payment related defaults.

3. Modifications to the rights of the Holders.

4. Optional, contingent or unscheduled calls.

5. Defeasances.

6. Rating changes.

7. Adverse tax opinions or events adversely affecting the tax-exempt status of the Bonds.

8. Unscheduled draws on the debt service reserves reflecting financial difficulties.

9. Unscheduled draws on the credit enhancements reflecting financial difficulties.

I 0. Substitution of the credit or liquidity providers or their failure to perform.

11. Release, substitution or sale of property securing repayment of the Bonds.

(b) Whenever the County obtains knowledge of the occurrence of a Listed Event, the County shall as soon as possible determine if knowledge of such event would be material under applicable federal securities laws.

(c) If the County determines that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the County shall promptly file or cause the filing of a notic:e of such occurrence with the Municipal Securities Rulemaking Board and each Repository; provided, that :notice of Listed Events described in subsections (a)(4) and (5) of this section need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Holders of affected Bonds pursuant to the Indenture.

SECTION 6. Termination of · Reporting Obligation. The County's obligations under this· Disclosure Certificate shall terminate (a) upon the legal defeasance, prior redemption or payment in full of all of the Bonds, or (b) if, in the opinion of nationally recognized bond counsel; the County ceases to be an "obligated person" (within the meaning·of the Rule) with respect to the Bohds or the Bonds otherwise cease to be subject to the requirements of the Rule. If such termination occurs prior to the fmal maturity of the· Bonds, the County shall give notice of such termination in the same manner as for a Listed Event under Section 5(c).

SECTION 7. Amendment: Waiver. Notwithstanding any other provision of this Disclosure Certificate, the County may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived; provided, that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business 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, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

( c) The amendment or waiver either (i) is approved by the Holders of the Bonds in the same manner as provided in the Indenture for amendments to the Indenture with the consent of Holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Certificate, the County 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 by the County. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(c ), 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 8. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the County from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the County chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the County shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

SECTION 9. Default. In the event of a failure of the County to comply with any provision of this Disclosure Certificate, any Participating Underwriter or any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the County to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be deemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the County to comply with this Disclosure Certificate shall be an action to compel performance hereunder.

SECTION 10. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the County, the Underwriter and the Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.

Date: July 1, 2004.

COUNTY OF SACRAMENTO

BY~~~~~~~~~~~~~~ Chief Financial/Operations Officer

1-4 EXHIBIT A

NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT

Nmne of County: COUNTY OF SACRAMENTO

Name of Issue: $426,131,120.25 COUNTY OF SACRAMENTO TAXABLE PENSION FUNDING BONDS, SERIES 2004C

Date of Issuance: July 1, 2004

NOTICE IS HEREBY GIVEN that the County of Sacramento has not provided an Annual Report with respect to the above-named Bonds as required by Section 7.08 of the Indenture executed and entered into as of July I, 2004, by and between Deutsche Bank National Trust Company, as trustee, and the County. The County anticipates that the Annual Report will be filed by _____

COUNTY OF SACRAMENTO

By

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