NEW ISSUE-Book Entry Only See "RATINGS" herein. $131,000,000 SANTA CLARA VALLEY WATER DISTRICT Revenue Certificates of Participation (Water Utility System Improvement Projects) Series 2007A and Taxable Series 2007B

$77,270,000 $53,730,000 Series 2007A Taxable Series 2007B Dated: Date of Delivery Due: June 1, as shown on the inside cover

The proceeds of the Certificates will be used (a) to finance the cost of certain water utility system improvements, (b) to reimburse the District for costs previously expended on certain water utility system improvements, (c) to purchase debt service reserve surety bonds for the Certificates, (d) to capitalize a portion of interest payable with respect to the Certificates on and prior to June 1, 2009, and (e) to pay the costs of executing and delivering the Certificates.

Interest represented by the Series 2007A Certificates is payable on December 1, 2007 and each June 1 and December 1 thereafter. Interest with respect to the Series 2007B Certificates is payable on December 1, 2007, and each March 1, June 1, September 1, and December 1 thereafter. The Certificates will be prepared as fully registered Certificates and, when delivered, will be registered in the name of CEDE & Co., as nominee of The Depository Trust Company, New York, New York. DTC will act as securities depository of the Certificates. Purchasers of beneficial interests will not receive certificates representing their interest in the Certificates. So long as CEDE & Co. is the registered owner of the Certificates, as nominee of DTC, references herein to the registered owners shall mean CEDE & Co., as aforesaid, and shall not mean the beneficial owners of the Certificates. Individual purchases of the Certificates will be made in book-entry form only in authorized denominations of $5,000 or any integral multiple thereof. Principal and interest are payable directly to DTC by U.S. Bank National Association, San Francisco, California, as Trustee. Upon receipt of payments of principal and interest, DTC is obligated to remit such principal and interest to the DTC Participants for subsequent disbursement to the beneficial owners of the Certificates.

The Certificates are payable from the Installment Payments. The obligation of the District to make the Installment Payments is payable from, and is secured by a pledge of and lien on, the District Water Utility System Revenues. The Installment Payments are payable from Net Water Utility System Revenues on a parity with the lien securing the $98,115,000 outstanding Series 2006 Bonds and on a parity with certain amounts payable by the District with respect to a State of California Department of Water Resources loan and any obligations hereafter issued or incurred or a parity therewith subject to the terms of the Water Utility System Master Resolution.

The obligation of the District to make the Installment Payments does not constitute a debt of the District or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction.

The Certificates are subject to optional, mandatory and extraordinary prepayment prior to maturity as described herein.

Payment of the principal and interest evidenced by each series of Certificates will be insured by a financial guaranty insurance policy to be issued simultaneously with the delivery of such series of Certificates by MBIA Insurance Corporation.

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco, California, under existing statutes, regulations, rulings and judicial decisions, and assuming the accuracy of certain representations and compliance with certain covenants and requirements described herein, the portion of each Installment Payment constituting interest (and original issue discount) with respect to the Series 2007A Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the {ilrther opinion of Special Counsel, the portion of each Installment Payment constituting interest (and original issue discount) with respect to the Certificates is exempt from State of California personal income tax. See "TAX MATTERS" herein with respect to tax consequences with respect to the Certificates. THIS COVER PAGE CONTAINS CERTAIN INFORMATION FOR GENERAL REFERENCE ONLY. IT IS NOT A SUMMARY OF THIS ISSUE. INVESTORS ARE ADVISED TO READ THE ENTIRE OFFICIAL STATEMENT TO OBTAIN INFORMATION ESSENTIAL TO THE MAKING OF AN INFORMED INVESTMENT DECISION.

The Certificates are offered when, as and if executed and delivered to the Underwriters, subject to the approval as to the legality of certain matters by Stradling Yocca Carlson & Rauth, a Professional Corporation, Special Counsel, and certain other conditions. Certain legal matters will be passed upon for the District and the Corporation by District Counsel, Debra L. Cauble, Esq., for the Underwriters by their counsel, Sidley Austin LLP for the Insurer, by its general counsel, and for the Trustee by its counsel. It is expected that the Certificates in book-entry form will be available for delivery through the facilities of DTC on or about October 1, 2007. MORGAN STANLEY LEHMAN BROTHERS DE LA ROSA & CO., INC. BACKSTROM MCCARLEY BERRY & CO., LLC Dated: September 11, 2007 $131,000,000 Santa Clara Valley Water District Revenue Certificates of Participation (Water Utility System Improvement Projects) Series 2007A and Taxable Series 2007B

$77,270,000 $53,730,000 Series 2007A Taxable Series 2007B

MATURITY SCHEDULE

$77,270,000 Series 2007A

Payment Date Principal Payment Date Principal (June 1) Amount Interest Rate Yield (June 1) Amount Interest Rate Yield 2010 $1,310,000 4.00% 3.38% 2015 $1,690,000 5.00% 3.55% 2011 1,375,000 4.00 3.42 2016 1,770,000 4.00 3.63 2012 1,430,000 4.00 3.45 2017 1,860,000 4.00 3.73 2013 1,505,000 5.00 3.47 2018 1,945,000 4.00 3.s2c 2014 1,580,000 5.00 3.50 2019 2,040,000 5.00 3.89c 2020 2,135,000 5.00 3.96c

$4,630,000 5.00% Term Certificates due June 1, 2022 - Yield 4.12%c $5,085,000 4.75% Term Certificates due June 1, 2024 - Yield 4.32%c $5,620,000 4.75% Term Certificates due June 1, 2026 - Yield 4.39%c $9,475,000 4.75% Term Certificates due June 1, 2029 - Yield 4.53%c $33,820,000 5.00% Term Certificates due June 1, 2037 - Yield 4.48%c

$53, 730,0001 Taxable Series 2007B

Due June 1 Interest Rate Spread % 2037 .32%

c Priced to call on June 1, 201 7. 1 The Series 2007B Certificates will represent interest from October 1, 2007 through and including November 30, 2007, at (a) the Three-Month LIBOR Rate determined as of September 27, 2007, plus (b) the per annum interest rate spread specified above, provided that the Series 2007B Certificates may not represent interest at more than the maximum rate of 17% per annum. Thereafter the Series 2007B Certificate will represent interest from the most recent interest payment date therefore to which interest has been paid or duly provided for at (a) the Three-Month LIBOR Rate for such period plus (b) the per annum interest rate spread specified above, provided that the Series 2007B Certificates may not represent interest in any interest period at more than the maximum rate of 1 7% per annum. SANTA CLARA VALLEY WATER DISTRICT 5750 Almaden Expressway San Jose, California 95118

BOARD OF DIRECTORS AND OFFICERS OF THE DISTRICT

Tony Estremera, Chair, At Large Rosemary Kamei, Vice-Chair District I Joe Judge, Director District 2 Richard P. Santos, Director District 3 Larry Wilson, Director District 4 Patrick Kwok, Director District 5 Sig Sanchez, At Large

BOARD OF DIRECTORS AND OFFICERS OF THE PUBLIC FACILITIES FINANCING CORPORATION

Vincent Garrod, President David Vanni, Vice President David R. Johnson, Chief Financial Officer

DISTRICT STAFF

Stanley M. Williams, Chief Executive Officer Debra L. Cauble, District Counsel Peter Ng, Chief Financial Officer Walter L. Wadlow, Chief Operating Officer, Water Utility James M. Fiedler, Chief Operating Officer, Watersheds Nai Hsueh, Chief Operating Officer, Capital Program Services Lauren L. Keller, Clerk of the Board

SPECIAL COUNSEL

Stradling Yocca Carlson & Rauth, a Professional Corporation Sacramento, California

TRUSTEE

U.S. Bank National Association San Francisco, California

FINANCIAL ADVISOR

Public Resources Advisory Group Los Angeles, California [THIS PAGE INTENTIONALLY LEFT BLANK] No dealer, broker, salesperson or other person has been authorized by the Underwriters, the District, the Corporation or the Trustee to give any information to make any representations other than those contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized by auy of the foregoing.

This Official Statement does not constitute au offer to sell or the solicitation of au offer to buy nor shall there be any sale of the Certificates by a person in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. This Official Statement is not to be construed as a contract with the purchasers or any of the owners of Certificates. Any statement made in this Official Statement involving estimates, forecasts or matters of opinion, whether or not expressly so stated, is intended solely as such and not as representations of fact. The information set forth herein has been furnished by the District, The Depository Trust Compauy, aud other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as representations by the Underwriters.

In reliance upon exemptions contained in such acts, the Certificates have not been registered under the Securities Act of 1933, as amended, nor has the Trust Agreement been qualified under the Trust Indenture Act of 1939, as amended. The registration or qualification of the Certificates in accordauce with applicable provisions of securities laws of any state in which the Certificates have been registered or qualified and the exemption from registration or qualification in other states cannot be regarded as a recommendation. Neither those states nor any of their agencies have passed upon the merits of the Certificates or the accuracy or completeness of this Official Statement.

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, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

The information set forth herein has been obtained from official sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Underwriters. The information and expression of opinions 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 District since the date hereof.

IN CONNECTION WITH THE OFFERING OF THE CERTIFICATES, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS THAT MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF SUCH CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

The District maintains a website, however, the information presented there is not part of this Official Statement and should not be relied upon in making an investment decision with respect to the Certificates. [THIS PAGE INTENTIONALLY LEFT BLANK] TABLE OF CONTENTS Page

INTRODUCTION ...... I

THE PROJECT ...... 3

THE CERTIFICATES ...... 4 General ...... 4 Series 2007A Certificates ...... 4 Series 2007B Certificates ...... 4 Optional Prepayment - Series 2007A Certificates ...... 5 Optional Prepayment - Series 2007B Certificates ...... 5 Mandatory Sinking Fund Payment - Series 2007A Certificates ...... 5 Mandatory Sinking Fund Payment - Series 2007B Certificates ...... 7 Extraordinary Prepayment From Insurance or Condenmation Proceeds ...... 8 Other Prepayment Provisions ...... 9

SECURITY AND SOURCES OF PAYMENT ...... 9 Net Water Utility System Revenue Pledge ...... 9 Allocation of Water Utility System Revenues ...... I 0 Rate Covenant ...... 11 Reserve Funds ...... 11 Additional Contracts and Bonds ...... 12

THEINSURERANDTHEPOLICY ...... 13

ESTIMATED SOURCES AND USES OF FUNDS ...... 16

INSTALLMENT PAYMENT SCHEDULE ...... 17

THE DISTRICT ...... 18 Organization, Purpose and Powers ...... 18 Board of Directors, Management and Employee Relations ...... 19 Defined Benefit Pension Plan ...... 22 Post-Employment Benefits ...... 22 Other Benefits ...... 23 Insurance ...... 23 Budgeting Process ...... 23

DEBT STRUCTURE OF THE DISTRICT ...... 24

SCHEDULE OF LONG-TERM INDEBTEDNESS ...... 24

WATER UTILITY SYSTEM ...... 24 Service Area ...... 24

PRIMARY SOURCES OF REVENUES ...... 25 Water Charges ...... 25 Groundwater Charges ...... 25 Treated Water and Other Charges ...... 25 Water Revenue Zones W-2 and W-5 ...... 25

HISTORIC WATER RATES ...... 25 Future Rates and Charges ...... 26 TABLE OF CONTENTS Page

PROJECTED WATER RATES ...... 26 Historic Water Deliveries ...... 26 Projected Water Deliveries and Sources of Water Delivered ...... 27 Historic Sales Revenues ...... 27

HISTORIC SALES REVENUES ...... 27 Projected Sales Revenues ...... 28

PROJECTED SALES REVENUES ...... 28 District Revenue Derived from Property Taxes ...... 28 San Jose Water Company ...... 29

DISTRICT FACILITIES ...... 30 Local Reservoirs ...... 30

SIGNIFICANT FEATURES OF DISTRICT RESERVOIRS ...... 30 Groundwater Basin ...... 30 Santa Clara Valley Groundwater Subbasin ...... 30 Llagas Groundwater Subbasin ...... 31 Coyote Groundwater Sub basin ...... 31 Managed Recharge Facilities ...... 31

MANAGED RECHARGE SYSTEMS ...... 31 Raw Water Conveyance System ...... 31

PIPELINES ...... 32 Water Treatment ...... 32 Santa Teresa Water Treatment Plant ...... 32 Penitencia Water Treatment Plant ...... 33 Rinconada Water Treatment Plant ...... 33 Treated Water Storage and Distribution System ...... 33 Seismic Considerations ...... 34 Water Distribution System ...... 35 Water Usage ...... 37

TREATED WATER AND GROUNDWATER USAGE ...... 37

GROUNDWATER, TREATED WATER, SURFACE WATER ...... 37

SANTA CLARA COUNTY WATER SUPPLY ...... 38 Summary Table of the County of Santa Clara's Water Supply ...... 39 Local Supplies ...... 39 Surface Water ...... 39 Groundwater Recharge ...... 40 Imported Supplies ...... 40 State Water Project ...... 40 Central Valley Project ...... 41

FACTORS AFFECTING WATER SUPPLIES ...... 42 General ...... 42 Endangered Species Act Issues ...... 42 Resolution of Bay-Delta Issues (CALFED Bay-Delta Program) ...... 43 Allocation of Water Deficiencies ...... 44 Water Banking ...... 45

11 TABLE OF CONTENTS Page

QUALITY OF DISTRICT'S WATER ...... 45 Groundwater ...... 45 Surface Water ...... 46 Treated Water ...... 46

CAPITAL IMPROVEMENT PROGRAM ...... 46 Future Water System Improvements ...... 46

FINANCIAL INFORMATION OF THE DISTRICT ...... 47 Financial Statements ...... 4 7 Historical and Projected Operating Results and Debt Service Coverage ...... 47

SANTA CLARA VALLEY WATER DISTRICT HISTORIC OPERATING RESULTS & DEBT SERVICE COVERAGE FISCAL YEAR ENDING JUNE 30 ...... 48 Projected Operating Results and Debt Service Coverage ...... 48

SANTA CLARA VALLEY WATER DISTRICT PROJECTED OPERATING RESULTS AND DEBT SERVICE COVERAGE FISCAL YEAR ENDING JUNE 30 ...... 49

THE CORPORATION ...... 50

CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES ...... 50 Article XIIIB ...... 50 Proposition 218 ...... 51 Future Initiatives ...... 52

CERTAIN LIMITATIONS ON RIGHTS AND OBLIGATIONS ...... 52

TAX MATTERS ...... 52

RATINGS ...... 54

UNDERWRITING ...... 54

FINANCIAL ADVISOR ...... 54

NO LITIGATION ...... 54

CERTAIN LEGAL MATTERS ...... 55

MISCELLANEOUS ...... 55

APPENDIX A AUDITED GENERAL PURPOSE FINANCIAL STATEMENTS OF THE DISTRICT ... A-1

APPENDIX B SUMMARY OF PRINCIPAL LEGAL DOCUMENTS ...... B-1

APPENDIXC BOOK-ENTRYSYSTEM ...... C-1

APPENDIX D FORM OF SPECIAL COUNSEL OPINION ...... D-1

APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT ...... E-1

APPENDIX F FORM OF MUNICIPAL FINANCIAL GUARANTY INSURANCE POLICY ...... F-1

111 [THIS PAGE INTENTIONALLY LEFT BLANK] $131,000,000 Santa Clara Valley Water District Revenne Certificates of Participation (Water Utility System Improvement Projects) Series 2007 A and Taxable Series 2007B

$77,270,000 $53,730,000 Series 2007A Taxable Series 20078

INTRODUCTION

This Official Statement, including the cover page, inside cover page and Appendices, is provided to furnish certain information in connection with the offering of $131,000,000 aggregate principal amount of Santa Clara Valley Water District Revenue Certificates of Participation (Water Utility System Improvement Projects), Series 2007A (the "Series 2007A Certificates") and Taxable Series 2007B (the "Series 2007B Certificates," and collectively with the Series 2007A Certificates," the "Certificates"). The Santa Clara Valley Water District (the "District") is a multi-purpose special district organized and existing in accordance with the Santa Clara Valley Water District Act, Chapter 1405 of Statutes 1951 of the State of California, as amended.

The Certificates will be delivered pursuant to a Trust Agreement, dated as of September I, 2007 (the "Trust Agreement"), by and among the District, the Santa Clara Valley Water District Public Facilities Financing Corporation, a California non-profit public benefit corporation (the "Corporation") and U.S. Bank National Association, San Francisco, California, as trustee (the "Trustee"). The Certificates represent a right to receive the installment payments (the "Installment Payments") payable by the District under an Installment Purchase Agreement dated as of September I, 2007 by and between the District and the Corporation. (the ''Installment Purchase Agreement'').

Purpose. The proceeds of the Certificates will be used (a) to finance the cost of certain water utility system improvements, (b) to reimburse the District for costs previously expended on certain water utility system improvements, (c) to purchase debt service reserve surety bonds for the Certificates, (d) to capitalize a portion of interest payable with respect to the Certificates on and prior to June I, 2009, and (e) to pay the costs of executing and delivering the Certificates.

Security for the Installment Payments. The Installment Payments are secured by a pledge of and lien on, the District's Water Utility System Revenues and are payable from Net Water Utility System Revenues (as described under the caption "SECURITY AND SOURCES OF PAYMENT - Water Utility System Revenues"). The District has covenanted at all times to fix, prescribe and collect or cause to be collected rates, fees and charges for Water Service sufficient to produce Net Water Utility System Revenues in an amount equal to 125% of all Debt Service. See the caption "SECURITY AND SOURCES OF PAYMENT - Rate Covenant" herein. The District's obligation to make the Installment Payments from Net Water Utility System Revenues is absolute and unconditional and the District has covenanted to continue such payments whether or not the facilities financed from the proceeds of the Certificates (as more particularly described under the caption "THE PROJECT," the "Project") is operating or operable. Such payments are not subject to annual appropriation or abatement in the event of loss or destruction of the Project. The District's obligation to make the Installment Payments payable from Net Water Utility System Revenues is on a parity with the District's obligation to pay debt service on the $98,115,000 aggregate principal amount of outstanding Series 2006 Bonds (as defined herein), and on a parity with certain amounts which are payable by the District with respect to a State of California Department of Water Resources loan, or any obligations hereafter issued or incurred or a parity therewith subject to the terms and conditions of the Master Resolution (as hereinafter defined).

Outstanding Water Utility System Obligations. On June 23, 1994, the District adopted Resolution No. 94-5 8, entitled "A Resolution of the Board of Directors of the Santa Clara Valley Water District Providing for the Allocation of Water Utility System Revenues and Establishing Covenants to Secure the Payment of 1 Obligations Payable from Net Water Utility System Revenues" (the "Original Master Resolution"), which on November 28, 2006 was amended by Resolution No. 06-80, entitled, "Providing for the Issuance of Santa Clara Valley Water District, Water Utility System Refunding Revenue Bonds, Series 2006A and Santa Clara Valley Water District, Water Utility System Refunding Revenue Bonds, Taxable Series 2006B (Third Supplemental Resolution to Water Utility System Master Resolution) (the "Third Supplemental Resolution"). The Original Master Resolution as heretofore amended and supplemented is herein referred to as the "Master Resolution". Pursuant to the Third Supplemental Resolution, the District issued $99,835,000 Santa Clara Valley Water District, Water Utility System Refunding Revenue Bonds, Series 2006A and Taxable Series 2006B (the "Series 2006 Bonds") of which $98,115,000 remains outstanding. The Installment Payments are payable from Net Water Utility System Revenues on a parity with the payment of principal and interest on the Series 2006 Bonds.

The Installment Payments are also payable from Net Water Utility System Revenues on a parity with a currently authorized Loan Agreement by and between the State of California Department of Water Resources ("DWR") and the District (the "DWR Loan") in a not to exceed amount of $6,350,000. While the balance of the DWR Loan is currently $5,575,000, the District expects to draw upon the DWR loan during the current Fiscal Year, resulting in a total of $6,349,000 being outstanding thereafter.

The District has no obligations or indebtedness outstanding which are senior to the Installment Payments with respect to payment from Net Water Utility System Revenues.

Additional Debt Test. The Master Resolution provides for the issuance of Bonds and the execution and delivery of Contracts payable from Net Water Utility System Revenues on a parity with the Installment Purchase Agreement (the "Parity Obligations") upon satisfaction of certain conditions. See the captions "SECURITY AND SOURCES OF PAYMENT - Additional Parity Obligations" and in Appendix B - "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - WATER UTILITY MASTER RESOLUTION­ Additional Bonds and Contracts and Other Parity Obligations."

Reserve Fund. A reserve fund has been established for the Series 2007A Certificates (the "Series 2007A Reserve Fund"). MBIA Insurance Corporation (the "Insurer") has issued a commitment to issue, simultaneously with the execution and delivery of the Series 2007 A Certificates, a debt service reserve surety bond in the amount of $5,307,750.00 (as further described in Appendix B hereto, the "Series 2007A Reserve Requirement") for deposit in the Series 2007 A Reserve Fund. See the caption "SECURITY AND SOURCES OF PAYMENT - Reserve Funds" herein.

A reserve fund has been established for the Series 2007B Certificates (the "Series 2007B Reserve Fund"). The Insurer has issued a commitment to issue, simultaneously with the execution and delivery of the Series 2007B Certificates, a debt service reserve surety bond in the amount of $3,636,257.72 (as further described in Appendix B, the "Series 2007B Reserve Requirement"), for deposit in the Series 2007B Reserve Fund. See the caption "SECURITY AND SOURCES OF PAYMENT - Reserve Funds" herein.

Insurance. The Insurer has issued a commitment to issue, simultaneously with the execution and delivery of each series of Certificates, a financial guaranty insurance policy ( collectively, the "Policy") which will provide for the payment of principal and interest with respect to the respective series of Certificates which become due for payment but remain unpaid to the extent that the Trustee has not received sufficient funds from the District to make such payment. See the caption "THE INSURER AND THE POLICY" herein.

Prepayment. The Certificates will be subject to optional, mandatory and extraordinary prepayment prior to maturity, as more fully described under the caption "THE CERTIFICATES."

Limited Obligations. The obligation of the District to make the Installment Payments described herein are secured by a pledge of and lien on, the District's Water Utility System Revenues and are payable from the Net Water Utility System Revenues. The obligation of the District to make Installment Payments

2 does not constitute a debt of the District or of the State of California or of any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction.

Miscellaneous. Brief descriptions of the Certificates, the security and sources of payment for the Certificates and the District are provided herein. Such descriptions do not purport to be comprehensive or definitive. Definition of certain capitalized terms used herein may be found in Appendix B - "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS." All references made to various documents herein are qualified in their entirety by reference to the forms thereof, all of which are available for inspection at the office of the Clerk of the Board of the District (see address on the inside cover of this Official Statement).

Continuing Disclosure. The District has covenanted in a Continuing Disclosure Agreement for the benefit of the holders and beneficial owners of the Certificates to provide certain financial information and operating data relating to the District by not later than each April I, commencing April I, 2008, and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report and the notices of material events will be filed by the District with each Nationally Recognized Municipal Securities Information Repository. The specific nature of the information to be contained in the Annual Report and the notice of material events is set forth in Appendix E - "FORM OF CONTINUING DISCLOSURE AGREEMENT" hereto. These covenants have been made in order to assist the Underwriters in complying with Rule 15c2- 12(b )(5) promulgated under the Securities Exchange Act of 1934. The District has not defaulted on any continuing disclosure undertaking in the previous five years.

Fonvard-Looking Statements. Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such statements are generally identifiable by the terminology used such as "plan," "expect," "estimate," "project," "budget" or other similar words. Such forward-looking statements include, but are not limited to, certain statements contained in the information under the caption "CAPITAL IMPROVEMENT PROGRAM" and "FINANCIAL INFORMATION OF THE DISTRICT" herein.

THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD-LOOKING STATEMENTS INVOLVES KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE DISTRICT DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THE FORWARD-LOOKING STATEMENTS SET FORTH IN THIS OFFICIAL STATEMENT.

Changes Since the Date of the Preliminary Official Statement. Changes have been made to this Official Statement since the Preliminary Official Statement, dated August 28, 2007, as follows: (a) changes to reflect that the Insurer is expected to issue the Policy to insure payment of the principal and interest with respect to the Certificates; (b) an update to certain litigation described under the caption "FACTORS AFFECTING WATER SUPPLIES - Endangered Species Act Issues"; and (c) an update to certain litigation described under the caption "NO LITIGATION."

THE PROJECT

Water Treatment and Other Related Infrastructure Improvements

A portion of the proceeds of the 2007A Certificates will be used to finance and reimburse a portion of the costs previously incurred and to pay additional costs to be incurred by the District with respect to water treatment and other related infrastructure improvements, including but not limited to: the replacement of certain water treatment plant equipment; the design and construction of a new water quality lab on the

3 District's main campus; preparation of plans and specifications to complete rehabilitation work on the Almaden-Calero Canal; the design and construction of improvements of recycled water system facilities in the south county area of the District: improvements to the outlet pipe problems at Lenihan Dam; the redesign of existing flashboard dams; the installation of state-of-practice automated geotechnical instrumentation at various dams in the District; the planning and implementation of improvements at the District's and United States Bureau of Reclamation's water supply facilities; the planning, designing and construction of security modifications at certain facilities; and the planning, designing, and construction of improvements to replace adjustable speed drives (ASDs) aud overlaud fiber optic cable aud refurbish a regulating tauk at the Pacheco Pumping Plaut. The District has completed or expects to complete all environmental aud other discretionary approvals with respect to such projects prior to the scheduled commencement of work. The District expects that all proceeds of the Certificates allocable to such projects will be expended by June 30, 2010.

THE CERTIFICATES

General

The Certificates will be executed aud delivered in the aggregate principal amount of $131,000,000. One fully registered Certificate for each maturity registered in the name of CEDE & Co., as nominee of The Depository Trust Company, New York, New York ("DTC") of each series, as registered owner of all Certificates will be delivered to DTC on the Delivery Date. The principal aud interest with respect to the Certificates will be paid directly to CEDE & Co. by the Trustee as long as DTC or its nominee, CEDE & Co. is the registered owner of the Certificates. The Certificates will be dated the date of delivery. For information relating to DTC aud the DTC book-entry system as it relates to the Certificates, see Appendix C - "BOOK­ ENTRY SYSTEM."

Principal with respect to the Certificates will be payable on June I in each of the years, aud in the amounts, set forth on the inside cover page of this Official Statement unless paid through maudatory sinking fund payments as hereinafter described or upon prior prepayment.

Series 2007A Certificates

Interest with respect to the Series 2007 A Certificates will be payable at the rates set forth on the cover page of this Official Statement on December I, 2007 aud each June I aud December I thereafter. Interest with respect to the Series 2007A Certificates will be calculated on the basis of a 360 day year consisting of 12 thirty day months.

Series 2007B Certificates

Interest on the Series 2007B Certificates will be payable on December I, 2007, aud each March I, June I, September I, aud December I, thereafter. Interest with respect to the Series 2007B Certificates will be calculated on a basis of a 360 day year, as applicable, for the actual number of days. For the period from the October I, 2007 through aud including November 30, 2007, the Series 2007B Certificates will represent interest at (A) the Three-Month LIBORrate determined as of September 27, 2007, plus (B) the LIBOR spread specified on the inside cover page, except that the Series 2007B Certificates may not represent interest in any interest period at more thau the maximum rate of 17% per aunum. Thereafter, the Series 2007B Certificates will represent interest at the Index Rate, representing (A) the Three-Month LIBOR rate for such period plus (B) the LIBOR spread specified on the inside cover page, except that the Series 2007B Certificates may not represent interest in any interest period at more than the maximum rate of 17% per annum. The interest rate represented by the Series 2007B Certificates (expressed as a percentage) will be rounded to the fifth decimal point.

The term "Three-Month LIBOR Rate" meaus for each Index Rate Period from aud including auy Index Adjustment Date for Series 2007B Certificates to aud excluding the next Index Adjustment Date the rate for deposits in U.S. dollars with a three-month maturity that appears on Reuters Screen LIBOR0I Page (or

4 such other page as may replace that page on that service, or such other service as may be nominated by the British Bankers' Association, for the purpose of displaying London interbank offered rates for U.S. dollar deposits) as of 11:00 a.m., London time, on the Index Rate Determination Date, except that, if such rate does not appear on such page, the "Three-Month LIBOR Rate" means a rate determined on the basis of the rates at which deposits in U.S. dollars for a three-month maturity and in a principal amount of at least U.S. $1,000,000 are offered at approximately 11 :00 a.m. London time, on the Index Rate Determination Date, to prime banks in the London interbank market by four major banks in the London interbank market (herein referred to as the "Reference Banks") selected by the Calculation Agent. The Calculation Agent is to request the principal London office of each of such Reference Banks to provide a quotation of its rate. If at least two such quotations are provided, the Three-Month Libor Rate will be the arithmetic mean of such quotations. If fewer than two quotations are provided, the Three-Month LIBOR Rate will be the arithmetic mean of the rates quoted by major banks in New York City, selected by the Calculation Agent, at approximately 11:00 a.m., New Yark City time, on the Index Rate Determination Date preceding the first day of such period for loans in U.S. dollars to leading European banks in a principal amount of at least U.S. $1,000,000 having a three-month maturity.

The term "Index Adjustment Date" means the first Business Day on or after March 1, June 1, September I, and December I of each year, for the Series 2007B Certificates.

The term "Index Rate Determination Date" means the second London Banking Day immediately prior to the start of the applicable Index Rate Period.

The term "Index Rate Period" means, with respect to the Series 2007B Certificates, each period commencing on an Index Adjustment Date and ending on the day before the next Index Adjustment Date.

Optional Prepayment - Series 2007 A Certificates

The Series 2007A Certificates with maturity dates on and after June I, 2018, are subject to optional prepayment prior to the respective maturity dates by the District on any date on or after June I, 2017, upon notice as provided in the Trust Agreement, as a whole or in part by lot in such order of maturity as the District may determine, in integral multiples of five thousand dollars ($5,000), from any source of available funds, at a prepayment price equal to 100% of the principal amount to be prepaid plus interest, if any, accrued with respect thereto to the date of prepayment, without premium.

Optional Prepayment - Series 2007B Certificates

The Series 2007B Certificates are subject to optional prepayment prior to the respective maturity dates by the District on any Interest Payment Date on and after June I, 2009, upon notice as provided in the Trust Agreement, as a whole or in part by lot in such order of maturity as the District may determine, in integral multiples of $5,000, from any source of available funds, at a prepayment price equal to I 00% of the principal amount to be prepaid, plus interest, if any, accrued with respect thereto to the date of prepayment, without premium.

Mandatory Sinking Fund Payment - Series 2007A Certificates

The Series 2007A Certificates with a Certificate Payment Date of June I, 2022 are subject to mandatory prepayment prior to such Certificate Payment Date, in part by lot on the dates shown on the following schedules, in integral multiples of $5,000 solely from the principal components of scheduled Installment Payments becoming due on such dates, at a price equal to the sum of the principal amount evidenced and represented by the Series 2007 A Certificates to be prepaid plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium.

5 Mandatory Sinking Fund Schedule

Sinking Fund Payment Date Principal (June 1) Amount 2021 $2,255,000 20221 2,375,000

Final maturity.

The Series 2007A Certificates with Certificate a Payment Date of June I, 2024 are subject to mandatory prepayment prior to such Certificate Payment Date, in part by lot on the dates shown on the following schedules, in integral multiples of $5,000 solely from the principal components of scheduled Installment Payments becoming due on such dates, at a price equal to the sum of the principal amount evidenced and represented by the Series 2007 A Certificates to be prepaid plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium.

Mandatory Sinking Fund Schedule

Sinking Fund Payment Date Principal (June 1) Amount 2023 $2,465,000 20241 2,620,000

Final maturity.

The Series 2007A Certificates with Certificate a Payment Date of June I, 2026 are subject to mandatory prepayment prior to such Certificate Payment Date, in part by lot on the dates shown on the following schedules, in integral multiples of $5,000 solely from the principal components of scheduled Installment Payments becoming due on such dates, at a price equal to the sum of the principal amount evidenced and represented by the Series 2007 A Certificates to be prepaid plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium.

Mandatory Sinking Fund Schedule

Sinking Fund Payment Date Principal (June 1) Amount 2025 $2,720,000 20261 2,900,000

Final maturity.

The Series 2007A Certificates with Certificate a Payment Date of June I, 2029 are subject to mandatory prepayment prior to such Certificate Payment Date, in part by lot on the dates shown on the following schedules, in integral multiples of $5,000 solely from the principal components of scheduled Installment Payments becoming due on such dates, at a price equal to the sum of the principal amount evidenced and represented by the Series 2007 A Certificates to be prepaid plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium.

6 Mandatory Sinking Fund Schedule

Sinking Fund Payment Date Principal (June 1) Amount 2027 $3,005,000 2028 3,150,000 20291 3,320,000

Final maturity.

The Series 2007A Certificates with Certificate a Payment Date of June I, 2037 are subject to mandatory prepayment prior to such Certificate Payment Date, in part by lot on the dates shown on the following schedules, in integral multiples of $5,000 solely from the principal components of scheduled Installment Payments becoming due on such dates, at a price equal to the sum of the principal amount evidenced and represented by the Series 2007 A Certificates to be prepaid plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium.

Mandatory Sinking Fund Schedule

Sinking Fund Payment Date Principal (June 1) Amount 2030 $3,485,000 2031 3,670,000 2032 3,855,000 2033 4,065,000 2034 4,320,000 2035 4,565,000 2036 4,805,000 2037' 5,055,000

Final maturity.

Mandatory Sinking Fund Payment - Series 2007B Certificates

The Series 2007B Certificates with a Certificate Payment Date of June I, 2037 are subject to mandatory prepayment prior to such Certificate Payment Date, pro rata among holders on the dates shown on the following schedules, in integral multiples of $5,000 solely from the principal components of scheduled Installment Payments becoming due on such dates, at a price equal to the sum of the principal amount evidenced and represented by the Series 2007B Certificates to be prepaid plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium.

7 Mandatory Sinking Fund Schedule

Sinking Fund Payment Date Principal (June 1) Amount 2010 $ 930,000 2011 970,000 2012 1,020,000 2013 1,065,000 2014 1,120,000 2015 1,155,000 2016 1,215,000 2017 1,270,000 2018 1,330,000 2019 1,390,000 2020 1,470,000 2021 1,540,000 2022 1,620,000 2023 1,740,000 2024 1,795,000 2025 1,925,000 2026 1,980,000 2027 2,125,000 2028 2,235,000 2029 2,345,000 2030 2,465,000 2031 2,595,000 2032 2,735,000 2033 2,870,000 2034 2,980,000 2035 3,115,000 2036 3,280,000 2037 1 3,450,000

Final maturity.

Extraordinary Prepayment From Insurance or Condemnation Proceeds

The Certificates are subject to extraordinary prepayment by the District on any date prior to their respective Certificate Payment Dates, upon notice as provided in the Trust Agreement, as a whole or in part by lot within each Certificate Payment Date, in such order of prepayment as the District may determine, in integral multiples of Authorized Denominations, from payments made by the District from the net proceeds received by the District due to the damage, destruction or condenruation of all or any portion of the Water Utility System under the circumstances and upon the conditions and terms prescribed in the Trust Agreement and in the Installment Purchase Agreement, at a prepayment price equal to the sum of the principal amount or such part thereof evidenced and represented by the Certificates to be prepaid, plus accrued interest evidenced and represented thereby to the date fixed for prepayment, without premium.

There is no requirement to prepay the Series 2007 A Certificates and Series 2007B Certificates from insurance or condemnation proceeds on a pro rata or other basis.

8 Other Prepayment Provisions

Notice of Prepayment. Notice of prepayment shall be mailed first-class mail by the Trustee, not less than thirty (30) nor more than sixty (60) days prior to the prepayment date to (i) the respective Owners of the Certificates designated for prepayment at their addresses appearing on the registration books of the Trustee, (ii) the Securities Depositories, and (iii) the Information Services. Notice of prepayment to the Securities Depositories and the Information Services shall be given by certified or registered mail, overnight delivery or confirmed facsimile transmission. Each notice of prepayment shall state the prepayment date, the prepayment price, if any, the series, the CUSIP number (if any) of the maturity or maturities, and, if less than all of any such maturity is to be prepaid, the distinctive certificate numbers of the Certificates of such maturity to be prepaid and, in the case of Certificates to be prepaid in part only, the respective portions of the principal amount thereof to be prepaid. Each such notice shall also state that on the prepayment date there will become due and payable on the Certificates to be prepaid, all of the principal amount thereof on the prepayment date, and that from and after such prepayment date interest evidenced and represented by the Certificates shall cease to accrue, and shall require that such Certificates be then surrendered at the address of the Trustee specified in the prepayment notice. Failure by the Trustee to give notice pursuant to the Trust Agreement to any one or more of the Information Services or Securities Depositories, or the insufficiency of any such notice shall not affect the sufficiency of the proceedings for prepayment. Failure by the Trustee to mail notice of prepayment pursuant to this section to any one or more of the respective Owners of any Certificates designated for prepayment shall not affect the sufficiency of the proceedings for prepayment with respect to the Owners to whom such notice was mailed.

In the event of prepayment of Certificates (other than sinking fund prepayments), the Trustee shall mail a notice of optional prepayment, other than any notice that refers to Certificates that are to be prepaid from proceeds of a refunding bond issue, only if sufficient funds have been deposited with the Trustee to pay the applicable prepayment price of the Certificates to be prepaid. The District shall give the Trustee written notice of its intention to optionally prepay Certificates at least 45 days prior to the intended Prepayment Date.

The District may, at its option, prior to the date fixed for prepayment in any notice of prepayment rescind and cancel such notice of prepayment by Written Request of the District and the Trustee shall mail notice of such cancellation to the recipients of the notice of prepayment being cancelled.

Effect of Prepayment. If notice of prepayment has been duly given as aforesaid and money for the payment of the prepayment price of the Certificates called for prepayment is held by the Trustee, then on the prepayment date designated in such notice, Certificates shall become due and payable, and from and after the date so designated interest evidenced and represented by the Certificates so called for prepayment shall cease to accrue, and the Owners of such Certificates shall have no rights in respect thereof except to receive payment of the prepayment price thereof. Any prepayment of Certificates pursuant to the Trust Agreement shall cause the schedule of Installment Payments set forth in the Installment Purchase Agreement to be recalculated by the District in accordance with the Installment Purchase Agreement. Such schedule shall be furnished by the District to the Trustee. All Certificates prepaid, pursuant to the provisions of the Trust Agreement shall be cancelled by the Trustee and shall be delivered to, or upon the order of, the District and shall not be redelivered.

SECURITY AND SOURCES OF PAYMENT

Capitalized terms used herein and not otherwise defined shall have the meanings set forth in "APPENDIX B-SUMMARY OF PRINCIPAL LEGAL DOCUMENTS."

Net Water Utility System Revenue Pledge

Pursuant to the Master Resolution and Installment Purchase Agreement, the District established and agreed to maintain, so long as any Bonds or Contracts remain outstanding, the Water Utility System Revenue Fund to be held by the Finance Manager. The District has covenanted that all Current Water Utility System

9 Revenues received by the District will be deposited in the Water Utility System Revenue Fund. Amounts in the Water Utility System Revenue Fund will be disbursed, allocated and applied solely to the uses and purposes described in the Master Resolution and Installment Purchase Agreement, and will be accounted for separately and apart from all other accounts, funds, money or other resources of the District. The District will only have such beneficial right or interest in such money as is provided in the Master Resolution and Installment Purchase Agreement.

All Water Utility System Revenues have been pledged to the payment of the Installment Payments, subject however to the pledge thereon securing other Bonds and Contracts as provided in the Installment Purchase Agreement, and such remaining Water Utility System Revenues will not be used for any other purpose while any of Installment Payments payable and the Installment Purchase Agreement remain unpaid. Such pledge constitutes a lien on Water Utility System Revenues for the payment of the Installment Payments payable under the Installment Purchase Agreement on a parity with payments made with respect to the other Contracts and Bonds, and such other obligations which are payable prior to the Installment payments under the Installment Purchase Agreement, all as under the caption "- Allocation of Water System Utility Revenues" below.

Pursuant to the Installment Purchase Agreement, the Installment Payments are payable solely from Net Water Utility System Revenues. Net Water Utility System Revenues are defined by the Master Resolution to be, for any fiscal year or other period, the Water Utility System Revenues during such fiscal year or other period less the Maintenance and Operation Costs during such fiscal year or other period. The obligation of the District to make such Installment Payments from Net Water Utility System Revenues is absolute and unconditional.

THE OBLIGATION OF THE DISTRICT TO MAKE THE INSTALLMENT PAYMENTS WITH RESPECT TO THE CERTIFICATES DESCRIBED IS A LIMITED OBLIGATION OF THE DISTRICT PAYABLE SOLELY FROM NET WATER UTILITY SYSTEM REVENUES OF THE DISTRICT'S WATER UTILITY SYSTEM AND, NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE DISTRICT, THE COUNTY OF SANTA CLARA, THE STATE OF CALIFORNIA OR ANY OF ITS POLITICAL SUBDIVISION IS PLEDGED FOR THE PAYMENT OF THE INSTALLMENT PAYMENTS. THE OBLIGATION OF THE DISTRICT TO MAKE INSTALLMENT PAYMENTS UNDER THE INSTALLMENT PURCHASE AGREEMENT DO NOT CONSTITUTE INDEBTEDNESS OF THE DISTRICT IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMIT OR RESTRICTION.

Allocation of Water Utility System Revenues

The Master Resolution provides for the allocation of Water Utility System Revenues. Such provisions apply to the payments due in accordance with the Installment Purchase Agreement, the Series 2006 Bonds and the DWR Loan, as well as to such other debts and obligations payable from Net Water Utility System Revenues which the District may issue or incur in the future, including without limitation water utility system revenue bonds, installment sale agreements, leases and contracts of indebtedness.

Under the Master Resolution, all Current Water Utility System Revenues are deposited initially in the Water Utility System Revenue Fund. Amounts are to be applied by the District to the following purposes, at the following times and in the following order of priority:

(a) to the payment of Maintenance and Operation Costs as the same become due and payable;

(b) to the payment of all Contracts and Bonds as the same become due and payable;

( c) to the replenishment of reserve funds securing Contracts and Bonds at the times and in the amounts required under the term of instruments securing such Contracts and Bonds;

10 ( d) on any date prior to the last Business Day of each fiscal year, after making each of the foregoing payments, the balance of the money then remaining in the Water Utility System Revenue Fund may be used for any lawful purpose of the Water Utility System; and

( e) on the last Business Day of each fiscal year, to any lawful purpose of the District.

Rate Covenant

The District has covenanted under the Master Resolution to at all times fix, prescribe and collect or cause to be collected rates, fees and charges for Water Service which are reasonably fair and nondiscriminatory and which will be at least sufficient to yield during each fiscal year (i) Current Water Utility System Revenues in an amount sufficient to meet the Maintenance and Operation Costs and Debt Service for the then current fiscal year, and (ii) Net Water Utility System Revenues in an amount at least (A) 1.25 times the sum of all Debt Service due in each fiscal year and (B) 1.10 times the sum of all Debt Service on all Bonds and Contracts plus all debt service on all obligations subordinate to Bonds and Contracts in each fiscal year; but, in any event such Net Water Utility System Revenues shall be sufficient in each fiscal year to make all of the allocations, transfers and payments contemplated by paragraphs (b) through ( c) above, under "- Allocation of Water Utility System Revenues." The District may make adjustments from time to time in such rates, fees and charges and may make such classification thereof as it deems necessary, but shall not reduce the rates, fees and charges then in effect unless the Net Water Utility System Revenues from such reduced rates, fees and charges will at all times be sufficient to meet the requirements of this covenant.

Reserve Funds

The Series 2007 A Reserve Fund is established by the Trust Agreement. The Series 2007 A Reserve Fund established for the Series 2007A Certificates will be $5,307,750.00. Thereafter, the Series 2007A Reserve Fund is required to be funded in an amount equal to the lesser of such amount and an amount equal to the maximum principal and interest due with respect to the Series 2007A Certificates due in the amount on any future fiscal year (the "Series 2007 A Reserve Fund Requirement").

The District has received from the Insurer a commitment to issue a surety bond (the "Series 2007A Surety Bond") for deposit in the Series 2007A Reserve Fund in lieu of cash. The Series 2007 A Surety Bond will provide that upon notice from the Trustee to the Insurer to the effect that insufficient amounts to pay the principal (at maturity or pursuant to mandatory prepayment requirements) and interest with respect to the Series 2007A Certificates, the Insurer will promptly deposit with the Trustee an amount sufficient to pay the principal and interest with respect to the Series 2007A Certificates or the available amount of the Series 2007A Surety Bond, whichever is less. Upon the later of: (i) three (3) days after receipt by the Insurer of a demand for payment in the form attached to the Series 2007A Surety Bond, duly executed by the Trustee; or (ii) the payment date of the Series 2007 A Certificates as specified in the demand for payment presented by the Trustee to the Insurer, the Insurer will make a deposit of funds in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment to the Trustee of amounts which are then due to the Trustee (as specified in the Demand for Payment) subject to the surety bond coverage described in the Series 2007A Surety Bond.

The available amount of the Series 2007A Surety Bond is the initial face amount of the Series 2007A Surety Bond less the amount of any previous deposits by the Insurer with the Trustee which have not been reimbursed by the District. The District and the Insurer have entered into a Financial Guaranty Agreement dated as of the date of the delivery of the Series 2007A Certificates (the "Series 2007A Financial Guaranty Agreement"). Pursuant to the Series 2007A Financial Guaranty Agreement, the District is required to reimburse the Insurer, within one year of any deposit, the amount of such deposit made by the Insurer with the Trustee under the Series 2007 A Surety Bond. Such reimbursement shall be made only after payment of Maintenance and Operation Costs and all required deposits with respect to Contract and Bonds. Under the terms of the Series 2007 A Financial Guaranty Agreement, the Trustee is required to reimburse the Insurer, with interest, until the face amount of the Series 2007A Surety Bond is reinstated before any payments are

11 made from surplus moneys as described in the Installment Purchase Agreement. No optional prepayment of Series 2007 A Certificates may be made until the Series 2007 A Surety Bond is reinstated.

The Series 2007B Reserve Fund is established by the Trust Agreement. The Series 2007B Reserve Fund established for the Series 2007B Certificates will be $3,636,257.72. Thereafter the Series 2007B Reserve Fund is required to be funded in an amount equal to the lesser of such amount and an amount equal to the maximum principal and interest due with respect to the Series 2007B Certificates due in the amount on any future fiscal year (the "Series 2007B Reserve Fund Requirement").

The District has received from the Insurer a commitment to issue a surety bond (the "Series 2007B Surety Bond") for deposit in the Series 2007B Reserve Fund in lieu of cash. The Series 2007B Surety Bond will provide that upon notice from the Trustee to the Insurer to the effect that insufficient amounts to pay the principal (at maturity or pursuant to mandatory prepayment requirements) and interest with respect to the Series 2007B Certificates, the Insurer will promptly deposit with the Trustee an amount sufficient to pay the principal and interest with respect to the Series 2007B Certificates or the available amount of the Series 2007B Surety Bond, whichever is less. Upon the later of: (i) three (3) days after receipt by the Insurer of a demand for payment in the form attached to the Series 2007B Surety Bond, duly executed by the Trustee; or (ii) the payment date of the Series 2007B Certificates as specified in the demand for payment presented by the Trustee to the Insurer, the Insurer will make a deposit of funds in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment to the Trustee of amounts which are then due to the Trustee (as specified in the Demand for Payment) subject to the surety bond coverage described in the Series 2007B Surety Bond.

The available amount of the Series 2007B Surety Bond is the initial face amount of the Series 2007B Surety Bond less the amount of any previous deposits by the Insurer with the Trustee which have not been reimbursed by the District. The District and the Insurer have entered into a Financial Guaranty Agreement dated as of the date of the delivery of the Series 2007B Certificates (the "Series 2007B Financial Guaranty Agreement"). Pursuant to the Series 2007B Financial Guaranty Agreement, the District is required to reimburse the Insurer, within one year of any deposit, the amount of such deposit made by the Insurer with the Trustee under the Series 2007B Surety Bond. Such reimbursement shall be made only after payment of Maintenance and Operation Costs and all required deposits with respect to Contract and Bonds. Under the terms of the Series 2007B Financial Guaranty Agreement, the Trustee is required to reimburse the Insurer, with interest, until the face amount of the Series 2007B Surety Bond is reinstated before any payments are made from surplus moneys as described in the Installment Purchase Agreement. No optional prepayment of Series 2007B Certificates may be made until the Series 2007B Surety Bond is reinstated.

The District may elect to fund the Series 2007A Reserve Fund Requirement or the Series 2007B Reserve Fund Requirement with a surety bond in lieu of the deposit of Certificate proceeds described above. See Appendix B - "SUMMARY OF PRINCIPAL LEGAL DOCUMENTS - Trust Agreement - Reserve Funds."

Additional Contracts and Bonds

The District may at any time incur or issue Parity Obligations (that is, obligations the payments of which are payable from the Water Utility System Revenues on a parity with the Installment Purchase Agreement), provided:

(a) The Net Water Utility System Revenues for the most recent audited fiscal year preceding the date of adoption by the Board of Directors of the District of the resolution authorizing the issuance of such Bonds or the date of the execution of such Contract, as the case may be, as evidenced by both a calculation prepared by the District and a special report prepared by an Experienced Banker or Advisor on such calculation on file with the District, shall have produced a sum equal to at least one hundred twenty-five percent (125%) of the Debt Service for such fiscal year; and

12 (b) The Net Water Utility System Revenues for the most recent audited fiscal year preceding the date of the execution of such Contract or the date of adoption by the Board of Directors of the District of the resolution authorizing the issuance of such Bonds, as the case may be, including adjustments to give effect as of the first day of such fiscal year to increases or decreases in rates and charges for the Water Service approved and in effect as of the date of calculation, as evidenced by a calculation prepared by the District, shall have produced a sum equal to at least one hundred twenty-five percent (125%) of the Debt Service for such fiscal year plus the Debt Service which would have accrued on any Contracts executed or Bonds issued since the end of such fiscal year assuming such Contracts had been executed or Bonds had been issued at the beginning of such fiscal year, plus the Debt Service which would have accrued had such Contract been executed or Bonds been issued at the beginning of such fiscal year; and

(c) The estimated Net Water Utility System Revenues for the then current fiscal year and for each fiscal year thereafter to and including the first complete fiscal year after the latest Date of Operation of any uncompleted Parity Project, as evidenced by a certificate of the Chief Executive Officer of the District on file with the District, including (after giving effect to the completion of all such uncompleted Parity Projects) an allowance for estimated Net Water Utility System Revenues for each of such fiscal years arising from any increase in the income, rents, fees, rates and charges estimated to be fixed, prescribed or received for the Water Service and which are economically feasible and reasonably considered necessary based on projected operations for such period, as evidenced by a certificate of the Chief Executive Officer on file with the District, shall produce a sum equal to at least one hundred twenty-five percent (125%) of the estimated Debt Service for each of such fiscal years, after giving effect to the execution of all Contracts and the issuance of all Bonds estimated to be required to be executed or issued to pay the costs of completing all uncompleted Parity Projects within such fiscal years, assuming that all such Contracts and Bonds have maturities, interest rates and proportionate principal repayment provisions similar to the Contract last executed or then being executed or the Bonds last issued or then being issued for the purpose of acquiring and constructing any of such uncompleted Parity Projects; and

Notwithstanding the foregoing, Bonds may be issued or Contracts may be executed to refund outstanding Bonds or Contracts if Debt Service on the refunding Bonds or Contracts is not greater than 105% of Debt Service on the Bonds or Contracts being refunded in each subsequent fiscal year.

THE INSURER AND THE POLICY

The MBIA Insurance Corporation Financial Guaranty Insurance Policy

The following information has been furnished by the insurer for use in this Official Statement. No representation is made herein by the District as to the accuracy or adequacy ofsuch information subsequent to the date hereof, or that the information contained and incorporated herein by reference is correct.

THE INSURER WILL ISSUE A SEPARATE FINANCIAL GUARANTY INSURANCE POLICY WITH RESPECT TO EACH SERIES OF CERTIFICATES. Reference is made to Appendix F for a specimen of the Policy.

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 the accuracy of the information regarding the policies and the insurer set forth under the caption "THE INSURER AND THE POLICY". Additionally, the insurer makes no representation regarding the Certificates or the advisability of investing in the Certificates.

The Insurer's Policy unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the District to the Trustee or its successor of an amount equal to (i) the principal ( either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and with respect to the Certificates 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

13 optional prepayment 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 Insurer 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, unless the Insurer elects in its sole discretion, to pay in whole or in part any principal due by reason of such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner of the Certificates ("Owner") 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 Insurer's Policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Certificates. The Insurer's Policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory prepayments ( other than mandatory sinking fund prepayments); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price of Certificates upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. The Insurer's Policy also does not insure against nonpayment of principal or with respect to Certificates resulting from the insolvency, negligence or any other act or omission of the Trustee or any other paying agent for the Certificates.

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 Certificates 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 Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such insured amounts which are then due. Upon presentment and surrender of such Certificates or presentment of such other proof of ownership of the Certificates, together with any appropriate instruments of assignment to evidence the assignment of the insured amounts due with respect to Certificates as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Certificates in any legal proceeding related to payment of insured amounts with respect to Certificates, such instruments being in a form satisfactory to U.S. Bank Trust National Association. U.S. Bank Trust National Association shall disburse to such owners or the Trustee payment of the insured amounts with respect to such Certificates 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 Yark Stock Exchange listed company (the "Company"). The Company is not obligated to pay the debts of or claims against the Insurer. The Insurer is domiciled in the State of New Yark 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, either directly or through subsidiaries, is licensed to do business in the Republic of France, the United Kingdom and the Kingdom of Spain and is subject to regulation uuder the laws of those jurisdictions. In February 2007, MBIA Corp. incorporated a new subsidiary, MBIA Mexico, S.A. de C. V. ("MBIA Mexico"), through which it intends to write financial guarantee insurance in Mexico beginning in 2007.

The principal executive offices of the Insurer are located at 113 King Street, Armonk, New York 10504 and the main telephone number at that address is (914) 273-4545.

Regulation

As a financial guaranty insurance company licensed to do business in the State of New York, the Insurer is subject to the New York Insurance Law which, among other things, prescribes minimum capital requirements and contingency reserves against liabilities for the Insurer, limits the classes and concentrations of investments that

14 are made by the Insurer and requires the approval of policy rates and forms that are employed by the Insurer. State law also regulates the amount of both the aggregate and individual risks that may be insured by the Insurer, the payment of dividends by the Insurer, changes in control with respect to the Insurer and transactions among the Insurer and its affiliates.

The Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law.

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 Insurer "AAA."

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

Each rating of the Insurer should be evaluated independently. The ratings reflect 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.

The above ratings are not recommendations to buy, sell or hold the Certificates, 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 Certificates. The Insurer does not guaranty the market price of the Certificates nor does it guaranty that the ratings on the Certificates will not be revised or withdrawn.

The Insurer's Financial Information

As of December 31, 2006, the Insurer had admitted assets of $10.9 billion (audited), total liabilities of $6.9 billion (audited), and total capital and surplus of $4.0 billion (audited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of June 30, 2007, the Insurer had admitted assets of $10.8 billion (unaudited), total liabilities of $6.8 billion (unaudited), and total capital and surplus of $4.0 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities.

For further information concerning the Insurer, see the consolidated financial statements of the Insurer and its subsidiaries as of December 31, 2006 and December 31, 2005 and for each of the three years in the period ended December 31, 2006, prepared in accordance with generally accepted accounting principles, included in the Annual Report on Form 10-K of the Company for the year ended Deceruber 31, 2006 and the consolidated financial stateruents of the Insurer and its subsidiaries as of June 30, 2007 and for the six month periods ended June 30, 2007 and June 30, 2006 included in the Quarterly Report on Form I 0-Q of the Company for the quarter ended June 30, 2007, which are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof

Copies of the statutory financial statements filed by the Insurer with the State of New York Insurance Department are available over the Internet at the Company's web site at http://www.mbia.com and at no cost, upon request to the Insurer at its principal executive offices.

15 Incorporation of Certain Documents by Reference

The following documents filed by the Company with the Securities and Exchange Commission (the ''SEC'') are incorporated by reference into this Official Statement:

(I) The Company's Annual Report on Form 10-K for the year ended December 31, 2006; and (2) The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

Any documents, including any financial statements of the Insurer and its subsidiaries that are included therein or attached as exhibits thereto, filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the Company's most recent Quarterly Report on Form 10-Q or Annual Report on Form 10-K, and prior to the termination of the offering of the Certificates offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof from the respective dates of filing such documents. 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 Company's SEC filings (including (I) the Company's Annual Report on Form 10-K for the year ended December 31, 2006, and (2) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007) are available (i) over the Internet at the SEC's web site at http://www.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 the Insurer at its principal executive offices.

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 I of Part 2 of Division I of the California Insurance Code.

ESTIMATED SOURCES AND USES OF FUNDS The following is an estimate of the sources and uses of funds with respect to the Certificates. Series 2007A(tJ Series 20078<1> Sources: Principal Amount of Certificates $77,270,000 $53,730,000 Original Issue Premium 3 152 840 Total Sources $80,422,840 $53,730,000

Uses: Deposit to Series 2007A Acquisition and Construction Fund(') $78,961,970 $ Deposit to Series 2007B Acquisition and Construction Fund<2J 52,642,443 Deposit to Capitalized Interest Fund(JJ 654,042 527,330 4 Costs of lssuance( ) 500,842 347,458 Underwriters' Discount 305 986 212 769 Total Uses $80,422,840 $53,730,000

(I) All amounts rounded to the nearest dollar; amounts may not independently add. (2) Includes a portion of swap termination payments. See the caption "CAPITAL IMPROVEMENT PROGRAM". (3) Represents a portion of interest with respect to the Certificates on and prior to June 1, 2009. (4) Includes the premium for the debt service reserve fund surety bonds and the Policy as well as certain legal, financing and printing costs. 16 INSTALLMENT PAYMENT SCHEDULE

Set forth below is a schedule of lustallment Payments with respect to the Certificates and the schedule debt service of the Parity Obligations due in each annual period ending June 1 of the following years:

Installment Payment Schedules'''

Parity Installment Paymenti2J ObligationJ3J Year Ending June I Series 2007A Series 2007B(4J Total Total 2008 $2,477,433 $2,002,935 $4,480,368 $6,720,813 $11,201,182 2009 3,716,150 2,996,194 6,712,344 6,915,910 13,628,254 2010 5,026,150 3,926,194 8,952,344 6,921,686 15,874,030 2011 5,038,750 3,914,333 8,953,083 6,918,174 15,871,257 2012 5,038,750 3,918,161 8,956,911 6,910,631 15,867,542 2013 5,056,550 3,898,363 8,954,913 6,923,999 15,878,912 2014 5,056,300 3,893,975 8,950,275 6,917,164 15,867,438 2015 5,087,300 3,866,519 8,953,819 6,916,515 15,870,334 2016 5,082,800 3,869,364 8,952,164 6,923,537 15,875,701 2017 5,102,000 3,849,359 8,951,359 6,918,005 15,869,364 2018 5,112,600 3,838,539 8,951,139 6,920,177 15,871,316 2019 5,129,800 3,824,373 8,954,173 6,919,287 15,873,460 2020 5,122,800 3,833,318 8,956,118 6,915,094 15,871,212 2021 5,136,050 3,814,888 8,950,938 6,920,489 15,871,427 2022 5,143,300 3,809,011 8,952,311 6,922,606 15,874,917 2023 5,114,550 3,838,674 8,953,224 6,922,282 15,875,506 2024 5,152,463 3,802,129 8,954,591 6,918,268 15,872,859 2025 5,128,013 3,826,549 8,954,561 6,920,273 15,874,834 2026 5,178,813 3,774,203 8,953,016 6,924,669 15,877,685 2027 5,146,063 3,808,791 8,954,853 6,916,003 15,870,856 2028 5,148,325 3,804,581 8,952,906 6,713,908 15,666,814 2029 5,168,700 3,785,660 8,954,360 6,513,377 15,467,737 2030 5,176,000 3,774,894 8,950,894 6,519,586 15,470,480 2031 5,186,750 3,767,436 8,954,186 6,524,640 15,478,826 2032 5,188,250 3,765,544 8,953,794 2,743,060 11,696,854 2033 5,205,500 3,745,214 8,950,714 2,744,212 11,694,926 2034 5,257,250 3,695,172 8,952,422 2,745,053 11,697,474 2035 5,286,250 3,663,995 8,950,245 2,740,315 11,690,561 2036 5,298,000 3,656,319 8,954,319 8,954,319 2037 5 307 750 3 642 385 8 950 135 8 950 135 Total $150,269,408 $111,607,071 $261,876,479 $175,429,731 $437,306,210

(I) Totals may not add due to independent rounding. 2 ( ) Corresponds to the Certificates 3 ( ) Includes scheduled debt service payable on the Series 2006 Bonds and projected payments on the currently outstanding balance of the DWR Loan. 4 ( ) Projected at 5.50% per annum.

17 THE DISTRICT

Organization, Purpose and Powers

Santa Clara Valley Water District is a special district authorized to supply water and provide flood protection services in Santa Clara Couuty, California (the "Couuty"). The District encompasses all of the County, one of the nine couuties which make up the San Francisco Bay Area. The Couuty had an estimated population of approximately 1,750,000 in 2005.

The District has broad powers relating to the management of flood and storm waters within the District. The District is also authorized to import, store, treat and distribute water within its jurisdictional boundaries to provide water in sufficient quantity and quality for present and future beneficial use by the lands and population within the District.

The District has been providing flood protection measures since 1951. These measures include maintenance and construction of flood protection facilities. The District's priority is to provide flood protection in a non-structural way, through coordination with the local land use agencies, resorting to using structural flood protection methods only as a last alternative. The level of protection that the District provides as a matter of policy is protection from flood damage that would result from a one percent flood (the flood that has a one percent chance of occurring in any given year).

The District provides water supply of adequate quantity and quality to meet the desired quality of life in the community. To fulfill this mission, the District imports water into the County, manages the groundwater basin, and owns and operates three water treatment plants, ten reservoirs, three pumping stations, a hydroelectric plant, 18 recharge facilities in six major recharge systems, and related distribution facilities. The District wholesales water to nine cities, two investor-owned companies, one private company, and several mutual water companies. These companies or agencies then deliver water to the consumers in the County. The District receives revenue from groundwater charges for water pumped from the groundwater basin, from the sale of treated water, and smaller amounts of revenue from the sale of non-potable surface water and reclaimed water.

Some of the water retailers within the District also receive supplies from the San Francisco Water Departruent through the Bay Division Pipelines ("Hetch Hetchy"). Additional storage and supply is provided by San Jose Water Company which owns and operates two small surface water reservoirs, Williams and Elsman, and two small water treatment plants within the County. Some local governmental agencies operate water reclamation projects. The District does not receive revenue from the sale of water from the Hetch Hetchy water source, San Jose Water Company local water sources, and wastewater reclamation sources other than the Gilroy Reclamation Facility.

The sources of District water are: the California State Water Project ("SWP"), U.S. Bureau of Reclamation's Central Valley Project ("CVP"), District reservoirs, and naturally recharged groundwater. The District is one of the twenty nine contractors with the SWP and receives imported state water through the South Bay Aqueduct. The District also receives imported water through the San Felipe Division of the CVP. Both the SWP and the CVP water are transported to the District from the Sacramento - San Joaquin Delta. Locally, the District owns and operates ten surface water reservoirs which collect runoff during the winter rams.

The District operates a conjunctive use system in which the District recharges surface water, from the imported water sources and the local reservoirs, into the groundwater basin to augment the natural recharge into the groundwater basin. The District uses streams and ponds as recharge facilities. The groundwater basin serves as a natural storage, conveyance, and treatment facility.

The Law authorizes the District to exercise the power of eminent domain; to levy and collect taxes; to levy and collect a grouudwater charge for the production of water from grouudwater supplies benefited by

18 District recharge activities; to contract for the fixing, revision and collection of rates or other charges under contract for the delivery of treated water, use of facilities or property or provisions for service. The District may also issue bonds, borrow money and incur indebtedness. The District may also acquire property of any kind; enter into contracts; and adopt ordinances with the force of County law to effectuate its purposes.

On September 14, 2006, the Governor of California approved Assembly Bill 2435 ("AB 2435"). AB 2435, which was co-sponsored by the County of Santa Clara and the District, and which removed the County from responsibility for approving the District's budget.

Board of Directors, Management and Employee Relations

Board of Directors. The District is governed by a seven-member Board of Directors (the "Board"). Five directors are elected from each of the five County Supervisorial Districts and the remaining two are appointed from two regions of the County by the County Board of Supervisors to represent the County at large. The directors serve overlapping four-year terms. Pursuant to AB 2435, the two at large directors' terms will expire in 2010 and the at large directors will not be replaced by the County. The current Directors are:

Rosemary Kamei (District 1): Ms. Kamei was appointed to the District Board of Directors in 1993 following the resignation of Joe Pandit. In 1994 she was formally elected to the Board of the District to represent District I which includes the southern portion of Santa Clara County and the cities of Morgan Hill, Gilroy, the town of Los Gatos, and the southern area of San Jose. The first woman elected to the board, she was the chairperson in 2002 and in 1995, and represented the District during a period of emergency with two flood disasters. Director Kamei currently serves as district representative on both the Environmental Advisory Committee and the Uvas/Llagas Flood Control and Watershed Advisory Committee. She has extensive experience in dealing with critical water resource policy issues, including water quality, MTBE contamination and perchlorate issues, underground storage tank challenges, non-point source pollution prevention, flood management, awareness and preparation issues, environmental protection with watershed and stream management and water use efficiency. Director Kamei is Vice President of Development for Planned Parenthood Mar Monte ("PPMM"), overseeing fundraising throughout its service area in California and northern Nevada. Previously she was Development Director and Associate Vice President for PPMM in Santa Clara/San Benito Counties. She is a former businesswoman and general manager for Kamei Nursery, Inc. She also has extensive community involvement for over 26 years on various commissions and boards. She holds a master's degree in Urban and Regional Planning from San Jose State University and a bachelor's degree in political science from the University of Wisconsin at Madison. She is fluent in Spanish and has studied Mandarin.

Joe Judge (District 2): Mr. Judge became a member of the Board in 1986. Mr. Judge is a general contractor in the County. He is a director of the Santa Clara County Building Authority, the Santa Clara County Public Facilities Corporation and Community Housing Developers, Incorporated. District 2 includes much of San Jose.

Richard P. Santos (District 3): Mr. Santos became a member of the Board in 2000. The Alviso native resident retired as a Fire Captain from the San Jose Fire Department with 33 years of service. Mr. Santos currently represents the District Board on the following committees: Association of California Water Agencies Water Use, Coyote Flood Zone and Watershed Advisory, Landscape Advisory, South Bay Recycling and the Santa Clara Valley Water Commission. While at the San Jose Fire Department, Director Santos was elected as vice chair for 12 years on the San Jose Police and Fire Retirement Board and was a labor representative of the San Jose Firefighters local union. He was then and is still very active as a volunteer for community services and as chair, spearheaded several civic activity fundraiser projects. Mr. Santos received a BS degree in public administration from Farelston and Nova Colleges and received an AA degree in political science and an AS degree in fire science. He also has a lifetime teaching credential from the California Community College system, where he taught fire science at Mission College. District 3 is in the northeastern portion of the county and includes the City of Milpitas, portions of San Jose (Berryessa area, the Alum Rock area north of McKee Road and the Alviso area) and a portion of Sunnyvale.

19 Larry Wilson (District4): Mr. Wilson became a member of the Board in 1995. He is a retired Groundwater Monitoring Superintendent of the District serving the community for over 33 years. Previous positions at the District included Watennaster, Hydrographer, and Water Operations Supervisor. Mr. Wilson currently represents the District Board on the Groundwater Resources Association, Los Gatos Creek Streamside Park Committee, Santa Clara County Parks and Recreation Department, Special Districts Association, and the San Luis Delta Mendota Water Authority. He is an active member of Kiwanis International (Cambrian Park). District 4 is in the north central part of the County and includes west San Jose and the cities of Campbell, Santa Clara and Saratoga.

Patrick Kwok (District 5): Mr. Kwok was appointed to the District Board on August 7, 2007. District 5 includes Palo Alto, Mountain View, Cupertino, Los Altos, Los Altos Hill, Saratoga, Monte Sereno and portions of Sunnyvale. Mr. Kwok has previously served on the Cupertino City Council between 200 I and 2007, and was elected by Council as Mayor in 2005 and Vice Mayor in 2004 and 2007. Mr. Kwok was previously a board member for the California Water Environment Association between 1999 and 2003, the Bay Area Air Quality Management District between 2004 and 2007, the Northwest YMCA between 1998 and 2007 and Chinese Historical and Cultural Project between 1998 and 2007. Mr. Kwok was a member of the District's Environmental Advisory Committee, West Valley Lower Peninsula Watersheds Committee and chair of the West Valley Watersheds Committee and Water Commission committee prior to his appointment to the District Board. He was also chair of the Santa Clara County Recycling and Waste Reduction Committee. Mr. Kwok is a registered Civil Engineer and Environmental Assessor. He was a Principal Sanitary Engineer for the City of San Jose Environmental Services Department for 24 years managing the operations and engineering sections of the San Jose/Santa Clara Water Pollution Control Plant. Prior to joining the City of San Jose, Director Kwok worked as a District Engineer and General Manager for the Windsor County Water District and Associate Engineer for the California Regional Water Quality Control Board. Mr. Kwok holds master's degrees in Civil Engineering from San Jose State University and Public Administration from Hayward State University. Mr. Kwok has been a resident in the District for over 26 years.

Sig Sanchez (Director at large, South County): Mr. Sanchez began his tenure on the District Board in 1980. He is a businessman/fanner and has spent more than 40 years in public service as a councilman and mayor of the City of Gilroy, as a Santa Clara County supervisor and as a member of the Board. Mr. Sanchez lives in Gilroy and farms in Los Banos.

Tony Estremera (Director at large, North County): Mr. Estremera began his tenure on the District Board in 1996. He is the Directing Attorney for the Santa Clara County Legal Aid Society. His government experience includes volunteering in both appointive and elected positions including the Santa Clara County Grand Jury, Santa Clara County Housing Task Force, Valley Medical Center Advisory Board, Santa Clara County Personnel Board, San Jose Municipal Stadium Task Force, (San Jose) Mayor's Committee on Minority Affairs and the San Jose/Evergreen Community College District Board of Trustees. Mr. Estremera received his law degree from the Boalt Hall School of Law, Berkeley. He is an active member of the State Bar of California and the Santa Clara County Bar Association.

Management. The District is headed by a Chief Executive Officer, District Counsel, Chief Administrative Officer, Chief Financial Officer, Chief Operating Officer - Water Utility, Chief Operating Officer - Watersheds, Chief Operating Officer - Capital and Clerk of the Board.

Stanley M. Williams, ChiefExecutive Officer. Mr. Williams was appointed CEO/General Manager by the Board Directors in November 1994. Mr. Williams has been with the District since 1990. He previously was Assistant General Manager, acting Flood Control Manager, acting Maintenance Manager and acting Chief Financial Officer of the District. He has a law degree from the Columbus School of Law. He also holds a masters degree in Regional and City Planning and a bachelor's degree from the University of Oklahoma. Prior to District service he was the Director of the City of Tulsa Department of Stormwater Management. He is on the Board of the California Urban Water Agencies, the Silicon Valley Pollution Prevention Center, the San Jose Conservation Corps and the United Way Silicon Valley.

20 Debra L. Cauble, District Counsel. Debra L. Cauble joined the District as District Counsel in August 2004. She is a graduate of Stanford Law School and has been a member of the California bar since 1978. Her legal experience includes in-house work for other public agencies (the cities of Palo Alto and San Jose, and the County of Santa Clara) and private practice representing businesses, landowners, developers, and public entities.

Peter Ng, Chief Financial Officer. Mr. Ng is currently the Chief Financial Officer for the District overseeing the Office of Strategic Management, Sustainable Organization Division and Budget. His responsibilities include managing the District-wide strategic planning and initiative process, the annual budget development, debt financing program, and the long-range financial forecasting function. He has been with the District since 2003, and has previously been responsible for the treasury/investment function and the accounting unit as well. Mr. Ng has over 23 years of accounting and financial management experience, including over 18 years with the County of Santa Clara. He has been a board member of the Santa Clara County Federal Credit Union since 2001, having served two terms as chair. Mr. Ng has a Bachelors Degree in Business Administration from San Jose State University.

Walter L. Wadlow, Chief Operating Officer- Water Utility. Mr. Wadlow, Chief Operating Officer for Water Utility for the District. He has 20 years of experience dealing with water resource issues for the District. His experience with the District includes water utility rate setting, water utility operations, water quality, Flood Control planning and active participation in Sacramento and Washington, D.C. on California water policy issues. He previously served as past president of the State Water Contractors and was a member of the CALF ED Delta Drinking Water Council. He is a registered civil engineer in California and received his Bachelors Degree in Civil Engineering and his Masters Degree in Water Resources Engineering from Stanford University.

James M. Fiedler, Chief Operating Officer - Watersheds. Mr. Fiedler is the Chief Operating Officer responsible for management of the District's Watersheds. Responsibilities include providing flood protection and stream stewardship. Mr. Fiedler has 22 years of engineering and management experience in the area of water supply and Flood Control, primarily with the District. His technical experience includes regional water resources and flood management planning as well as design and construction of water and flood protection facilities. Mr. Fiedler recently led the District's Clean Safe Creeks and Natural Flood Protection Program development that culminated in successful voter support in the November 2000 election. He is a registered engineer in California and received his Bachelors Degree in civil engineering from Loyola Marymount University, Los Angeles, California and his Masters Degree in civil engineering from Stanford University.

Nai Hsueh, Chief Operating Officer, Capital Program Services. Ms. Hsueh has more than 25 years of experience working on various aspects of water resources issues. During her tenure at the District, she first progressed through the engineering career path from Assistant Engineer to Senior Engineer, then successfully transitioned to a management career, and is currently one of the District's Chief Operating Officers responsible for managing and implementing the District's capital improvement program to support its water supply, flood protection and environmental stewardship missions. Ms. Hsueh is a registered civil engineer in California and received her Bachelors Degree in Agricultural Engineering from National Taiwan University and her Masters Degree in Hydraulic Engineering from the University of Iowa.

Lauren L. Keller, Clerk of the Board. Ms. Keller began service with the District in 1990. Prior to her appointment as Clerk of the Board, she held the position of Deputy Clerk of the Board. She also serves as Corporate Secretary for the Corporation, a nonprofit public benefit corporation that assists the District in financing the acquisition, construction and improvement to public buildings, works and equipment. Ms. Keller has served in both the public and private sector. She is an active member of the International Institute of Municipal Clerks ("IIMC") and is currently working on requirements for certification from the !IMC.

The position of Chief Administrative Officer is currently vacant due to the retirement of the prior Chief Administrative Officer. The District is currently recruiting to fill the vacant position.

21 In addition to its staff and Board, the District has a total of nine citizen advisory committees: one for each Flood Control zone, as well as the Santa Clara Valley Water Commission, the Agricultural Water Advisory Committee, the Environmental Advisory Committee and the Landscape Advisory Committee. The District Board also appointed an independent oversight committee to monitor the District's progress in meeting the outcomes promised in the Clean Safe Creeks and Natural Flood Protection Programs.

Employee Relations. The District has 830 funded positions assigned to one of four functional Groups as follows; Executive Management - 36, Mid Management Association - 63, Engineers Society - 189, and Employee Association - 564. The District has three formally recognized bargaining uuits, the Employees Association, the Engineers Society, and the Mid Management Association. Employees and management engage in a cooperative relationship, meeting regularly to address problems of concern. Memoranda of Understanding (MOUs), or labor agreements, are entered into between the District and each of these bargaining units. The Board recently approved new multi-year agreements between the District and these three bargaining units. These agreements are five year agreements which became effective January 1, 2007. The agreement includes salary increases based on a formula which includes a consumer price index adjustment which the District estimates will result in increases averaging 3% to 4% per year, depending on the consumer price index and other factors. For Fiscal Year 2007-08 the salary increase is approximately 3.2%.

Defined Benefit Pension Plan

The District is a member of the California Public Employees' Retirement System ("PERS"), an agent multiple-employer pension system, which provides a contributory defined benefit plan for all permanent employees of the District. These benefit provisions and all other requirements are established by California law. The District's PERS contract requires an eight percent contribution of an employee's base salary. The District, as employer, is required to contribute the amounts necessary to fund PERS, using the actuarial basis specified by California law. The total pension expense of the District for the year ended Juue 30, 2007 was $9,057,398 (uuaudited). As of Juue 30, 2005, the District had approximately $48,803,227 (unaudited) in unfunded actuarial accrued pension liability. The District projects increased contributions in future years according to PERS contribution requirements.

Post-Employment Benefits

The District provides post-employment health care benefits, in accordance with the negotiated MO Us with employee groups adopted by the Board for retired employees and/or their surviving spouses who meet the eligibility requirements and elect the option.

The Governmental Accounting Standards Board Statement No. 45 requires governmental agencies that fund post-employment benefits on a pay-as-you-go basis, such as the District (beginning for the District with the fiscal year ending June 30, 2008), to account for and report the outstanding obligations and commitments related to such post-employment benefits in essentially the same manner as for pensions. The District engaged Mercer Human Resource Consulting ("Mercer") in 2005 to calculate the District's post­ employment benefits fuuding status. Pursuant to a draft report prepared by Mercer, the District's uufuuded actuarial accrued liability for post-employment benefits as of June 30, 2005 was approximately $256,000,000 and the District's annual required contribution (based on amortization of the unfunded actuarial accrued liability over 30 years) would be approximately $27,000,000. For the year ended June 30, 2007, the District recognized expenditures of $3,260,016 (uuaudited) for post-employment benefits. The District is currently working with Mercer to update the uufuuded actuarial accrued liability for post-employment benefits and expects to receive an updated study before the end of the current Fiscal Year. The District has not made a final determination on how to fuud such uufuuded actuarial accrued liability. The District does not expect that any increased funding of post-employment benefits will have a material adverse effect on the District's obligations with respect to the Installment Purchase Agreement.

22 Other Benefits

The District provides employer-paid benefits as follows: medical, dental, vision, basic life, and basic long-term disability. Employees may also purchase supplemental life, supplemental long-term disability, aud accidental death aud dismemberment.

The District has established a deferred compensation plau for employees wishing to defer part of their salaries. Under certain conditions, the District makes matching contributions. In the Fiscal Year ended June 30, 2007, the District contributed $446,117 (unaudited) to the deferred compensation plau.

Insurance

General Liability Insurance. Since January 1, 1987, the District has maintained a self-insurance program in connection with its General Liability risks, including non-vehicular loss exposures due to premises, operations, personal injury aud product liability.

Under this program, the District is responsible for the first $2,000,000 per occurrence for all General Liability claims. The District also purchases General Liability insurauce with limits of not less thau $50,000,000 per occurrence aud aggregate in excess of its $2,000,000 self-insured retention.

The District maintains a risk management information system to track claims, litigation and establish claims reserves which are used to derive self-insurance fund requirements. These funding requirements are reviewed by outside actuaries biannually.

Property Appraisal and Insurance. A property appraisal aud valuation of the District's buildings aud contents was prepared in April 2006 for the period ending that date. The appraisal was in conformity with generally accepted appraisal practices for purposes of establishing insurable values aud property records. The report provides current replacement costs for buildings and equipment in the event of a loss.

The District maintains blanket property insurance coverage for its buildings and equipment, covering all traditional perils, but excluding earth movement aud risks that are usually covered by bonds. The current blanket limit for this coverage is $125,000,000. There are sublimits for particular perils consistent with normal property policies and appropriate to District loss exposures. The District's dams are not insured.

Workers' Compensation. Since January 1, 1994, the District has maintained a self-insurance program in connection with its Workers' Compensation risks. Under this program, the District is responsible for the first $1,000,000 per occurrence of any loss. The District also purchases Workers' Compensation Insurance with statutory limits above this self-insured retention aud Employers' Liability limits of $2,000,000 per employee/accident.

The District contracts with a third party claims administrator to review, investigate, track, pay and set case reserves for Workers' Compensation claims. As with the General Liability self-insurance program, these reserves are used to derive funding requirements. Actuarial study frequency and funding confidence levels are the same as described above for the General Liability program.

Budgeting Process

The District's budget process uses a goal-driven approach that spaus the plauuing, development, adoption and execution phases of the budget. These practices encourage development of organizational goals, aud establishment of policies aud plaus to achieve these goals aud policies. The guidelines used by the District in developing this formal budget process are the recommended budget practices for improved state aud local government budgeting prepared by the National Advisory Council on State aud Local Budgeting aud the Government Finance Officers Association.

23 The District traditionally develops a two-year spending document for all funds every two years. The appropriations are made for two individual years. The cycle encompasses the guidance of several documents and processes that include: long-range planning documents; the long range Capital Improvement Plan; the Priority Setting Matrix; and resource allocations. After adoption by the District's Board of Directors in the first year, the District has authority to expend the appropriations for the first year of the biennial budget only, with the second year serving as an unadopted spending projection. At the end of the first year, a mid-cycle review is required. During the review period, budget amendments and adjustments will be made to reflect changes in financial conditions, programs and/or authorizing laws that affect ongoing expenditures. Following these changes, the second year appropriations are approved. The budget cycle is completed with the review and revision of the long-range planning processes and documents.

The current budget for Fiscal Year 2007-08 was approved on June 28, 2007.

DEBT STRUCTURE OF THE DISTRICT

The District's long-term debt outstanding as of June 30, 2007 consisted of the following:

SCHEDULE OF LONG-TERM INDEBTEDNESS (Dollars In Thousands)

Balance Outstanding Type of indebtedness Maturity June 30, 2007 Parity Obligations DWRLoan 2027 $ 5 ,575(l) Water Utility System Refunding Revenue Bonds Series 2006A and Taxable Series 2006B 2035 98 115 Total Parity Obligation: $103,690 All Other Debl2l 1994 Installment Purchase Agreement 2024 $ 100,020 1995 Installment Purchase Agreement 2026 78,780

1963 Water Utility Bonds, Series C 2008 $ 360 1963 Water Utility Bonds, Series D 2012 2 270 Total Other Debt: $181,430 Total Long-Term lndebteduess: $285,120

(l) The District expects to borrow an additional $774,000 available under the DWR loan during Fiscal Year 2007-08. (Z) Debt not secured from Water Utility System Revenues. Source: District.

WATER UTILITY SYSTEM

Service Area

The District's service area encompasses all of Santa Clara County, one of nine counties that make up the San Francisco Bay area. The service area is approximately 1,330 square miles and constitutes a major portion of "Silicon Valley." According to the U.S. Census Bureau, the County's population increased by approximately 4 percent between 2000 and 2005 to a total of approximately 1,750,000. Of the 400,000 acre­ feet of water used in the County on average in a normal rainfall year, the District estimates that approximately 54 percent of water use in the County is residential, approximately 20 percent is commercial, approximately 10 percent is industrial, approximately 9 percent is agricultural, and approximately 6 percent is public water use.

24 Primary Sources of Revenues

Water Charges Water charges are established by the District's Board and are not subject to regulation by the California Public Utilities Commission or by any other local, state or Federal agency. In addition, the District water charges are not subject to the substantive and procedural requirements of Article XIIID to the California Constitution. See the caption "CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES" herein for a discussion of certain limitations of the rate setting authority of the District Board.

Groundwater Charges The District Board has the power to, and does, levy and collect a groundwater charge for the production of water from the groundwater supplies within zones of the District that will benefit from the recharge of under groundwater supplies or the distribution of imported water in such zones. The District has established two primary zones, one in the northern area of the county and one in the southern area. The District prepares an annual report supporting the basis for the groundwater charges that are adopted. The charges are levied upon the production of groundwater from all water-producing facilities, whether public or private. A fixed and uniform rate per acre-foot is set for agriculture water, and another rate per acre-foot for all water other than agricultural water. See the caption "LITIGATION" herein for a discussion of certain litigation with respect to the District groundwater charges.

Treated Water and Other Charges The groundwater charge per acre-foot for water other than agricultural water becomes the basic user charge per acre-foot for treated water delivered pursuant to treated water delivery contracts. The contracts also provide for the imposition of a treated water surcharge which is annually set by the Board. Water which is purchased and delivered in addition to certain fixed or minimum deliveries under the contract is charged at a non-contract rate per acre-foot. Surface water deliveries of District water to users are charged at variants of these rates. In the southern portion of the County ("South County"), rates are charged for usage of recycled water produced by the South County Regional Wastewater Authority and sold by the District under a producer-wholesaler agreement.

Water Revenue Zones W-2 and W-5 The water charges listed in the following table are the historical agricultural and non-agricultural water charges for Zones W-2 and W-5. Zone W-2 refers to the northern area of the County and the Santa Clara Valley Groundwater Subbasin. Zone W-5 refers to the southern area of the County and the Llagas and Coyote Groundwater Subbasins. The treated water deliveries are all for municipal and industrial water use. The non-contract treated water may be available at the discretion of the District to encourage more treated water use and reduce groundwater pumping to maintain local aquifer storage. The water charges for the northern area of the County are higher than the southern area because the three water treatment plants and most of the distribution system service the northern area of the County. The southern area depends solely on groundwater and recycled water, rather than treated water.

HISTORIC WATER RATES (DOLLARS PER ACRE-FOOT)

Groundwater Treated Water Surface Water Reclaimed Water Fiscal Non- Non- Non- Non- Year Zone Agricultural Agriculturall1J Contract Contract Agricultural Agricultural Agricultural Agricultural

2007-08 W-2 $475.00 $15.50 $575.00 $575.00 $486.75 $27.25 W-5 255.00 15.50 266.75 27.25 $244.00 $40.50 2006-07 W-2 435.00 21.50 495.00 535.00 446.75 33.25 W-5 230.00 21.50 241.75 33.25 195.00 40.50 2005-06 W-2 420.00 42.00 470.00 510.00 431.75 53.75 W-5 215.00 21.50 226.75 33.25 156.00 39.00 2004-05 W-2 405.00 40.50 455.00 495.00 416.75 52.25 W-5 200.00 20.00 211.75 31.75 125.00 31.00 2003-04 W-2 375.00 37.50 420.00 460.00 386.75 49.25 W-5 160.00 16.00 171.75 27.75 100.00 25.00

(1) Agricultural rates for groundwater do not include agricultural discounts. Source: District.

25 Future Rates and Charges The water charges listed in the following table are the projected agricultural and non-agricultural water charges by the District for Zones W-2 and W-5.

PROJECTED WATER RATES (DOLLARS PER ACRE-FOOT)

Groundwater Treated Water Surface Water Reclaimed Water Non- Fiscal Zon Agricult Non- Non- Non- Year ~ ural Agricultural Contract Contract Agricultural Agricultural Agricultural Agricultural

2008-09 W-2 $520.00 $16.50 $620.00 $620.00 $531.75 $28.25 $ $ W-5 275.00 16.50 286.75 28.25 305.00 41.50 2009-10 W-2 570.00 18.00 670.00 670.00 581.75 29.75 W-5 300.00 18.00 311.75 29.75 381.00 43.00 2010-11 W-2 625.00 20.00 725.00 725.00 636.75 31.75 W-5 325.00 20.00 336.75 31.75 426.00 45.00 2011-12 W-2 685.00 22.00 785.00 785.00 696.75 33.75 W-5 355.00 22.00 366.75 33.75 426.00 47.00

The projected water charges set forth above have not been approved by the Board and there can be no assurance that the water charges will be approved by the Board as currently projected.

Historic Water Deliveries The District records the volume of water delivered by the District. The following table presents a summary of historic water deliveries and the sources of water supply in acre-feet per year for the five most recent fiscal years.

HISTORIC WATER DELIVERIES AND SOURCES OF THE WATER DELIVERED (In acre-feet per year)

Deliveries

Fiscal Year Ending % Increase/ June 30 Non-Agricultural Agriculture (Decrease)

200611 ) 245,940 27,146 273,086 NA 2005 249,600 24,700 274,300 (9.29)% 2004 270,400 32,000 302,400 4.89 2003 259,500 28,800 288,300 (3.32) 2002 269,200 29,000 298,200 (155)

Sources

Central State Calendar Local Ground & Valley SFWD Water Year Surface Water Project Jntertie Project Other121 Total

200611 ) 195,900 64,200 0 64,200 700 325,000 2005 140,500 89,100 0 52,400 700 282,700 2004 76,400 127,700 0 59,500 600 264,200 2003 83,200 106,400 0 76,100 600 266,300 2002 72,750 134,270 410 58,880 500 266,810

(I) Estimated. 2 ( ) Includes recycled water produced by South County Regional Wastewater Authority. Source: District.

26 Projected Water Deliveries and Sources of Water Delivered The following table projects water deliveries and sources of water delivered by the water system of the District for Fiscal Year 2006-07 and the next four fiscal years. Projected decreases in water deliveries in Fiscal Year 2009-10 reflects projected increases in recycled water sales by agencies other than the District.

PROJECTED WATER DELIVERIES AND SOURCES OF WATER DELIVERED (In acre-feet per year) Deliveries Fiscal Year Munici(!al & % Increase/ Ending Industrial Agricultural Total Decrease 2007 270,600 30,000 300,600 NA 2008 270,600 30,000 300,600 0.00% 2009 270,600 30,000 300,600 0.00 2010 266,800 28,000 294,800 (2.00) 2011 266,800 28,000 294,800 0.00 Sources(!) Local Central State Fiscal Year Ground & Valley Water Ending June 30 Surface Water Project Project Other<2J Total

2007 102,500 114,400 83,000 700 300,600 2008 102,500 114,400 83,000 700 300,600 2009 102,500 114,400 83,000 700 300,600 2010 94,900 114,400 83,000 2,500 294,800 2011 94,900 114,400 83,000 2,500 294,800

(I) County-wide sources. 2 ( ) Includes recycled water produced by South County Regional Wastewater Authority and the south bay water recycling system. Source: District.

Historic Sales Revenues The following table shows the District's historic water sales revenues for the last five fiscal years.

HISTORIC SALES REVENUES

Fiscal Year Surface & % Increase/ Ending June 30 Groundwater Treated Water Recycled Water Total (Decrease)

2006 $40,675,000 $66,614,000 $720,000 $108,009,000 3.03% 2005 40,798,000 63,219,000 814,000 104,831,000 (344) 2004 46,143,000 61,688,000 734,000 108,565,000 14.82 2003 36,004,000 57,007,000 1,540,000 94,551,000 1.00 2002 39,901,000 53,005,000 713,000 93,619,000 5.70

Source: District.

27 Projected Sales Revenues The following table shows the annual water sales revenues projected by the District for Fiscal Year 2006-07 and the next four fiscal years. The projections reflect an assumption by District staff that the water charges will be increased by approximately 9.5% in each fiscal year from 2007-08 through 2010-11. Such increases would be required to be approved by the District Board and there can be no assurance that such increases will be implemented as currently projected.

PROJECTED SALES REVENUES

Fiscal Year Treated Surface & % Increase/ Ending June 30 Groundwater Water Rec:i:cled Water Total (Decrease)

2ooi1l $47,300,000 $75,200,000 $1,217,000 $123,717,000 14.54% 20081') 65,563,000 66,689,000 1,373,000 133,625,000 8.00 2009 71,653,000 71,908,000 1,576,000 145,137,000 8.61 2010 78,781,000 77,707,000 1,821,000 158,309,000 9.07 2011 86,591,000 84,086,000 2,044,000 172,721,000 9.10

(I) Estimated. 2 ( ) Fiscal Year 2008 assumes more groundwater pumping and less treated water deliveries due to dry surface water conditions. Source: District.

District Revenue Derived from Property Taxes The County levies a I% property tax on behalf of all taxing agencies in the County, including the District. All property is assessed using full cash value as defined by Article XIIIA of the State Constitution. State law provides exemptions from ad valorem property taxation for certain classes of property such as churches, colleges, nonprofit hospitals and charitable institutions.

The taxes collected are allocated to taxing agencies within the County, including the District, on the basis of a formula established by State law enacted in 1979 and modified from time to time. Under this formula, the County and all other taxing entities receive a base year allocation plus an allocation on the basis of"situs" growth in assessed value (due to new construction, change of ownership, or a 2% inflation allowance allowed under Article XIIIA of the State Constitution) prorated among the jurisdictions which serve the tax rate area within which the growth occurs. Tax rate areas are groups of parcels which are taxed by the same taxing entities. Cities, counties, special districts and school districts share the growth of "base" revenues from each tax rate area. Assessed valuation growth is cumulative, i.e., each year's growth in property value becomes part of each agency's allocation in the following year.

The availability of revenue from growth in the tax base may be affected by the establishment of redevelopment agencies which, under certain circumstances, may be entitled to revenues resulting from the increase in certain property values.

California law exempts $7,000 of the assessed valuation 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 made up by the State.

Under AB 454 (Statutes of 1987, Chapter 921), the State reports to each couuty auditor-controller only the couuty-wide uuitary taxable value of State-assessed utility property, without an indication of the distribution of the value among tax rate areas. The provisions of AB 454 apply to all State-assessed property except railroads and non-unitary properties, and do not constitute an elimination of a revision of the method of assessing utilities by the State Board of Equalization. AB 454 allows generally valuation growth or decline of State-assessed unitary property to be shared by all jurisdictions within a county.

The Fiscal Year 2004-05 and 2005-06 State Budgets shifted a portion of the share of the one percent property tax collected by counties from special districts to school districts or other governmental entities to the Educational Revenue Augmentation Fund ("ERAF''). As a result, in Fiscal Year 2004-05 $25,500,000 in District property tax revenues was transferred to ERAF. For Fiscal Year 2005-06, $25,500,000 in District 28 property tax revenues was transferred to ERAF. The ERAF shift expired in Fiscal Year 2006-07. For Fiscal Year 2006-07, the allocation received by the District of the 1% property tax was approximately $49,721,912, compared to approximately $24,003,566 million in Fiscal Year 2005-06. There can be no assurance that the share of the I% property tax the District receives will not be reduced pursuant to State legislation enacted in the future to address future budget deficits. However, Proposition IA enacted by California voters in November 2004 limits the ability of the California Legislature to reduce local government property tax proceeds.

The table below sets forth the total amount of revenue received by the District from the District's share of the one-percent ad valorem property taxes levied in the County in each of the last five Fiscal Years.

District Share of 1 % Property Tax Levy

Fiscal Year % Increase/ Ended June 30 District Share of 1% Levy (Decrease) 2003 $42,008,740 5.7% 2004 42,202,488 0.5 2005 20,043,405 (52.5) 2006 24,003,566 19.8 2ooi1l 49,721,912 107.1

(I) Budgeted. Source: District.

The District determines the amount of one-percent ad valorem property tax allocated to the Water Utility System on a year-to-year basis. In Fiscal Year 2006-2007, the District allocated approximately $3,700,000 (approximately 7%) to the Water Utility System.

San Jose Water Company San Jose Water Company is the largest water retailer served by the District and currently provides water service to over 1 million customers. San Jose Water Company is currently owned by SJW Corporation, a public traded company. For the fiscal year ended June 30, 2006, the District received $60,078,762 in charges for treated water and groundwater from the San Jose Water Company consisting of approximately 56 percent of the water sales revenues of the District's Water Enterprise.

The principal business of the San Jose Water Company consists of the production, purchase, storage, purification, distribution and retail sale of water. The San Jose Water Company provides water service to customers in portions of the Cities of Cupertino and San Jose and the Cities of Campbell, Monte Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated territory, all in the County.

San Jose Water Company and SJ W Corporation are not obligors with respect to the Certificates. The Certificates are obligations of the District payable from the District's Net Water Utility System Revenues. See "SECURITY AND SOURCES OF PAYMENT," herein. References made herein to San Jose Water Company and SJW Corporation are for informational purposes only. The District makes no representations as to the accuracy or the adequacy of any of the filings of SJW Corporation with the Securities Exchange Commission (the "Commission") described below. The filings described below are strictly those of SJW Corporation and not of the District and such filings are not incorporated by reference herein.

SJ W Corporation is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Commission. The Annual Report on Form 10-K (the "Form 10-K") for the year ended Deceruber 31, 2005, has been filed by SJW Corporation with the Securities Exchange Commission. The Form 10-K and other aunual and periodic reports of the SJW Corporation (including financial information) may be inspected and copied at the public reference facilities of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 and the Securities Exchange Commission's regional offices.

29 DISTRICT FACILITIES

Local Reservoirs

The District constructed and now operates and maintains a countywide water conservation and distribution system to convey water for recharge and treatment. Included are ten local surface water reservoirs which conserve winter runoff for either managed recharge of the groundwater basin or treatment at the District's water treatment plants. Water from the Anderson/Coyote and the Almaden/Calero Reservoir systems can be delivered to the water treatment plants.

The following table lists the significant features of the District's reservoirs:

SIGNIFICANT FEATURES OF DISTRICT RESERVOIRS

Capacity Year Surface Area Dam Height Reservoir (acre-feet) Completed (acres) (ft) Almaden 1,586 1935 59 105 Anderson 90,373 1950 1,244 240 Calero 9,934 1935 347 98 Chesbro 7,945 1955 265 95 Coyote 23,244 1936 638 138 Guadalupe 3,415 1935 79 129 Lexington 19,044 1952 404 195 Stevens Creek 3,138 1935 92 120 Uvas 9,835 1957 286 118 Vasona 400 1935 -----28. 30 Total 168,914 3,472

Source: SCV\VD Urban Water Management Plan 2005.

The District monitors, collects, and analyzes seepage and vertical and horizontal movement data monthly and reports to the California Department of Water Resources Division of Safety of Dams ("DSOD"). DSOD has an annual dam inspection program. In addition, the District performs monthly inspections of the entire Water Utility System from a helicopter. From this visual and data monitoring program, the District determines and performs the maintenance or improvements needed at each dam.

Groundwater Basin

The District depends upon the groundwater basin as a natural water storage, conveyance, and treatment facility and an integral part of the District's conjunctive use system. The District manages the groundwater basin for both water supply and water quality.

The groundwater basin underlying the County is divided into three interconnected groundwater subbasins: Santa Clara Valley Groundwater Subbasin, Llagas Groundwater Subbasin, and Coyote Groundwater Subbasin. These subbasins and their operational capacities are described below.

Santa Clara Valley Groundwater Subbasin

Santa Clara Valley Groundwater Subbasin extends from Metcalf Road to the northern boundary of the County at the San Francisco Bay. It is bounded on the west by the Santa Cruz Mountains and on the east by the Diablo Range. The subbasin is 22 miles long and 15 miles wide with a surface area of 225 square miles. A confined zone within the northern area of the subbasin is underlain with a thick clay layer. The southern area is the unconfined zone or forebay where the clay layer does not extend. The forebay is where the District recharges local and imported water. DWR published Bulletin Number 7 in which the storage volume is estimated at 1,770,000 acre-feet of water. However, subsidence will occur if groundwater elevations drop

30 below subsidence threshold elevations for an extended period of time. As a result, the District estimates that this subbasin has an operational capacity of approximately 350,000 acre-feet.

Llagas Groundwater Subbasin

Llagas Groundwater Subbasin extends from the Pajaro River at the southern border of the County to Cochran Road near Morgan Hill. This subbasin is approximately 15 miles long, three miles wide at the northern boundary and six miles wide along the Pajaro River. Its surface area is approximately 74 square miles. A thick clay layer extending north from the Pajaro River divides this subbasin into confined and fore bay zones. The District's groundwater recharge activities are primarily in the northern area or fore bay of this subbasin. The District estimates that the operational storage is between 150,000 and 165,000 acre-feet of water.

Coyote Groundwater Subbasin

Coyote Groundwater Subbasin extends from Santa Clara Valley Groundwater Subbasin at Metcalf Road to Cochrane Road. The subbasin is seven miles long and ranges in widths of half a mile to three miles. It has a surface area of approximately 15 square miles. The entire subbasin is unconfined and has no thick layers of clay. The operational storage for this basin is between 23,000 and 33,000 acre-feet of water.

Managed Recharge Facilities

The District has six major managed recharge systems. Within these systems, the District owns and operates 18 off-stream recharge facilities and supplements natural flow in existing stream channels to recharge local and imported water into the groundwater basin. In 2005, it was estimated that the amount of water recharged into the groundwater basins by the District was 101,700 acre-feet. Significant features of these managed recharge systems appear in the following table.

MANAGED RECHARGE SYSTEMS

Average Annual Recharge Number of Pond Area Miles of Recharge Quantity System Ponds (in acres) Stream (acre-feet per year)

Westside 2 3 20 9,000 Los Gatos 32 112 8 29,000 Guadalupe 20 107 21 21,000 Penitencia 10 30 2 3,000 Coyote 0 0 17 22,000 Upper Llagas 12 43 10 10,000 Lower Llagas 3 25 8 11,000

Total 79 320 86 105,000

Raw Water Conveyance System

The District uses several major pipelines to transport imported and locally conserved water to various locations for treatment and groundwater recharge. This conveyance system first meets the demands of critical stream flows/water treatment plants and then delivers the remaining water to recharge systems on an ability-to­ convey basis. The major components of this conveyance system consist of the Central Pipeline, the Rinconada Force Main, the Almaden Valley Pipeline, the Calero Pipeline, and the Cross Valley Pipeline. Another facility, the Stevens Creek Pipeline, taps off of the Rinconada Force Main and conveys water to west side recharge facilities. The District also operates and maintains the San Felipe Division of the CVP which delivers

31 imported water into the County. The San Felipe Division conveys water from the San Luis Reservoir through six miles of tunnels, two pumping plants, and 29 miles of pipe.

The District also owns and operates the Vasona Pumping Plant, with a total capacity of 1,200 horsepower, which is located at the juncture of the Central Pipeline, the Rinconada Force Main, and the Almaden Valley Pipeline. The Vasona Pumping Plant can pressurize any of these three pipes. The District also operates two pumping plants on the San Felipe Project: The Pacheco Pumping Plant and Coyote Pumping Plant, with a combined capacity 36,000 horsepower. In addition, the District owns the Anderson hydro­ electric station with two turbine-generator units licensed through the Federal Energy Regulatory Commission capable of producing 450 kw each. The power generated is sold to Pacific Gas and Electric Company pursuant to contract.

The table below sets forth each of the pipelines described above, its diameter and the year it was completed.

PIPELINES

Diameter Year Line (in inches) Completed

Central Pipeline 66 1966 Rinconada Force Main 72 1967 Stevens Creek Pipeline 20-37 1971 Almaden Valley Pipeline 72-78 1981 Calero Pipeline 78 1990 Cross Valley Pipeline 78 1986 San Felipe Division 96-120 1987

Water Treatment

The District owns and operates three water treatment plants (each, a "WTP"): Santa Teresa WTP, Penitencia WTP, andRinconada WTP. The design capacities of these three plants are 100 million gallons per day ("MGD"), 42 MGD, and 80 MGD, respectively.

The District's treated water system provides flexibility if one water treatment plant is shut down. Penitencia and Santa Teresa WTPs are both connected to East Pipeline. Santa Teresa WTP was designed to be capable of delivering treated water to the retail customers of both treatment plants. The water retailers receiving water from Santa Teresa WTP are able to use Penitencia water or groundwater if Santa Teresa WTP is shut down. The water retailers served by Rinconada WTP can use groundwater or Hetch Hetchy water to replace Rinconada water if the treatment plant is shut down. In general, the major water retailers within the County can acquire either Hetch Hetchy or groundwater to replace District treated water if necessary.

Santa Teresa Water Treatment Plant

First operated in 1989, Santa Teresa WTP is the largest of the District's three treatment plants with the ability to treat and deliver up to 100 million gallons of water per day. The plant is primarily supplied by imported water from the San Luis Reservoir, a key component of the federal Central Valley Project. In addition, the plant is also fed from the District's local supplies at Anderson and Calero reservoirs.

The Santa Teresa WTP is a conventional treatment plant utilizing coagulation, flocculation, sedimentation, filtration, and disinfection. In spring of 2006, the plant completed significant upgrades which were highlighted by the addition of ozone to the treatment process. Ozone is a strong disinfectant that creates less disinfection byproducts than chlorine. Disinfection byproducts at high levels can be a health concern.

32 Drinking water from the plant serves most of the southern portion of the City of San Jose (Almaden Valley, Blossom Valley, Santa Teresa), supplying water to both residential and commercial users.

Penitencia Water Treatment Plant

First operated in 1974, the Penitencia WTP has the ability to treat and deliver up to 42 million gallons of water per day. The South Bay Aqueduct, owned by DWR, provides most of the "raw" water to the Penitencia plant. Water from the Sacramento-San Joaquin Delta is pumped into the California Aqueduct and then into the South Bay Aqueduct in Tracy.

The Penitencia WTP is a conventional treatment plant utilizing coagulation, flocculation, sedimentation, filtration, and disinfection. In the summer of 2006, the plant completed significant upgrades which were highlighted by the addition of ozone to the treatment process. This plant typically serves an area of the northern portion of the City of San Jose, supplying safe drinking water to approximately 270,000 residential and commercial users.

Rinconada Water Treatment Plant

First operated in 1968, the Rinconada WTP is the oldest of the three surface water treatmeut plants in the District system. As the second largest of the District's treatment plants, Rinconada can treat and deliver up to 80 million gallons of water per day. The Rinconada WTP draws water from the South Bay Aqueduct and from the San Luis Reservoir. The plant can be supplied from the District's local Anderson and Calero reservo1rs.

The Rinconada WTP differs from the two other plants in that the plant utilizes upflow clarifiers in place of the coagulation, flocculation, and sedimentation processes. The District is in the process of final design to integrate the use of ozone into the water treatment processes like the other two plants. In addition to adding ozone, changes will be made to increase the plant's treatment capacity to 100 MGD and to perform various seismic upgrades. Projected completion of construction is 2012.

Drinking water from Rinconada WTP serves both residential and commercial users in the west valley including the cities of Los Gatos, Santa Clara, Campbell, Sunnyvale, Cupertino, Mountain View, Los Altos, and Los Altos Hills.

Treated Water Storage and Distribution System

Treated water is stored in a clearwell at each of the three treatment plants and one reservoir at Rinconada WTP and then distributed to the District's retail customers by nine treated water pipelines. The total storage capacity is 30 million gallons.

33 The following table depicts the District's water treatment facilities and treated water storage facilities and distribution systems:

WATER TREATMENT AND STORAGE FACILITIES AND DISTRIBUTION SYSTEM

Treatment Plant Storage Facility Distribution System

Rinconada Water Treatment Plant Rinconada Clearwell West Pipeline Rinconada Reservoir Santa Clara Distributary Sunnyvale Distributary Mountain View Distributary Campbell Distributary

Penitencia Water Treatment Plant Penitencia Clearwell East Pipeline Milpitas Pipeline

Santa Teresa Water Treatment Santa Teresa Clearwell East Pipeline Plant Snell Pipeline Graystone Pipeline

Seismic Considerations

Beginning in the late 1970's, the District conducted a series of studies that focused on evaluating the seismic performance of major facilities of the District. The studies provided the District with a detailed analysis of the predicted seismic performance of District dams. As a result of these studies, a seismic retrofit was completed at Stevens Creek Dam to enable it to have acceptable predicted seismic performance, and a reservoir operation restriction was implemented at Guadalupe Dam. All the other dams were determined to have acceptable performance without modifications. Other studies resulted in seismic retrofitting programs at two of the older water treatment plants. These programs targeted the need to define necessary non-structural or minor structural improvements. The required improvements have been completed.

Additional studies completed in 1993 and 1994 defined the faults and fault systems most likely to generate destructive earthquakes, and the level of movement expected at the District's three water treatment plants from a major earthquake occurring on any of the nearby active faults. The San Andreas, Hayward, and Calaveras faults are the most likely sources of strong seismic activities. Other faults are also known to have a potential for earthquakes.

District facilities have been and continue to be designed in accordance with applicable standards to withstand the effects of earthquakes with acceptable damage levels. Seismic upgrading has been implemented as noted above. Seismic loads are taken into account in the design of all facilities. Damage to District facilities in historic earthquakes has been modest (there has been damage to pipelines, water treatment plants, and dams) with no resulting injury or loss oflife.

Earthquake effects on dams, pipelines and other water facilities are expected to vary depending upon the nature of the facility and the magnitude of the seismic forces (which depend upon a number of factors, including the energy released, proximity to the epicenter, duration of strong shaking, etc). In the design of new facilities, care is taken to avoid active faults, liquefaction areas and landslide terrain when feasible. Under some earthquake scenarios, significant damage is predicted for District raw and treated water pipelines. A project is scheduled for completion by December 2007 to obtain adequate spare pipe which will reduce outage periods from seismic damage to pipelines. Studies are in progress to further evaluate ways of mitigating the damage and minimizing loss of water and impacts to level of service. Recent independent studies indicate that some District facilities might be subject to damage from fault displacement or moderate earthquakes on faults previously thought to be low-risk. Updated seismic stability evaluations are in progress at four District dams 34 (Almaden, Anderson, Calero and Guadalupe); results from this assessment will be available by the end of 2007. The District expects to incorporate these assessments into future planning and design work.

The District has established a program for inspecting its dams, and activating its Emergency Operations Center ("EOC"), immediately following a major (5.0 or greater on the Richter scale) earthquake occurring within 20 miles of District dams. The program provides for the self deployment of trained District personnel to specific sites, the inspection and recording of any damage at those sites and the reporting of the status back to the EOC.

Water Distribution System

The illustration set forth on the following page shows how all water distribution system components are utilized to serve the water demands of the County. In general, the District's water distribution system has the capacity to deliver the total projected water needs of the County.

35 l""r(llillM C•- lrlil EIJ.t11•t•• S.%tWD ____., (d 111 •""1111:!onJ,

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• • • • ~ ' Raw Water Facility Water Usage The District receives revenue from sales of treated water, non-potable surface water and reclaimed water, and from a groundwater production charge. The following charts list: treated water and groundwater usage in acre-feet, District receipts from water retail customers, and total usage of non-agricultural groundwater, agricultural groundwater, treated water, surface water, and reclaimed water. Water production refers to the total quantity of water pumped from the groundwater basin or delivered through pipelines to water retailers and individual water users. Approximately 80 percent of the District's water use is by the water retailers and the larger mutual water companies listed below. TREATED WATER AND GROUNDWATER USAGE (ACRE-FEET)

Fiscal Year 2004-05 Fiscal Year 2005-06 Groundwater Treated Water Total Groundwater Treated Water Total

WATER RETAILERS

San Jose Water Company 45,961 81,907 127,868 42,867 83,589 126,456 Santa Clara, City of 14,612 4,051 18,663 14,507 4,126 18,633 California Water Service 4,622 9,771 14,393 5,302 9,422 14,724 San Jose, City of 695 15,161 15,855 886 15,466 16,352 Sunnyvale, City of 1,558 11,283 12,841 1,268 10,299 11,567 Great Oaks Water Co 12,228 0 12,228 12,758 0 12,758 Gilroy, City of 7,947 0 7,947 8,650 0 8,650 Morgan Hill, City of 7,516 0 7,516 7,913 0 7,913 Milpitas, City of 3,953 3,954 0 4,096 4,096 Mountain View City of 77 1,188 1,265 158 1,310 1,467 Cupertino, City of 25 3,407 3,432 43 3,313 3,356 Stanford University 272 0 272 151 0 151 West San Martin Water Co 372 0 372 305 0 305 New Avenue Mutual Water 178 0 178 177 0 177 Palo Alto, City of 0 0 0 0 Subtotals Water Retailers 96,061 130,722 226,783 94,985 131,621 226,606 All Others 43,996 0 43,946 42,917 0 42,917 Total 140,057 130,722 270,779 137,902 131,621 269,522

GROUNDWATER, TREATED WATER, SURFACE WATER AND RECYCLED WATER USAGE (ACRE-FEET)

Groundwater Treated Water Surface Water Recycled Water Total Fiscal Year Ended June 30 Agricultural Non- Agricultural

2002 27,978 133,746 132,891 2,986 550 298,151 2003 27,665 118,847 138,260 3,001 502 288,275 2004 30,648 131,718 135,980 3,365 650 302,361 2005 23,580 116,478 130,722 2,878 562 274,220 2006 25,836 112,065 131,620 2,909 659 273,089

Source: District.

37 DISTRICT RECEIPTS FROM WATER AGENCIES AND COMPANIES FOR TREATED WATER AND GROUNDWATER (DOLLARS)

Fiscal Year 2004-05 Fiscal Year 2005-06 Groundwater Treated Water Groundwater Treated Water WATER RETAILERS

San Jose Water Company $18,600,736 $39,902,827 $58,503,563 $17,986,462 $42,092,300 $60,078,762 Santa Clara, City of 5,917,701 2,004,137 7,921,838 6,093,142 2,103,119 8,196,261 Sunnyvale, City of 629,657 5,502,439 6,132,096 532,623 5,191,006 5,723,629 California Water Service 1,870,902 4,736,260 6,607,162 2,226,853 4,716,069 6,942,922 Gilroy, City of 1,549,328 0 1,549,328 1,859,767 0 1,859,767 San Jose, City of 252,565 7,504,512 7,872,077 288,007 7,887,594 8,175,601 Great Oaks Water Co 4,902,786 0 4,902,786 4,622,570 0 4,622,570 Morgan Hill, City of 1,503,160 0 1,503,160 1,701,188 0 1,701,188 Cupertino, City of 10,050 1,672,021 1,682,071 18,035 1,676,594 1,694,629 West San Martin Water Co 74,316 0 74,316 86,475 0 86,475 New Avenue Mutual Water 35,570 0 35,570 37,973 0 37,973 Stanford University 61,673 0 61,673 35,538 0 35,538 Milpitas, City of 340 1,956,908 1,957,248 0 2,089,006 2,089,006 Palo Alto, City of 57 0 57 0 0 0 Mountain View, City of 31,039 587,790 618,829 66,557 665,288 731,846 Subtotals Water Retailers 35,554,880 63,866,894 99,421,774 35,555,189 66,420,977 101,976,166 All Others 6,935,063 0 6,820,063 6,307,219 0 5,119,836 Year-End GAAP Adjustments (1,577,135) (648,378) (2,225,513) (1,187,811) 193,006 (994,805) Total $40,797,808 $63,218,516 $104,016,324 $40,675,025 $66,420,977 $107,096,002

Source: District. SANTA CLARA COUNTY WATER SUPPLY

The District derives its water supply from four main sources: (i) local natural recharge in the groundwater basin, (ii) local surface water from District reservoirs, (iii) water imported by the District through the State Water Project ("SWP"), and (iv) water imported by the District through the Central Valley Project ("CVP"). The District also sells a small amount of reclaimed water from the Gilroy Reclamation Facility. The District receives revenue from the sale of treated water at its three water treatment plants, a small amount of revenue from reclaimed water at the Gilroy Reclamation Facility, and revenue from a groundwater pumping charge. Some of the water retailers within the District also receive water supplies from San Francisco Water Department through Hetch Hetchy. Also, San Jose Water Company owns and operates two small surface water reservoirs, Williams and Elsman, and two small water treatment plants within the County. The District does not receive revenue from the sale of water from Hetch Hetchy, Williams and Elsman Reservoir, and wastewater reclamation facilities other than the Gilroy Reclamation Facility.

Approximately 50 percent of the District's water supply comes from local sources. Such sources are heavily dependent upon rainfall, runoff, and District operated recharge facilities. The remaining 50 percent of the District's water supply comes through purchases from CVP and S WP. For the calendar year ended December 31, 2006, the CVP and SWP each supplied the District with 64,200 acre-feet of water for a total of approximately 128,400 acre-feet of water.

38 Summary Table of the County of Santa Clara's Water Supply

The following table summarizes the County's sources of its water supply:

SANTA CLARA COUNTY WATER SUPPLY (ACRE-FEET)

Calendar Hetch- Recycled Groundwater Year SWP CVP Hetchy Water Pumping Total

2006(]) 64,200 64,200 58,200 15,200 173,900 374,800 2005 52,000 89,000 59,000 14,000 155,000 369,000 2004 60,000 130,000 61,000 10,000 120,000 381,000 2003 76,000 106,000 60,000 9,000 116,000 367,000 2002 59,000 134,000 61,000 8,000 119,000 381,000

Source: District. Note: Groundwater includes both natural and controlled recharge from both local and imported water sources. Excludes water banked in groundwater banking programs outside the boundaries of the District. As of June 30, 2006 the District had approximately 280,000 acre feet of water banked in such groundwater banking programs. (I) Estimated.

Local Supplies

The County's local water supplies fall into two major components: (I) the major surface tributary drainage area yields; and (2) the natural groundwater basin yields. These two components, when combined, represent the total local supply available to the District.

The availability oflocal surface and groundwater supplies depends upon local rainfall. An analysis of the 125 years of rainfall data at Rainfall Station 86 in San Jose shows that the average ( or mean) annual rainfall is approximately 14 inches. However, the rainfall data, as all of the local hydrological data, does not fit a normal distribution.

Surface Water

Local surface water is both streamflow and reservoir inflow. Studies show that eight inches of rainfall are necessary before runoff will occur. During years of especially high rainfall, not all surface flows can be captured in the reservoirs or put to beneficial use. In these years, there can be considerable local surface flows to the San Francisco Bay.

The District operates ten surface reservoirs, with a total capacity of about 169,000 acre-feet, which generally provide seasonal storage for downstream releases to percolation facilities. Groundwater storage is also available in the District's three groundwater subbasins and is used for both seasonal and carryover storage.

The total amount of surface water flowing into the County does not necessarily represent local water supply yield. The yield of the major tributary drainage area is defined as that portion of the historical surface water that can, on a long-term basis, be put to beneficial use through surface diversions and/or groundwater recharge, considering the available storage, recharge, and conveyance capacities of the distribution facilities.

Through the District's existing reservoir and groundwater recharge facilities, about 4 7 percent of the average surface water is actually developed into local water supply yield. Due to existing reservoir and groundwater recharge capacities and the historic pattern of surface runoff, the remaining surface water goes to the San Francisco Bay. The average District surface water yield is about 91,100 acre-feet per year. During a critical dry period the yield from local surface runoff averages 54,000 acre-feet per year. 39 Groundwater Recharge

Recharge to the groundwater basin consists of natural groundwater recharge and artificial recharge with local surface and imported water. Natural groundwater recharge includes recharge from rainfall, net leakages from pipelines, seepage from the surrounding hills, seepage into and out of the basin, and net irrigation return flows to the groundwater basin. Artificial recharge is controlled recharge that occurs in specific streams and in off-stream recharge facilities. The District artificially recharges from local water conserved in surface water reservoirs and imported water from both the SWP and CVP.

Imported Supplies

Although the residents of the County recognized the decreasing groundwater supplies and the threat of land surface subsidence in the 1930's, the need for supplemental imported water supplies became more apparent during the l 940's when an increasing population and a series of locally dry years combined to dramatically increase groundwater pumping.

To meet this growing water need, which continues at a slower pace today, the City and County of San Francisco first started delivering Hetch Hetchy water in 1956 to municipalities in the northern area of the District. The Hetch Hetchy water supply continues to provide approximately 16 percent of water supply in the District; however, the District does not receive revenue for the Hetch Hetchy water supply.

The District then imported SWP water starting in 1965 and CVP water in 1987. The SWP water and CVP water are either treated in the District's water treatment plants or recharged in the groundwater basin. The recharge of SWP water contributed to the District's success in arresting land surface subsidence due to groundwater overdraft by 1969. Because the District recharges and manages the groundwater basin, the District collects a groundwater pumping charge when groundwater is pumped from the groundwater basin. Treated water wholesaled by the District reduces the demand for groundwater which also serves to prevent further land surface subsidence.

State Water Project

In 1961, the District contracted with the SWP (the "SWP Contract") for a new water supply. This imported supply provides water for groundwater recharge and for treatment at two District water treatment plants, the Rinconada and Penitencia WTPs. The SWP Contract provides for a maximum annual entitlement of 100,000 acre-feet of water from SWP and a maximum total of 6,510,783 acre feet of water from the SWP over the term of the SWP Contract. As of June 30, 2005 the District had received approximately 3,510,783 acre feet of SWP water pursuant to such entitlement. In certain years, the District can receive additional SWP water consisting of temporary flood flow in the Delta which does not count against the entitlement amount. SWP water deliveries began in 1965 and are transported to the District service area via the South Bay Aqueduct.

The S WP Contract requires the District to reimburse the State for capital costs (including interest thereon) and minimum operating, maintenance, power and replacement costs of the S WP transportation and conservation facilities. A tax is levied to pay the fixed cost of this obligation. The State re-estimates the District's total commitment for reimbursement of such costs annually.

DWR is responsible for statewide water supply planning. The California Water Code requires DWR to publish an update of the California Water Plan every five years. Bulletin 160-03 is the latest in a series of water plan updates. The Bulletin 160 series evaluates water supplies and assesses agricultural, urban, and environmental water uses to quantify the gap between water supplies and uses.

DWR faces various challenges in the continued supply of imported water to the District and other member agencies. A description of these challenges as well as a variety of other operating information with respect to DWR is included in certain disclosure documents prepared by DWR. DWR has entered into certain

40 continuing disclosure agreements pursuant to which DWR is contractually obligated for the benefit of owners of certain of its outstanding obligations, to file certain annual reports, notices of certain material events as defined under Rule 15c2-12 of the Exchange Act ("Rule 15c2-12") as annual audited financial statements (the "DWR Information") with certain information repositories. DWR has not entered into any contractual commitment with the District, the Trustee or the Owners of the Certificates to provide DWR information to the District or the Owners of the Certificates.

DWR HAS NOT REVIEWED THIS OFFICIAL STATEMENT AND HAS MADE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED OR INCORPORATED HEREIN, INCLUDING INFORMATION WITH REGARD TO DWR. DWR IS NOT CONTRACTUALLY OBLIGATED, AND HAS NOT UNDERTAKEN, TO UPDATE SUCH DWR INFORMATION, FOR THE BENEFIT OF THE DISTRICT OR THE OWNERS OF THE CERTIFICATES UNDER RULE 15c2-12.

See the caption "FACTORS AFFECTING WATER SUPPLIES" for further information with respect to the SWP water deliveries.

Central Valley Project

On June 7, 1977, the District entered into a contract (the "CVP Contract") with the United States Bureau of Reclamation ("USBR") for water service from the San Felipe Division of the CVP. The CVP contract provides for both agricultural and municipal and industrial ("M&I") water deliveries to the District up to a total contract amount of 152,500 acre-feet per year. In certain years, the District can receive additional CVP water consisting of temporary flood flow in the Delta which does not count against the contract amount. The CVP Contract specified initial water rates for agricultural and M&I water service and provides for periodic adjustment of the respective water rates in accordance with prevailing CVP water rate policies commencing in the years 1993 for the in-basin M&I rate component, 1996 for the agricultural O&M rate component and 200 I for the full agricultural water rate. The methodology of CVP water rate setting has historically recovered current year operating costs, and over 50 years, the applicable construction costs.

The District's initial CVP water rates were determined based upon a November 1974 CVP water rate policy and estimated construction costs of the San Felipe Division. The actual construction costs of the San Felipe Division were significantly higher than the estimates used in the initial rate calculation, and changes in the Federal Reclamation Law during the l 980's have led to the development of new CVP water rate policies. A new agricultural water rate policy was adopted in 1988 while the M&I water rate policy is still an interim policy.

The CVP Contract established a fixed rate for repayment of San Felipe Division facilities during the first 20 years of water deliveries (1987 through 2006) in recognition of the District's need to expand its local infrastructure to accept CVP water. The fixed rate provided for partial repayment of annual capital interest expense, and the cumulative shortfall was being tracked by the USBR as an alleged "operation and maintenance deficit," even though the District self-funds and performs San Felipe Division operation and maintenance. The District contested the USBR's accounting for project costs, and a settlement was achieved in March 2005. The settlement reduced the District's costs for CVP water by approximately $5 million per year.

The term of the CVP Contract extends through 2027, with provisions for renewal. Pursuant to the 1992 Central Valley Project Improvement ACT ("CVPIA"), the District is negotiating an early long-term renewal, and expects that process to conclude in late 2008 or 2009. The term of the renewed contract would extend 25 years from the date of execution (through 2033 or 2034). In January 2007, the District decided to proceed with amending its existing long-term contract to change the repayment terms for the San Felipe Division facilities. The purpose of the amendments were to improve financial certainty and resolve costs issues with San Benito County Water District. The District expects such repayment terms will carry forward to any renewed contract.

41 The first water from the CVP was delivered in June 1987. In preparation for this source of supply, the District completed construction of raw water pipelines from Coyote Pumping Plant to Calero Reservoir and across south San Jose to deliver CVP water to Santa Teresa WTP, Guadalupe recharge facilities, Vasona Pumping Plant and Rinconada WTP. The 100 MGD Santa Teresa WTP was completed in 1989 to treat CVP and local reservoir water and serve the increasing water needs of the County.

See the caption "-FACTORS AFFECTING WATER SUPPLIES" for further information with respect to CVP water deliveries.

FACTORS AFFECTING WATER SUPPLIES

General

The District has several sources of water supply that provide a great deal of flexibility in managing water supplies to meet the needs of the County.

Under normal water conditions, the District imports about half of its water supply from the Sacramento-San Joaquin Delta (Delta); and obtains the other half from local surface and groundwater supplies. The water retailers also import water from the San Francisco Water Department's Hetch-Hetchy system.

The District completed its Urban Water Management Plan ("UWMP") in December 2005, pursuant to California Water Code Sections 10610 through 10657 (the Urban Water Management Planning Act). The Act requires urban water suppliers such as the District to review, update and adopt an UW.lVlP at least every five years. UWMP 2005 updates the District's water demand projections based upon Association of Bay Area Governments ("ABAG") 2005 projected increases in population and job growth to 2030 and demands projected by major water retailers. Completion of the UWMP allows the District to remain eligible for state water bank assistance and for state funding managed by DWR.

The District's UW.lVlP is prepared in coordination with water retailers (who also must prepare their own UWMPs), the County, and local cities and towns. As part of this work, the District performed demand studies using the growth projected in the cities and county general plans; population growth projections from the state and the regional ABAG; and water demands projected by major water retailers.

A key finding of the UWMP 2005 is that, in addition to investing in new supplies, the District must also make significant investments to maintain and safeguard existing water supplies, infrastructure, and programs to ensure a reliable water supply into the future. The District is currently undertaking a project to examine and assess these existing water supplies, infrastructure and programs in an effort to ensure they can be sustained into the future. The District will periodically monitor these programs to determine if additional investments are needed to sustain or enhance these critical supplies, programs or infrastructure. The District's Asset Management Programs, Capital Improvement Program, master planning, and strategic planning will support this decision making framework.

Endangered Species Act Issues

The District's imported and local supplies are subject to uncertainties due to implementation of the Endangered Species Act ("ESA"). The listing of winter-run Chinook salmon in 1989 and delta smelt in 1993 precipitated in pumping restrictions imposed on the state and federal water projects to protect these species. These pumping restrictions resulted in reduced deliveries from the SWP and CVP, compounding the shortages created by the on-going drought at the time. In 1993, the United States Environmental Protection Agency (the "EPA") also proposed to implement water quality standards for the Bay-Delta that would impose severe restrictions on the operation of the SWP and CVP. It was the combination of these intense conflicts that led to the historic Bay-Delta Accord in 1994, in which the state and federal governments, along with urban, agricultural and environmental interests, agreed to an interim set of Endangered Species Act protection measures coupled with water supply certainty. The Accord, or an interim "cease-fire," laid the groundwork for

42 the establishment of the CALFED Bay-Delta Program (described below) to develop a long-term solution for conflicts in the Bay-Delta.

In recent years, populations of Chinook salmon have improved with ecosystem restoration efforts, but populations of delta smelt and other pelagic organisms have declined sharply. Studies have identified a range of factors in the decline that includes invasive species competing for food supply, toxics from watershed runoff, and Delta pumping by the CVP, SWP and in-Delta agricultural water users. The decline of delta smelt has prompted litigation by environmental organizations to limit CVP and SWP Delta pumping operations. In 2005, suits were filed challenging the adequacy of biological opinions adopted for the USBR's revised Operating Criteria and Plan.

On August 31, 2007 U.S. District Court Judge Oliver Wanger issued a verbal decision (the "Ruling") regarding interim measures to protect the delta smelt, a species of small fish found in the Sacramento-San Joaquin Delta, listed under the ESA. A formal written order reflecting the verbal decision will be filed in the next 60 days. The Ruling is an interim measure that affects the operation of the Delta pumping plants owned and operated by the USBR and by the California DWR. The Ruling applies only until new biological opinions regarding the delta smelt are developed and adopted by the U.S. Fish and Wildlife Service (the "Interim Period"). The new biological opinions (the "New Biological Opinions") are expected to be completed by the end of calendar year 2008.

The precise impact of the Ruling on water deliveries to the District by the CVP and the SWP during the Interim Period cannot yet be projected. Additional technical and analytical work is needed, and actual impacts will be dependent on hydrology. The District anticipates that less CVP and SWP water will be available to the District between the end of December and late June during the Interim Period. During an average water year initial District estimates are that it will lose from about I 0% to about 30% of the pre-Ruling CVP and SWP water supply. During dry years the impact of the Ruling could range from a loss of about 5% to about 20% of the District's regular imported supply.

During the Interim Period the District will need to implement water conservation or other measures to compensate for reduced CVP and S WP water deliveries. The effect of such measures could be a reduction in water sales by the District and water revenues received by the District during the Interim Period than currently projected under the caption "WATER UTILITY SYSTEM". The District does not believe, however, that such a reduction in water sales or water sales revenues would have a material adverse impact on the ability of the District to pay Installment Payments during the Interim Period.

The District cannot predict the contents or effects of the New Biological Opinions on the amounts of water which may be available to the District from the CVP or the S WP after the Interim Period.

Resolution of Bay-Delta Issues (CALFED Bay-Delta Program)

The District imports water through the San Francisco Bay/Sacramento San Joaquin River Delta Estuary ("Bay-Delta") under contracts with the SWP and the CVP. The Bay-Delta is the largest estuary on the west coast and supports more than 750 species of plants and wildlife. The Bay-Delta also provides water supply to more than two-thirds of the population in the state and to agriculture in the Central Valley and the San Felipe Division. However, decades of competing demands have taken a toll on the Bay-Delta and today it no longer functions as a healthy ecosystem or as a reliable source of water. Regulatory actions to protect threatened or endangered fish have reduced the reliability of Bay-Delta water supplies. Water quality is degraded, making it difficult and expensive to meet drinking water standards. In addition, the vulnerability of Delta levees to seismic and flooding failures threatens both the infrastructure and the quality of California's water supply.

The District is a leader in garnering broad support for the CALFED Bay-Delta Program. Staff actively participate in the Bay-Delta process and the Bay-Delta public advisory committees. A successful Bay

43 Delta resolution is absolutely essential to address California's water problems and to maintain the public welfare and the economic viability of the state.

In addition, the District supports restoration of the Bay-Delta ecosystem through payments to a restoration fuud that are mandated by CVPIA. Depending on the amouut of CVP water taken, the District contributes approximately $2 million annually to this fund.

In 2005, the governor proposed development of a ten-year action plan for the CALF ED program. The plan involves four key activities: refocusing on the highest priority Delta issues; installing a new governance structure; improving program and fiscal management; and implementing a near-term funding strategy. In November 2005, the governor's Little Hoover Commission issued its findings of CALFED governance, concluding, "One lesson from the CALF ED experiment is that process and structure cannot substitute for leadership or authority." The report contained specific recommendations to separate and clarify the roles of management, public involvement and legislative oversight. State and federal agencies and water users are currently developing regulatory commitments and additional water user contributions for the preparation of Habitat Conservation Plans, a Species Recovery Capital Fund, a long-term "Delta Vision" process, and Pelagic Organism Decline studies.

In addition, CALF ED continues to move forward with a package of Delta infrastructure improvements to improve Delta water quality and increase Delta water supplies, improve conditions for fish, and protect in­ Delta water users. Potential benefits of the package to the District include: more reliable CVP and SWP supplies; near-term protections against the San Luis Reservoir low point; improved Delta water quality, and an extension of the Environmental Water Account to provide regulatory certainty.. The allocation of costs to beneficiaries is the subject of ongoing negotiations among stakeholders, agencies, and legislators. However, some portion of the cost of Delta improvements is expected to be allocated to the District. These costs currently are not included in water charge projections.

Allocation of Water Deficiencies

The District's SWP maximum annual contract amouut of 100,000 acre-feet is entirely for municipal and industrial (M&I) use. SWP Contract provide that water shortages will be shared equally among all SWP contractors based on relative contract amounts. These rules were established pursuant to a comprehensive set of contract amendments in 1994 (kuown collectively as the Monterey Amendment) that also gave contractors the right to establish groundwater banking and exchanges to meet dry year reliability needs. The District subsequently purchased rights to 350,000 acre-feet of grouudwater banking capacity in a program operated by Semitropic Water Storage District in Kem Couuty to enhance its dry-year water supply reliability.

The District's maximum annual CVP Contract amouut of 152,500 acre-feet is currently allocated as 130,000 acre-feet M&I use, and 22,500 acre-feet as agricultural use, but the contract provides flexibility to convert the entire amount to M&I use in future years. In 1994, the U.S. Bureau of Reclamation (USBR) developed a M&I water shortage policy that gives M&I use a higher degree of protection than agricultural use in drought periods. The USBR has implemented this policy as an Interim Policy since 1994. The policy generally provides a minimum of 75% of historic use to M&I contractors during times of shortage, with "historic use" calculated from average CVP water deliveries during the last three years of normal water deliveries, adjusted for growth. In 1997, the District entered into a 25-year renewable contract with the USBR and agricultural contractors in the San Luis & Delta Mendota Water Authority to further establish the reliability of its CVP M&I supplies (the "Water Reallocation Agreement"). Under the Water Reallocation Agreement, the District may at its discretion reallocate some of its CVP water to agricultural contractors in wet years, in return for firmer CVP M&I supplies in shortage years. Thus, notwithstanding the Interim Policy, the USBR allocates a minimum of 75% of the District's M&I contract amount (75% of 130,000 acre-feet, or 97,500 acre-feet).

44 Water Banking

The District's IWRP identified banking of excess supplies in wet years as a central element in the preferred strategy for providing supplies needed in future dry years.

In May 1996, the Board took the first step in implementing the banking strategy when it approved an agreement with Semitropic Water Storage District to store 45,000 acre-feet of State Water Project water. In 1997, the Board approved a long-term agreement with Semi tropic. Under the terms of this agreement, the total banking capacity available to the District until January I, 2006 was 350,000 acre-feet. By that date, the District had to decide its permanent level of investruent in Semitropic, and make any capital payment necessary to reach that level. On December 6, 2005, the Board approved moving forward with the remaining investruent to secure 350,000 acre-feet of storage capacity in the Semi tropic Groundwater Banking Program. Staff completed the required contract amendment and made all necessary capital payments by January I, 2006.

Through the Semitropic Groundwater Banking Program, the District has banked water in years 1997 through 2007. The District now has approximately 280,000 acre-feet in storage. In the event of a major disruption in the Delta or failure of the Delta pumping plants, delivery of water from the Semitropic Groundwater Banking Program to the District would be siguificantly affected along with other imported water deliveries from the District's SWP and CVP contracts. To the extent that Kem County Water Agency has SWP water stored in San Luis Reservoir that is not needed in Kem County, deliveries from the Semitropic Groundwater Banking Program could be accomplished through the San Felipe Division.

QUALITY OF DISTRICT'S WATER Groundwater

Groundwater in the County is generally of good water quality. Generally, the water retailers within the County can distribute groundwater directly to the consumer without treatment. The retailers are responsible for monitoring and reporting water quality.

The District has implemented numerous programs to protect groundwater quality. Each year, the District analyzes water quality data from approximately 300 wells (sampled by water retailers and the District) to assess current conditions, evaluate trends, and identify areas of special concern. Elevated nitrate concentrations in the southern portion of the County resulting from rural land use pose an ongoing groundwater management challenge. The District continues to implement a comprehensive nitrate management program to monitor nitrate occurrence, reduce consumer exposure to nitrate in drinking water, and reduce nitrate loading. To encourage more efficient fertilizer and irrigation use, the District also provides in-field nutrient management assistance to local growers. The District also promotes groundwater protection through workshops, groundwater fact sheets, and website information. The District's well construction and destruction programs ensure wells and other deep excavations are constructed, maintained, and destroyed such that they will not cause groundwater contamination.

The District also provides teclmical expertise and peer review to regulatory agencies such as the Regional Water Quality Control Board, the state Departruent of Toxic Substances Control, and the EPA for cleanup sites and for the development of standards for groundwater protection. The District is continuing to support the Central Coast Regional Board's efforts to regulate perchlorate cleanup in the Llagas Subbasin. The District provides groundwater data, technical assistance, and logistical and teclmical support for Perchlorate Community Advisory Group meetings. In addition, staff is working closely with the Regional Board, County of Santa Clara, and the cities of Morgan Hill and Gilroy to ensure that the Regional Board's long-term corrective action plan meets all of the community's interests for water supply and groundwater cleanup.

The District is currently updating its Groundwater Management Plan to include specific basin management objectives related to groundwater quality. These objectives, along with related performance measures and monitoring protocols, will help the District ensure the long-term viability of local groundwater resources.

45 Surface Water

The District relies heavily on imported surface water, but also stores local surface water supplies in the District's reservoirs. The District participates in statewide activities aimed at reducing contamination of imported supplies and implements programs to protect local supplies. Surveys of these supplies are conducted every five years, in accordance with state regulations, to ensure they are suitable drinking water sources.

The District's imported supplies from the SWP and CVP are occasionally low in quality because of the high bromide and organics content. Since DWR and the CVP pump supplies out of the Bay-Delta Estuary, the quality of those supplies are subject to tidal influences, natural organic content of the peat soil in the Delta and discharge from agricultural and urban runoff. Constituents such as bromide and organics are of concern to the District because they are disinfection by-product precursors.

Treated Water

The District produces treated water that meets or exceeds all current requirements of the Safe Drinking Water Act ("SDW A") and the regulations of the California Department of Health Services.

In recent years, the EPA has enacted new drinking water regulations affecting the treatment of surface waters. These key regulations are the Interim Enhanced Surface Water Treatment Rule (!TR), the Long Term 2 Enhanced Surface Water Treatment Rule (LTR), and the Stage I and Stage 2 Disinfectants-Disinfection By­ Products Rules (DDBPR). The regulations were enacted in segments with the !TR and the DDBPR (Stage I) going into effect by 2001 and the LTR and DDBPR (Stage 2) becoming effective in January of 2006. In order to assure compliance with these regulations the District developed major capital improvement projects for its treatment plants. The projects are referred to as the Water Treatment Improvement Project Stage I ("WTIPI") and the Water Treatment Improvement Project Stage 2 ("WTIP2") which correspond to the grouping of the four regulations. The WTIPI was completed in 2000 and the WTIP2 is currently underway.

The District's three water treatment plants: Santa Teresa WTP, Rinconada WTP, and Penitencia WTP, provide high quality treated water to the residences and businesses in Santa Clara County. The treatment plants utilize conventional treatment process of flocculation, sedimentation, filtration, and disinfection to provide high-quality water. As part of WTIP2, the treatment plants are in the process of adding advanced treatment teclmologies, including ozone as the primary disinfectant, in order to continue ensuring high-quality drinking water that meets drinking water standards. The District brought ozone systems on-line at Santa Teresa WTP in February 2006 and at the Penitencia WTP in July 2006. Construction of ozone systems at Rinconada WTP are planned to be constructed and on-line by 2012.

Reflecting the District's commitment to provide the highest quality water possible, the District was among the first water utilities nationwide to join the Partnership for Safe Water in 1995 ("PSW"). The PSW is a voluntary program developed cooperatively by the EPA, the American Water W arks Association, the Association of State Drinking Water Administrators, and several other national drinking water industry organizations. The purpose of the program is to further reduce the potential risks to consumers from microbial contaminants such as cryptosporidium and giardia. The District has consistently surpassed the PS W's goal for filtered water turbidity, a critical indicator of plant performance.

CAPITAL IMPROVEMENT PROGRAM

Future Water System Improvements

The District currently expects to undertake approximately $375,000,000 of improvements to the Water Utility System over the next five years. Approximately $57,000,000 of such improvements will be funded with commercial paper, approximately $87,000,000 of such improvements will be funded with

46 additional long-term debt issuance, approximately $100,000,000 will be funded pay-as-you go, and approximately $131,000,000 of such improvements will be funded with proceeds of the Certificates.

In April 2006, the District entered into two interest rate swap agreements totaling an aggregate notional amount of $131,000,000 (the "Swaps") to provide a hedge against changing interest rates in anticipation of entering into the Installment Purchase Agreement. Morgan Stanley Capital Services Inc. is counterparty on $78,600,000 notional amount of Swaps and Lehman Brothers Special Financing Inc. is counterparty on $52,400,000 notional amount of Swaps. The Swaps are based on the District paying a 4.971 % fixed rate and receiving 86.1 % of 3-month LIBOR. The Swaps are expected to terminate on or about the date the Installment Purchase Agreement is anticipated to be delivered.

FINANCIAL INFORMATION OF THE DISTRICT

Financial Statements

Copies of the most recent audited financial statements of the District prepared by Maze & Associates, Walnut Creek, California (the "Auditor") are attached as Appendix A hereto (the "Financial Statements"). The Auditor letter concludes that the audited financial statements present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the District as of June 30, 2006 and the respective changes in the financial position and cash flows, where applicable, for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Historical and Projected Operating Results and Debt Service Coverage

The following table summarizes the District's combined revenues and expenses relating to the Water Utility System recorded in Fiscal Year 2001-02 through Fiscal Year 2005-06. Historical results have been derived from the Financial Statements of the District but exclude certain non-cash items and include certain other adjustruents. The table has not been audited by the Auditor.

47 SANTA CLARA VALLEY WATER DISTRICT HISTORIC OPERATING RESULTS & DEBT SERVICE COVERAGE FISCAL YEAR ENDING JUNE 30 (Dollars in Thousands)''' 2005-06 2004-05 2003-04 2002-03 2001-02

Revenues Groundwater Charges $40,675 $40,798 $46,143 $36,004 $39,901 Treated Water Charges 66,614 63,219 61,688 57,007 53,055 Surface and Recycled Water Charges 720 814 734 1,540 713 State Water Project Reimbursements 15,951 17,657 14,587 11,802 9,588 Property Taxes 1,698 1,400 3,071 3,049 2,925 Investment Income 3,086 3,614 2,369 7,281 12,I04 Intergovernmental Services 407 542 347 314 315 Other 3,223 2 676 4 941 I 036 7 921 Total Revenues $132,374 $130,720 $133,880 $ II 8,033 $126,522

Operating Expenses Sources Of Supply $71,234 $52,729 $49,128 $51,768 $51,098 Water Treatment 22,860 23,716 21,089 18,923 16,011 Transmission And Distribution Raw Water 7,308 7,546 6,883 7,942 5,936 Treated Water I, 128 1,369 2,354 1,581 1,432 Administration and General (2 13 394 12 206 11 031 11 778 9 551 Total Operating Expenses $115,924 $97,566 $90,485 $91,992 $84,028

Net Water Utility System Revenues $16,450 $33,154 $43,395 $26,041 $42,494 Debt Service Series 1994A Bonds $ 0 $ 0 $6,335 $8,691 $8,693 Series 2000 Bonds 4,052 4,052 4,049 4,050 4,048 DWRLoan __o 0 0 0 0 Total Debt Service $4,052 $4,052 $10,384 $12,741 $12,741

Debt Service Coverage 4.06 8.18 4.17 2.04 3.34

Revenues Remaining for Capital Improvements $12,398 $29,I02 $33,01 I $13,300 $29,753

(I) Amounts rounded to nearestthousand. 2 ( ) Excludes certain capital expenditures. Source: District.

Net Water Utility System Revenues declined significantly between Fiscal Year 2003-04 and Fiscal Year 2005-06 primarily as a result of increased costs for CVP and SWP water supplies. In addition, in Fiscal Year 2005-2006 a reclassification of approximately $6,200,000 of expenses incurred in prior years increased source of supply expenses on a one-time basis. Projected Operating Results and Debt Service Coverage

The estimated projected operating results for the Water Utility System for Fiscal Year 2006-07 through Fiscal Year 2010-11 are set forth below, reflecting certain significant assumptions concerning future events and circumstances. The financial forecast represents the estimate of projected financial results of the District based upon the District's judgment of the most probable occurrence of certain important future events. The assumptions set forth in the footnotes to the chart below are material in the development of the financial projections of the District, and variations in the assumptions may produce substantially different financial results. Actual operating results achieved during the projection period may vary from those presented in the forecast and such variations may be material. 48 SANTA CLARA VALLEY WATER DISTRICT PROJECTED OPERATING RESULTS AND DEBT SERVICE COVERAGE FISCAL YEAR ENDING JUNE 30 (Dollars in Thousands)(!)

2 2006-07' ' 2007-08''' 2008-09 2009-10 2010-11

Revenues 4 Groundwater Charges( ) $47,300 $65,563 $71,653 $78,781 $86,591 Treated Water Charges(s) 75,200 66,689 71,908 77,707 84,086 6 Surface and Recycled Water Charges( ) 1,217 1,373 1,576 1,821 2,044 State Water Prodect Reimbursements(7) 16,500 17,000 18,000 19,000 21,000 Property Taxes ) 3,732 3,907 4,067 4,234 4,408 9 Investment Jncome( ) 4,541 4,550 2,375 1,653 1,699 Intergovernmental Services 586 819 403 433 560 Other 909 4,826 327 328 330 Total Revenues $149,985 $164,727 $170,309 $183,958 $200,718 Operating Expenses Sources Of Supplto) $68,432 $76,429 $83,377 $85,961 $91,058 Water Treatment( I) 24,023 28,204 27,570 29,067 30,268 12 Transmission And Distribution( ) Raw Water $8,035 $10,303 $10,588 $11,294 $11,279 Treated Water 2,972 3,011 2,857 2,743 2,806 13 Administration and Genera1( ) 17 038 12 949 19 712 20 726 21 269 Total Operating Expenses $120,500 $130,897 $144,103 $149,791 $156,680

Net Water Utility System Revenues $29,485 $33,830 $26,206 $34,167 $44,038 Debt Service Series 2000 Bonds $1,449 0 0 0 0 DWRLoan 0 201 401 401 401 Series 2006 Bonds 3,701 6,520 6,515 6,520 6,517 14 5 2007 Installment Purchase Agreement( )(l ) 4,480 5,494 8,952 8,953 Total Debt Service $5,150 $11,201 $12,410 $15,873 $15,871

Debt Service Coverage 5.73 3.02 2.11 2.15 2.77

Revenues Remaining for Capital Improvements $24,335 $22,629 $13,796 $18,294 $28,167

(I) Amounts rounded to nearestthousand. 2 ( ) Estimated. 3 ( ) Budgeted. 4 ( ) Projected to increase by approximately 16.3% per annum over Fiscal 2006-07 levels. Assumes the water rates and changes set forth under the caption "PRIMARY SOURCES OF REVENUES Water Charges." 5 ( ) Projected to increase by approximately 2.8% per annum over Fiscal 2006-07 levels. Assumes the water rates and changes set forth under the caption "PRIMARY SOURCES OF REVENUES Water Charges." 6 ( ) Projected to increase by approximately 13 .8% per annum over Fiscal 2006-07 levels. Assumes the water rates and changes set forth under the caption "PRIMARY SOURCES OF REVENUES Water Charges." 7 ( ) Projected to increase by approximately 6.2% per annum over Fiscal 2006-07 levels. 8 ( ) Projected to increase by approximately 4.2% per annum over Fiscal 2006-07 levels. 9 ( ) Projected to decrease as the District reserves are reduced to pay for capital improvements. Interest is projected at an average rate of3.0%. (IO) Projected to increase by approximately 7.4% per annum over Fiscal 2006-07 levels. (I I) Projected to increase by approximately 5.9% per annum over Fiscal 2006-07 levels. 12 ( ) Projected to increase by approximately 6.4% per annum over Fiscal 2006-07 levels. 3 (l ) Projected to decrease by approximately 5.7% per annum over Fiscal 2006-07 levels. 4 (l ) Does not reflect interest earnings, if any, on the Capitalized Interest Fund. Portion of 2007 Installment Purchase Agreement allocable to the Series 2007B Certificates projected at 5.50% per annum. 5 (l ) Net of capitalized interest Source: District. 49 THE CORPORATION

The Santa Clara Valley Water District Public Facilities Financing Corporation is a nonprofit public benefit corporation formed December 21, 1987 under the California Nonprofit Public Benefit Corporation Law. The specific and primary purpose of the corporation is to provide assistance to the District in financing the acquisition, design, construction, improvement, and installation of public facilities.

In order to carry out its specific purpose, the Corporation has all powers conferred upon nonprofit public benefit corporations of the State of California. Under its articles of incorporation, the Corporation may never engage in any activity other than those activities incidental to and for the purpose of carrying out the primary purpose for which it was formed.

The board of directors of the Corporation consists of three positions who are approved by the Board. The offices of president, vice president, and chief financial officer are members of the Corporation board and are selected by vote of the Corporation board. The president serves as chief executive officer of the Corporation, and may sign and execute, in the name of the Corporation, deeds, mortgages, leases, bonds, contracts, and other instruments duly authorized by the board. The vice president may perform the duties of the president in the event of the absence or disability of the President. The chief financial officer is in charge of all funds of the Corporation.

The members of the board of directors of the Corporation are Vincent Garrod, David Vanni and David R. Johnson. The Corporation Board has appointed the Clerk of the Board of Directors of the District to serve as the Secretary of the Corporation.

CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES

Article XIIIB

Article XIIIB of the California State Constitution limits the annual appropriations of the State and of any district, county, school district, corporation or other political subdivision of the State to the level of appropriations of the particular governmental entity for the prior fiscal year, as adjusted for changes in the cost of living and population. The "base 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 and consumer prices. Adjustments in the appropriations limit of an entity may also be made if (i) the financial responsibility for a service is transferred to another public entity or to a private entity, (ii) the financial source for the provision of services is transferred from taxes to other revenues, or (iii) the voters of the entity approve a change in the limit for a period of time not to exceed four years.

Appropriations subject to Article XIIIB generally include the proceeds of taxes levied by the State or other entity of local government, exclusive of certain State subventions and refunds of taxes. "Proceeds of taxes" include, but are not limited to, all tax revenues and the proceeds to an entity of government from (i) regulatory licenses, user charges, and user fees (but only to the extent such proceeds exceed the cost of providing the service or regulation), and (ii) the investment of tax revenues. Article XIIIB includes a requirement that if an entity's revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years.

Certain expenditures are excluded from the appropriations limit including payments of indebtedness existing or legally authorized as of January I, 1979, or of bonded indebtedness thereafter approved by the voters and payments required to comply with court or federal mandates which without discretion require an expenditure for additional services or which unavoidably make the providing of existing services more costly.

50 The District is of the opinion that its water charges do not exceed the costs it reasonably bears in providing such services and therefore are not subject to the limits of Article XIIIB.

Proposition 218

General. An initiative measure entitled the "Right to Vote on Taxes Act" (the "Initiative") was approved by the voters of the State of California at the November 5, 1996 general election. The Initiative added Article XIIIC and Article XIIID to the California Constitution. According to the "Title and Summary" of the Initiative prepared by the California Attorney General, the Initiative limits "the authority of local governments to impose taxes and property-related assessments, fees and charges."

Article XllID. Article XllID defines the terms "fee" and "charge" to mean "any levy other than an ad valorem tax, a special tax or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including user fees or charges for a property-related service." A "property-related service" is defined as "a public service having a direct relationship to property ownership." Article XIIID further provides that reliance by an agency on any parcel map (including an assessor's parcel map) may be considered a significant factor in determining whether a fee or charge is imposed as an incident of property ownership.

Article XIIID requires that any agency imposing or increasing any property-related fee or charge must provide written notice thereof to the record owner of each identified parcel upon which such fee or charge is to be imposed and must conduct a public hearing with respect thereto. The proposed fee or charge may not be imposed or increased if a majority of owners of the identified parcels file written protests against it. As a result, if and to the extent that a fee or charge imposed by a local government for water service is ultimately determined to be a "fee" or "charge" as defined in Article XlllD, the local government's ability to increase such fee or charge may be limited by a majority protest.

In addition, Article XIIID includes a number of limitations applicable to existing fees and charges including provisions to the effect that (i) revenues derived from the fee or charge shall not exceed the funds required to provide the property-related service, (ii) such revenues shall not be used for any purpose other than that for which the fee or charge was imposed, (iii) the amount of a fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel and (iv) no such fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. Property-related fees or charges based on potential or future use of a service are not permitted.

Based upon the California Second District Court of Appeal decision in Howard Jarvis Taxpayers Association v. City of Los Angeles, 85 Cal. App. 4th 79 (2000), which was denied review by the California Supreme Court, it was generally believed that Article XIIID did not apply to charges for metered water, which had been held to be commodity charges related to consumption of the service, not property ownership. In a decision rendered in February 2004, the California Supreme Court in Richmond et al. v. Shasta Community Services District (Sl05078) upheld a Third District Court of Appeal decision that water connection fees were not property-related fees or charges subject to Article XIIID while at the same time stating in dicta that fees for ongoing water service through an existing connection were property related fees and charges. In October 2004, the California Supreme Court granted review of the decision of the Fourth District Court of Appeal in Bighorn-Desert View Water Agency v. Beringson, 120 Cal. App. 4th 891 (2004), in which the appellate court had relied on Howard Jarvis Taxpayers Association v. City of Los Angeles and rejected the Supreme Court's dicta in Richmond et al. v. Shasta Community Services District. On March 23, 2005, the California Fifth District Court of Appeal held that an "in lieu" fee which is payable to the City of Fresno's general fund from its water utility and which is included in the city's water rate structure was invalid. In reaching its decision, the court concluded that the city's water rates were "property related" fees, governed by the limitations of Article XIIID. The City of Fresno requested a review of this decision by the California Supreme Court, which denied review. On July 24, 2006, the Supreme Court ruled in Bighorn-Desert View Water Agency v. Verjil. In dicta, the Court repeated the Supreme Court's previous dicta in Richmond et al. v. Shasta Community Services

51 District that fees and charges for ongoing water service through an existing connection were property related fees and charges under Article XIIID. As a wholesale water agency, the District and District Counsel do not believe District rates are subject to the substantive and procedural requirements of Article XIIID.

Article XIIIC. Article XIIIC provides that the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge and that the power of initiative to affect local taxes, assessments, fees and charges shall be applicable to all local governments. Article XllIC does not define the terms "local tax," "assessment," "fee" or "charge," so it was unclear whether the definitions set forth in Article XIIID referred to above are applicable to Article XIIIC. Moreover, the provisions of Article XllIC are not expressly limited to local taxes, assessments, fees and charges imposed after November 6, 1996. On July 24, 2006, the Supreme Court held in Bighorn-Desert View Water Agency v. Verjil that the provisions of Article XIIIC included rates and fees charged for domestic water use. In the decision, the Court noted that the decision did not address whether an initiative to reduce fees and charges could override statutory rate setting obligations. The District and District Counsel do not believe that Article XIIIC grants to the voters within the District the power to repeal or reduce rates and charges in a manner which would be inconsistent with the contractual obligations of the District. However, there can be no assurance of the availability of particular remedies adequate to protect the Certificate Owners. Remedies available to Certificate Owners in the event of a default by the District are dependent upon judicial actions which are often subject to discretion and delay and could prove both expensive and time-consuming to obtain.

Future Initiatives

Articles XIIIB, XIIIC and XIIID were adopted as a measure that qualified for the ballot pursuant to California's initiative process. From time to time other initiatives could be proposed and adopted affecting the District's revenues or ability to increase revenues.

CERTAIN LIMITATIONS ON RIGHTS AND OBLIGATIONS

In addition to the specific limitations on remedies contained in the applicable documents themselves, the rights and obligations with respect to the Certificates are subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights, to the application of equitable principles if equitable remedies are sought, and to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against public agencies in the State of California. The various opinions of counsel to be delivered with respect to such documents, including the opinion of Special Counsel (the form of which is attached as Appendix D), will be similarly qualified.

TAX MATTERS

In the opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation, San Francisco, California, Special Counsel, under existing statutes, regulations, rulings and judicial decisions, and assuming certain representations and compliance with certain covenants and requirements described herein, interest with respect to the Series 2007A Certificates is excluded from gross income for federal income tax purposes, and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations. In the further opinion of Special Counsel, interest with respect to the Certificates is exempt from State of California personal income tax. Special Counsel notes that, with respect to corporations, interest due with respect to the 2007 A Certificates may be included as an adjustment in the calculation of alternative minimum taxable income which may affect the alternative minimum tax liability of such corporations. In addition, the difference between the issue price of a Certificate (the first price at which a substantial amount of the Certificates of a maturity is to be sold to the public) and the stated prepayment price at maturity of a Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method. Original issue discount with respect to the Certificates will accrue to a Certificate Owner before receipt of cash attributable to such income. The amount of original issue discount deemed received by the Certificate Owner will increase the Certificate Owner's basis in the Certificate. The amount of original issue discount with respect to the Series 2007A Certificates that accrues to a Certificate Owner is excluded from the 52 gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, and is exempt from State of California personal income tax. Complete copies of the proposed opinions of Special Counsel are set forth in APPENDIX D-"FORM OF SPECIAL COUNSEL OPINION."

The amount by which a Series 2007A Certificate Owner's original basis for determining loss on sale or exchange in the applicable Certificate (generally, the purchase price) exceeds the amount payable on maturity ( or on an earlier call date) constitutes amortizable bond premium, which must be amortized under Section 171 of the Code; such amortizable bond premium reduces the Certificate Owner's basis in the applicable Certificate and the amount of tax-exempt interest received with respect to the Series 2007 A Certificate), and is not deductible for federal income tax purposes. The amount by which a Series 2007B Certificate Owner original basis for determining loss on sale or exchange in the applicable bond (generally, the purchase price) exceeds the amount payable on maturity ( or on an earlier call date) constitutes amortizable bond premium, which a bondholder may elect to amortize under Section 171 of the Code; such amortizable bond premium reduces the Certificate Owner's basis in the applicable Certificate ( and the amount of taxable interest received with respect to the Series 2007B Certificates), and is deductible for federal income tax purposes. The basis reduction as a result of the amortization of bond premium may result in a Certificate Owner realizing a taxable gain when a Certificate is sold by the Certificate Owner for an amount equal to or less (under certain circumstances) than the original cost of the Certificate to the Certificate Owner. Purchasers of the Certificate should consult their own tax advisors as to the treatment, computation and collateral consequences of amortizable bond premium.

The Internal Revenue Service (the "IRS") has initiated an expanded program for the auditing of tax­ exempt bond issues, including both random and targeted audits. It is possible that the Certificates will be selected for audit by the IRS. It is also possible that the market value of the Certificates might be affected as a result of such an audit of the Certificates ( or by an audit of similar bonds).

It is possible that subsequent to the date of original execution and delivery of the Certificates there might be federal, state, or local statutory changes (or judicial or regulatory interpretations of federal, state, or local law) that affect the federal, state, or local tax treatment of the Certificates or the market value of the Certificates. No assurance can be given that subsequent to the execution and delivery of the Certificates such changes or interpretations will not occur. On May 21, 2007, the U.S. Supreme Court agreed to review a Kentucky state court decision, in the matter of Kentucky v. Davis, on the issue of whether the U.S. Constitution commerce clause precludes states from giving more favorable tax treatment to state and local government bonds issued within that state than the tax treatment given bonds issued outside that state. The outcome of this or any similar case cannot be predicted, but the ultimate result could be a change in the treatment for state tax purposes of interest with respect to the Certificates. If the Kentucky v. Davis decision is affirmed by the United States Supreme Court, states such as California may be required to eliminate the disparity between the income tax treatment of out-of-state tax-exempt obligations and the income tax treatment of in-state tax-exempt obligations, such as the Certificates. The impact of such a United States Supreme Court decision may also affect the market price for, or the marketability of the Certificates. Prospective purchasers of the Certificates should consult their tax advisors regarding this matter.

Although Special Counsel has rendered an opinion that the interest (and original issue discount) with respect to the Series 2007 A Certificates is excluded from gross income for federal income tax purposes provided that the District continues to comply with certain requirements of the Code, the ownership of the Series 2007A Certificates and the accrual or receipt of interest (and original issue discount) with respect to the Certificates may otherwise affect the tax liability of certain persons. Special Counsel expresses no opinion regarding any such tax consequences. Accordingly, before purchasing any of the Series 2007A Certificates, all potential purchasers should consult their tax advisors with respect to collateral tax consequences relating to the Series 2007 A Certificates.

53 RATINGS

The District has received from Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P") ratings on the Certificates of"Aaa" and "AAA" respectively, based on the issuance of the Policy. The District has received from Moody's and S&P underlying ratings on the Certificates, without respect to the issuance of the Policy, of "Aa2" and "AA", respectively.

Such ratings reflect only the views of such organizations and any desired explanation of the significance of such rating should be obtained from the rating agency furnishing the same, at the following addresses: Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007 and Standard & Poor's Ratings Services, 25 Broadway, New York, New York 10004. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agencies, if in the judgment of such rating agencies, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Certificates.

UNDERWRITING

The Certificates will be purchased by Morgan Stanley & Co. Incorporated, acting on behalf of itself, Lehman Brothers, De La Rosa & Co., Inc. and Backstrom McCarley Berry & Co., LLC (the "Underwriters"), under a Purchase Contract, dated September 11, 2007 (the "Purchase Contract"), pursuant to which the Underwriters agree to purchase all of the Certificates for an aggregate purchase price of $133,634,085.95 (which represents the par amount of the Certificates less Underwriters' discount of $518,754.40 plus $3,152,840.35 of original issue premium).

The initial public offering prices stated on the cover of this Official Statement may be changed from time to time by the Underwriters. The Underwriters may offer and sell the Certificates to certain dealers (including dealers depositing Certificates into investment trusts), dealer banks, banks acting as agents and others at prices lower than said public offering prices.

FINANCIAL ADVISOR

The District has retained Public Resources Advisory Group, of Los Angeles, California, as financial advisor (the "Financial Advisor") in connection with the execution and delivery of the Certificates. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement. Public Resources Advisory Group is an independent financial advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities. The payment of the fees of the Financial Advisor is contingent upon the execution and delivery of the Certificates.

NO LITIGATION

No litigation is pending or, to the knowledge of the District, threatened, in any way questioning or affecting the validity or enforceability of the Certificates or the Installment Purchase Agreement. Neither the creation, organization or existence of the District, nor the title of the present directors or officers of the District to their respective office is being contested.

The District is a party to litigation filed by the Great Oaks Water Company ("Great Oaks") in Santa Clara County Superior Court concerning the District's establishment and use of its groundwater charges. Great Oaks is a private water retailer that pumps groundwater from within the District's jurisdiction for sale to its customers. Great Oaks has, over the past two years, filed four suits against the District, of which two remain active. On November 22, 2005, Great Oaks filed the first suit against the District (l-05-CV-053142).

54 The complaint was amended before it was served on the District on January 19, 2006. Great Oaks alleges in the suit that the District's charges for groundwater pumping are an illegal tax under Proposition 218; that the groundwater charges are used for purposes not permitted under the District's enabling act; that the District is improperly failing to impose groundwater charges on construction dewatering, thereby resulting in higher charges to Great Oaks to compensate for the uncollected revenue; and that the District is improperly "pooling" groundwater charges. Great Oaks seeks relief including compensatory damages, rate rollbacks, and an injunction prohibiting the District from using groundwater charge revenues for any purpose not authorized by the authorizing act. The case is in the discovery phase and a trial date in 2007 or early 2008 is anticipated.

Great Oaks filed a second suit on July 11, 2006, one month after adoption of the groundwater charge rates for Fiscal Year 2006-07 (l-06-CV067000). In this writ of mandate proceeding, Great Oaks asserted that the District's adoption of annual water rates is subject to the California Environmental Quality Act ("CEQA") and that the 2006-07 rate-setting decision should be invalidated for noncompliance. In July 2007, a ruling in the District's favor was entered following hearing on the writ, on the basis that the District's rate-setting is exempt from review under CEQA. Judgment dismissing the entire action was entered on August 27, 2007. Great Oaks has filed an appeal.

Great Oaks filed a third suit on October 4, 2006 challenging the FY 2006-07 groundwater charge rates on essentially the same grounds as those alleged in the initial action. The suit was dismissed in April 2007 after the District filed a demurrer on various grounds. A new action challenging the FY 2006-07 rates was filed by Great Oaks on June 14, 2007 (l-07-CV072314). The District's demurrer to this action is scheduled for hearing in September, 2007.

The District believes that groundwater charges approved by the Board of Directors for fiscal years 2005-06 through 2007-08 were approved in compliance with the District authorizing act and other State of California constitutional and statutory provisions applicable thereto. See the caption, "CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS AND CHARGES".

While the District has certain other ongoing litigation with respect to the Water Utility System, District Counsel does not believe such litigation is material to the finances or operation of the Water Utility System.

The District is engaged in routine litigation incidental to the conduct of its business. In the opinion of the District's District Counsel, Debra L. Cauble, Esq., the aggregate amounts recoverable against the District, taking into account insurance coverage, are not material.

CERTAIN LEGAL MATTERS

Special Counsel will render an opinion substantially in the form set forth in Appendix D hereto. Copies of such opinions will be furnished to the Underwriters at the time of delivery of the Certificates. Certain legal matters will be passed upon for the District and the Corporation by District Counsel to the District, Debra L. Cauble, Esq. for the Underwriters by their counsel, Sidley Austin LLP and for the Trustee by its counsel. The payment of the fees of Special Counsel is contingent upon the execution and delivery of the Certificates.

MISCELLANEOUS

This Official Statement has been duly approved, executed and delivered by the District and the Corporation. Copies of this Official Statement may be obtained from the Financing Officer of the District at the address indicated on the inside cover page of this Official Statement.

The general purpose financial statements of the District, a summary of the principal legal documents related to the Certificates, information with respect to the book-entry only system relating to the Certificates, a form of opinion of Special Counsel and the form of the proposed Continuing Disclosure Agreement are

55 attached hereto as Appendices. The Appendices are integral parts of this Official Statement and must be read together with all other parts of this Official Statement.

The delivery of this Official Statement, including the Appendices and other information herein, has been duly authorized by the District.

SANTA CLARA VALLEY WATER DISTRICT

By: ____~l~sl~S~tan~l~ey~M~-~W~i~ll~ia~m~s~------Chief Executive Officer Attest:

Isl Lauren L. Williams Clerk of the Board of Directors

56 APPENDIX A

AUDITED GENERAL PURPOSE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2006 [THIS PAGE INTENTIONALLY LEFT BLANK]

Santa Clara Valley Water District San Jose, California

Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2006

Prepared by the General Aooounting Services Unit Peter Ng, Chief Financial Officer Najon Chu, Financial Services Unit Manager SANTA CLARA VALLEY WATER DISTRICT COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Year Ended June 30, 2006

Table of Contents

Introductory Secflon

Letter of Transmittal...... 1 Organizational Chart ...... B Board of Directors ...... 9 GFOA Certificate of Achievemant ...... 1a

.Fin•ncial Section

Independent Auditor's Report ...... ,...... ,...... ,...... ,...... ,...... 11 Management's Discussion and Anatysla (Required Supplementary Information) 13 BASIC FINANCIAL STATEMENTS: Government-wide Financial Statements: Statement of Net Assets ...... ,...... 28 Stalemont of Aolivilios ...... ,...... ,...... 29 Fund Financial Statement9: Balance Sheet - Governmental Funds ...... , ...... 30 Reconciliation of the Balance Sheet of Governmental Funda to the Statement of Net Assets ...... 32 Statement of Revenues, Expenditures and Change& in Fund Balancee - Governmental Funde ...... 34 Reconciliation of the Statement of Revenuet, Expendltur&a and Change. in Fund 811lances of Governmental Funds to the Statement of Activiti1111. 36 Statement of Net Assets - Proprietary Funds ...... 37 Statement of Revenues, Expenses and Changes in Net Assets - Proprietary Funds ...... 38 Statement of Cash Flowe - Proprietary Funds ...... 39 Statement of Fiduciary Net Assets - Agency Funds ...... 40 Notee lo Besic Financial Statements: (I) The Financiel Reporting Entity ...... ,...... 41 (2) Summary of Significant Accounting Policies...... 42 (3) Caih and Investments ...... 48 (4) Due from Other Governments ... 55 (5) Reimbursement of Capital Costs ...... 55 (6) Interest Income...... 56 (7) Capital Aasets ...... , ...... 57 (8) Short-Term and Long-Tenn Liabilitie1 ...... 59 (9) Property Taxes and Benefit Assessments ...... 64 (10) Net Assets/Fund Balances ...... , ...... , ..... 55 (11) Em~oyee1' Retirement Plan ...... 67 ( 12) Post-Employment Bel'l8fits ...... 68 (13) Risk Management ...... 8Q (14) Advances To end From Other Funds ...... 70 (15) Transfa.-. In ,md Out ...... 70 {16) Commitments ...... 72 (17) Contingencie, ...... 73

REQUIRED SUPPLEMENTARY INFORMATION: Schedule of Revenues, Expenditures and Changes in Fund Balances • Budget and Actual on a Budgetary Basis• Budgeted Govemmen!el Funds .. 76 Notes to Requirad Supplementary lnfonnation ...... 82

COMBINING AND INDIVIDUAL FUND STATEMENTS AND SCHEDULES: Water Enterprili8 Fund:

Sohedllle of Revenues, Expen•e& end Ch•nges in Fund Net Assets - Budget and Actual on a Budgetary Basi•...... 85 lnbirnal Servic. Funda: Combining Statement of Net Assets...... 87 Combining Statement af Revenues, Expenns and Ch•ngea in Fund Net Aseet, ...... 88 Combining Statement of Ca1h FIOINs ...... 89 Schedule af Revenuee, Exp,mses end Change, in Fund Net Assets • 81Jdget and Actual on a Budgetary Basis. .. 90

ll Agency Funds: Combining Statement of Changes in Assets and Liabilities ...... 93 Capital A..aet& Uaed in Iha Operation of Government.ii Funde: Schedule by Source ...... 95 Schedule by Function and Acti11ity...... , ...... 96 Schedule of Changes by Function and Activity ... ., ...... 97

Statiatical Section

Financial Trends: Net Assets by Compon1;1nt ...... 100 Change in Net Assete ...... 102 Fund Balances of Governmental Funds...... 104 Change in Fund Balances of Governmental Funds ...... 106 Revenue Capacity: Water Salee by Category ...... 108 Principal Water Sal11s Custom11rs ...... 109 Water Enterprise Rates Summary...... 11 O Aasesaed and Estimated Actual Value of Property...... 112 Property Tax Rates• Direct and Overlapping Government• ...... 113 Principal Properly Tax Payers.. . .. 114 D11bt Capacity: Ratio of Gsneral Bonded Debt Outstanding ...... ,, .... ,, ...... ,, ... ,, ...... 115 Ratio of Outstanding Debt by Type ...... 11 O Computation of Direct and Overlapping Debt...... 118 Revenue Bond Coverage ...... ,, ...... 119 Computation of District Act Debt Margin...... 120 Demographic and Economic Information: Demographic and Economic Statistics ...... 121 Principal Employers...... 122 Operating Information: Full-time Equival11nt District Employees by Function/Program...... 123 Operating Indicators by Function/Program... 24 Capital AHet Statistics by Function/Program ...... :125 Flood Control System Historical Operating Results ...... 126

iii ra ~,ic~

iv

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November 3, 2006

TO THE BOARD OF DIRECTORS OF THE SANTA CLARA VALLEY WATER DISTRICT:

It Is our pleHure lo submit the Compn,hllll'l~ve Anmial fil'l(lncillll RePQrt (C,,,.FR) for the Sama Clara Valley Waler Disn:t (Dlatrict) for lhe fiscal year ended June 30, 2006. The Compn,t,en1lve Arinual Flnanclal Report is pntp-d in acooroance with Generally A00ept11d Accounting Pril'l(:iple• In the United States of America (GMP) as promulgated by the GOY11mmental Accounting Stanclan:l, Board (OASB). Retponaibillty for bath Ille acwracy of Ille data, and the complatenass and faimee• of the prMent1tion, indudlng all dil!dosurws, rest11 with the Dimria. To the belt of our knol'>1edgs and belief, the 1ncl0Nd data are acwrate In all material respects and are n!IPQrted In a manner de11Qned to preNnt fllirty the financial poalion and results of op•rationa of the 11arim.1s actilliliea of the District. All disclosures n-N•I)' to enable the rwader t

To pro~klt a rea1,011able basis for mlldng thelle 111p111santation11. management of the Dlstrid has wtabliati.d a comprehensi11e internal control framework that is design•d both to protea the District's assetil from loH, theft, or misuse and to compile 1ufflclent, nili,ble lnl'onnatlon for tile preparation of !he District's fimmcial atelemem:s in conformity with GAAP. Because the oom of Internal controls should no! o~igh their beneftta, the District's CC11T1pr,,hentive lrarnewolk of lntemal control! hu been de1ign1d to provide re•on•bl• r•th1r than absolute assurance Ihm the financial statementll will be fill• from material miAlalement As m•negement, we aoomt lh•t, to the best of OW' knowl1dga a11d belief, this fimincial report is comple4e and reliable in all material respedll.

The District's final'l(:ial elalemeflls have been audited by Maza & ANociet1111, a firm of liooneed certified public accountants. The goal of the irw:lapendenl audit was to prC>11id11 reasonable assUl'anoo that the financial statements of lhe District for the fiscal ya• ended June 30, 20015, are free of material misstatement, The independent 111.Jdil involved examining, on a teet ba11i1, evidence aupporting the amounts and di1clo1ure• il1 the financial at• tam1nts; a11•asing the aocounting principlea l.l!!1i!d and tign!llcant estimalas made by m1nagarn•nt; mid ev•lullllng the overah financial statement p111.entation, The ind1pandent auditor ooncludad, based upon tile audil, ihal there was a reasonable basis for rendering an unqualified opinion that the Diatricl'1 financial statements for the fiscal year ended June 30, 2005, are fairly presanted, in all matel'ial reaptctt, in cooformily with GAAP. The 1ndap111nd111nt il'lldilor's report is pretented llS the first componi.1nt of the financi,al section of this report.

·t \ , ,~, .:,>r,, , .,\•' ;-r :., ~. ,,, ,:,,;L,,,/. J;l •. -1f>,;-;;;;.,, t,,.,.; ,; .... ,•~•r••1••r·,;ir1, 1-'•'lt,k•t ,·,,~,. ,;,;,, 0 The independent audit of the llnancial statements of the District is part of a broader, federally mandated •single Audit' deaigned lo meet the special needs of federal grantor agenciea. The 81:andards governing Single Aud~ engagement• require the independent auditor to report not only on the fair presentation of the financial atatements but also on the District's internal controls and compliance mrer the administration of federal awards. The single audit review is typically completed after the audit of the financial statements and will be issued ,eparately for the Board'a accepllilnce.

GAAP requires that management provide a narrative iivoduction, overview, and analy1i11 to accompany the basic llnancial statements in Iha form of Managamant'a Ditcuaaion and Analysis (MD&A). This letter of tranamittal is d•aigned lo complement the MO&A end should be read in conjunction with it. The District's MD&A can be found immediately following the report of the independent auditor.

District Profile

The District traces it11 origin11 lo the Santa Clara Valley Water Conservation District, approved by north county voters in 1929. Voters elsewhere in the County eventually formed similar agencies Iha! lalar consolidated with the original Distnd. T oday'1 District r•preHnta a consolidation of four agencies. In 1954, the Central Santa Clara Valley water Conservation District was annexed to ths Santa Clara Valley Water Conservation Diii;trict. With the 1968 merger of the Santa Clara Valley Water Conservation District and the Santa Clara County Flood Control and Water District, the agency adopted dual missions of providing waler 11upply and flood protection. The South Santa Clara Valley Water Conservation District was renamed the Gavilan Water District in 1980, and upon south oounty voter approval was annexed to the Santa Clara Valley Water District in 1987. Thi! merger's cataly11t was Iha belief that a coordinated operation of the County's waler aupply and flood control syetama would result in oplim1.111 water resource management.

Throughout its history of consolidations, the Di1tric:t has maintained a relatiom;hip with Santa Clara County. In 1952, County Supervi5ors initiated the valley'a first flood protection program; they later expanded their efforts to include waler importation. In 1968, the District and County decided lo merge their waler function•, and the g011eming boards of both agencies agreed the County supervisors would have a role in reviewing and approving the water district's annual budget. On September 14, 2006 Aasembly Bill 2435 was passed (effective January 1, 2007) which ends the Caunty'a oversight of the District's budget and other proOl!ldural holdovers from the 1968 merger.

The Santa Clara Valley Water Dil!trict (District) operatea as a State of California special district under !he authoriy of the District Act (Stab. 1951, c. 1-405, p.3336, urgency, eff. July 10, 1951, as amended Stats. 1963, c.1941, p.3993, 1}. The District ls tha primary water resources agency for Santa Clal'll County, California. It ads not only as the county'• water whole1111ler but also as its ~ood protection agency 11nd is the steward for its streams and creeka, underground aquifer!! and district-built reservoirs. It is go1,1ern•d by a aev•n-membar Board of Directors. Five members are elected from geographical areas which coincide with the county superviaorial diii;trict11, and two at-l11rg1t members are appoint•d by th• county Board of Supervitore. The mission of the District is a healthy, aafe and enhancad quality of living in Santa Clara County through watershed 1teward1hip and comprehenaive m11nagemenl of water resources in e practical, cost~ffective end environmmtally sensitive manner. Each year, the county residents and bu&inesses use about 400,000 sere-feet of water, both treated water and groundwater. Approximately 80 percent of the walllr is delivered by 13 water retail agencies that aervice communities within the County via their own distribution eyatem1. This demand requires the Distric:I to operate and maintain a complex delivery and treatment system that includes 3 drinking waler plants, 10 reservoirs, a 1tate-of-the-art waler quality laboratory, 18 groundwater recharge f11cilities, 3 pump stations and more than 165 miles of canals, tunnels, and pipelines. As the primary wholesale waler supplier in Santa Clara County, the District is dedicated to eesuring a reliable supply of healthy, clean drinking water. The District provides stream 111-ardship that encompasses managing flood and storm waters within the County and protecting watersheds and riparian corridors, thereby providing for public safety, and the protection of property and the natural environment along creeks and rivers, and at the edge of the San Francisco Bay. The District makes every effort to provide clean Hfe water in our creeka and bays: to provide, enhance, and restore creek: and bay 11co11yslllms, and to promote additional open space, traile end perks along creeks end in the watenshed11.

The District maintains budgetary controle, the o~ectives of which are to ensure the compliance with legal provision&, embodied in the annually appropriated budg~ approved by the Board. Activities of the governmental funds and proprietary funds are included in the annual appropriated budget. Additionally, as a management tool, project-length financial plane are included in the annual Capital Improvement Plan. The legal level of budgetary control (that it, the level al which expenditures cannot legally exceed the appropriated amount) is established at the fund level, further limited by two categories, the operating budget (consisting of total operations, operating projects, and debt aarvice) and the capital budget (consisting of capital project expenditures). Budget adjustments that increase or decreaaa revenue projections, appropriations or reserves of any fund requir• Board approval. Budget and actual compariaona are provided in thia report for each fund for which an appropriated annual budget has been adopted. For governmental funds, this compari1on is preNnted on page 76-81 as part of required supplementary information. For proprietary funds, this comparison Is presented on page 85 and 90-91 as part of the combining and individual fund statements and schedules.

On February 23, 1999, the District Board of Directors (Board) approved the development of a variation of biennial budgets, called a Rolling Biennial Budget, with the first year serving as the adopted budget and the 1econd year in place as a spending plan. At the end of the first year, a mid-cycle review of the i,econd-yeer spending plen is required before adoption. The District's biennial budget serves as the foundation for financial planning and control. The objectives of a Rolling Biennial Budget are to atebilize operating expenditures from year to year, to ensure the operating expenditures are within generally agreed-upon leve111, and to align operating and capital expenditures with fairly stable and predictable revenue sources. The District'• budget process uses a goal-driven approach that spans the planning, development. adoption, and execution phases of the budget. These practices encourage the d&Vl!lopment of organizational goals, and the establishment of policies and plans to achieve these goals.

The District moved to a two-year budget to demonstrate to the community a commitment to financial responsibility and long-term planning. The initial development of the rolling bi11nni11I budget relied upon guidance from several long-range plann,ng document! and processes including the original five-year Capital Improvement Plan, the Water Utility Buaineas Pl11n, the Flood Protection Businesa Plan, and the Priority Setting Matrix.

For ftscal year 2005/0e a single-year fonmat was used and is a departure from the District's cu1tomary rolling biennial budget. The District changed the format to accommod11te a request by the County of Santa Clara for earlier review.

3 The guidelines used by the Dislrict in developing this formal budget process are tho1e recommended by the National Advisory Council on State and Local Budgeting, and the Government Finance Officers Anociation (GFOA). The Board adopted the fiscal year 2005/06 budget.

Factors Affecting Financial Condition

Loeel .c:onomy. Santa Clara County has one of the most diverse population• in California. Many of its 1. 7 million reeidil!nt1 moved here from other states or countrie1 for employment in Silicon Valley, famed for both ila technological successes and dot-com bust. Of Silicon Valley residents, 38 percent are foreign-born. Eighty-two percent have flnished high school, with .o41 percent holding bachelors degrees. Average pay and per capita income increaaed in 2005, with average per capita income at S56,633 - 1.55 times greater than the national level. However, median household income has remained flet for the p119t decade lmmigra1ion to the area has increased and emigration decreaaed, with the overall population growing by 1 percent in 2005, the largest increase since the 2000 dot-com collapse. (Source: Silicon Valley 2006 lndai1:, Joint Venture/Silicon Valley Network)

Last year, the area had Its first increase in jobs in four years, following a turbulent period that saw the loss of more than 200,000 jobs, particularly in the technology sector. Silicon Valley continues to have a higher concentration of core design, engineering, scientific and business management skills than other regions, with 14 percent of total regional employment in these areas. The number of patents per capta has continued to rise, with 47 percent of al California patent, granted to Silicon Vmlley in 2004. Value added per employee rose at a rate of 4,4 percent from 2004 to 2005, compared with the nation rate of 2 percent. (Source: Silicon Valley 2006 lndax, Joint Venture/Silicon Valley Network)

The long-term trend for Santa Clara County•• economy is expaeted lo become more etable, with slow job growth recovery from 2005 through 2015. Highest job growth is forecast for health, education, and recre11tion:al job sectors. A significant imbalance between jobs and housing is expedad to keep housing cost among the highest in the nation, with a median home price in spring 2005 of $705,000. The total assessed value, net of homeowner exemption vale, of Santa Clara County in FY 2004105 increased B percent to $240.1 billion. (Source: Silicon Valley 2006 Index, Joint Venture/Silicon V11lley Network)

Long-tem1 planning. During FY QQ/00 th• Board implemented a new form of board governance centering upa, their role as policy makers establishing de1ired outcomes in key areas of responsibility. The Board focused its attention on policy setting in the areas of providin9 a reliable supply of healthy and clean drinking water: adequate water supply; groundwater basin protection; recycling; flood protection; enhanced qu1lily of life; watersheds and stream natural resource protection; and open space. Among those policies are provision& that define the Board's expectations and results (Ends Policiaa) for the above areas that emphaaiz:e public health and safety, waler supply, protection from flooding, andquallty of life in Santa Clara County.

Aligning resources and staff to carry out the Board Enda policies during a time of financial constraint requires vision and commitment. As an intemal response lo economic challenge&, and lo maintain excellent service with fewer resources, the CEO launched a new vision in the fall of 2004: "Getting Cleaner, Greener and Leaner". Designed to lead toward greater efficiency, Aligning resources and staff to carry out the Board Ends policies during a lime of financial constraint requires vision and commitment. Aa an internal response to economic challenges, and to maintain excellent service with fewer resources, the CEO launched a new vision in the fall of 2004: "Getting Cleaner, Greener end Leaner". Designed ta lead toward greater efficiency, accountability and environmental responsibility in all District activities, the vision Is crucial in light of business costs, local economic pressures and impacls from the state budget deficit.

The District's largest revenue source is the sale of water, acting as a wholesaler for numerous water supply companies in Santa Clara County. Water sales for FY 2006/06 were $108 million. Water revenue budgeted for FY 2006107 are based on the water rates for the North County and South County zones of benefit as recommended to the District's Board of Directors. An approximat1' increase of 3.6"/o in water rates in the North County and 7% increase in the South County have been estimated. Revenue projections assume a water demand volume of 299,000 acre-feet.

The Five-Year Capital Improvement Plan (CIP) includes a total of 91 capital projects with an estimated cost of over $1.7 billion. Theae include projecte that began implementation prior to the 5-year period of the new CIP. Of the total estimated cost, $396 million is expected to be funded from various partners and the $1.3 tJillion balance from the District's various revenue sources. This year's CIP process identified new funding requests ol $54 million.

The District's Flood Protection and Stream Stewardship Program take a watershed-based approach to nature resources management. Its cornerstone, the 15-year Clean, Sale, Creeks and Natural Flood Proteclion Plan, was developed through a dynamic, interactive, community based process and was approvlld by county voters in November 2000, along with a special tax to help fund the plan's projects. The 15-year pay-as-you-go plan is a major component of the District's overall flood protection and stream stewardship plan. For FY 2006/07, the proposed budgot includes $19.0 million for thie capital program.

Relevant Financial Policies

End of Year Balances

The District policies for end-of-year balance re-appropriations are as follow!:

• A.ny remaining appropriation balances at the end of the fiscal year lor capital projects are annually re-appropriated for continued used in those same projects in the following fiscal year. These amounts ~hall be consistent with the planned expenditure schedule identified in the 5-year Cl P; • A.ny variances at the end of the current fiscal year in Operating Reserves, Contingent Liability Reserves, Capital Replacement Reserves, and Future Years· Capital Reserves from those estimated in the budget not otherwise re-appropriated above shall result in corresponding adjustments to the estimated roscrve appropriations in accordance with District Reserve policy. · Caah lll11n11gem11nt

The D1stnct's adopted investment policy adheres to the provisions of the California Government Code and. in accordance with the code, is rsviewed and revised as appropriate. Among the primary objectives stated in the policy are the maintenance of safety, liquidity, and yield { in that specific order).

Dlllbt Management

The District haa restricted long-term borrowing to the funding of capital improvement projects and equipment. The term of the debt does not exceed the eKpected useful life of the assets. The District also maintains a commercial paper program for funding the Water Utility capital projects. Commercial paper will be used during the early phases of construction: long-term debt, matching the useful life ol Ille asset, will !hen be issued once the project is complete.

R•••r¥• R•quir• m• nt•

The District's financial policies eatablish the levels at which reserves shall be maintained. District reserve policies address the need for both operating and capital reserves, and funding of contingency and future liabilities.

Awards and Acknowledgement•

The Governmental Finance Oflicers Association of the United Stl!ltes and Canada (GFOA) awarded a CAFR for Excellence in Financial Reporting lo Santa Clara \/allay Water District for its comprehensive annual financial report for the fiscal year ended June 30, 2005. This is the eighth consecutive year that lhe District has received !his prestigious award. In order to be awarded a CAFA Certificate of Achievement, the District must publish an easily readable and elficienlly or1:1anized compreher"l!live annual financial report. This raport must sali!!ily both GAAP and applicable legal requirements.

A Certificate of Achievement is valid for a period ol one year only. We believe that our current CAFR Report continues to meal the Certificate of Achievement Program's requirements and we are submitting it to the GFOA to determine its eligibility for another ceirtificate.

The preparation of this CAFR represents the culmination of months of concerted team effort by diverse Drslricl stall, including learn members from General Accounting, Financial Services, Public Information, Risk Management, Information Systems Services. Information Technology, Businees Support Se1Viceg, and District Counsel. Many team members demonstrated e high degree of personal dedication and determination in producing this exemplary document.

In addition, special thanks to District staff in atl groups fm responding so polSitively to Ille requests for detailed information that accompanies each arir1ual audit. The role ol ~aze & Associates is also acknowledged for the significant technical contribution and unlimited patience. Special thank, goet to Najon Chu, Financial Service, Unit Man•11•r. the following A000unting staff: Robert Edris, Guy Canha, F•my Ch• n, Tri11h11 Cheung, Christine Hem• ndmz, Letici• Rocha, and Nancy Tien; with the assistance of the Budg•t Unit •t• ff: Ron Mayorga and Ch.,..l•i Yao for their talent and dedication in preparing thi• financial r&port.

Finally, we with to express our sincere IIIRJl'8Ciation to the District's Board of Directors and m• n• g•m•nt for providing policy dir• ction arid a firm foundation of 1upport for pur,uit of excellence in all realms of profeseional •ndeavons.

GllLA., iln P11t11r Ng, {I Olga Martin Slllel•, Chief Financial Officer Chief Adminillrative Officer

Star1ey M. WIiiiam•, Chief Executive Officer

1 Santa Clara Valley Water District Board of Directora & Executive Management

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g SANTA CLARA VALLEY WATER DISTRICT DIRECTORY OF OFFICIALS 2005-2006

BOARD OF DIRECTORS

Lany Wilson, Chair District 4

Tony Eatremera, Vice Chair Al Large

RoNmary C. Kamei Diniet 1

Jo&Judg9 Diatrict2

Richard P. Santos Dislrlct3

Gregory A. Zlotnick Dislrict5

Sig Sanchez At Large Certificate of Achievement for Excellence in Financial Reporting Presented to Santa Clara Valley Water District, California

For its Comprehensive Annual Financial Rqlort for the Fiscal Y 1:11r Ended Jwie 30, 2005

A C•nificall: of Achi•vancnt wr &ccllcncc ill Pitm>cial Roportinc ia prcacntcd by the Govm:n:mcnt Finance Ollleen A:ISOClltion of tho United Slltel and Clllllda to eovernment I.IDWI ttd pnbbe ~layee reliremo111 J)'SICl?llli .,11,o,e C011'4'tebe1lli:ve Annllll fieancial rq,om (CAFR.s) achieve the hi&),01 ,!Qldo.rdil ia &Overnnillli! ~eountilla md financial reportin1.

President ~/.~ Executive Director

JO

& ASSOCIATES ACCOUNTANCYCORPORADON 3A78 Buskir!< Ave. - Suit

We have audited the basic financial statements of !he governmental aetivitie!I, bmineu-type activitie<, each mljor fond :md !he aggregate n!maining fund infornia1ion of !he S:m!l! Clw:a Valley Water District, as of and for the year ended June 30, 2006, which oolloctivoly compri•o !he District's basic financial statements as listed in the Table of Conlon ls. These financial statements are tho re•pon,ibility of the District's management. Our responsibility Is to express an opll1ion oo these financial statements based an our audit.

We conducled Ollr audit in accordance with ienenJly accepted auditing stllndards in lhe United Slllles of America and me standards far financial audits con111Illod in Govemme11I ,hdling S/andard,, iss11ed by lhe Comptroller General of the United Siates. Those standards require that we plan 11Dd pcrfonn the audit to obtain reasonable assurance as to whether the financial sllllements are free of material misstatement An audit includes ex:amining on a test basis evidence supporting the amounts and disclosures in 1he fin11Dci1l sllltements. An audit also includes MScssini tbe 11':COuntin, principles used and sijp1itlcant e!liimates made by m.anagement, as well as evaluating the overall finl!!'lcial statement presenil!tion. We believe that our audit provides< a reasonable basis fur our opinion.

In our opinion, the finmeial stlllements referred to above prc•cnt fairly, in all materi11l re,ipect,, the n!spective financial po,ition of !he governmental activitie'i, the busino.,.•typc activities, c,ch major fund. 11.11d lhe aggrog•l• remaining fund infurmotion of the Sanlll Clara Valley Waler District, California as of Jime 30, 2006 and the respective change, in the financial po

In accordance with Government Auditing SW!dards, we have also issued rq,orts dated November 3, 2006 on our consideration of the District's internal control structure and on its compliance with lllws and regulations.

Management's Discussion and Analysis l!lld the Schedule of Revenui,s, Expendillres and ChMiiei in Fund Balances Budget and Actual on Budget!ry Basis are not required p~ of the basic finllncia! staremenls but are ~uppl-•ntary infl:>nnation requim:I b)I !he Governmental Accounting Stllldards Board. We have applied certain limited procedures, which consisted principally of inquirios of managcmenl reg;,.rding the methods of measurement and presentation of the required supplementary info11:m11ion. HOWl'ver, we did no! audil this information and express no opinion on it.

Our audit was conducted for !he purpose of fanning opinions on the fimmcial stateme111s tbat collectively comprise the basic f1mmcial statements. The Combining and Individual Fund Swements and Schedules lil!led in the Table of Contents are presented for purpo,e, of :additional malysis and are not a require:! part of the ba,ic financial statements. Toi, information has been ,uijected to the auditin& procedures applied iA the audit of the basic fiITilllcial s1atements and, in our opinion, is fairly stated in all material respecB in relation to the basic financial statements taken as a whole.

The Statistical ,md lntmduotory Sec1io11S were 110! audited by us and we express no opinion on them. 7"7 '?'~CL4- November 3, 20~

ll Prohnuion.al Corpor•lion 11

Management's Discussion and Analysis

Our discussion end analysis of the Santa Clara Valley Water District's financial performance provides an owrview of the District's financial activities for the fiscal year ended June 30, 2006. This information is presented m conjunction with !he audited financial statements that follow this section,

Financial Hlghlighte

• The total net assets of the District exceeded its liabilities by $1,504.7 million. Of this amount, $352.6 million (unrestricted net assets) may be used to meet the District's ongoing ooligations to citizens and creditors. • The District's net assets increased by $17.8 million during the current fiscal year. The net assets of our governmental activities increased by $19.9 million and net assets of our business-type activity decreased by $2.0 million. • As of the close of the current fiscal year, the District's governmental funds reported combined ending fund balances of $218.0 million, a decrease of $27.0 million in comparison with the prior year fund balances of $245.0 million, • At the end of the current fiscal year, fund balance for the general fund was $35.9 million, a decrease of $0.9 million from the prior fiscal year. Unreserved, designated fund balance was $32.1 million (89.8 p,ircent) ol the total fund balance and increased by $1.0 million during the fiscal year.

Overview of the Flnanclal Stalainent•

The financial statements presented herein include an of the activities of the District and its component units using the integrated approach as prescribed by GASB Statement No. 34.

Government-wide financial etatamante. The government-wide financial statements present the financial picture of the District from the economic resources measurement focus using the accrual basis of accounting.

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

The statement of activities presents information showing how the District's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardl11e11 ol lhe timing of related cash flows. Thus, revenues and expense& are reported in this statement for some items that will only result in cai,h flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leaw),

13 Both of the government-wide financial statements distinguished functions of the District that are principally supported by laxes and intergovernmental revenues (governments/ sctivities) from other Junctions that are intended to recover all or a significant portion of their costs through user fees and charges ( bu911't6S$-typ/J activity). The governmental activities of the District include general government, watershed management, debt service and construction funding. The business-type activity includes the water utility operation.

The government-wide financial statements include not only the District itseH (known as the primary government), but also a legally separate Senta Clara Valley Water District Public Facilities Financing Corporation (the Corporation) for which the District is financially accountable. Financial information for this blended component uni! is reported as ii ii were part of the primary government because its sole purpose is lo provide financing to the District under the debt issuance document& of the District. Additional information on this legally separate entity can be found in Note 1(b) in the notes to basic financial statements.

Fund flnanclal statements. A Jund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The District, like other special districts, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. The funds of the District sre segregated into three categories: governmental funda, proprietary funds, and fiduciary funds.

Gol'll'ITlmtnttl tuncn. The Districrs basic seMces are reported in governmental funds, which focus on how money flows into and out of those funds and the balances left at year-end that are available for spending. These funds are reported using the modified accrual basis of accounting, which measures cash and other financial assets that can readily be converted to cash. The governmental fund statements provide a detailed short-term view of the Di$trict'11 general government operations and the basic services it provides. Governmental fund information helps determine whether there are more or fewer financial resources that can be spent in the near future lo finance the District's projects.

Govemmental func/6 are used to account lor essentially the same functions reported as go'll!lmm(lntal activities in the government-wide financial statements. However, unlike the government-wk:le financial statements. governmental fund statements focus on near­ term inflows and outflows of sp9fldable resources, as welt as on balances of spt!Hldable resources available at the end of the fiscal year. A reconciliation of both the governmental funds balance sheet and the gowmmental funds statement of revenues, exp,mditures, and changes in fund balances are provided lo lacililale this comparison between gavemmental tunds and governmental activities.

Proprllttary fund/I. The Ds1rict maintains two-different types of proprietary funds: enterprise funds and internal service fund5. Proprietary fuoos are reported using the accrual basis ol accounting. Enterprise funds are used to report lhe same functions presenh,d as busineae-type activity in the government-wide financial statements ~t provide more detail and additional information. The District uses an enterprise fund to

14 account for its water utility operations. Internal service funds are an accounting device used to accumulate and allocate costs internally among the District's various functions. The District uses internal service funds to account for its fleet of vehicles end computer equipment, and for its risk management activities. The internal service funds have been included within governmental activities in !he government-wide financial statements.

FldJJcillry fundtl. Fiduciary lunds are used to account for resources held for the benefit of parties outside the District. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the District's own programs.

Note• to baaic financial statements. The notes provide additional information that is eseenlial to a full undamlanding al the data provided in the government-wide and fund financial statements. The notes to basic financial statements can be found on pages 41- 74 of this report.

Government-wide Financial Analyala

Net assets may serve over time as a useful indicator of a government's financial position. In the case of the District, assets exceeded liabilities by $1,504.7 million at the end of the current fiscal year.

Santa Clara Valley Waler District's Net Asset" (Dollars in Thousands)

Govammenlal Aciivil.ios ~ 1otal 2006 2005 2006 2005 2006 2005 Currant and other ~!$ $ 200,249 $ 316.5:llJ $ 131,146 $ 157,532 $ 421.395 $ 474,062 CE!ptal assets ~ ~ ~ 552,284 l 434 829 ~

tu1,:t!~Js ~ , 1•e 30I! 69519'l5 ~ ~ l 858 121 Currant i:iatn{itfes 2S,7'9l 24,939 71,661 62.289 95,472 67,2:28 Long,OOm1 lia'mlihos outstarwing 111!!9711 100 750 il6 O:ll.l B7272 ~ 284 022 T olal liabiHties 213 767 221 889 137 7t1 149 5181 35'1418 ~ Net assets; hwestmen:t in capital ass0cts. nm: or related debt 700,201 664,7:l5 412,4511 397,271 1, iH!,659 1,oo:1,006 Aas!ricil!d 12,211 rn,661 21,256 22,939 33,473 33,600 Unrestricted ~~ 124,540 ~ i1AA 14 1,1 $ IMIEl.4112 S Q28,B1~ S 5511,25-4 ~~~

By far the largest portion of the District's net assets (74.3 percent) reflects its investment in capital assets (e.g., land, buildings, infrastructure, machinery and equipment), lees any related debt used to acquire those assets still outstanding. The District uses these capital assets to provide services to citizens and consumers; consequently, these assets are not available for future spending. Although the District'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.

Investment in capital assets, net of related debt increased by $-41.5 million in the governmental activities. Major capital projects attributing to the increase include the

15 Guadalupe River reaches of $8.0 million, $11.6 million on Iha Lower Silver Creek, and $8.8 million from the Clean, sate Creeks and Nall.Ire! Flood Protection Program that was approved witi passage of Measure Bin November 2000. The increase of $15.2 million rn the business-type activity was primarily due to ongoing major water treatment plant improvements.

The balance of unreetricled net assets may be ueed 10 meet the District's ongoing obligations to citizens, customers, end creditors. The Dislrict's unrestricted net assets decreased by 9.9 peroent, or $38.7 million, during the current year. The dacmase came primarily from the e)(penditures on capital projecls.

Santa Clara Valley Water Olltl'ict'1 Changes in Net A1aete (Dollen; in Thiltmmds)

Gm1,immemal Bosintu•type ,'d,tiel N!My Tot1I 200II 2006 2006 2005 2006 2006 Revenues: Progran revenues: Charges for '""vices $ $ $ 108,00!! $ 104,631 $ 108,009 $ 104.831 Opmitng grant& and contnbulioos 1,2119 2,039 1,269 2,039 Caplll grant• a!ld contnool,on• 24,613 19,135 1.407 313 26,020 19,«e General rev©nues: Property taxes 50,923 46,396 19.338 20,005 70,261 oo.481 Investment earning& 6,615 9,188 3,01!6 3,614 9,701 12,002 MiscellaJleoos ___ml..~~~ 5,3!1(1 5, 16'4 Total revenues 8-4,288 77 127 136,332 133,638 220,620 ~ Expen9es; General gov@mmieot 7,149 4,il'l!lg~orm deb! 9.344 11,735 9,344 1,135 wa1er enterprise ~ ~ 1378'48 ~ Total e,panses 64,8119 82,lCij 137,114& 11e,340 202,H5 118,109 increase in nm assem lll31ore transfers 19.:)119 ~ 18,298 17,375 ~ Tr;U1sfers 487 ! 2l 3!17 13 gn 181!85 17 875 !ncmase in net asets 19,B7e i I 1I ~ 1,481:1,871 NM aS!SelS, bolgimilg ~ 912,&45 560,255 541.570 ~ S 1,6,871 ~el asselll, endl!l9 S 9411,4112 $ 92e,8!8 $ ~51!1,2~ s seo,2es $ t 1504,?

16 Governmental activities. Governmental activities increased the District's net assets by $19.9 million, an increase ot 2.1 percent over fiscal year 2005. Key elements ot this increase are as follows:

• Capital grants and contributions increased by $5.5 million or 28.6 percent. The increase represents additional reimbursements from the State of California Department of Water Resources during the fiscal year. • Property taxes increased by $4.5 million or 9.8 percent. Increased property tax collections is due to an improving economy in Santa Clara County and increased housing activity. • Investment income decreased by $2.6 million or 28.0 percent. The District received slightly increased investment income from its portfolio but had a negative impact from the GASB 31 tair market value adjustment because of increasing interest rates during the year. • Net general gowrnment expenses increased by $2.3 million or 47.5 percent. The increase is due lo increased depreciation cost, an increased share of the internal servi~ cost, and a lower overhead reimbursement from operations. • Interest on long-lerm debt decreased by $2.4 million or 20.4 percent In addition lo a reducing outstanding debt service amount, the decrease represents the effect of the recent refunding end retirement of outstanding debt from prior fiscal years.

Revenues by Sources • Gov.-nmental Activities (FY 05/06 & FY 04105)

6!UJOO py QSl(lo I 50.{ffi • Cpy 04/05 I ,!i 4-0,000 z I 30,(JOO § :s 20,000 W.i~IU

~~I grants Pmp()fty taxas •nd oontri!::HJl!ans

17 unratrici:00 !nVEi:5tnl~nt eiamITTgs 8%

18 Bu•in•• 11-typ• activity. Business-type activity decreased !he District's net assets by $2.0 million, a decrease of 0.4 percent compared to the previous fiscal year. Key elements are as follows.

" Charges for servicE!S increased by $3.2 million or 3.0 percent. The increase represents a rise in water rates while water volume demand has remained constant. " C11pllal grants and cootributions increaeed by $1.1 million or 3-49.5 percent. The increase represents additional funding from the State of California Department of Water Re!IOurces. • Water enterprise expen5ea increased by $22.6 million or 19.5%. The incre111e is due to increase cost al source of water supply and depreciation expense.

Rwenue• by Sources• Bullin-• 11 Activity (FY 05,IIMS & FY IM/05)

:,:1/r:t: I /CFrt~t:~ .

..... ,,.,.

\.1' ..., rn -

19 Revenues by Source - Buainen Activity (FY OIIIOI)

QPlraWng gl'llnl• '"' mlilc,~•~"' ln._.t....,..,I Nmlngl 2%

Fln11ncl11I An1lyal1 of the Dlarlct'• Fund•

The District uses fund accounting to ensure and demonatr11te compliance with finance­ related legal requirements.

Gov.rnmental func:111. The focus of the Diatrict'a govemmenlal funds is to provide informstion on near-tern, inflows, outllowa, and b11l11noes of apendable resources. h d the end of the fiscal year 2005106, the District's go\19mmental funds reported combined ending fund balancH of $218.0 milllon, a doc;rease of $27.0 million In comparleon with the prior year. Approximately 74.0 percent of the total amount ($161.4 million) constitutes unreserved fund balance but have been de&lgnated for specific purpoeea. The remainder of fund balance is reserved to indicate that it is not av•ieble for new apending because it has already been committed; 1l to pay dflbt eervie& ($15.0 million); 2) restricted to use for specified capital projectg ($14.6 million); 3) reserved for encumbrancee ($:26.2 million); or 4) other restricted purposed ($0.8 miUion).

The General Fund ie lhe chief operating fund of the District aupporting all administrative and •trategic support eervices costs for lhe organization. It accounts for all financial resources except those required to be accounted for in another fund and is supported primarily by oY&rhead reimbuniements from other luncll. At the end of the current fiec:al year, the re1erved and unreserved fund balance of the General Fund was $35.9 million.

20 Property taxes increased by $0.3 million or 19.4%. tn FY 2004/05, a one-time grant was received by the District which did not occur in FY 2005/06, so reimburBement of capital cost decreased by $0.9 million during the current fiscal year. Net operating expendituree were lower during the current fiscal year but the intra-district overhead reimbursement charge was reduced by $5.6 million resulting in a net increase in reported operating expenditurl!!IS of $1.4 million.

The special revenue funds are used to account for specific revenue sources for which expenditures are restricted by law or regulation to finance particular watershed functions or activities of the District. The available fund balances decreased during the current m,caf year by $22.9 million or 13.0 percent. The main deceases in fund balances occurred in the Guedelupe and Coyote watershed while the Clean, Sale Creeks, end Natural Rood Protection Program increased.

During the current year, property tax receipts increased by $4.2 million or 9.2 percent. Investment income decreased by $1.3 million or 2"4.4 percent, mainly due to the GASB 31 fair market valua adjuetment which reql.ires that the District records any dlflerenoes between the fair market value and book value of the investment portfolio, as of June 30, 2006, as an adjustment to interest income. Because the Diatrict holda its investments to maturity, the District never realizes any gains or lossei, from flese adjustments. This annual adjustment is based upon the individual fund's cash balance, the Lower Peninsula Watershed ($200,000) and Coyote Watersheds ($209,000), and the Clean, Safe Creek, and Natural Flood Protection Program ($797,000) incurred the major portion of the aquatment.

Operating and operations project cost remained stable during the fiscal year, dropping $2. 7 million or 6.6 percent. Capital improvement project cost& decreased by $30.3 million or 38.0 percent. Major decreases in capital improl/9ment spending occurred in the Lower Peninsula Water ($6.6 million), Guadalupe Watershed ($16.6 million) and the Coyote Walershed ($6.4 million).

At the end of the current fiscal year, reser11ed and unreserved fund balance of the special reve11uefunds was $152.5 million.

The debt service fund hes a total fu11d balance of $15.0 million, all of which is reserved for the payment of debt service. The net fund balanC$ increaeed In the debt ssvice fund by $0. 7 million due to increased amounts required in the District reserve and rebate accounts.

The capital projects fund is used to account for resources used for the acquisition or construction of major capital projects within tha governmental fund twies. It has total fund balance of $14.0 million all of which is reserved for the payment of capita.I related e:a:pendituree. The net fund balance decreaS$d in the capital projects fund by $4.0 million primarily due to the transfers out to the special revenue funda.

21 Proprietary funds. The District's proprietary funds provide the same type of inlonnation found in the government-wide financial statements, but in more detail.

En,.rprl•• fund. The water enterprise is a fund that accounts for oper11.tions in a manner ~imilar to a private business enterprise. Operations are accounted for in such a manner as to show net income or loss and the fund is intended to be entirely or preoominantly sell &upported from user chargi,s.

Nat assets of the Water Enterprise fund at the end of ttte fiscal year was $561 ,o million, a decrease of $0.4 million from fiscal year 200~05. Investment in capital assets, net of related debt increased by $15.2 million, restricted net assets decreased by $L7 million, unrestricted net assets decreased by $13.9 million. Charges for servicee increased by 3.2 million or 3.0 percent. Operating expenses increased by $20.0 million or 18.0 percent and non-operating expenses increased by $1 .3 million or 35.0 percent. The W11ter Enterprise fund's portion of the internal &&Nice funds consolidation is $1.2 million. Factors concerning the finances of the fund have already been addressed in th11 discussion of 1he Distric:t'a busineas-type actiYity.

Internal S•nitc. Fut>dll. The District has two internal service funds, the Equipment Fund and the Risk t.11an11.g11ment Food. Revenue11 to the funds are generated from fees charged to the District C4Jerating programs for services provided.

The Equipment Fund charges replacement and maintenance costs to all operations, operating, and capital projects baBed on equipment assignment or hourly usage of equipment on projects. Operating revenues in the Equipment Fund for the fiscal year ended June 30, 2006 decreased by $1.9 million or 31.9 percent. The amount required to fund the replacement and maintenance cost of the Equipment Fund is determined during the budget process and varies yearly depending upon need. Equi1X11ent maintenance costs and depreciation elq)en99s decreaeed by $0. 7 million or 10.4 percent during the year. The reduction in operating expense raflect11 a decreased replacement of equipment. Non-operating revenues dacr11a11ed by $46 thou11and due to decreased investment income.

The Risk Management Fund charges premiums based on llltpoeure levels by project for liability, property, worker's compensatron and self-insurance costs. Revenues required to properly fund the Risk Management Fund are detennined during !he budget process end a reduction in sell-insurance service charges of $1 .s millions was decided upon as the proper funding level. Operating expense decreased by $423 thousand and is a combination of lower administrative and general cost but increased insurance coat due to an actuarial increase in insurance claims payable.

General Fund Budgetery Hlghllght1

Co~aring the FY 2005/06 original budget (or adopted) Oenaral Fund amount of $47.2 million to the final budget amount of $65.3 million shows a net inoraase of $18.1 million. Included with the original budget is $13.5 million of prior FY 200'4/05 capital projects approved lo carry forward into FY 2006'06 and $4.0 million in committed purchase orders from the prior June 30 balance, also carried forward. Thereby, bringing the beginning budget balance equal to $65.3 million.

22 .171.

Comparing the beginning budget of $6-4.7 million to the final budget of $65.3 million shows the G811eral Fund supplementary budgetary appropriations totaling $659,000, or 1.0 pGrcent 1or the liecal year.

The following are the components of the supplemental appropriations:

• $100,000 for the FY 2005/06 collectlve bargaining praceas; • $93,000 for repair and upgrade of the Board Roam audloNisual system; • $401,000 for the purchase of the county-wide photography and contour elevation data; • $65,000 !or the comprehensive performance audit.

The District had 57 unfilled positions ( district-wide) in FY 2005/0S which resulted in a $1.8 million salary savings to the general fund. The District became a member of the Power and Water Resources snd Pooling Authority for the purchase of electrical power. It resulted in a cost aevings to the District of over S600,000 end will be an on-going savings into FY 2006107. A savings of $300,000 occurred because a Waterahad Stewardship Orenl Program was not administered during the fi9Cal year.

Capital improvement projects are budgeted at their full project costs end are not a~pected to be 1p1mt in a single year, therefore an anal\llilil of variances would not be practical.

Prior year operating and operation11 projects enoumbranoee are not included in the Schedule of Revenue11, Expenditures and Change in Fund Balances - Budget and Actual on a Budgelary Basis which begins on page 78. The total general fund budget of $65.3 million ha1 been reduced by $-4.0 million equaling $61.3 million for the prior y•r operating and operations projects enoumbrance1 for the budg11tary schedules.

C• pit•I A• 1ets

The District's inwsbllent in capital assets for its governmental and business-type activities as of June 30, 2006, amounts to $1,435 million (net of accumulated depreciation}. The investment in capital assets includes land, buildings, structures and improvements (which includes the llood control improvement), machinery and equipment. During FY 2005/06 the total increase in the District's investment in capital assets for the current year was 3.7 percent (a 4.6 percent ncrease for governmental activities and a 2.3 percent incraese for busineee-type activity).

23 Major capital projects in progre98 during the current fiecal year include the following:

• Pond A4 Tidal Watland Site $2,100,000 • Coyote 10A Walland Conv•rsion 1,100,000 • Guadalupe river UPRR to 1880 8,000,000 • Lower Silver Creek Reach 3 7,000,000 • Lower Sliver Creek (LERRDS) 4,400,000 • Calabazaa Creek Miller to Wardell 1,100,000 • Guadalupe River Reach 6 2,000,000 • Coyote Creek Montague/Hwy 280 1,900,000 • FWTP Treated Water Improvements 6,300,000 • STWTP Treated Water lmprovemertill 4,200,000 • FWTP Treated Water Improvements 2,700,000

SlinUI CIiia Vlllley w111t.. , Dlllllril:l'I C1pllllll - (n111 Ill depreciation) (Dollara 1n Thousaf'il:B)

(lQVs,nmental Bulln--typa e;tt:clt1•• IClbo:b: IWII 2Wlti 2!1'15 i:QQ!i 2005 2D!lfi 21lllfi Land $108, 1111! $1 (15,786 $17,0511 S17,0511 $123,22~ $122,!M~ Contracl water and storaoo riahts 55,160 56,205 55,196 56,205 Building" 32,595 33,038 23 23 32,608 33,001 Slruotures <1nd imorvvements 370,341! 352,428 277,093 260,916 647,441 613,344 Equipment 14,949 11,899 12,288 7,494 27,237 19,393 ConwucUon in r,mJQF8$S li:iac.'l 32!1 ll24 200 lZll 21!l 511Z 549,133 ~92.ll Tptal &IZQ QJij lil~l ZZ~ eAS1Ja ,~~ar.1 ll did ~iii ll iWai~st

Additional infonnetion on the District's capital asset6 can be found in note 7 which begins on page 57 of this report.

24 Debt Admlnlltretion

Al the end of the current fiscal year, the District had total debt outstanding of $256 million. Thia Diatrict's long-term obligations outstanding as of June 30, 2006 consisted of the following:

Santa Clara Valley Water 01.trlot'• Out•tandlng Oblgetlon• (Oollo111 in Thw""'1dS) Govsmml!lllal BusineSll·lypo ociivilios _J!!l!!!l!l:.._ To•I 2006 2005 -~ ;l(IQ' i008 2005 Generali obligation: bonds $ $ $ 3,205 $ 4,565 t 3,200 $ 4,~5 Certificates of pmtication 180,760 155,140 t!lll,700 !Ill!, 140 Revcem,1e bondi 54,313 55,379 54,313 55,379 Complltns.atad absenees 11,555 I 1,003 l l,555 11,0ll:l Sernltroplc water banking 8,512 27,328 8,512 27,328 Dtferrad amount oo refunding (5,007) (6. lWJ (5,ffl7) (6,199) l'"'m!um M rolund•d delJI --2J!il.._ML __.,;_ ---~ ~ Tola! .!..l!W2. ~ ..Ll!.lll!1.. ..I..Jl:a. ~ .u=&

The District's total obligations decreased by $28.0 million during the fiacal year. In FY 2006 $18.6 million was paid against the Samitropic Water Banking debt in ord« D guarantee our rights to the storage facility through the year 2035. All other decreases in obligations was from the normal repayment d principal on existing outatsnding debt.

The rating of the District's certificates of participation series from Moody's rangee from Aaa to Aa2 and from Standard & Pam's from AAA to AA-, The revenue bonds of the Water Enterprise Fund have a bond rating from Moody's ranging from Aa to Aa3 and from Standard & Poor'a from AA ta AA-.

Additional information on the District's long-tenn debt can be found in note B on pages 59-63 of this report.

Economic Factors and Next Year'• Budget• and Rate•

The Annual Budget outlines the staff's plan lo carry out the District's mission, • .•• a healthy, sale end enhanced quality of living in Santa Clara County through watershed stewardship and comprehensive management of water resources in a practical, cost­ effective and an11ironmentelly sensitive matter."

Guiding management and staff in carrying out the Board Enda pollclee Is the District's vision, Getting Cleaner, Gr9sner, and Leaner.

• Cleaner: meeting increaaing stringent regulatory requirements for drinking watar quality and environmental protection. • Greener: producing a net positive impact on the environment. • Leander: improving processee to do more with lass. focus on collaboration and process improvamen~.

25 In considering the District's budget for fiscal year 2006107 the Board of Directors and management used the follo'll'l'ing e11timate11:

" As more flood protection projects are completed and transitioned into operations, environmental monitoring cost will increase proportionally. Expected cost will increase by $2.4 million over FY 2005/08. " Interest-based bargaining is a new proceas being used at the District to negotiate the labor agreements between management and employeee bargaining units. lt is an open inronna:tion-eharing procen which allows parties to negotiate together at a global able and 11upports tie District's emphasis on collaboration. • The Dietricl is adopting ,ow caee· rates in FY 2006/07, representing the low end of the range for possible rate increases. Under this scenario, rates will increase between approximately 52 and 88 cents per monlh per houeehold. " Even though real estate costs are some of the higheat in Santa Clara County, the District must acquire land for required mitigation on of construction impacts from its flood protection and water supply projects. For FY 2006l07, $12.4 miUlon is budgeted for land acquisition while $25.3 million is budgeted for construction. • While there has been rec;ent discussion in the state legislature for new flood subY&ntiona and related funding for critical flood control projects, no amounts have been budgeted, given the uncertainty for p&11sage. • Oler the past two years, ad valorem property taxes were impacted by a state property tax shift that reallocated $51.0 million from the District to school districts. II is expected that $25.5 million will be restored in FY 2006/07, in addition to the normal net increase expected from annual assessment valuation growth. • I nter1111t earnings are projected to increase by 7 .4 peroent.

Requeet• for Information

This financial report is designed to prollide cit!zen11, taxpayers, oulltomers, invelltors, and credilOrs, with a general overview of the District's finances and to demonstrate the District's accountability for the money it receilles. If you have any questions about this report or need any addltional inlonnation, contact the General Accounting Unit at 5750 Almaden Expressway, San Jose, CA 95123, or phone (-408) 265-2600.

26 BASIC FINANCIAL STATEMENTS SANTA CLARA VALLEY WATER DISTRICT Statement cf Net Aaell J1me 30, 2016 (Dollam in ThllUIIIldJ)

Go11ormnollllll B111m1--type Aciivitio• Acdvity Tollll ASSETS Ca&h ond invos-.i (NOie 3) s :l:07Jll9 $ 108,1"1 s 316,089 Rosirictlld "'"" ud m'"'111mlllllll (Noa, 3) 19,650 ,.1,2 34,802 Receivables (ne1): Accolll!IS 552 lS,012 1:5,564 Interest 3,074 21 3,09:5 Taxes 330 132 462 Duo from other go..,,mmi:nts (Nole 4) 42,343 41,343 Depolil! and olher MSOIS 2,375 5,495 7,870 l111ellllll balm= 2,816 (l,816) Deferred cllarp, 1,170 1,170 C•pilll ru11re1S [Nm 7): Contract water mid •lln&I' ripll, m:t s,.186 :5:5,186 Noodeprec:itbkl .. ,2.123 220,229 672,357 DC?m:iable, ne! 417,88:l 289,-IOI 707,2116 Tola! rui,ots 1,160,259 695,965 1,856,224 LIAlllLITIES Accounts p1y1ble 5,266 1:5,089 20,35:5 Accrued li1bili1i"" 2,309 11.162 13,471 Commercial pllper, ""I of di!!<:ounl (Noll! Ila) 39,657 39,657 Dcpo1i11 payable 2,978 S,288 8,266 Accrued interest paJlblc 3,684 485 4,169 Claims payable (Noll> 13) 9,554 9,SS4 Noticurrent liabilities (NOie 8): Doo wi!hill one year 10,075 1,692 11,767 Duo ir. more thon

28 8111.wmelll of Aelivili"11 for lhe Year E!lded Jillie 2006 mo'llanin

Gmml Wuonllw Debi TIMI T<>lill

10d $ $ 9,344 s S 137,1146 $ 202,745 revenues: for services gTill'.IIS l!l'.ld oomrlhl.l!ioll!I 1,2<19 J!Til!llll md contribuliollli 26,020 NM program r•vemie (67,447} Gtll!md rev•:mia: mos (Note9J 50,923 Um:eslrii::ted inves!llrenl 6,!lil!li 3,0l!!li 9,102 Mi..,.IIMOllll!l Tmmrm

TQl!il NWfflllffliii ad tnlnd'en 1nne1- N4!1-, 926,616 560,2.SS 1,486,871 N•t -•ts, ud

29 SANT A CLARA VALLEY WATER DISTRlCT Barance Sheet Govemmenlal Fwld! June 30, 21))6 (Dollars in ThOUll!lds) Lnwer Wat.el"llhed & Pel:llmtu Wfflll Vdoy Cleu,ral SueNll Stowanl Wati,rshed W&1or,bc,d ASSETS Cash and imrtstmoms (Note 3) $ 3,,035 $ 17,449 1,,.c95 s 6,612 Restt:ict

LIAJIILITIES AND FUND BALANCES Llabllltles: ACCOlll'.lll! payable s 1,3-41> $ 187 s 85 s 00 Accrued liabilitie, 1,028 3 5 6 Dcpo1i1S p•yabh, 9 500 39 67 Due to other funds (Nole 14) 667 Deferred relfellue 14 Total liabilities 2,«x> 1,3,7 129 133

FuE1d blllw,cm (NOiie 10): Rese,:ved for: Encumbr:m= 3,742 900 3,379 909 Res1ricred pw:poses Debi service Del:J1 ~de u...... e"NI, dfllllJDliled r«: Specific pw;,osc 3 Ope~ colllqencies :l.11 104 110 98 C001pcmate4 absen= 11,578 Newly Improved Cmt Maintmmce Other CSC Operatiom Aclivilic, En11iromnen!al encrumcemenl progrmn ape,, spare & trails progl'run Capital p,ojeets: C11Pllal l!SSOIS 1,659 Cum:111 aulhortred projocu: 9,-471 12,1!13 8,548 2,833 Fufllre capil& projoctJ: 9,209 2,771 3,-40S 2,687 Total fund bl!lm:es 3,.873 16,IS78 1.5,442 6,527 Total liabllltles ud t1111d buwet $ 38,273 s 18,03.5 $ IS,S11 $ 6,660

30 Clean, Sak Credc & Narurlll Flood COP COP O...Wupe Coyo1c UYlll/Uapa Pro!eclion Debt Colllllmctioo W1terlihi:d Watershed Watershed Pro&I'llll Senice Fl!lld TOOi!

:s 9,779 $ 33,228 $ l,904 $ 69,%8 $ $ $ 191,970 77 1'4,964 J.4,609 29,6'0

231 11 34 :552 l/~J7 63 62 B 330 18,861 20,6.56 661 2,1!11 42,343 667 667 1,171 161 1,891 $ 29,951 $ 56,338 $ 4,2515 s 71,653 $ 1•.~ $ 14,609 $ Z?0,310

$ 409 $ 1,7~ $ 16 $ 1,088 $ $ $ 4,974 I :3Z3 1,366 2,'lm 16! 2,9'/S 667 18,861 20,tiS6 661 l,151 41.,3',3 21,472 22,598 677 3,561 !12,3:28

:5,37:5 3,868 57 7,912 26,232 276 494 770 1-4-,964 14,964 14,60~ 14,609

667 670 142 125 40 92 922 ll,578 2,017 2,017 2,509 2,'°9 5,182 ,.1n 4,058 4,058

1,659 2,686 16,235 24,392 76,971 13,018 2,815 21,929 :55,834 !,479 33,740 l,579 68,091 U,964 14,609 217,!1182 s 29,951 s 56,338 $ 4,256 $ 71,6S3 .$ 14,964 $ 14,d09 ' 270,310

See 1CCompmying ootes to bli!lic !lnm;lal s11tements

31 SANTA CLARA VALLEY WA1ER DISTRICT Reconciliation of the Balance Sheet of Governmental Fuoos to the Sta~mclt of Net Assets lllllC 30, 2006 (Dollars in Tb.ou!llll£b)

Amount rqiorted for govermnentll activiti~~ in 1he staremel'lt of nel assl!IS are differenr becaw;e:

FWld bala!¥:ei of govermnmlll funds (page 31)

Capital ruisets used in 1overmnental activities are not c11rrmt financial resources and, therefore, are not rq:,orted in the balance sheet of 1ovcmnental funds. a64,se6

Long-term ieceivables, ia:ludcd in due from other governmenti:, are not available to pay for current period expenditures IIIld therefore. are deft1Ted on !he modified accrwil buill in lhe blllmce sheet of governmental funds. 42,343

Accrued expemes for Ille esti.t:rulred IJ'bitnae liability owed ro the Imemal Revenue Service does not repreJent on obli.lation that is expecti:d 10 be liquidated with Ille expendable available firumcial resources and, accordingly, ill 001 ri,poned u II fund liability of the balance llheel of 1overnmeual funds. (793)

Internal servi~ funds are Wied by Illllll,IC!llent ro char1e die rom of equipment and risk managemem to individual funds. The assets and liabilitie1 of !he inlenml service funds are included in govermnernl activities in !he Sllltement of nel auets. 14,697

Interest payable on long-tenn debt does 001 require the me of current financl.al resourC4:S and, lherefore, illleteG! payable is no! a;;:crued as a liability in !he balance 1bee1 of 1ovemmeDal funds. (3,684)

Accrued interest income for monillli held in die restricted bond tn.llll accollll.t'! are not available to pay for cunetll period deb! paymew, and therefore, are 1101 included in the balance sheet of govermnemal l'uncls. 167

Underwritor's dilcount and oosts of llllll.WlCC are capitalized on the 1ovemxnent-wide st11.temen1 of net asseis, whBreu, they are reponsd u expmxliturll$ in !he l!OVOl1Jlllental f11ndli. 1,170

Lon,-term liabilities are not due and payable i11 the cum:m period lltld, therefore, are 1101 reponed in the balance sheet of governmental funds: Certificates of puticipati;Jn (180,760) Deferred amount on refunding 5,867 Net oriiinal iMue premium (3,525) Compensated absences (11,SSS)

Net assets of governmental activities (page 28) s 946,492 32 Sa ra Valley ~er Dis · t

33 W~& Lower SlnU! PnimruJg Wm Wlllmlhl,d Wllleflllred RevmliU: wees 9) $ Bem:,fit-- Use of mo=y ml mv-1 ~ 441 446 224 R.emJ. 37 19 5116 66 Reim1>1memn1 or fflD Other 333 20 I Toll! revtnlll:ll 6,345

C11ITeot:

8,060 Excas (

34 Creek: & Nalllral Flood COP COP Ptot

3,192 :I, 1!62 $ $ $ 740

435 81 916 455 684 SI! 1 82 276 11 372 89 66 72 584 916 455 80,377

14,698 216

9,133 9,133 17,552 20,073 2,615 19,015 16,Sl:;1 107,905

(6,666) (II, 998} ---~~(920) 11,416 455

35 SANTA CLARA VALLEY WATER. DISTRICT Reconciliation of !he Statement of Revenuea, &pc:aditurea and ChangCB in Fund Balances of Governmental Funds to 11m Statement of Activ:irica For the Year Ended JW!i! 30, 2006 (Dollm in Thou,andJ)

Amounts reported for l!Overnmemal activities in the statement or activities are dilferenl becauae:

Net change in fund balancee • wttl governmantal funds (page )S) $ (27,026)

Oovermncntal funds report capital outlays u expendituroa. However. in the statement of activities the cost of those usets is alloc11ed over their alimati:,d Ulieful lives and reporud u depreciation expeme. This is the amount by which capital outlay• ($44,808) exc=l depreciation ($5,944) in the cum:nt period. 38,864

Revenues recognized in the govcromental funds that were e1.med md recogniud in pre'\lious years and are reported u begilllling net assets in the st11emen1 of activites. 3,636

Repayment of the principal of long-term debt comumes the currem financial resources of governmel'llal funds while ii does not have :my effect on nel ruisel!L Certificates of pa.nicipatlon 7,380

Accrued imerest expeme on long-tenn debl is rq,oned in !he government-wide stllmment of activities, bu1 they do not require Ille Wit of current filllncial rcsourres. Thill amoum represents the 11et accured interest expeme 110! reported in aovermnCDtal funds. 121

Deferred char3e:a lCliU!ting from !he refunding of ouistandmg rertifii:ates nf pArticipation are not available 10 pay for current-period eicpeadirurea md therefore. are expended in the funds. Deferred amount on refundms: (332) U nderwriler' s discount md cost of issuance (66) Net orisinal issue premium 201

Internal service funds art used by maaagement to charge the costs of equipment and risk m11m&emcnt to individual funds, The net revenue of inti:mal servire funds us reported witb govert11t1eril.l activities. (2,003)

Some revenues ~ ell:peruies reported in the statement of activities do not provide or require the use of current financial resources and, therefore, are not reported as reve11ues or expl!Ilditures in governmental funds: Compematcd absences (475) Interest from monies beld in restrieled bank 11Crounts (5) Interest from arbitrage rebate account (419)

Change in net lllisets of governmemal activitie11 (page 29) $ 19,876

36 Sll!tmwat ;)f Ntl Asstb Fl.llldll JIB 2006 in

ASSETS Cu"""" ..- : c..h llllIO 3) $ 108,lSO $ IS,969 R<:lllriot«I Ql,ih llll!I mvmroonl> (Nw :'I) S,lS:! Receivables: AOOOUllls 15,012 Interest 21 T41J«lli 1;12 Deposi1m Md mher assas S,495 T<>l>I ,:iirroot .,..,. 133,962 Noo GW'rtnt assets: .._, (Nbllitl.,. 137,711 11,1196 NET ASSETS (Nole 10) Investment in 412,458 5,424 lifflriot«I for; Debi """'""' Rtstricwd asset s 10,1'15 Son 3,339 Rare slllbilizlllioo l,000 Umostrici.d: Tomi 00! llBU AdjiWll!TIOlll II> rofl= 1lll, COO!!Oli

On•N>·lino el!pl!-: Sources W11tertrealma'.l! Trammission and distribution: Raw w111er TrOlllod walor Administration al'.ld mailllimn:.:

md amortizatioo

OlqlC!l!leil income (22,144) (4,043) rtv,em~ Proi!lertv taxes 19,338 lnvesttnem income 3,086 479 Rental ira:omo 50 Other hlll::rcst and fiscal agem fees Net nmJOr>til>I[ reveooes Income before rontriblllims mid lrl!mfe111 (j) Tramfe111 out in llO! IIS!ielS Net asselS, of )ll!ar Net """"' • om Adliw11m1:ni to reflect Ille comolidaOOl:l of inll:rm! ••nrice llmd ••tivili•• relalm m me enlerprill< fimd. Nel lWOIS of bUiffll:SS••IJl'l,O aclivitlos

and in Net Ailseill ro me :Smemom of Aeti'llil:i1!$ Amounlll m,r,rtod for bu!:ineS!I-IVII

38 Governmentll Activille•

Fwd Cub flews rrom ""'""''"'II actM1.,., from customers .and users 109,174 $ 6,762 !O (66,127) (5,105) 10 (40,370) P-a}'fflents for internal services used Net cash provid,,d b)i oo,,ratin• activities Oish !low• !i'4lll!I l!Ol><•p!ull llffimSI! nmvid<>

Recondliation to the oombi:ned balmce sheet: Cam a!ld investments 13,969 Restricted ca.sh and imrescrnents L£ss ash a.mi J1tvest1nents nm 1ku%ting the definitiun of etib equ:ivaie!llS

KKoociU•ll•n or income (loss) lo not ""'"11 (Wied) $ $ (4,043)

to net c.uh

and o!hor asso!li 2.725 (f:nc:rease:) in accooots receivable (104) (lrn:,..,•) in prep•id l!llset (413) (mere=) ill iOVeJUOl')' (35) (Decrease) increase: in acrom1ts S,538 205 {Decre&'!e) increase in accrued liabilities 185 143 Tocruse in Increase in claims payable Net cash i,rovl

SANTA CLARA VALLEY WATER DISTRICT Notea to Basic Financial Statements For the Year Ended June 30, 2006

(1) THE FINANCIAL REPORTING ENTITY

(a) Deacription of th• Reporting EnUty

Santa Clara Valley Water District (District) is a special district created by an act of the legislature of the State ot California (State) in 1951 and as emended. The District encompaaeea all of Santa Clara County.

The District is governed by a seven member Board of Directors. Five of the members are 11l11ctad from the area of each of the flve Di1trict 1uparvisorial districts and two members are appointed from specillc gaographic areas by the Board of Supervisore to n,preHnt the District at large. The term of office for the din!ICtonJ is four years.

The District haa broad powers relating to all aspects of flood control and storm waters within the District, whether or not such watera have their sources within the District. It is also authorized to store and distribute water for use within it1 juriadiction1I boundariea and authorized to provide sufficient water for preaent or future bl!Jn11flcial use of the lands and inhabitant, of the District. The District acquire•, stor11&, and di1tribute1 water for irrigation, reaidenti1I, fire protection, municipal, commercial, indulltrial, and all other uses. The Diatrict also direotly 1upport1 the caring for the environment and the community through careful atewardehip.

As required by generally accepted accounting J;linclplea (GAAP) in the United States of America, the accompanying buic financial etatementa preeent the District and its component unit. The component unit di&cuaeed below is included in the District's reporting entity because of the significance of its operational and financial relationship with the Dlatrict.

(b) Blended Componant Unit

The Sants Clara Valley Water Diatrict Public Facilitie• Fin11ncin11 Corporation (the Corporation) was established on December 16, 1987 for the purpose of providing 111siatance to the District in financing the acqui11ition, construction and improvement of public building,, workll and equipment for the Di1trict. Althoui;ih legally separate from the District. the Corporation is reported es if it were p11rt of the primary government because ita aole purpose is to provide financing to the District under the debt l11uance documents of the District. The operalions of the Corporation are accounted for in the special revenue end debt &11rvioe funds.

Component unit financial information can be obtained from the General Ac:cot.nting Unit of the District at 5750 Almaden Expreaa-y, Sen Jose, CA 95123.

41 SANTA CLARA VALLEY WATER DISTRICT Notes 10 Basic Financial Statements (Continued) For tho Yoar Endod June 30, 2006

(2) SUIIIIIARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Pre••ntatlon

Government-wide Rnancial Statements The statement of net H1et1 and statement c:l actMtiea di11play information about the primary government (1h11 Di1trict) and its component unit. Th11111 1tat11mant1 include the financial activities of the overall government, except for flduoiary activities. ThHe statements di5linguiah between tha govemman~l and bualntJM-type activity of the Dialrid. Oo.-.rnmental activities, which normally are aupported by taxes and irter-gov11mmenta1 revenues, are reported separately from the bu1ines11-type adivlty, which rely to a aignlllcant extent on fees charged to external parties.

Certain elimination, have been m1de as prescribed by GASB St.tement No. 3• in regards to interfund adivitiea. All internal balances in the Statement of Net A11et11 have been eliminated e~cept those repraunting balanoas between the govamment activities and bueineH-type activities, which are presented as internal balances and eliminated in the total primary government column. In the Statement of Activitiea, internal 10rvice fund tranaactions have been eliminated. H01Nevar, tranaactions between the governmental and business-type activities have not been eliminated.

The statement of activitia1 presents a comparison between direct expen111a and program revenues for each segment of the boaineas-type activly of the District end for each function of the District's governmental activities. Direct expenses are those that are apacifically aHociated with a program or function and; therefore, are clear1y identifiable to a particular function. Program revenues include 1) charges paid by the recipients of goods or services offered by the program, and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular program. RIIY8nuea that are not classified as program revenue,, including all teltn, are presented as general revenues.

When both reatrided and unrestricted net aastta are available, restrided resources are used for qualified expenditure• for capital improvement projects before any un~slr1cted resources are spent

Fund Financial Statements

The fund flnancial statements provide information about the Diatrid'1 funds, includini;i agency funds and the blended component unit. Separate statements for each fund category - governmental, proprietary and flduciBry - are pre1ented. Toe fund nnancial statements present all governmental funda and the water enterprise fund.

The District report, the following governmental funds:

• The Gerntrel Fund is used to account for all revenues and expenditure• necessary to carry out basic governmental activities of the District that are not accounted for through other funds.

42 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statements (Continued) Forthe Year Ended June 30, 2006

• The Watal'llhed and Straam Stewardship Fund is funded by the Di11tricf11 1 percent property tax allocation and used to proted, restore, or enhance the watershed,, streams and natul'llll resources therein.

The Dietrid'1 watersh111d funds are created according lo geographic watenihedil and th11ir tribulariaa for the management of natural resources in a manner that foster, ecosystem h•alth, improved water quality, flood protection, and compatible recreational opportunities.

• The LoW!lf Peninsula Wst8f11had is defined by geographic boundariee enoompaeaing the tributaries and wate111heda of San Franc:iaqulto Creek, Matadero Creek, Barron Creek, Adobe Creek, Ste11ens Creek, and Permanente Creek. The geographic area includes the Citie, of Palo Alto, Los Altos, Los Altos Hille, Mountain View, and portions of Cupertino.

• The West Va/1ey Watershed is defined by geographic boundaries encompasaing the tributariet and watersheds of the Guadalupe Slough, Sunnyvale West Outfall, Sunnyval11 East Outfall, Calabazas Creek, San Toma, Aquino Creek, and Saratoga Creak. The geographic area include• portions of the Clliet of Sunnyvale, Cup111rtlno, Monte Sereno, San Jose, Santa Clara, Campbell, Saratoga and the Town of Loa Gatoa.

• The Guadalups Wat81"8hed is defined by geographic boundaries encompassing the tributaries and watersheds of the Guadalupe River. The major tributaries are Los Gatos Creek, C11n01111 Creek, Ro.a Creek, Guadalupe Creek, and Alamitos Creek. The geographic area includes portions of the Cities of Santa Clara, San Jo1111, Campbell, Monte Serano, and the Town of Loa Gato1.

• The Coyote Wllhmlhed is defined by geographic boundaries encomp1111ing the triblJarie1 and watersheds of Coyote Creek. The major tributaries are Lower Penit111ncia Creek, Scott Creek, Berryeesa Creek, Upper Penltencia Creek, Silver Creek, Thompaon Creek, Fisher Creek, and Packwood Creek. The geographic area includet the City of Milpitaa and portion, of the Citiea of San Jose and Morgan Hill.

• Tha Uvas/Uagas Wa18n;had is defined by geographic boundaries encompa.. ing the tributaries and waterehed• of the Pajero River in Santa Clare County. The major tributaries are Little Llagae Creek, Llagat Crsek, the weet brandl of Llagas Creek, Uva11-Camadero Creek, Peacadero Creek, and Pacheco Creek. The Uvae/Uagas Watershed Fund Is compri,ed of moetly unincorporated area and includes the City of Gilroy and portions of the Cities of San Jo•e and Morgan Hill.

• The Clean, Safe Creeks and Natural Flood Protection Progmm is uead to manage specific revenues and expenditure, approved with the passage of Measure B in November 2000.

• The COP Debt S&Nic& Fund is usl!ld to account for monies being held for reserve rQqui~ment1 and arbitrage rebate for 1h11 Diatrict'a debt payments.

43 SANTA CLARA VALLEY WATER DISTRICT No!Bs to Ba1ic Financial Statement, (Continued) For the Year Ended June 30, 2006

• The COP Construction Fund is usad to ac:oount for COP proceeds used for the comitrudion of major capital projeds wlh their reapedive watershads.

The District reports the following proprietary funds:

• The water Ente,pnse Fund accounts for operations that are flnanced and operated in a manner similar to private b1Aine111 enlerpriN1$ whe1111 the intent of the governing body is that the costs (including depreciation) of providing goods or services to the general pubic on a continuing bAais be flnancad or recovered primarily through user charges.

• The lnlllmal S&rllice Furnia account for the financing of good, or Hrvicea provided by one department or agency of the Di1triot to oth« departments or agenciet on a cost­ reimbursement bnia.

• The Equipmsnt Fund accounte for the maintenance and operation of tie District's vehicle fleet. heavy conlltrudion, and information ayltem equipment.

• The Risk Management Fund accounts for the monies set aside to pay for an claims, judgmenta, and premium cost.

The Dislrict reports Agency Funds (fiduciary fund type) lo account for ae11ate held by the District as an agent for privata organizations anQ'or othar govammenta.

• The Deposl Fund is used to account for the collection and payment of axpendituret for funds held in truat for specific reatrided purpotea. • The StJnta Clara Va/fey UrlJan Runoff Prevention Program is to account for monies held jointly with 13 other citie• within the county to fom, the Santa Clara Valley Nonpoint Source Pollution Control (NPS) Program. The responsibility for managing the program was tran,ferred to the City of Sunnyvale at Juna 30, 2005.

(b) Basis of Accounting

The government-wide and propr&tary fund financial atatementa are reported ueing the economic resources m&a,urement fooJe and the acaual batis of accounting. Revenues are recorded when earned and expen1e1 are recorded at the time liabilities are incurred, regardless of when the related cash flows take place. Nonexchange tran•action1, in which tha Diatrict givea {or receivH) value without directly receiving (or giving) equal value in exchange, include property taxet, benefit assessments and granta. On an accrual basis, revenues from property taxes and benefit assessments are recognizad in the flacal year for which the taxes and assessments are levied; revenue from grantt is recognized in the fiacal year in which all eligibility requirements have been aatisfiad; and revenue from investmenta is recognized when earned.

Governmental funds are reported uaing the current flnancial resources meaeurement focus and tha modified accrual b111i1 of accounting. Under thia method, revenues are recognized when measurable and available. Property taxe1, benefit HMNment1, intan,1t, g111nt1 and charges for aervicea are accrued when their rl!tCllipt occurs within 1i:,rty daye alter the end of the accounting period so as to be both me&1urable and avallable. Expendlturee are generally SANTA CLARA VALLEY WATER DISTRICT Notee to Basic Financial Statements (Continued) For the Year Ended June 30, 2006

recorded 'M'!en a liabilly is incurred, as under accrual accounting. However, debt service expenditur1111 and compensated ebaencea are recorded when payment is due. General capital assets 11cquisition11 are reported as expenditu11111 in governmental funds, Proceed, of general long-term dabt and capital leaaes are reported as other financing sources.

For ita business-type activities and enterpriae fund, the Dietrict h•a elected, under Governmental Accounting Standard's Board (GASBJ Statement No. 20, Acax,ntin

Proprietary funds diltinguish operating revenues and expenses from non-operating items. Oparaling revenues and expenses generally reault from providing service• in connection with a proprietary fund'• principal ongoing operationa. The principal operating revenues of the Water enterpriae fund is the eale of water to outside ou1tomer1, and of the District's internal service funds are charge• for eerviced provided to internal departments. Operating expenses for the entarprise fund and Internal service funds include the cost of •elaa and 1ervice11, administrative expenses, and depreciation on capital assets. All revenues and expanses not meeting this deftnilion are reported as nai-aperating revenues and expen111a.

Proprietary fund operating revenues, 1uch as charges for services, result from the exchange transactions associated with the principal activity of the fund. Exchange transactions are those in which each party receives and 1iiva1 up esaentially equal value. Nonop«ating revenues, such as subsidies and investment earning•, result from nonexohange tran•aotione or ancillary activities,

Agency funds are ueed to account for assets held by the District in a fiduciary capacity as an agent for individual11, private organizations, other govarnmenta and/or other funds. Funds held in the Deposit Fund and in the Sant• Clara Valley Urban Runoff Pre11ention Program Fund use the accrual method of accounting.

(c) Noncurrent Governmental A11et• /Liabiliti••

GASB at..tement No. 34 eliminate& the preeent1tion of account groups, but provid1111 for theee recardi to be maintained and incorporates the information into the governmental actlvities column in the government-wide statement of net asaeta.

45 SANTA CLARA VALLEY WATER DISTRICT Notea to Basic Financial Statements (Continued) For the Year Ended June 30, 2006

(d) C•• h • nd lnv•atmenta

While maintaining safety and liquidity, the Diatrict maximizes Ht inveatment return by pooling ita available cash for investment purpo11ea. Interest earnings are apportioned among funds based upon the average monthly ca1h balance of each fund and are allocated to each fund on a monthly basis.

The Di,trict reported investments in nonparticipating intell!at eaminga contracts (including gu.;iranteed investment contract1) at cost, invHtment1 that mature beyond one yaar from the date of acquiaition at fair value, and investments that mature within one year or leas from the date of acquisition at amortized cost. The fair value of investments is based on current market priCH.

For purposes of the Statement of Caeh Flows, the proprietary fund, consider all highly liquid investment11 with a maturity of three month11 or 11111 when purchased (including restricted investment,), and their equity ln the cash and investment pool to be cash equivalent,.

(•) Inventory

Proprietary fund inventory conaists of materials and 1upplie1 held for consumption. The cost of ell inventory acquired is recorded as an expense at the time of purchB1111. Al the end of the accounting period, the inventory valuaa of material, and auppliea on hand are detenmined using a current cost method which approximates market value. For ftnenciel statement purposes inventories are presented under dllpoaill and other 1111.t1.

(f) Ceplt• I Assets

Capital assets (including infrastrudure) are recorded at hiatorical cost or at estimated historical cost if actual historical cost is not available. Contributed capllal assets are v11lued at their estimated fair market value on the date contributed. Capitel 1111et1 of governmental activltlea include pipelines, channel linings, ftoodwalls, levee1, bridge ftood proofing, box culvert, and revegetation. The District deftnH capital assets as aeset1 with an initial, individual coet of more than $5,000 and an estimated useful life in excess of one year. Capital assets including assets under capital leases used in operatlorn1 are depreciated or amortized using the straight­ line method over the lesser of the capital lea,e period or their estimated useful lives in the government-wide statemanta and proprietary funds.

The estimated useful lives are as follow11:

Water treatment facilities SO Years Building,, ,tn1ctures, and trailers 25-50 Years Flood control projects 30 - 100 Years Dams, structures, and improvements 80 Years Office furniture, fixtures, and equipment 5 • 20 Years Autornobil1111 and trucks 6-12 Yeara Computer equipment 5 Years

46 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statements (Continued} For the Year Ended June 30, 2006

Maintenance and repaini are c:nargad to operations when incurred. Bettennenta and major improvements which significantly increase values, change capacities or e)(t&nd uae:flJ live• are capitalized. Upon aal• or nttirem11nt of capital • saets, the cost and ralated accumulated depreciation are removed from the reepective accounts and any re1ulling gain or 10111 is included in the 111111ub of op11retion11.

(g) Amortization of Contract water Rights

The District has contracted with the State for water deliveriea from the State Water Project through calendar year 2035. A portion or the payments under lhi1 contract represent reimbur91m1nt of capital co1ta for transportation facilltiH (the capital cost component). The Wat11r Enterpriae Fund capltaliz1111 the capital cost component and amortizH such component, u1ing the 11traight•lin11 method, over the remaining entitlement period.

(hi Amortization of Water Banking Rights

The District has contracted with the Semitropic Weter Storage District and !11 Improvement Diatrie!a for the water banking and e>

(i) Recelvabl••

Receivables include amounts due from water utility customers as well as amounts due for property taxes and intere,t on inwstmsnt11. All receivables are shown net of an allowane& for doubtful accounts of $6,000.

(J) Du• 1'ran Other Govarnm1nta

Amounts due from other govammenll represent amounts due from various government agencies for reimbursement of the District's expenditures/expenasa in association with construction projects.

(k) Accrued Vacation and Sick Leave Pay

It is the policy of the District to p•rmlt employee• to accumulate • arn1d but unused wcation and sick leave beneffla. Vealed or accumulated vacation and sick leave are report11d as noncurrent liabililie1 on the statement of net assets.

Maximum vacation accruela may not ll)(ceed three times the employee's annual accrual rate, per empbyee. All regular full-time employees are eligible for twelve (12) day& of aick leave per fiscal year. Unused sick leave may be carried forward to the following nscal year without limitation. Upon termination, the eligible employees will be paid a portion of unused sick leave at the employee's bHe pay rate at the time of t11rmination. The rate of unused aick leave varies with the langth of aorvice and the bargaining unit of th11 employee.

47 SANTA CLARA VALLEY WATER DISTRICT Notas to Ba11ic Financial Statements (Continued) For the Yaar Ended Juna 30, 2006

(I) Bond Premiums, Dlacounta and lasuanc. Costa

Water Enterprise bond discounts, as well as i1au1nce costs, are defemsd and amortized over the life of the bonds. Bonds payable are reported net of th• appli~bl1 bond discounts. IHu•noe costs are reported as def!lrred oharge1.

On the statement of net 11aet1 and the statement of activities the 2003A COP and 2004 COP ~emiuma, as well as issuance coat•. are deferred and amortized over the life or the certificate11. COP payable are reported net of the applicable bond premium. Issuance costs are reported as deferred chargH.

(m) Encumbrances

The District employs encumbrance accountlng as 11 •ignilcant • spect of budgetary conlrol. Under cmcumbrsnce accounUng, purchase orders, contract, and other commitments for expenditure of funds are recorded as reservations of fund balance since they are not treated as current axpendture1 or outstanding liabilitie• at year 1nd for GAAP Hn11ncial reporting.

(nl Estimates

The preparation of the b• 11ic financial statements in confonmity with GAAP require, management to make ellimate1 and assumptions that affect certain reported amount• and disclosures. Accordingly, actual results could differ from those eetlmates.

(3) CASH AND INVEITMENTI

Total District cash and investments 11 June 30, 2006 are as followt (in thou111nds}:

Statement of N• t Assets: Cash and in11estments $ 316,089 Restricted cash and investment• 34,802 Statement of Fiduciary Net All11et11: Cash and investments 227 $ 3151.118

48 SANTA CLARA VALLEY WATER DISTRICT Notes to Baeic Financial Statements (Continued) For the Year Ended June 30, 2006 lnvettm•nta

At June 30, 20Cl6, cash 1md inW"8tment1 con1hlt of the following (in thoueend1):

U.S. Treasury Obligations $ 18,638 U.S. Government Agencies 300,955 Medium Term not• 10,047 LoealAgencylnve1trnentFund 130 Guaranteed lnvewnent Contn1cta 9,374 Santa Clara County Investment Poot 4711 Mutual Funds 16,255 Money Market Funds 91 Certillcale1 of Deposit 300 Total Investments 356,268 Carrying amount of ca1h (overdraft) \4,1 ~ Total ca1h and inveslments s 3511118

As of June 30, 2006, the District's in1191tment in the State investment pool (LAIF) is $130,000. The total amount invested by all public ~•ncies in LAIF at that date is $63.3 billion. Of that amount, 97.43 p• rcertl is invested In non-derivative financial productll and 2.57 percent in asaet-back.ed securities and structured notes. At June 30, 2008 these investm•nt1 matured in an average of 152 days. The Local Investment Advieory Board (Board) has oversight responsibility for LAIF. The Board oonaiate of five membere as do1ignated by Stato Statute. The value of the pool 1h11rea in LAIF, which may be withdrawn, is dotermined on an amortized coal baaia, which is different than the fair value of the Dilltrict'a position in LAlF.

As of June 30, 2006, the Dilltric:t', investment in the Santa Clara County Investment Pool (Pool) is $478,000 which is restricted for interest and redemption of the 1973 general obligation bonds and the 1963 water utility bonds. The Pool hae eatablished a treasury oversight committee to monitor and review the managsment of public funds maintained in the Poot. Participants' equity in the Pool is determined by the dollar amount of participant deposit•. adjusted for wll:hdr•wals end distributed inveetment income. The value of the District shares in the Pool, is determined on an amortized cost besis, which is differant than the fair valua of the District's position in Iha Pool. The Di11tric1'1 invastment in the Pool is elated at fair value, available upon demand and considered a caah equivalent.

Authorized lnveatments by th• Dlatr1ct

The District's lnve1tment Policy and the Callfomia Government Code allow the District to invest in the following, provided the credit rating• of the iuuera are acceptable to the District. The folowing also id• ntllles c.rtain provision• of the District • nd California Govemm• nt Code that eddntsa interest rate risk, cradit riak, and concentration of cntdit riak. This does not address the Diatrict'a inveatmanls of debt proceeds held by fiscal agent• that are governed by

49 SANTA CLARA VALLEY WATER DISTRICT Nollts to Basic Financial Sta•m•nta (Continued) For 1he Year Ended June 30, 2006 the provi•iona of debt agreements of the District, rather then the general pn:wi•ion• of the Califomie Government Code or the Entity's investment policy.

Maximum Mulmum Maximum Minimum """"'•11111••' lnve,trn,ent in -1' ~ ~ !!I Pon,.,Jio One l•u•r U.S. TNl•••l'J Obllglllona 5 ye1111 NIA Nlll'III NOile U.S. Govemment Agency IUUIII (A) 5 ye1n, NIA NOMI None Bank•!'11 Acoeptan01• 180dly1 AA3 40% 12% Comm1rci1I P•~r 90 a,,, AA3 15% 12% N1g0111bla Cer!ifi- of O.pmt 1 yNr AA3 30% 12% $100,000 & FDIC Nonnagoblll• T1m11 Cortili<:lltu of O,,poo~ 1 year WI\ 5% Ma!llbil!ll~ip Coll1terallmd Rapuldl111 Ag1Nrnonta 30 d11YI AA3 None None Medium Tenm Noles 3 yun, AA3 15% 12% Taxoble Municipol Obliglllo!lt ~y• l!II AH None 12% Clllifomi1 Local Ag1ncy lnvestmonl Fund (B) NIA NIA (B) Non11 Mutual Funds NIA Ml 10% None Money Market Account with Union Bank NIA NIA None 12%

(A) SecJrillN iHuen of Amenoa, 111<> Tonn.,,,_ Valle, -rt,' and Ille Sludenl Loan Mlllketing ANooillllion.

(B) LAIF will "°""pt no more lh1n $40 million of 1n 1gency'1 un11111rtc:11<1 fund• while pl•clng no constrains on fund$ "'I•1Ing 10 un•p•ntbOnd prooeed1.

R••tricted Caeh and lnveebnentll for Bond lnterNt and Redemption

Under the provi•ion1 of the Di1tric:I'• revenue bond rHolu:ion1 and Installment Purchase AgrNment for the 2000A & 2000B Certificate, of Perticipetion, 2000A & 2000B WalerUtility R1ivanue Bond•, 2003A Certlflc.te1 of Participation, and 2004A Certlftc•tee of Perticipation, a portion of the proceed11 from the1e debt ieauanc.a is required to be held in custody accounts by a fiscal agant as trustee, As of June 30, 2ooe, the amount invested in assets held by nscal agent amounted to $1•,9 million for certiftcates of participation and $4,7 million for revenue bonds and was equal to or in excess of 1he emount required at that date,

Ra•trict.d Cesh and lnVNbnentl for Capltal Projectll

The Diltrict ha. oonstruc:lion and acquisition fund• from Iha 2000A Certiflcate1 of Participation (COP} which is used to pay for the capital project• authorizad by the COP, At June 30, 2006, Iha balance of this fund is $4,005,000.

The Oietriel also hall conatruction and ecquialtlon funds from 2003A & 20CMA Certiftcatea of Participation. Theae fund11 are used to pay for the cepital projeds on flood control improvemenlll au:horizad by the COP indenture. At June 30, 2006 the balance in thHe funds was $10,604,000.

50 SANTA CLARA VALLEY WATER DISTRICT Notea to Basic Financial Statament11 (Continued) For the Year Ended June 30, 2006

Addltionally, the District has issued the commercial paper to provide for the acquisition and conetructlon Of improvements to the District'• Water Utility syetem. At June 30, 2006 the balance rn the Ccrnmercial Paper Program was $21,000.

Rulrfeted C•• h • nd Investments for Watershed ll• n• gement Projects

The District has entered into certain coat sharing agnsements with the U.S. Army Corpe of Enginaers (the Corps). Under these agreement• the District is required to dap01lt monies into escrow accounts to be used by the Corps for watershed management projects. At June 30, 2006 the Distrid'11 re1trided deposit, held in escrow for construction of the Guadelupe Waterthed management projects • mounted to $77,000.

Authorized Investments by Debt Agreement•

The District must maintain required amounts of cash and investments with trustees or fiscal agents under the tenns of certain debt i1111ue,. These funds are unexpended bond proceeds or ans pledged reserves to be u1ad if the District fail• to meet Ill obligations under these debt iHuea. The California Government Code require, these 1'unde to be invested in accordance with District ordinances, bond indentunii, or State statutss. The following identifle1 the invaetment lypss that are authorized for inveetments hsld by llscal agsnt,. The table also identifies certain provisions of these debt agresmenta:

Maximum Minimum Authorized lnVNtrnent T pe Maturity Credit Quality U.S. Treasury Obligationa (A) NIA NIA U.S. Agency Securities (B) NIA NIA State Obligatton, ( C) NIA A Commercial Paper 270day, A1 Unsecured CD'a, deposit account,, time deposits, bankers acceptancet 365days A-1 FDIC Insured Deposit (D) NIA NIA Money Market Funds N/A AANn Co!lnralimd Repurchase Agreement! (E) NIA A-1 Investment Ag1191ments (F) NIA AAA Investment Approved in Writing by the by the Certiffc:ale lm.urer (0) NIA NIA

(A) Direct obligations of the United States of America and securities fully and uncondltionally guaranteed as to the timely payment of principal and interast by the United State, of America, provided, thst the full failh and credit of the United States of America must be pledged to any such direct obligation or guarantee.

51 SANTA CLARA VALLEY WATER DISTRICT Noles to Basic Financial Statamenta (Continued) For the Year Ended June 30, 2008

(B) Direct obligation, and fully guaranteed certincate, af beneficial irtereIt of the Export­ Import Bank of the United States; con10Udated debt obligation, and letter of credit-backed is11u1111 of the Federal Home loan Banks; participation certlftcatee and aenior debt obligations of the Federal Home loan Mortgage Corporalon ("FHLMC1•); dtbenturee; of the Federal Hou1ing Administration; mortgage-backed ucurlie1 (except •tripped mortgage 1ecurlties which are valued g111ater thin par on the portion of unpaid principal) and senior debt obligation, of the Federal National Mortgage A110ciation f'FNMAtj; participation ctrtlllcates of the General Services Admini1tration; guaranteed mortgage-backad securities end guaranteed participation certiflcatH of the Go11ernment National Mortgage Auociation (·GNMA1·); guaranteed participation oertiflcat111 and guarantead pool oertillcatea of the Small Business Administration; debt oljigationI and letter of a-edit-backed iasue1 of the Student Loan Maootting Association; local authority Certlflcatea oflhe U.S. Department of HouIing & Urb1n DeYelopment; guaranteed Title XI ftnancing1 of the U.S. Maritime Adminlatratioo; guaranteed tranait Certllcat111 of the WaIhington Metropolitan Area TransH Authority; Resolution Funding Corporation 1ecuritieI.

(C) Direct obligelion11 of any state of tha United Statea of America or any subdivision or agemcy th11raof whose unaacured, uninsured and unguaranteed general obligation debt is rated, at the time of purcha11, 'A" or better by Moody's ,nd "A" or better by S&P.

(D) Depoalta of any bank or 11vings and loan aaociation which ha• combined capitell, ,urplua and undivided profit, of not less than $3 million, provided 1uch dep01lt1 ere continuou1ly and fully insured by the Bank Insurance Fund or the Saving, A11ociation ln,urance Fund of the Federal D11poait Insurance Corporation.

(E) Repurchase agreemenl:I collateralized by Direct Obligations, GNMA11, FNMAs or FHLMCs with any registered broker/dealer subject to the Securities lnve1to111' Proted:ion Corporation jurisdiction or any commercial bank inIu!11d by the FDIC, if 1uch brokartdealer or bank haa an uninIured, unsecured and unguaranttad obligation raled 'P-1" or"A3" or better by Moody's and 'A-1' or 'A-' or better by S&P, provided: (1) a rn.aater repurchase agreement or 1pecific written repurchaH agreement governs lh• tran11ction; and (2) the 11curiti111 are htld fr•• and clear of any lien by the Trustee or an independent third party acting 1olely as agent ('Agent") for the Trullee, and such third party is {i) a Federal Reserve Bank, or (ii) a bank which is a member of the Federal Depo1it Insurance Corporation and which has combined capital, surplus and undivided profits of not 111.. then $50 million or (iii) a bank approved in writing for 1uch purpoae by the Certificate ln1urer, and the Trustee shall have received written confirmation from auch third party that it holda auch aecurtties, f11M and clear of any lien, as agent for the Trustee: and (3) a perfeded nrst lollCUrlty lntertl8t under the Uniform Commercial Code, or book entry procadurea pre11cribed at 31 C.F.R. 306.1 et MQ. or 31 C.F.R. 350.0 et aeq. in such Iecuriti111 is created for the benent d the Trustee; and (4) the repurcha&e agreement has a term of 180 days or less, and tha Tru1tee or the agent will value the collateral securitieI no Illas frequently than weekly and will liquidata the collateral securities if any deficiency in the required collateral percentage is not re1tored within two bu1insu day, of 11uct, valuation; ind (5) the fair market value of the 1ecuritie1 in relation to the amount of the repurcha•e obligation, including principal and inttreat, is equal to at least 103%.

52 SANTA CLARA VALLEY WATER DISTRICT Notes to Ba•ic Financial Statements (Continued) For the Year Ended June 30, 2006

(F) lnve1tmel'i agreements, guaranteed in11e1tm11nt contract1, funding agreement, or any other form of corporate note repreaenting the uncondftional oblig11ion1 ofentitie1 or agencies with the unsecured long-term debt obligations or claims-paying ability rated in one of the lop two rating catagori• by Moody'• and S&P.

(G) Any investment approved in writing by the Certificate ln•urer.

Interest Rate Rl•k lntere•t Rite Ri1k is the riek that change, in market intereat rates 'lllill adven1ely affect the f• ir value of an inveetment. Generally, the longer the maturity of an inv111tment, the greater the sensitiYity of its fair value to changes in mar1(at intare,t rate•. The Di1trict generally manages its own Interest rate risk by holding investments to maturity.

Information about th• 11n1itlvily of the fair valu11 of the Diatrlct'I Investments lo market interest rate fluctuation• is provided by Iha follo'llling table that showe the distribution lo the District'& investments by maturity or earlie11t call date (in thou111nds):

12 Months 1310 2510 Mare lhilll Total orlus 2~ Month• eo Month• ® Manlhl us. rro.. ury Obligation• $ 18,638 $ 10,909 $ ~.eo" $ 2,117<1 US. Oov..-nm111t ,t,gencill1 219,103 113,1307 59,145 46,351 • U.S. Government Agencie• - Callable 81,852 16,695 37,150 27,407 Medium Te,m notes 10,047 4,971 5,076 Local Agoncy lnvo•tment Fund iso 130 Guaranteed ln11estment Contrael• 9,:i>74 9,374 SC Coonly lnve•lment Pool 478 478 Mutual Fund• 15,255 1~255 Mon40y Markel Funds 91 91 Certi4cates of Depo•lt 300 300

Total Investments ~ ~ $ 1Cl!l,8Z" $ M,e32 $ 9,37<1

Credit Ri1k

Credit Risk is Iha riak that an i11uer of an investment will not fulllll its obliga:ion to the holder of the investment. This is m11a1ured by Iha a11ignm11nl of a rating by a nstion1lly recognized statistical rating organization. Presented below is the minimum l"lllllng required by the California Government Code, the Di1tric:t'1 inve1tment policy, or debt 1greementt and the actual rating as af June 30, 2006 for each inve1tment type as provided by Standard 11nd Poor's (in thousands):

.SJ SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statements (Continued) For the Year Ended June 30, 2006

Minimum Ell~ a of Y--illld LeQal from NOC Total _'3:!!!!!ll__ Di1do1unt AAA Aa2 RaMd U.S, Trt.. ury Obligatlon1 $ 18,1136 NIA $ 18,1138 $ $ $ U.R Government AQenci• 300,955 NIA 300,111515 Medium Term notes 10,047 A 4,971 5,076 Local Agency Investment Fund 130 NIA 130 Guar1nll!ed Investment Comrads 9,374 NIA ;,37'4 SC County lm,estme!lt Pool 478 NIA 478 Mutual Funds 15,255 MA 15,:155 Moner l\hriet Funds 91 NIA 91 Certifica:es of Depollit 300 NIA 300 Total lnwotmenlll $ 365,289 s ,e.e:1& $ 321,181 S 5,0711 t 10,373

Concentration of Credit Risk

The District's investment policy regsrding the amount that can be invHted in any one iuuer is 9tipulated by the California Government Code. Ho-ver, the District is required to discloae investments that represent a concentration of five percent or more of investments in any one issuer, held by individual District Funds in the securities of issuers other than U.S. Treasury securities, mutual funds and external investments pool•. At June 30, 2008, those inv1111tment1 con1i11ted of (in thousands):

Investment Reporllld laauer T Amount District-Wide Federal Farm Credit Bank U.S. G0111emment Agency $22,-418 Federal Home Loan Mortg11ge Corp. U.S. GOllemment Agency 53,819 Federal National Mortgage Asaociation U.S. Government Agency 72,847 Federal Home Loan Bank U.S. GO'o'ernment Agency 130,267 Fund Level COP D"bl Service Fund Westdeutsche Landesbank Girozentrala Guarant~ Investment Contract 5,768 Federal National Mortgage Association U.S. Government Agency 7,717

COP Construction Fund Fedtuel National Mongage Aaaoci11tlon U.S. Government Agency 4,004 Federal Home Loan Bank U.S. G011emment Agency -4,941

W•t.er Enierprise Fund Sarco Coll lnveet~ntw Guarani~ Investment Contract 3,806

54 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statements {Continued) For the Year Ended June 30, 2006

Cu1todial Credit Riak

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository ftn11ncial institution, the District will not be able to recover its clepo11its or will not be able to recover collateral aacurltiet that are in the poHesaion of an outside party.

Under California Government Code Section 53851, depending on spedllG types c,f eligible aecurilies, a bank muat deposit eligible aecurillH poated as collateral with ita Agent having a fair value of 10!!% to 1150% of the Di11tricl's ca1h on deposit. All of the Di1trict'1 deposit• are either insured by the Federal Depository Insurance Corporation (FDIC) or collaterallzed with pledged aecuriliea held in the true! department of the financial in1tlttltion1 in the Dillrict'a name,

(4) DUE FROM OTHER GOVERNMENTS

Governmental fund1 report deferred revenues in connec:tlon with re01lvabla1 for revenues not considered avail11ble to liquidate liabilities of the current period. The following is a 1ummary of amounts due from other governments for the flecal year anded June 30, 2006 (in thouaand1):

State of California, Department of Water Reeourcet $31,421 Natural Reaourcee Conservation Service 10,907 State of California, Mandated Cost 15

Total

(5) REIMBURSEMENT OF CAPITAL COSTS

The Diatrid derives certain revenues from reimbursamenta of cepitel costs by local, elate, federal agenciee and other outside sources. The following is a 1ummary cl such reimbursements In 2005/06 (in thou11&nd1):

Governmental Business-type Ac:tivitie11 itY Local Agencies: City of San Jose $ 613 City of Morgan Hill 211

Blllte A.gencle1: State of California 893 State Water Reaources Control Board 48 Department of Water Resources $1,366

Federal Agenelff: U. S. Department of Agriculture: Bureau of Reclamation 41

Total $1,765 lJ. oz

55 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statements (Continued) For the Year Ended June 30, 2006

(61 INVESTMENT INCOME

The District eams income from the inve11ment of ca,h not required for current expenditurea. Beginning after June 15, 1997 the Govemment•I Ac:counting St,ndard Board iHut>d GASB pronouncement number 31 to eat,blieh ac:countin11 and fin•noial reporting standard, for all investments. One provision of this ,t.nd•rd was to report inveebnent11 at f•ir value in the balance sheet,. Becau11a of thi• requirement, investment income must be adjusted upwards or downWa"ds to refted the fair value change from one fl1cal year to the next ftacal year. In m•king the adjustment, the inveatment income earned diredly by the inv111alment1 is modified.

The following repreaents the inve1tment income as ntported in the nn,ncial ,tatements, the current year GASB 31 fair value a:fjustmenl, and the unadjusted investment income at June 30, 2006 (in thou1and1):

FY2006 Interest Interest GASB31 Earned as Fair Value Before R p rted ~~ Fund: General $ ~9 $ (31ST) $ 1,3215 Watershed & Stream Steward 441 (59) 500 Lower Penin1ula Waterahed 446 (200) 646 Weal Valley Watershed 22<4 (34) 258 Guadalupe Watershed '435 34 •01 Coyote Watershed 1,106 (209) 1,315 Uvaa/Llagas Waterahed 80 (25) 105 Clean, Saf11, Creek. 1,287 (797) 2,08• COP Debt Service 916 916 COP Caislrudion ,455 455 Water Enlerpri1e 3,086 (1,210) •,298 Equipment 126 11 115 Risk lneurance 353 (1 ) •80 Total I ntere,t $ Q,Q24 $ (2,1173) _$.,__1_2... ag_1_

56 SANTA CLARA VALLEY WATER DISTRICT Notea to Ba1ic Financial Statement, (Continued) For the Year Ended June 30, 2006

(7) CAPITAL ASSETS

Capital assets activity for the year ended June 30, 2006 was as follow• (in thou111nd1);

Balance Tran1fen1 I Balance Julf 1, 2005 Addlllons Deletions Raci--1 Jun1t 30, 2000 Govemrmml:al Ai::tMOe11 Nondeprtcllbl& caplllll assets; Land $105,786 $ 299 $ $ 1Cll, 165 Construction in progress 328,624 45,0415 3415,863 Total nondei:ed• ble capilll 111111111 434,410 46,344 •62,128 Depreciable capillll assets: Building1 37,180 293 37,473 Structures and improvements 387,71Q 21,Q3Q 409,6•9 EquiplTll!lnt: Governmental funds 10,603 229 4,638 115,470 Internal sevice funds 1-4, 1-43 750 (2'4e) 14,647 Total dep11!ci11ble capital assets 4-49,&41! 979 (2-48) 26,1161 •77,239 Less accumulated depn1a• tion 8uildin~s (4,142) (7«1) (4,888) Strucil.lres and improvements (35,291) (• ,010) (3Q,301) Equipment Governmental funds (4,757) (1. 1tl8) (5,945) lntem11I sevice funds ,s.0001 (1 164 ({1-223) Total accumulated depreciation (52,280) (7,241) 164 (59,367) Net depn,cieble capilal SSIQ 397,365 l6.262l 82) 26,861 417,882 Total C,lll)ilal •Rell, net $831,775 $ 3Q,01!2 $ (647) $ T7iro,iffo

Bual11t11-type lcilvlty Nondepniciabl11 capital assets: Land $ 17,059 $ $ $ . $ 17,059 Conlltruction in progress 210,!587 27,526 (6,225) (28,718) 203,170 Total nondll!predable capita I 81Seta 227,646 27,628 (8,225) (28,718) 220,229 Depntciabl• capllal assets: Contract water and atorag• ri11hts 110,852 1,403 112,0116 Buildings 28 28 Structures l!lnd improvern1!11111 •01,535 23,656 425,190 Equiprn1!111! 12,20g 930 (6) 15,0!13 18,190 Total clepreci1ble capital assets 024,-424 2,333 (6) 28,718 555,469 Less accumulated depntci1tion and amortization Contract water and Itorage right• (64,4-47) (2,-422) (58,869) Buildings (5) (5) structures and improv&m&nts (140,619) (7,478) (148,097) Equip11111nt (4,715) (1,1QB) 3 (5,908) Total accumulated deprecietkm and amortization (1kl9,786) (11,096) 3 (210,879} Nat depraciabl• capital assets 32•,638 (8,763) (3) 28,718 34-4,690 Total cepct111 essell, net $552,284 $ 18,763 * (6,228) $ $ 1564,819

57 SANTA CLARA VALLEY WATER DISTRICT Notes to Baaic Financial Statementa (Continued) For the Year Ended June 30, 2006

During fiscal year 2005106 new construction in progret1 expendHures increased by $45.0 million in the governmental adi\lities. The cla11ilication of those expendiure1 were: $2.3 million to the general fund, $34.0 million to the waterahed1, and $8.7 millon to the Clean Safe Creek & Natural Flood Protection Fund. Eight-«ie project• were in progreet during the fiscal year with the mejor project expenditure• liated below (in million1);

• Pond M Tidal Wetland Site - $2.1 • Coyote 10A Wetland Con\lersion - $1.1 • Guadalupe river UPRR to 1880 - $8.0 • Lower Silver Creek Reach 3 - $7.0 • Lower Sill/er Creek (LERRDS) - $4.4 • Calabazas Creek Miller to Wardell• $1.1 • Guadalupe Ri\ler Readl 6 • $2.0 • Coyote Creek Montagllll/Hwy 28:> - $1.9

New conatrudion in progreaa expense increased in the bu1iness-type adiviliea by $27.5 million. The upgrading of the Di11trict'a waler treatment plant• continues to be the largest construction expenBe, with $6.3 millionB being spent on project• at the Penltencia Water Treatment Plant, $4.2 million at the Santa Teres. Water Tr11atment Plant, and $2.7 million at the Rinconada Water Treatment Plant. Addlionally, $2.5 million was expended on the Lenihan Dam Outlet Modifications.

Depreciation expense was charged to projects of the primary go,..emment as follows (in thou11erida):

General govemment $ 2,088 Watersheds 3,656 Capital assets held by the Diatric:t's internal sar,,ice funds are charged to the variou1 functions baaed on their usage of assets. _Llfil Total depreciation expense - g011emmental acti\litie1 U...241

Total depreciation and amortization expen,e - bu,ineas-type activity Wat.er enterprise $11,09

58 SANTA CLARA VALLEY WATER DISTRICT Notea to Basic Financial Statement• (Continued) For the Year Ended June 30, 2006

(l!I) BHORT-TERII AND LONG-TERM LIABILITIES

(1) Short-btrm debt

On December 17, 2002, the District Board of Diredo111 authorized a commercial paper program for financing prima'ily Water Utility caplal expendltur11a. The commercial paper program 11ll0w• th• District to finance capital expenditures while laking advantage of short term ratea. Thia program will be used in conjunction with i111uing long4ermli1bilitie1 to obtain the least coal financing for the District. The authorized limit for ftacal year 2000 was $100 million ($20 million for t11Xable debt end $80 million for tax-exempt debt). This limit may change from flacal year to fl•cal year. Lehman Brothers is the approved dealer for the commercial paper prognim.

The taxable debt portion of the commercial paper program is i11ued at a discount and the District pays the obligation in full at maturity. At June 30, 2006 taxable commerolal paper i1111ued was $20 million with an interest rate of 5.30 percent. maturing November 2, 2006.

The outstanding non-talCable commercial paper at June 30, 2006 was $20 million with interest rates of between 3.30- 3.70 percent with a final maturity date o# September 7, 2006.

The District's short-term debt outstanding oonsisted of the following, as of June 30, 2006 (in milliom1): ~ leaued Av•ilable Commercial Paper Program $100 $40 $60

59 SANTA CLARA VALLEY WATER DISTRICT Notes to Baaic Financial Stai.manta (Continued) For the Year Ended June 30, 2006

(b) Long-tarm liablllllN

The Oietrict'• long-torm liabilaio, outatanding oonai•ted of the following (in thou,anda);

lnlllll'tlt Aulholiz8d June 30, Due Within ~ !i Rates 1ndl11Utd 2008 One Year G11111ral 1o1111•rm oblli,allone Certificates of participation 2000A Certilica1aa of partlclpltloo 2030 5-5.875% S 80,000 $ 71,MO $ 1,650 :!OOOB Certificates of p,aftlolplltion 2030 5-5.75% 3,110 2,820 60 2003A Certlfleates of participation 2024 2•4,1125% 86,716 71i1,99Ci •,1ee! 2004A c,r111e11111a of p• r1icip11t1on 2024 2.5-5% 32,1186 28,106 1,lil16 Compen-•d absellcn 11,51511 2,517 Oderred amourt oil nifunding (6,967) (332) Premium Oil mfundlld dabl 3,926 201 Total general loog-tenn oblig1tklna S 181ii,976 s 10,078

Enterprl•• Fo11d Debt 1963 Water utilfty bonds - general obUglltlon Serles C 2008 -.,,. $ 3,l500 $ 530 $ 170 Solies o 2012 2.26·~ • 7% &,8150 2,876 405 Tolal 1983 waler udl!lv • G.O.B, 12,3150 3,206 676

2000A Weterrevenue bond 2031 3,9-5,125% 66,180 49,522 1,045 20008 water revenue bond 2031 6Jl25- 7,8% 5,175 4,791 72 Semitropic Wl!ller benklng • (lniernent 2035 •11,;o() 11,51:2 Total enlltrprille fund debt * ee,o:,o s 1,8112

60 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statements (Continued) For the Year Ended June 30, 2006

The following is a summary of changes in long-term liabiltties as of June 30, 2006 (in thousands):

Balance Balance DueWllhn 07/0112005 Addition11 Rllductiona 06/3012006 One Year Goneral Long-Tenn Obllgatio,. 2000ACOP $ 73,315 $ $ (1,47~) $ 71,1!40 $ 1,550 2000BCOP 2,880 (80) 2,820 60 2003ACOP 83,985 (3,Q~) 711,1111!5 4,185 2004ACOP 27,1180 (1,8U) 26,105 1,916 Co,,...:,en•ted absences 11,083 5,777 (5,302) 11,558 2,517 Deferred amount on ral'unding (e,198) 332 (5,e87) (332) Premium 011 refunded debt 3,726 (2 1) 3 !125 201 Total general lalg-tenn obligation• ~ ' 5,777 $ (12,551) $ 189,Q76 ' 10,078 Enterprt•- Fund Debt 1963 Walsr Udlity bonds $ 4,565 $ s (1,360) $ 3,205 $ 575 2000A revenue bonds 61,425 (1,035) 50,3110 1,080 2000B revenue bonds 4,945 (70) 4,875 75 Discount amount on refunding (991) 39 (952} (38) Semitroplc: waler ato111g• agrMrnent 27,328 (18,816) 8512

Total enterpnse debt s 87,272 $ $ (21,242) $ 88,030 s 1,692

The aggregate maturities of long-term debt are as follows (in thousands):

Glovernm•ntsl • ctiviliH BUIIHl

Year ending June 30: Princ·e•I JnlerHt Princie• J • m artization 2007 $ 7,890 $ 8,S-41 $ 1,730 3,0011 2008 8,0!10 8,•114 1,810 2,1126 2009 6,430 8,132 1,880 ' 2,842 2010 6,770 7,777 1,Hll5 2,834 2011 9,000 7,419 1,1715 2,712 2012 2016 42,805 38,401 8,-400 12,255 2017 2021 40,430 22,816 10,2Q5 11,8,&2 2022 2026 35,1580 10,388 13,340 6,806 2027 2031 20,025 3 022 17 3315 2 !il10 Total Requir11menta s '80,780 113,300 58,-470 46,338 Add: Semitropic water •torage agreement ' 8,512 ' Lass unamortized discount and deferred amount on refunding !11521 Total principal outttanding al June 30, 2006 ~

61 SANTA CLARA VALLEY WATER DISTRICT Notes to Ba11ic Financial Statement11, (Continued) For the Year Ended June 30, 2006

Governmental 4ctlvlt1••

The following provide• a brief description of the District's debt for governmental activities outstanding as of June 30, 2006:

of P

In March 2000 the District issued $80,000,000 in Certincatea of Participation, parity obligations Series 2000A (the 2000A Certificates) and $3,110,000 in Certil!cates of Participation, subordinate obligations, Series 2000B (1he 20008 Certificate•) to pay the costs of improvements to the District's flood control 11,ystema. The District hes pledged its flood control system's revenues to secure the Hmi-anrual installments debt eervice payments. nofP ..

In February 2003, the Di1tric:t i111ued $65,715,000 of Refunding and Improvement Certificates of P.irticipation. The proceeds of the 2003A Certificete, were used to rennance $76,445,000 of the 1994A Certincates of Participation and new cert!flcates were is•ued to flnance the cost of certain other flood control improvements. The District has pledged its flood control sy11tam's revenue to secure the semi-annual inlltallment11 of debt service payment.

In January 2004, the Di,trict issued $32,965,000 of Refunding and Improvement Certlficate11 of Participation. The proceed• of the 2004A Certific::atea were used to refinance $38,915,000 of the remaining 199~ Certificate, of Participation and new certtficetea were issued to finance the cost of certain other flood control improY111111ents. The District purchased a aurety bond to fund the Debt Service Reserve Fund. The Di•trict has pledged its nood control aystem's revenue to secure the semi-annual in•tallments of debt service payment

Bu1ine11-typ• Activity

The following provides a brief description of the District's debt for bu11inH11-type • ctivlty outstanding as of June 30, 2006:

1963 Water Bonda

The Weter Bonda are general oblig.i8on, of the Oi1trlct. These bonds were luued purauant to the provlslon1 of Reaolution No. W-1.8, adopted NOYember 12, 1963. Proceed• from these bonds have been used for construction of a comprehen11ive water treatment and dilltribulion system. Debt service payments are funded through ad valorem taxes on property.

62 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statements (Continued) For the Year Ended June 30, 2006

E Revenue

In December 2000, the District iSBued $55,180,000 in Revenue Bond, Serie, 2000A (the 2000A Revenue Bonds) and $5,175,000 in Revenue Baids Taxable Serie1 2000B (the 2000B Revenue Bond•) for the acquisition and c:on1tn.1ctlon of improvement, to the Diltrict's Water Utility System. The Di1tricl ha, pledged it1 net water utility ey1tem revenues to secure the annual inltallments debt service payment,.

In December 1995, the Santa Clara Valley Water District enten,d into a water banking and exchange program with Semitropic Water Storage District and its Im prov amenI Districts that entitles the Dittrict to storage, withdrawal, and exchange rights for the Di1trict'1 St•te Water Project supplie1. The Santa Clara Valley Weter District's shan, of the total program capital costll is $46.9 million b&11ed on a 35 percent veiling in the program. The District pays the program capital costs when storing and recovering water. At Ji.me 30, 2006 the District has p• id $38.4 million towards the obligation of thia agreement.

Compensated absences are paid out of tha general fund as an employee benefl expense in the year the expense is realized. At the end of the each year all funds reimburae the general fund on a pro-111t11 basis of salary expense cost for the payment of these payouts.

Resolutions a1aoci1ted with the District's bonds and certificates of participation contain a number of covenants, limitations, and 111111lrictiona. The District believes it Is in compliance with all aignificant covenants. limitallon1, and rettrictiona. At June 30, 2008, the contingent arbitrage liabillly arising from interest earnings is $793 thousand for governmental activities and $41j1 thousand in th• Water Enterpritt Fund. At June 30, 2006, the leg•I debt margin for short term notes was $8 million.

63 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statemena (Continued) For the Year Ended June 30, 2006

(91 PROPERTY TAXEi AND BENEFIT ASSESSIIENTI

The District derive, certain revenues from Iha assessment of property tax parcel lavies and the levy of benefit a11esamenl1 and a 1pecia parcel tax. The property tax levy is compo•ed of three catagoriH: (1) a 1 percent tax allocation; (2} voter 11pproved levy to 1ervice the 1963 Water General Obligation bond• (G.O. bond1); and (3} voter approved levy to repay capit•I and operating costs related to Slate Water Projactl. Benefit Alseaem•nts are collected as part of duly au:homd debt repayment phate of the voter-epproved assessments. Jn November 2000, votere 11pproved a 15-year special parc:el tax to fund the countyMde Clean, Safe Creaks and Natural Flood Protection Program. The levy became e"9ctive July 1, 2001 and is based on the proportionate storm water runol'r for each property.

Property tax and bend aasessment revenue r11corded for the year ended June 30, 2006 follows (in thouaandI):

Spacial Water General Revenue Enterprise Fund Funde Fund Property taxes: 1 % tax allocation $ 2,024 $ 20,281 $ 1,699 Special parcel tax 28,618 Voter approved indebtedness: State water 16,961 G.0. bonde 1.688 Total taxes 2,024 48,899 19,338 Benefit asaessmants 19 212 Total property taxes and benefit 1111e1sments ~ ~ ~

The County is responsible for the aHeaament, collection, and apportionment of property t•xe• for the Diatrict. The amount of property tax levies is restricted by Artide 13A of the California State Consttution (commonly referred to as PropoI1!ion 13). The Diall1d is reapon•ible for determining the amount of benefit •s1e11ment, 1peclal parcel tax, and State Water Project Debt Service. Secured property taxes • nd benell 11ae11ment1 are each payable in equal installments, November 1 •nd February 1, •nd become delinquent on December 10 and April 10, respectively. The lien date is January 1 of each year. Property t~• are accounted for as collec:led and r11mitted by the District within the govemmel'll•I fund revenues. The proprietary fund record, property taxes as they are levied. Property taxes on the unsecured roll are due on the March 1 lien dale and become delinquent if still unpaid on August 31

The Di•trlc:I has elected to participate in the 'Teet •r Plan• offered by the County whereby the District receives 100 percent of secured property and supplemental property taxes levied in exchange for foregoing any intere•t and penalties collected on the related delinquent taxe,s.

64 SANTA CLARA VALLEY WATER DISTRICT Notaa to Basic Financial Statemant11 (Continued) For the Year Ended June 30, 2006

(1D) NET ASSETS/FUND BALANCES

Toa government-wide and butinen-tvpe activitie, fund financial statement• utilize a net assets presentation. Net Hteta are categorized as invested capital assets (n•t of r1latad debt), retlric:ted and unrettric:ted.

Invested In C8p/t8I Assets, Net of Related Debt - Thi• category groupa all capital aeeete, including infra1tructure, into one component or net aeaett. Accumulated depraciltion and the outstanding balance, of debt that are attributable to the acquisition, oonatrudion or improY!lment of theae assets reduce the balance in this category. Restricted Nat A.saat, - This category p1111111nts external restrictions imposed by cred~ors, grantora, contributora, laws, or regulations of other governments and reetridiona impoeedby law through constitutional provisions or enabling legislation. Unrestricted Net Assets- This category rapr11aent11 net assets or the Dittrict, not restricted for any project or other purpose.

Reserved fund balance represent• that portion which is not appropriable for expenditure or is legally aegregated for a specific futur11 use. As of Jun11 30, 2006 the reserved fund balanc1111 in the governmental fund, is $56.6 millions. The remaining portion is unreaerved.

Portione of unreeerved fund balance may be designated to indicate tentative plan• for financial resource utilization in a future period, such as for general contingenoie• or capital projeote. Such plans or intent are subject to change, require further legal authorizdon 1nd may not reaull in expendtures or exp11nse1. The unreserved fund balance, as of June 30, 2006 are $161.4 million in the governmental funds.

Reservations and designations of govemmental fund balances are ni!ported in the fund flnanci.11 statements of the accompanying baaic financial statements.

65 SANTA CLARA VALLEY WATER DISTRICT Notss to Baeic Financial Stat.manta {Continued) For the Year Ended June 30, 2006

Reatrided and de•ignat.d proprietary fund net assets as of June 30, 2006 are repraaented below (in thouaand•):

Water Rl1k En•rptlM lqUIPfMnt •n1111•ment Fu•d Fund Ful'ld Restricted Nat Asub Re1trlcilld for Debt Sel'llic:e 4,647 Re11ricted for R1111ricled Asut 5 Restricted for Won:in; Caplllll 10,265 Restricted for San F•lipe Oper•llona 3,3311 Restricted for Rale Stabilization 3,000 Sob-totll Restricted Net Assets 21,256

O.•ignatad for Operatlone & Co11t1neanalN De1ignallld fl:lr Encumbrana,11 s 14,372 s 1199 $ 129 Deaignalld for Operating Conting•naea 1,232 48 53 Deaignalld for Supplemental Walor Supply 589 Deaignalad for EnvironlTBllal Waler Banking 921 Sub-total Designated for Op1r•110111 & Conlll'IIJ•n0i•1 17,114 947 182

0Hignettd for c• plbll Proj•et• D•1ign11ed for Capital A.HIiis 3,418 o.. ignaled !or Future Capllal Pn:,jeda 4,428 1,145 Sub•iolal for Deaignatltd for Capital Proj• cta 7,tMII 1,145

DHIQn ..1d for Future Conllng•nt Llablllllff Oe1ignatad for Central Valley Projed 1e.oe5 Da,ign•tad fo, Self ln,urance 4,183 Sub-total for DlliQNlttd fl:lr F1.111.1re Con1Ina111t Uallilities 16,065 •,183

Investment In Non-cumntAullla 488,791) ,.• 12 12 Net A"""1ll $ 581.070 • 7,504 • •.m

66 SANTA CLARA VALLEY WATER DISTRICT Note, to Basic Financial Statemenlll (Continued) For the Year Ended June 30, 2006

(11) EMPLOYEES' RETIREMENT PLAN

Plan D11cription

All pem,anent employ11111 are 11ligibl11 to participate in the mi11c11llaneous plan with the California Public Employeea' Retirem&nt System (CalPERS), an ageri multipla.. mployer public employee dalin•d benefit i:,.n1ion plan. CalPERS provides 11!1tirement and disability benefits, 1;mnual coat-of-living adjustments, and death benefits to plan memberll and beneficieriea baaed on member's ye• 111 of service, age and final compeneation, Distlict employees vest ill'ler five year& of l!ervice and are eligible to rsc11ive retlrement bensflla at age flfty, CalPERS acts as a common investment and administrative agent for participating public entitiea within the State of California. Benefit provision, and all other requirement• are eatabliahed b)' state statute and District's ordinance. CalPERS iaeuaa a eeparste comprehensive annual financial report. Copies or the CalPERS' annual financial report may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, CA 9581•.

Funding Su.tu, and Prog""'

District employen are r•quired to contribute B.O perc•nt of thair annual covered salary to CalPERS. The Di11trict makes the contribution• required cf Di1trict employee• on !hair behalf and for their account. The Dietrict is required to contribute the actuarially determined remaining amounts neoesaary to fund th& benefits for ita members. The actuarial methods and aasumplione used are those adopted by the CalPERS Board of Administration. The required employer contribution rate for the Dilltrict for fiscal year 2005/06 was 15.•66 percent In January 2003, the Distrct emended its contract with CalPERS to include the 11tnhenced retirement formula of 2.5% at 55. The District employe&s share 2.5% of the cost of this amended retirement plan. The contribution requirements of plan memb&ra are established by State statute and employer contribution rate is e1tablished and may be amemdad by CalPERS.

Annual P1nsion Coat

For fiscal year 2005/06, the District'a annual i,.nsion cost of $11,2Q3,022 for CalPERS was squal to the Dietrict'e required end actual contributions. The required contribution was determined as part of the June 30, 2003 ectu11riel v11lu11tion uaing the entry age normal actuarial cost method with the contributions determined as a percsnt of pay. The acti.;arial assumptions included (a) 7. 75 percent investment rate of return (net of administrative expenses) and (b) projected annual salary increases that vary by duration of service. Both (a) and (b) included an inflation component of 3.0 percent. The actuarial value of CalPERS a88ets was delem,ined using a technique that emoothes the effects of short-term volstillty in the market value of inveatmenta over a three-year period. Initial unfunded liabilltiea are amortized over a cloal!ld psriod that depends on the plan's date of entry into CalPERS. Subsequent plan am11ndmenta are amortized as a level percentage of pay over a closed 20- year period. All annual pension costs are paid upon receipt of invoicee.

67 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statement, (Continued) For the Year Ended June 30, 2006

THREE-YEAR TREND INFORMATION FOR CalPERS (Dollars in Thousands)

Fiscal Annual Pen1ion Cott Percentage of Net Pension Year !APC~ APC Contributed Obl'gation 06130/2004 4,063 100% 0 06130/2005 9,385 100'J1, 0 08/30/2006 11.293 100% 0

f'UND~D STATUS OF PLAN (Dollars in Thouaand1) Unfunded (Overfunded) Act111ri•I Entry Age Unfunded Accrued Actuarial Nonna! Acluaial liability/ Annual liability Valuation Accrued Value of (Exc11111 Funded Cova"'d Asa% Date Liability Assets Al11ta) Ratio P•yroll of Payroll ja} ( } (al ! l (b~(a) (cl ((a) (b)~c) 06/30/2003 $243,620 $215,412 $28,208 100.0~ $64,234 43.9% 06/30/2004 275,6411 232,922 $42,723 84.5% 70,007 81.0% 06/30/2005 306,652 257,849 $46,803 84.1% 73,793 66.1%

(12) POST-EIIPLOYIIIENT BENEFITS

The District provides post-employment health care benefill, in accordance with negotil,ted memoranda of understanding with employee group• and adoption by the B011rd of Dir11tctore. for retired employees and/or their &urviving spouses who meet Iha eligibility requirements and elect the option. For amployaaa who ratired prior to June 30, 1988 with at least 10 years of &ervice, the Distrid provide• reimbun1ement of medical premium, of $165 per month payable quarterly. For employee• who retired after June 30, 1988, the Diatrict p11y1 100 percent of medical premium• provided the employee h• a 10 years of service with the Diatrict, the employee retires from the District at minimum age SO, and the employee is recei¥ing a monthly allowance from PERS. For 11mploye111 who 111til'lld after June 30, 1990, the Diatrict provides additional medical coverage for one dependent provided the employee haa 15 years of service with the District and their dependent does not have coverage from a current employer. Benetta are recognized as daim, are paid. For the year ended June 30. 2006, expenditures of $2,631,000 were recognized for post-employment healthcare benefit•. with 255 participants currently eligible to receive ben9fitl. The poat-emp!oyment healthcare ben.tll• are paid by an funds beaed upon their portion of annual ealary expense.

63 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Stetementa (Continued) For the Year Ended June 30, 2006

{13) RISK MANAGEMENT

Toe Distrid is expotad to various ri1kl of 10111 related to tort1; theft of, damage to, and dastruotion of a1sets; errors and omi11ion1; injurie1 to employees; and natural di111111tens. The District raporta 1111 of it1 risk managament activities in Its Risk Management lntemal Service Fund.

Toe District's dedudiblee and maximum coverage are as follows (in thousand•): Commercial Insurance ~ Deductibles ~ General liability $2,000 $50,000 Workeni' oompensation 1,000 Statutory Property damage (subject to policy aub-limlts) 100 125,000 Fk:lelity (Crime) - Directors 5 1,000 Fk:lelity (Crime) - Non-Directors 10 2,000 Non-owned aircraft liability 5,000 Boiler ind machinery 500,000

Claims expensH 1nd liabilities are reported for self-insured deductibles when ii is probable that a lass has occurred and the amount of that loss can be reasonably elltimaled. Thea• losses include an estimate of claim• that have been incurred but not reported, aliocsted and unallocated c;laim, adjustment expenses and incremental claim expense. Claim liabilitie1 are reevaluated perlodically to like Into consideration recently HIiied cl1im1, the frequency of claims, and other economic and social factors. At June 30, 2006, the liability for salf-in11ur1n01 claims was $9,~54,000. This liability is the Di1tricl'I best eetim1te b111td an available inform1tion. Settled claims have not exceeded commercial ineurance coverage in any of the past three fiscal years.

Charigee in the reported liability sirice June 30, 2004 are as follows (in thoueands):

General Workers' ~ Compensetion Tatel Claims payable at June 30, 2004 $ 3,584 $ 3,238 6,822 Current ye• r p111mium1, ' incurred claims and changes in estimates 376 1,265 1,641 Net paymanta 44) !602l (646) Claims pay11ble at June 30, 2005 3,918 3,901 7,817 Current year p111mium1, incurred claims and change• in estimates 52 2,569 2,621 Net payment• (128) (768) (88,4) Claims payable al June 30, 2006 $ 3,840 $ 6,714 $ '1,654

69 SANTA CLARA VALLEY WATER DISTRICT Notes to Basic Financial Statements (Continued} For the Year Ended June 30, 2006

(1-4) ADVANCES TO AND FROM OTHER FUNDS

The Uvas/L11ga• Watershed advanced $2.&7 million to the Watershed and Stream Stewardship Fund to provide financing for the acqui11tion of property from the Land Truat for Santa Clara County. The Uv•a/Llagaa W&l&rthad will receive intarast on tha outatandlng balance of the advance based upon the average investment portfolio of the Di•trict. Repayment of the advance will occur based upon an annual payment 1chedule and will be complete by fiscal ye• r 2006/07.

A summary of current adv•ncet to/from other funds, as of June 30, 2006, follows (in thousands):

Due within Advances to other fund Advances from other fund Amounl ~

Uvas/Llaga1 Watershed Water1hed & Stream Stewardship $667 $667

The amounts listed above as due within one year can be found on Iha govammental fund balance sheet as due to other funds and due from other funds.

(15) TRANSFERS IN AND OUT

Tran.tare are uaed to 1) move revenues from the fund that statute or budget requi~• to collect them to the fund th• t statute or budgst requires to expend them, 2) move receipte to debt service from the funds collecting the nsceipt1 to the debt 11ervice fund as deb! service payments become due, and 3) move debt proceeds hald in the c:onltruction fund to !he funds incurring the conatrudion expense.

In the year ended June 30, 2006, $16.3 million was tranafllmtd from the governmental funds to seNice debt payments; $4.5 million was tran1femKI from the COP construction fund to reimburse claim• for qu1ilified c:vpital project&, $13.-4 million WillS tr• n1ferred to reimburse capital costs; and $0.'4 million was tnsnsfem!ld for the other op11ration mattere.

70 SANTA CLARA VALLEY WATER DISTRICT Notes to Baaic Financial Statementa (Continued) For the Year Ended June 30, 2006 lnterfund tranefere for the ye• ended Jun11 30, 2006, is as follows (in thousands):

Amount Fund Receivin Tramllara Fund Trana:lanl Trensferred General Fund Waterahed & Stream Stl!lward1hip $ 19 Lower Peninsula Watershed 23 West Vall•Y Watershed 15 Gu•dalup• Watershed 30 Coyoi. Watershed 17 Uv• !I/Llag• a Watershed 6 Clean Safe Creek & Natural Flood 24 Water Entarpriae 187 Equlpm•nt Internal Service Fund 9 Risk Managem11nl lntemal Service Fund 6

Watershed & Stream Stewardahip Lower Peninsula Watershed 99 West Valley Watershed 370 Guadalupe Watershed •,O•O Coyote Watershed 676 UY111lllga1 Watershed 227 Clean Side Cre11k & Natural Flood 21

Lower Peninsula Watershed Clean Safe Creek & Natural Flood 311 COP Cons1ruction Furid •,180 West valley watershed waterahed & Stre• m Slewlrdlhlp 17 Clean Safe Creek & Natural Flood 379 COP Conllllud!on Fund 317 Guedalupt!I Watershed West V• ll•y Watershed 6,000 Clean Safe Creek & Natural Flood 615 Coyote Watershed West V•lley Watershed 7 Clean Safe Creek & Natural Flood 1,338 Uvaa/Llagaa Watershed West Valley Watershed 53 Clean Safe Creek & Natural Flood 30

Clean sale Creek & Natural Flood Water Enterprise 300 COP Debt Service Fund General Fund 772 Lower Peninsula Watershed 3,8211 West Valley Watershed 2,31!1 Guadalupe Watershed 4,951! Coyote Watershed 3,786 UVHILl•g•s Wslereh•d 609

Totel interfund tr11n,ler1 $ 34,607

71 SANTA CLARA VALLEY WATER DISTRICT Notee to Basic Financial Statements (Continued) For the Year Ended June 30, 2000

(16) COIHIITIIEHTS

(a) Contract and Purchase Commltmentll

As of June 30, 2006, the proprietary funds had open purch111e commitments of approximately $15A million related to new or exieting contract, and agreemente, Governmental funde had encumbrances of approximately $26,2 million as 11tGected in the accompanying basic financial statements, These encumbrance, repreeent commitments for the expenditure of funds and do not represent expenditures or liabit~iea. Additional commitments of $10.8 milliol'I exist in the proprietary funds and $4.8 million in th, go1141mmental fund• which relate to capital projects and are not reflected as current encumbered amounts as they will be co.,.ered by the issuance of debt and not by current resources,

(b) State Water Pro:j1ct Weter Dlllverte,

The District has contracted with tt,e State for water deli"'8riH from the State Water Project. Under the terms of the contract. tt,e Oilltrict 1111c:ured rights to obtain 6,510,763 aa-e-feet of water, of IM'lich, 3,560,783 acre-feet of water h• ve been allotted through June 30, 2006. The contract requires tha District lo reimburse the Sta for capital costs (including interest thereon) and minimum operating, maintenance, power, and replacement costs of the State Water Project transportation and conservation flllcillties. The State annually reestimetes the District's total commitment for reimbursement of euc:11 costs.

A summery of the ct111111ntly estimated remaining commitment to the State through 2035, is as follows (in flouaanda):

Tranaportation Charge,: Capital cost component, Including principal and interest $80,416 Operations and mail'ltenance 2.46,596 Delta water charges 76,700 Water revenue bond surcharges 32,793 Total State Water Project Commitmimt $436,507

(c) San Felipe Proj,ct Water D1Hv1rl11

The District has also contracted with the U.S. Dep1rtm1nt of th• Interior for water deliveries from the s,n Felipe Project. Under the terms of the contract, the District secured rights to a minimum of 4,022,900 acre-feet of w1ler, of which 2,005,402aa-e-feet of water he.,., been recei.,.ed through June 30, 2006. The contract requires the District to operate and malrtain its share of the facilities. The e11limaled remaining commitment, for water purcha&e& through 2027 total approximately $96,351,000 as of June 30, 2006.

72 SANTA CLARA VALLEY WATER DISTRICT Notee to Basic Financial Statement11 (Continued) For the Year Ended June 30, 2006

(d) Participation Rights in Storage Facllltlet

In December 1995, the District entered into a water banking and exchange program with Semitropic Water Storage District and lte Improvement Districts that entitles the District to storage, withdrawal, and exchange righta for the District's Stat& Water Project aupplie11. The Distric:t'a ahare of the total program capital costs is $46.9 million baaed on a 35 percent vesting in the program. Tha District pay• the program capital costs when storing and r.covering water. The agreement terminate, in December 2035.

The District pays the program capital costs when 11toring and recovering water. As of June 30, 2006 the Oiatricl has paid $38,338,000. Dur1ng the n"t 1 o years the District has a reservation for the full 35 percent allocation; but, by January 1, 2006 if the Dilltrict'acontribution towards the program capital coats do not equal $46.9 million, the Diatrict'a permanent storage allocation will be reduced. The [)jatrict decided to utilize its total allowable storage right• at 35 percent on January 1, 2006.

The [)jatrict has a 1torage allocation of 350,000 acre-feet and has been able to store 224,577 acre-feet in th• progriilm as of June 30, 2008. The participation rights are amortized u1ing the straight-line method over the life of the agreement. Amortization of $12,311,000 hae been recorded through flacel year 2006.

{17) CONTINGENCIES

(1) Litigation

The Diatrid is a defendant or co-defendant in a number of lawsuit, for property damages end/or personal injuries. Although the outcome of the lawsuita is not preeantly determinable, counsel for the District hae indicated that materiel loaaaa, if any, arising from these l11W11ulte are adequately provided for under indemnification agreements or inaurance coverage and therefore would not have a material effect on the June 30, 2006 basic flnancial statements.

(bl Grants and Subvention•

The District has received federal and stale grants for specific purposes that are subject lo review and audit. Although such audits could result in expenditure diaallowances under grant terms, any required reimbun,ements are not expected to be material.

(c) Cantral Valley Project

On June 7, 1977, the District entered into a contract with the U.S. Bureau of Reclamation for water seNice from the San Felipe Division of the Federal Centre! Valley Project (CVP). The CVP water service provides for both agricultural operation and maintenance (O&M) and municipal and industrial (M&I) water deliveries to the District up lo a total ma>

73 SANTA CLARA VALLEY WATER DISTRICT Notes to Basio Financial Statament11 (Continued) For the Year Ended June 30, 2006 agricultural water rate; and 2008 for the out-of-b11in M&I rate component. The methodology of CVP water rate aetting has historically recovered current year operating costs and the applicable con,truction costs over 50 years.

The Diltrict'11 initial CVP water rate, were determined ba11ad on a November 1974 CVP water rate policy and estimated construdion costs at the San Felipe Division. The actual conatrucllon costs of the San Felipe Division were ligniftcantly higher than the estimates used in the inillal rate calculation, and changes in the Federal Redamation Law during the 1980'a have led to tha development of new CVP water rate policiet. As a result, the District is facing signi!icart poasibl• Mure CVP waler rate increases because, uider the terms of the Di1trict'11 CVP water service contract, the future rate adjuatments must conform to prevailing wiiter rate policiea at the time of adjustment. Projected water rates include an estimated amount for future CVP water costs in accordance with the new CVP water rate policy.

In past ye•ni, to minimize Iha potential adverH effects at po11ible future CVP water rate lncreaset, the District collected addllional revenue through ill water ratea. Thtt District has dHignated the related incremental portion of net aa•ata of the Water Enterpri,e Fund asa duignated for CVP amounting to $16. 1 million at June 30, 2006.

(d) Perchlorate

In 2003, an invHtigation performed under the direction of ,tale water officials detected a chemical called perchlorate in several wal&r wells in South County. Although the contaminatlon is under the jurisdiction of the Central Coast Regional Water Quality Control Board, the Diatrict applied it• significant resources to assess the extent of the perchlorate contamination. In addition to offering free well testing wl1hin the initial 111tudy area, the District's EjrOundwater 111xperta continue to provide technical 11•i1tanoe to the inve~igation. The responsibility 1or assessing the problem and cleaning up the oontamination resided with the Olin Corporation. The District involvement is ,upporting local, stae, and federal efforts to ensure a safe water supply and groundwater cleanup.

74 Required Supplemental lnfonnatlon

75 v.-with I'm! Positive

s 1,742 t -2,024 m p"'"'"" ...... Beefs. :aseumiem:s US< nhn-,v ml pmpol'IJ/: 9:12 ImitllffllOm - m (l7) lilmlll 41 41 37 (4) Roimllw'i!on:III of oom - Ol!lor To~ 11::v011\IO:$ 2,7:lS

41,443 42,102 3,249 Debi sorvil:¢: -)l'.lllm 4611 469 469 Inter$ Eld fulW (I) Tm! 3,248

4.9:IS Total 47,171 Excess of te'¥i!llt.llt$ over (Ullder) Olh

$ 4,992 $ 4,992 $ 5,865 $ rn $ 1,591 $ 2,397 $ $ 379

211 211 441 2:IIJ 654 634 446 19 19 713 713 586 (127)

20 3IJ ~.lm 5,2£13 6,3'1~ 1,142 8,653 8,681 211

8,001 1,861 14-0 4,245 401

II 8,001 7,861 14-0 412

16,163 9,127

6,359 4,180 (;1,17!1) 10,058 5,433 1,119 1,432 311 (!,Ill)

16,9il 19,539

667

77 V•rill!D will! I'm! l'Mi~•t Ai::ul Revmum; wt.. s $ 2,1161 $ 3,2% $ 435 ~ll!IIS- 2,969 2,969 2,!141 Use or - ml P"'!l"r!JI: invut:mmt ~m@l 2!!0 2911 224 (1!6) llm!lll RS 85 116 R,,imb-- """11 Omer Total ''"""""' 11._, ml S,141 5,433 5,419 14 Debi '"'"'°"' lqlllymml ffl!Oresl ll!ld Tollll

011>•• llwmcmii-<->: lritta-disttia cwt:rl:tem reim~ l'lwl.,_lo~r­ R"!"'yro•nt w w,,._ w _, - COP oroomili Tl1111Sfors m TrMSfers out ToU!I oll,,r fillllru:ilig soom,,i {_,) Excess of r•voo~ ml •1 fillllru:~1g soom,,i over Food lml•ru:.., -•of GAAPIDl llu~ buh: uiss !lril>eitml p•ym1m1 fur >livllllOO w oltl!ilt ~- Add al.-, ml of year

78 Co)'llte We- V~wilb l'iul Fillll Positive Posiliff A<1Wll

$ 2,625 $ l,625 $ $ 567 $ $ $ $ m

912 912 435 (477) 1,532 1,532 723 723 684 31 31 5!1 ::17 7,713 276 276 1,106 1,106

11,075 !,SOI

5,919 5,919 5,664 255 S,691 l17

2;147 1,466 1.466 1,%6 2,SSO l0,!116

2,611 709 36,009 18,365 2,960 10,302 45,697 27,:549

3,301

2,984 3,322 1,345 (l,!177) (757) (830) (6112) 138 2,227 2,492 653

(15,321) 18,558 45,85:1, R11dl1>et imd Aa:w!I 011 ll Gov~Fwm For the Yeu Ended !UM in

Fiml Posl1iw,

Revmua:: llllllS 694 694 $ -162 $ 168 llomfrt- 765 765 140 Use of mooey ud property: Investment income 81 81 81 R

E,q>Mtlltu ...,

2,ffl :2,406 114 Debts Servioe: f"l"'J'fflffl' 370 370 lnrer..i """ f'=al T!DI op,:tao"I! il

Excess (de!loioru::y) ol r,"''"'""" over (Wider) e,p<~1,ires 706

Inna .. distriet overhe.id reimbursement from advll!lt¢ to o!hor 1imds 120 720 Repayment w adv= to oilier fullds COP Tr:ansfers: in 388 388 30 'fn11nsfers oot 6 Total other fim.11Cillj so~:s (USH} (3S2) Excess (~ficieJ}C)'} cf reve~JJes Ulld ~er fimnd1,1 sow:ca ovu (ll.llde1) oitp,odli!ll-!a (1,023) 354 Fund balam:es, be11im1mg S,:!.:S8 Rm>•cili111ioo of GAAi' - li,i

$ $ IQ

1,012 l,1112 !,W ::1'15 20 20 m Q 100 100 37::1 :i:n 72 !141

7,378 SANTA CLARA VALLEY WATER DISTRICT Noles to Required Supplementary lnfonnation For the Year Ended June 30, 2006

The District ennually adopla a budget in June lo be effective July 1 for the enauing fiscal year. Annual appropriated budgets are adopw.d for the general fund, •~c:ial revenue funds, and for alt proprietary funde. The capital proj111c:ts and debt ael'\lioe fund, are not budgeted.

Legal budgetary (expenditure) control is eetablished at the fund level, funh&r controlled within the fund at the category level. The categori111 are defined as the ol)l!lrating budget (operations and maintenance, debt service, and operating projects) and the capital budget (capital improvem&nt project,) in the budget and actual budgetary basi• 1chedulea. The amounts stated therein as proposed expenditure, become appropriations to the various District organization units. The Board may amend the budget by motion during the lleeel year. The District Chief Executive Officer is authorized lo transfer appropriationa within budget categoriea by fund. All unencumbered appropriations for operations and maintenance, operating projects and debt service lal)ie at llscal year-end. The encumbered appropriation balance is carried forward to the succeeding year and is not reappropriated. Unexpanded appropriation, for capital projects are carri11td forward until project completion or tenninalion.

The budget process is based upon accounting for certain transactions on a ba1i1 other than the Generally Accepted Accounting Principlee (GMP) basis. The reaulta of operations are presented in the budget and actual schedules in accordance with the budgetary basi11 to provid& a meaningful comparison with the budget. The major d11Terence1 between the budgetary basis and GAAP basis are as follows:

• Certain accruals (primarily accrued vacation and sick leave pay) are excluded from the budgetary basis because such amounts are budgeted on a cash basis. • Year-end encumbrances are recognized as expendlture11 on the budgetary basis, while encumbered amounts are not recognized as expenditures on the GMP b1111is until incurred. • Some operating transfers are not budgeted and therefore excluded from the budgetary basis. • Certain budgeted debt service expenditUllll in special revenue funds are recorded as operating transfers out on a GAAP basis. • Intra-district 011erhead reimbureemant on a budgetary basis is reflected as a reimbursement of e>

R11ported budget amounts reflect the annual budget as originally adopted and as sub111quently amended by the District Board of Directors. The budget amounts are baaed on estimates of the Districf11 expenditure1/e)(pense1 and the proposed means of financing them. Actual expenditures for capital items, as in the case of special revenue fund11, may vary significantly from budget due to timing of such expenditures.

82 Santa C Valley r District

83 w•r EntarprlN Fund lciMcl•llol""1••••• ...... IMIC1111119NIIIP1•NltA1•1III lulalltlMIAdlllla111•ta1L1.._

M SANTA CLARA VALLEY WATER DISTRJCT Schedule of Revenue11, Expenses and Changes in Net Assets - Budget and Actual on a Budgetary Basis Watc:r Enterprise Fum For the Year Ended June 30, 2006 (Dollars in Thou1and1)

V arilim:e wilh Finlll Budp:t OriJlm) Final Positive Budget BudJCI A~tual (Ne,alivc) Revenues: Property taxes $ 17,904 $ 17,904 $ 19,338 $ 1,-434 lutergovernmcntal services 4,153 4,153 2,676 (1,477) Ground water charaes ,;J,666 50,666 40,675 (9,991) Treated water charaes 68,197 68,197 66,1514 (1,583) Surf1.ce and reclaimed water clw:aea 1,1415 1,146 720 (42ti) Investment income 2,487 2,487 3,086 S99 Other 832 832 3,223 2,391 Total revenues 145,385 145,385 136,332 (9,053) ~: Cm-not: Operatiom and opera.ting projects 117,172 119,330 109,084 10,246 Debt Servioe: Principal ref)llyment 2,548 2,548 2,548 Interest and fiscal charges 3,4!15 3,455 4,638 (1,183) Capital oolhly! Capital improvement projects 44,698 67,577 67,129 448 Totlll expcnditur~ 167,~73 192,910 183,399 9,511 Excess (deficiency) of revenues over (under) expendinues (22,488) (47,525) (47,067) 458 Other ftn11.Dcin1 (1-): Commercial paper proceeds 13,SOO 16,426 l,115 (15,311) Tnnsfcm out (11,684) (11,684) (487) 11,l97 Excess (deficiency) of revenues illld other financing sources over (und~r) expendiwres $ (20,672) $ (42,783) (46.439) $ (3,656) Net u1cts0 beginning of year 561,514 Reconciliation of GAAP and blldsetar7 basis: Add GAAP bll!is expense• and other liabilities 17,738 Less GAAP basis other flnlncina sources (l.115) Less depreciation and amortization expense not budgeted (11,096) Add debt priocipll and GAAP buia accrual& for intereat payable 2,320 Add capital iz~d expcndiwres 22,228 Los& prior year budgetary buis ellpenses (8,017) Add current year budgetary bosi1 encumbrances 23,937 Net assets, end of year $ 561,070

85 Internal Service Fund•

The Internal Service Fund, are timilar to Enterprt• Fund, except that 111rvioe1 are rendered to other Dlllrlc:1 unb ratt.r than to the Diltrlc:1'1 ouatamen. Thia fund type con1iat1 of th• Equipment Fund and 11• Riek Man191m1nt Fund.

Equipm,nt Fund • to account for the maint.nanc. and operation of the Diatrlct'a vehlcle neet, heavy con,trudlan, and infonnatlan •yam equipm•nt. Financl~ ia pl'O\lided through 111nta1 chargn to openition• ba•ed upon usage.

Rl1k lt1n1g1ment fund • to aecoun1 for the moniea llt aside to pay for •II daima, judgments, and premium co1tl. Financing la provided through pntmium1 charged to District operations.

86 SANTA CLARA VALLEY WATER DISTRICT Combining StatemeDI of Net Auett Internal Scnicc Fu:ixb June 30, 2006 (Dollars in Thousanda)

bk Equipment MUl.ljemeot Total ASSETS Current aliSelS: Cash and investments (Note 3) 2,345 $ 13,624 $ 15,969 Accounts receivable lflpaid asseu 413 413 lnven!Ocy 71 71 Total current assets 2,416 14,037 16,453 Noncumnt assets: Capital assets (Note 7) Deprceillblc assets 14,629 18 14,647 Accumulated dqm:ciation (9,217) (6) (9,223) Total noncurrent assets 5,412 12 5,424

Total assets 7,82& 14,049 21,817 LIABILITIES Current liabilities: Accounts payable 254 38 292 Accrued liabilitie1 70 80 150 Claims payable (Note 13) 9,554 9,554 Total liabilities 324 9,6n 9,996 NET ASSETS Investment in capital assets, net of related deb! 5,412 12 5,42-4 Unreatticled, dei!igoated fie: Encumbrances 899 129 1,028 Operating co11ingeacioi 48 53 101 Spociflod purposes 4,183 4,183 Capilll projects: Future capital projecb 1,14, 1,145 Total net assets s 7,504 $ 4,377 $ 11,881

87 SANTA CLARA VAi.LEY WATER DISI'RICT Combining Statement of Revermea, Expemel md Changes in Fund Net Asscta Immal SCrvkc Ponds For the Year &ml Jane 30, 2006 (Dol]•s in Tlloouml)

Rat Bqalpm=m Mimapnelll Tollll

Ope~ nvenuffl: Vehrele 111:rvia: cbarp 2.049 $ s 2,049 Computer equipmeot ue cbuJee 2,032 2,032 Self-insurance terllice cl:lllra111 3,004 3,094

Total opc::[ltina revmues 4,081 3,09,( 7,175

Operatilllf ~: Admlol111ralio11 W se~w 2,091 2,091 Eq11ip:nClll ~ 4,346 4,846 IIISW:lllll:e 2,9114 2,9114 Depreciation and illlOm:w:ioll 1,296 1 1,297

Toll.I open.ting CJP!:mel 6,14Z S,016 n,218 Opetm1g (losa) (2,001) (l,9S2) (4,043)

NoWlpenliBI revmus Investmoot income 126 353 479 Other 4 15 19

Tol:lll noDOperatin& teVe!ll!CII 130 368 <495 Income belen traaon: (1,931) (1,614) (3,5,(5) Tr.asfen out (9) (6) (15)

Change in net Wiiietll (I.IMO) (1,620) (3,560)

Net :useta, begillning of year 9,444 5,991 15,441

Net useta, end of year s 7,504 $ 4,377 $ 11,831

88 SANTA CLARA VALLEY WATER DISTRICT Combining Statement of Cash FloWll Internal Service Funds For the Year Ended June 30, 2006 (Dollars in Thou,aooa)

Rillk EqulpmeDI M-acmcnt Tow C11Sh Dows from operatiae aotMties: Rtaip11 from eusromers ar.d =rs s 4,081 $ 2,681 s 6,762 Paym•nl! to mpplicn (2,886) (2,219} C,,105) Payment! IO •mplaycc• (1,735) (1,031) (J,766) Net Clish provided (1110d) by oponttni activities (l«l) ('69) (1,109) Cll!lh !lows. from o«1capltal llaaadna activities: Otlret receipt, 4 15 19 Tr11n.~fers out m other furuls. (9) (6) (15) Not ca,Ji provided by IIOPcopital &.a:ioa activities (5) 9 4 Cru;ll lloffll from capital md relmd llnanclnl 11.ellvltles: Acquisition and comtruaicm of c:tpital assei:S (669) (668) Net cash (uxd) by capital .md re!llled tlnancin11 activities (669) (668) Cash floffll from 1n,es11nc il!dlvltles: I.men!$t received oa cash and investment.a 126 353 419 Ne1 cash provided by m,e11!n3 activities 126 353 479 Net increase (decreue) in cash and callh equinlonll {1,018) (206) (1,294) Cash am! ca,h eqaivalontl, bc1imin& of yen 3,433 13,830 17,263 Cash and Clish eqoivllent&, end of )11:J!f 1,345 $ 13,624 s 15,969

Kecoocili~lio11 11f operatio1 income to nit CIISh pro'rided by operatln& aotmlies: Opcratus income (1011) (1,061) $ (1,982) s (4,043) Adjw,;me;at, to rec11ncil• •pcnitil'.III im:11m" (1.-) lo m:I tOlib prond•• (t11cd) by operatlua •otMlies: Depm;illioo and amortization 1,296 1,2!17 Ch•"ll" i11 operatin; ~ •11d li•bililla: ([ro:reue} in prop&id wets (413) (413) (lacreue) in ill"CJltory ()j) (3S) Increase (.iecrc•e) in accounts payable 197 8 205 Increase in accrued liabilities 63 !!O 143 increase in claim,; payable 1,737 1,737 Net cash provided (med) by 0pcl1ilti"i a,:!ivities s (!WO) $ (Sli9) $ (1,109) F11mi Net Ai!ooll! • Bw:lg.,, ud A<:lrnll 011 i, hemal Service Flll!m For th" Year Boom June 2006 in

Fl.lllll 1'11$ilillli

Rewem,©iii: lnv•sttoo1:11 illrome !08 $ !Ol! $ 126 s 18 v ehlcle service S7 Gru1:1 01:1 sale of fw:d -me!S 15 75 3 Self~illSllfm:e ervioo Olh•r Tow re11eeues 4,256

CuIT•nl: ,md 4,3911 178 2,2!0 46 Toll!! 6,431 214 01116 s:o11rees: lrllll!Sfors ool (17) (9) 11f rewm,.,, mid other r.01.rrces over Net assets, 001:iooing of year Rocoodlillllloll! of GAAi' !lll!l!II 1!111(1aeu,;y ~: Less 0011roi:ia1io1:1 !md amortmtioo expeme 001 Add capitruizoo ei:perwlnirea 750 Add GAAP buis O"J"'IIS<: Less year bur!ge1my bui! •xpens,:s Add cll!ren1 year l!ru!geti,ey buil: ••eumbrne!:ll Ne, assets, e!ld of year Tow Vlrilnc& widi Variuawidl Fmll B1111.. !'Im.I lllidfel Orfaal Fbillll: l'i!l!ililll! Or11lllll Fiwl l'oillMl illldgel l'lw!g

$ 322 $ 322 $ 353 $ 31 $ 430 $ 430 $ 479 $ 49 1,992 1,99'.2 2,049 57 2,081 2,081 2,032 (-4P) 15 75 3 (72.) 3,131) 3,131) 3,0'X (-45) 3,131) 3,139 3,094 {-45) 15 IS 16 16 3,-461 3,-461 3,462 1 7,717 7,717 7,673 (#)

-4,088 ,,s02 ,,m 1,8'1 9,901 9,723 178 910 l,256 2,210 46 4,088 5,502 ,.m 8,767 ll,157 11,933 124

(II) (II) {6) 5 (28) (28) (IS) 13

$ (63&) s (2,052) (2,046) $ 6 $ (1,078) s (-4,-468) (4,275) $ (2SS) 5,997 1,,441

(I) (1,297) 750 413 413 (lOII) (IZ!) 122 974 s 4,377 s 11,881

91 Agency Fund•

Agency f1.mda are used to account for •-•eta held by Iha Diatricl in II ftduciary capacity as an agem for im:llvidu• la, prlwlt• or;anlz•tlon1, ottwtr govemmena and/or other fum:111.

~ • The fund i11 used to aceount for the colleollon and p• ymem of expend1tun1111 for fund• held in trust f0r apeclftc 11J11rid.1d purix-.

Y · The Dillrict, S1nl1 Clar• County and 13 citiN within th• county jointly tormecl the s.,ta Clara Valley Nonpoint Source Pollution Control (NP8) Program in 1QQO, with the Dlltrlct functioning as program manager. The re1pon1ibilly for Ile fund was tnlinlfemad to the city of Sunnyvale at the •nd of filcal y11r 2005. Tti. lnel ballnca in fllcll yeer 2006 is a .,.,dual • mount that WH tranaferred durtng the yeer.

92 SANTA CLARA VALLEY WATEll DISTRICT Combining Statement of Cha111es in Assets and Liabilities Agency Funds For the Year Ended June 30, 2006 (Dollau in Thousand!)

Balance Balaru;e July I, 2005 Additions Deletiont June 30, 2006 D1p;;i11l1 l!11Dd Assets: Cash and investtnenu (Note 3) $ 98 $ 711 $ 582 $ 2!7 Due from other govermnenm 23 137 149 11 Total assets $ I 848 $ ~ $ 2~S Llabllit.les: Account.~ payable $ 18 $ '426 $ 397 $ 47 Deposits payable 103 697 609 191 Total liabilities s ':!I $ $ ,006 !; 238 t!iQQilOIUi SC1111:i:c E11ud 1 Assets: Cash and investments s 6 $ $ 6 $ Total l!llSCtS $ ~ s iii Liabilities: Depooiu payable 6 6 Total liabilities $ 1i s 0 I11111I AliltDl:J Eo11d1 Asslets: Cash and investments $ 104 $ 7J l $ 588 $ 227 Due from other govermnems 23 137 149 11 Total asselll s ':! s g $ l7 s :!l Liabilities: Accoums payable $ 18 $ 426 $ 397 $ 47 Deposits payable 109 697 615 191 Total liabilitiee s $ $ $ 2

1 As of 06/30/2005 the responsibility of the Nonpoint Soarce Fund was tr1U1sfcrrod to the City of Sammyvale. Tho remaining balance is a residual amount which was lra111ifermcl in fiscal year 2006.

93

SANTA CT..ARA VAi.LEY WATER DISTRICT Capital Assem U1ed in th~ Operation of Govemme11tal Flmdt Schedule By Srn:,n:el June 30, 2006 (Dollars in Thouwidt)

Gevermneatal acthim capital -ts: Land $ 106,IM Buildlll,ii 37,473 S1racture11 and improvcmenl5 409,649 Equipment IS,470 Cons1metion in process 345,963 Totll!I JOTUDIIIMtal. f\mill capital -l:lil $ 914,720

hnlltmenu in 10.emmental fimd!i c:apital lll!i!ll!l!i by muree:

General fund $ 81,830

Special revenue ftmds:

Waiershed & Stream Stewardship 16,214 Lower Pclll!lllllla Watershed 136,334 West Vailey Watenbcd 90,364 Guadalupe Wlllelllhed 298,986

Coyote Waterab::d 204,381 Uvas/Llaga.s Watershed 49,630 Cl.can Safll Creeks 36,981

Total pYl!l'.Ulleatal flllldiil capital ~ $ 914,720

1 This schodule presenll ooly the capital a;;i;et balam:es related to 1ovcmmcml funda. Aci:ordllJIIIY, the capital 11ssets reported in i111emlll sel'\lice funds are eacluded from the 11bove amol!llts. Generally, the capital a:,sets of imcmtl service funds are included as governmental activitie1 in the statement of net assem.

95 SANTA ICLAIIA VALLEY WATJ!III, DISDIICT c.pim! A,,m u...i m 0!",!ll!!,oo ot a-.....i - - lly ~ ffll!Aal'Vll!I' J- 31!, 2!llli!i (Dollm, ill~)·- .... Cl!O Cluef E•etmlv• - $ $ $ $ $ $ 400 PuMk: Afmn -11 11 W•-.- Q!d(lp<1>m111 llllle!,,_ 2,ui W-"'• II WIIOOnllod !I- M Warenllod P!mlil!!: !2 Lower P--m Volley ll w~ M Co)IOO) « UWll/U- ~ 13

Capiml Prog;nm s.m-~ 100 JOO Wmr ll!D.r ~-- ~ Chief Oi,

F'mamml -- Office of AdmlW:r.tffitive Senr:lce$ 5li llwinc,. ll!!d F,-~ l,:119 hl'•mmlon l\lmm~- Information M~m Diwi®loo II Lufurmatio:n MgmL SiUpp©rt l,m a.-S!!nim - Technii21 s«Yica Di'miot1 12 Technical Services Divisioo 1,004

R-- 61 Dll!l'lct,wil!, p~ - U:14 SANT A CLARA VALLEY WATER DISTRICT C1j>ilal Assets Used in the Op1n1io11 of Govornm

Gm, Chief Operatinf; Office 2,&59 Wowrshed M... pmml Division W1-,rsbed Busmm M&IUltmcul 94 94 Watershed PbMin& 12 12 Lower Peninsu.l,a/W1$$t Valley Ma;nt. 9 9 0.-Jupe Watus!,ed Msmt. 4S 49 94 Co)'Ole & Uva/LIJili MJmt 13 13 Capital l'r•p-,m Servie.s Division C'l'illl Proic•m Services DC!"'rtmcolt HW 180 Wat.r Utility 1!:mrprlt, O~ntt•• Chief Oporatin~ Office 3 Water Utility Enterprise 70 70 Admmme~lion Chief Admi:niA.tratlve Office 219 Clert Of The Board :l Fmom:i..t Serviffll Dimlon Office of Adminislrotive Sorvi«:s 52 51 Business And Fi1W1ce Proaram l,5!9 1,519 mforllUl!iOO Mlo... me • t D1mioo 1nfonnati€m Man•eemcnt Divis.:ioo !8 18 Jnformation Mamt. Support Departi:ncmtli 1,799 78 1,877 GweraJ Sc::rviccs Divi!ikm Tedrnical Service_°' Divisimt 12 12- Tectmical Services SUR)Ort Division 978 1,024 Hllltllll llA!SOUIX8 Prop- Hurrum Resources Pro1ram 60 61 O'lh•r: DistriCl»

1 This schedule presents only the capf:Qll asset balances related to ,ovemmcota.1 funds. Accordin&ly, ibe capiial """Ill n,porlod in internal service fan

97 San le,

98

[Tms PAGE INTENTIONALLY LEFT BLANK] SANTA CLARA VALLEY WATER DISTRICT

Statistical Section

This part of the District's comprehensive annual financial statement report presents detailed inform11tion as a context for understanding what the information in the financial statement, note disdogures, and required aupplementliry information 1ay11 about the Dlatrict'a overall financial health.

Content. Page

Financial Trends 100 Theae schedules contain trend information to help the reader understand how the District's financial performance and well-being have changed over time.

Revenue Capacity 108 These achedules contain information to help the reader assess the District's most significant local revenue source, water sales.

Debt Capacity 115 These schedules present information lo help the reader assess the affordability of the District's current level of outstanding debt and the Dietrict's ability to issue additional debt in the fulure.

Demographic and Economic lnfonnation 121 These schedules offer demographic and economic indicators to help the reader understand the environment within which the Di1trict'11 financial activities take plaO&.

Operating Information 123 These schedulee contain M!rvice and infrastructure data to help the reader understand how the infonnation in the District's financial report relates to the services the Di11bict provide• and the activitiea it performs.

The District implemented GASB Statsnent No. 3• in f11cal year 2000/01; achedules preaenting government-wide infonnation include information beginning in that year.

The District implemented GASB Statement No. 44 in 1'111cal year 2005/06; nevwly required schedules pre11enting infonnation in the Statistical Section beginning in that year.

gg Santa Clara Valley Water District Net Assets by Component Las! Six Fi11Cal Yeare (accural basis of accounting) (dollars in thousands)

2006 2005 2004 Governmelltal activities Investment in capital assets, net of related debt $ 706,201 $ 664,735 $ 587,667 Restricted 11,447 10,661 81,137 Unrestricted 228,8,4,4 251 ,220 243,8-41 Total governmental activities net assets ~ ~

Business-type activities Investment in capital assets, net of related debt $ 412,458 $ 397,271 $ 382,192 Restricted 21,258 22,939 59,138 Unrestricted ~ 140,045 100,240 Total business-type actillitiee net assets ~

Primary government Investment in capital assets, net of related debt $1,118,659 $ 1,062,006 $ 969,859 Restricted 32,703 33,600 1,40,275 Unrestricted 353,384 391.265 344 081 Total primary government net assets I 1,4114, 15

--""·"" I -- • ---,., ... I• -- ---1«,mi

Source: Santa Clara Vall•y Water Oistricl General Acoouotiog U111t

100 2003 2002 2001

$ 505,218 $ 448,045 $ 403,384 16,289 14,168 13,848 328,336 328 714 30-4 507 s 849,843 $ 790,927 $ 721,739

$ 300,872 $ 312,023 $ 264,871 12,442 11,925 12,109 190,843 200,314 218,504 $ 504,157

$ 806,090 $ 760,068 $ 868,255 28,731 26,093 25,957 519,179 __ _ 529,028 521,011 $1,364,000 ~

450,000 J 400.000 m 350,000 ~ 300.000 "' 250,000 J:ii 200,000 $ iS0,000 - 100,000 ~.:,: u1:0000 ' 2006 2005 2004 2000 :!00~ 2001 Filltal Year

Ill R"•llicled • UnrMtncied

101 Santa Clara Valley Weter District Change in Net Assets Last Six Fiscal Years (accural basis of accounting) (dollars in thousands)

200!:J 2005 2004 ExpenN• Governmental aclivilias: General go11emmant: $ 7,149 $ 4,848 $ 15,553 Watersheds 48,406 46,180 3-4,033 Interest on tong-term deb! 9344 11135 8,406 T 01111 govemm• ntal actillltlas expenses 64,899 62 Til9 57,992 Business-type actillllies: water enterprise 137,846 115 340 104 752 Total primary government expenses $ 202,7,45 $ 178,109 ~

Program Revenues Governmental aclivilies: Capital gn1nte and contlibutions s 24,&13 $ 19,135 $ 40,936 Bu1ine6s•t~e activities: Charges tor services 108,009 104,631 106,565 Operating grants and conlribulio11s 1,269 2,039 3,412 Capital grants and contMbut1ons l 407 313 6304 T olal bueiness-tw,e activities program revenues 110,685 107,183 116,281 Total jYimary govamment program revel'lues $ 135,298 $ 126,310 ~

Net (expense)/revenue Govemmental aclrilllties $ (40,286J $ $ (17,0SSJ

Business-twe activities 121 11s11 13,529 Total primary goV11rnment net expense ~ $ (3 l

G111111r111 Revenues end Other Ch• ng,n lnNetAneti 13011emmental activities: Property taxes $ fi0,923 $ 48,396 $ 65,954 Unrestricted inveslmenl earnings 8,1118 9.188 7,501 Miscellaneous 2,136 2,-408 3,383 Transfers 487 j387j 3020 Total gowmmentsl acii11iiies 60 162 57,605 79858 Business•l)'pll activities: Properly taxes 19,338 20,085 19,548 Unrestricted investment earnings 3,088 3,1514 2,369 Miscellaneous 3,223 2,756 4,987 Transfers {-48 l 387 ' ,0201 Total business-twe activities ~ ' 26,842 ~ Change in Net AaHta Governmental activities $ 19,678 $ 13,971 $ &2,602 BusineBS•tw,e acllllllies 12,001 l 18685 31413 Total primary govemmenl ! 171875 ~ ~

Souree: Santa Clara Vlill!'f Water Dislricl General Acrounting Unit

102 2003 2002 2001

$ 7,393 $ 3,906 $ 9,269 32,734 30,801 20.614 11 847 12 516 11 460 51,974 47 223 41,343

106 871 915 643 ~ $ 157,845 $ 1-421866 $ 123,305

$ 29,149 $ 27,833 $ 22,427

94,551 93,889 88,570 2,220 1,97<4 2,310 1,505 102 ~2 91',271!1 95 745 91,782 s 127,425 ~ $ 114,209

$ $ (19,390) $ (18,916) 102 9,820 I i (191 l ! 19,ooeJ

$ 6-4,8~ $ 61,780 $ 32,916 14,834 22,036 27,986 1,810 1,:letl 1,61-4 354 3397 81 893 88 578 ~

16,239 13,865 1-4,447 7,281 12,10-4 15,370 1,068 8,104 441 (354) (3, l $ 24,234 s 30,676 $ ao.250

$ 59,068 $ 89, 188 $ 43,600 16 839 30 778 ,(() 078 _s,___1... s.._10_1_ ~ _,___ a_a._/3_1e_

103 Santa Clara Valley Water District Fund Balances ol Governmental Funds Last Ten Fiscal Yeafs {moditled accural baais ol accounting) (dollars in tt»usands)

2006 2005 2004 2003 General Fund Roserwd $ 3,742 $ 5,645 $ 4,338 $ 9,269 Unresearved 32 131 31 094 31,284 38 788 Total general fund $ 35,873 $ 36,739 $ 35,022 $ 48,057

All other governmental funds Reserved, reported in Special revenue funds $ 26,232 s 34,053 $ 63,322 $ 79,747 Capital project lund 14,609 18,651 21,553 Debi service fund 14,964 14,270 16,021 20,558 Unreserved, reported in: Special revenue funds 126,304 141,29!5 170,474 174,822 Capital project fund 31,042 Total all other governmental funds ~ s 208,269 $ 271,370 $ 30!5,969

GmnFund fund B•lancM 40,000

35,000 fil 0 30,000 "ill 25,000 "a ,,; 20,000 5 .,l! 15,000 l 10,000 5,000 0 2006 200'! = 2002 mn 2llOO 1!!!19 1999 Hl1l7 = F"~ V'Mt

Source· Santa Cl11r11 Valley Water District General Accounting Unit

104 2002 2001 2000 1999 1998 1997

$ 4,436 $ 1,686 $ 3,435 $ 3,997 $ 10,360 $ 20,615 37,825 33,709 2•, 76• 13,248 15,830 1•,212 $ •2,260 $ 35,395 $ 2e, 1a0 _s__ ,_1._,2_45_ S 26,190 $ 34,827

s 18,009 $ 20,104 $ 16.(>47 $ 17,2•1 $ 14,828 $ 17,049

41,628 17,730 17,232 10,9•7 10,950 10,950

216,169 210,672 172,996 142,2'41 12'4,710 118,906 37,9815 47,802 158,3715 HS,337 20,288 22,0(18 $ 314,691 $ 296,308 $ 264,649 s 186,766 $ 170,776 ~

other Govlll!'nmenlal l'und!ll l'Ulld IElal11m:n

2006 2005 2004 l!003 2002 2001 2IXIJ IO~i I ~91!, !9111 FfS.CW Vear

105 Santa Ciera Valley Water District Changes in Fund Balances of Governmental Funds Las! Ten Fiscal Years (modiiied accurai basis ot accounting) jdollare in thousands)

2006 2005 2004 2003 Ri!\IE!llUes

P ropeny taxes $ 50,923 $ -4e,39tl $ 65,954 $ 04,1!195 Benefit assessments 19,212 19,187 19,234 19,161 Intergovernmental services Use of money and property: Investment income 6,360 7,1137 5,666 1•,942 R!lnlal 1,533 1.463 1.436 1,100 Reimbms11ment of capital oosls 1,765 1,171 365 9,626 O!her 584 1112 1 925 1 385 Total Revenues 80 377 '78,666 94580 111109

Expendllurw• Operation6 and operating project 41,707 •2,974 47,•69 37,529 Capital ,mprovement project& -49,6811 80,011 78,835 6",831 Debt Semce: Principal repayment 7,380 7,125 2,670 12,083 Interest and llscal charge& ~ 10 711!1 9 274 ~ Total expenditures ~ 1•0,828 ~ ~ Excess of revenues over (under) expenditures (27,528) (64,100) (43,6681 (16,153)

Olher financing sour"""' (u-) Transfers in 34,607 33,039 42,640 31,536 Transfers out (34,105) (30,863) (-40,208) (31,886} Proceeds from Issuance of debt 32,965 85,715 Payment to refunded bond escrow agent (40,738) (7•,29<1) Net original Issue premium 1,973 2,137 Sale ol a:sset Total other financing sourciiie (ueea) 502 2,176 !3368) 13,228

Net change in fund balances (27,026) (61.984) (47,034) (2,925)

Debi service as a parcentage of r1on-capitel expenditures 28.4% 29.3% 20.1% 39.9%

~llflfollll1!141-

:iooi; :100~ 2(l)t :,oo:, :IOCla m, - ,..., ,... 1i.1 ~ellll ••r

• Revenues OExpend1lures

Sourc1>: San!a Clara \/alley Water District General Accountln,1 Unit

l06 2002 2001 2000 1999 1988 1997

$ 61,780 $ 32,916 $ 21,669 $ 19,591 $ 17,831 $ 16,6nl 19,141 19,137 2•,8•4 25,711 23,164 23,341 69 1,22!! 1,023 82 51 112

22,342 26,06• 11,2•0 9,613 12,873 12,068 1,045 903 954 855 746 714 9,775 2e,896 13,355 8,965 2,152 6,715 814 501 376 213 161 261 114,966 107 443 ~ ~ 56.798 59884

32,175 26,417 24,200 28,858 28,488 16,491 49,937 25,424 30,028 1~.403 2•,2e3 24,199

5,160 5,180 3,515 3,360 3,205 3,070 11,657 11,297 6813 7687 71340 7,980 98,929 68318 66556 59,308 63,796 51,740

16,037 39,125 7.107 5.722 (6,998) 8,144

52,631 29,924 60,281 16,909 13,921 30,500 (50,712} (30,184) (eo,e11) (17,682) (14,444) (30,720) 83,110

1,076 I 910 82,720 323 (5231 17,956 38,865 89,827 e.045 (7,521) 7,92•

34,3% 38.4% 33,7% 27,7% 27,9% 40,1%

107 Santa Clara Valley Water District Water Sales by Category Laat Ten Fiscal Yeara (dollars in thousande)

Surfaoe & Ground Treated Recycled Total Fiscal Water Water Water Waller Year Sales Sales Sales Sal98 1997 s 29,727 -42,0.0 $ 2EIO $ 72,027 1998 28,044 • 34,882 2•2 e:?,948 1999 28,779 41,015 2•7 70,041 2000 35,033 •9,090 465 84,588 2001 37,889 49,982 919 88,570 2002 311,901 53,01515 713 93,669 2003 36,004 57,(J(fl 1,540 94,551 200• 46,143 61,688 134 108,565 2005 40,798 83,219 81• 10•,831 200IS 40,675 e&,&14 720 108,009

1997 1M lOOII l!OOO 2001 ~ ii!oo:il 200'! - - ~Yillllr

108 Santa Clara Valley Water District Principe I Water Sales Cuswmers Curren! year and Nine yams ago (dollars In lhOUMnds)

FisCl!II YMr 2Doe fl•oal YMr 11197 P"""enl Peroant ol Total of Total Water water Water Watar Water Customer Salai Rank Sales Sales Rank Sale1 San Joie Water Compeny $ 60,079 1 56.82% $ 38,823 1 53.62% City of Santa Clara 8,Hl6 2 7.59% 6,2'43 2 867% City of San Jose 8,176 3 7.57% '4,116 4 5.71% Calllomla Water Service Co. 6,9'43 4 6.43% '4,0'45 5 5.52',l, City of Sunny,,rale 5,724 5 5.30% 4,209 3 5.84% Greal Oaks Waler Company 4,623 8 4.28% 2,11112 8 4.15% City ol Milpillls 2,009 7 1.93% 1,736 7 2.41% Ghroy City Water 1,860 8 1.72% 752 9 1.04% City ol Morgan Hill 1,701 9 1.57% 704 10 0.98% City ol Cupertino 1,677 10 1.55% 971 8 1.35%

Total 93.56'% $ 1 8839%

Toial Water Sales

Soorca: Santa Clara Valley Waler District - Walls & Waler Pro

109 Santa Clara Valley Water District Water Enterprise AalH Summary Lael Ten Fiscal Y&ara (rates 111 dollars per acr&-foot)

Groundwater Rates Treated Water Rates Fiscal Zone W•2 Zone W-5 Non Year AG Non-AG AG Non-AG Contract COntnact 1997 $ "'3.75 S 240.00 S 11.50 I 106.00 S 310.00 S 290.00 1998 43. 7!5 240.00 1 1.50 106.00 310.00 270.00 1999 26.00 280.00 10.60 106.00 330.00 2eo.oo 2000 28.50 285.00 11.50 115.00 356.00 286.00 2001 31.00 310.00 11.50 115.00 360.00 310.00 2002 33.00 330.00 13.00 130.00 410.00 350.0!l 2003 34.00 340.00 14.00 1-40.00 420.00 360.00 2004 37.50 375.00 16.00 160.00 460.00 420.00 2005 40.50 405.00 20.00 200.00 495.00 455.00 2006 42.00 420.00 21.50 215.00 510.00 470.00

50

40 I..0 30 ~ :! 20 ..e! 0 10 '.:!?,

1997 1998 1999 2000 2001 2002 2003 2004 2005 2000 Flllclll YEllilr -+-Ground · W-2 -tt-Ground - W-5 • · lk'ICrNled • W·2 --><- Unlmated W-5 ..-REIClalmil!d

Souroe: Sama Clara Vlllley Water District- Walla & Water Producllon Un•

110 Untreated Water Rates Reclained Water Rates Zane W-2 Zon&W-6 AG Nan-AG AG Non-AG AG Non-AG $ 43.75 $ 240.00 $ 11.50 $ 108.00 $ 20.00 $ 60.00 43.75 240.00 11.50 108.00 20.00 60.00 26.00 260.00 10.80 108.00 20.00 80.00 28.50 285.00 11.50 115.00 20.00 80.00 31.00 310.00 11.00 115.00 20.00 80.00 33.00 330.00 13.00 130.00 20.00 80.00 34.00 340.00 14.00 140.00 20.00 80.00 37.50 375.00 16.00 160.00 25.00 100.00 40.50 405.00 20.00 200.00 31.00 125.00 42.00 420.00 21.50 215.00 39.00 156.00

Non-Agrlcultural & TNNll:ed W&III' Rates

eoo

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 FiscalYHr ....._G,ooml • W•2 -Ill-Ground • W•5 a Un!reiilad W-2 -1'!-- Umreatad W-5 -Recl11im!>d ...._ T,ea!Bd Contract --+-Treal<1d Non-Conlracl

Ill SANTA CLARA VALLEY WATER DISTRICT AsaeS&!d and Eotimaled Aciual Valoo ot Pm

v.. 11.1m1on Flsellll Nei L1>Cllll Toll!! Slllcuffld Secumd SBE IIOl"TIII T-1 1007 $104,876,859 $138,046 $105,014,905 $1,931,51 $120,596,052 199!! l12,459,7!lll 13•2 •3 112,689,971 15, 198,9:39 um,1,11 130,7511,551 1900 124,589,233 132,675 124,721,008 11,116,803 14:1,4:38,611 1,9!19,!166 14U38,579 2000 137,489,364 12,382 137,001,746 17,170,341! 155,372,llSII 2,014,900 157,387,684 2001 151,925,296 16,022 152,001,318 18,005,0l:16 170,500,434 2,010,724 172.517, 128 2003 173,034.086 88,487 173, 122,553 24,194,600 197,317,162 2,014,905 199,332,067 2003 164,590,934 100,606 lM,891,740 23,906,620 20i!,596,380 1,998,229 210 596,5ffll 2004 193,189,575 485,969 193,655,564 22,076,991 215,732,555 1,967,G24 211,100, 11'9 :mos 201,958,267 549,SM :200,508, 131 11,712,736 220,220,1!67 1,945,1!61 222, 166,528 2006 218,911,222 713,150 219,624,352 18,002,938 235,427,290 1,956,31:l 240,383,1363

,ii ! 15().000 ;s" s ] 100,000 ~ ·--

Srmre•:

112 S.nta c1.. Valley w•r District Property Tax Rstes-Direct and 0\/19rlapping Governments last Ten Fiscal Years

Santa Clara Schools and Fiscal Basic County Valley Water Other Total Year Wide Coun Cities CAstrict DiBtricts Tax Rate 1997 1.0000% 0.0341% 0.0000% 0.0192".4 0.0576% 1.1019% 1998 1.0000% 0.0388% 0.0000% 0.0098% 0.0920% 1.1-400% 1999 1.0000% 0.0388% 0.0000% 0.0082% 0.0736% 1.1206% 2000 1.0000% 0.0319% 0.0000% 0.0085% 0.0902% 1.1306% 2001 1.0000% 0.0356% 0.0000% 0.0075% 0.1001% 1.1432% 2002 1.0000% 0.0364% 0.0096% OJJ062% 0.0906% 1.1427% 2003 1.0000% 0.0388% 0.0193% 0.0072% 0.0973% 1.1626% 2004 1.0000% 0.0388% 0.0129% 0.0087% 0.10.3% 1.1647% 2005 1.0000% 0.0388% 0.0247% 0.0092% 0.1118% 1.1845% 2008 1.0000% 0.0388% 0.0258% 0.0078% 0.1036% 1.1780%

1.20% 1.18% 1.16% 1.14% 1.12% 1.10% 1.08% 1.08% '------"------1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fl101I Year • Total Tax Rate

Source: County of Santa Clara, Department of Finance (lwt rate area 17-028)

113 Santa Clara Valley Water District Prindpel Property Tu Paya<$ Cumml )'9AI oad Nill!> jfl!l>flil ago (OOlerl 111 thOu ..ndlj

l'IIOll'l'•r- ~111'111111"7 Pen:.nt Percent Tueble lliTueble Tueble cl T"•abla A~ ~ Allllllill!Od Yalu•''' Rank Yliu• Yliue1'1 Rank Value -1- ~- -1- Loland Slanlord Jr. UniY41raily $ 2,1589,0ilQ 1.08'JI. s 1,•211,e..1 1.20% ln!al Corpora1,oo 1,322,324 2 0,115'11, Appliod Mateliall, loo, a..4,11111 3 0.3!!'JI. 249,41!9 1Q 0.21% Soorai 00100 Proper!IH 1192,915 7 o.~ Peery Joial Velllura 611&,1199 8 0.2'1'!1. 453,052 5 0,38% Lockheed Mi!lllilllll !llld Spao• Co, ll59,615 9 0,23'11, VF Mell LLC 1108,723 10 0.21'11, 918,1140 3 0,TT% ln!.,me!ional Busirn,:1111 Machlnea Corp, 1,311,007 2 1.11% Hewie!! Packard Co 659,4-01 4 0,56% AMD PrlJl)ert1es 3411,548 1 029% National Semiconductor Corp, 321,589 8 0,21% Metropolitan Ufe lnsur~noo Co, ~ 9 O.li!5% To!al ~ 3.111'!1. ~ 5.42%

114 Santa Ciera Valley Water Oistrid Ratio cA G•n•J"II Bondld Dlbt Outstanding Lall Tin Flecal Yea111 (dollars in thousands, u:cept per capita)

Peiwntao• of Gena111I Aa-ld Filcal Obligation Value of Per YNr Bondi ~ 9!P!! 11197 $ 17,BSD 0.01"8% ...,$.,....;;=-1"""1'"" 11198 18,175 0.0124% 10 11199 14,.425 0.0100% 9 2000 12,580 0.0080% 7 2001 10,8155 0.0082% II 2002 8,~ 0.0043% 5 2003 7,21515 0.0034% 4 2004 5,8315 D.DOIZ7% S 2005 4,l585 0.0021% S 2006 3,2015 0.0013" 2

Soun:it: 8anlll Cl•,. v•11., Water Dl1ti1ot 8--•I Accounllng Unit

115 santa Clara Valley Water Distrid Ratloe of Outstandfng Debt by Tw,e Lui Ten Amill YNns (dollai. In lhouanda, exoept per oapita)

Governmental Acll~liea General Certllicaltl General RscaJ Oblgallon of Obligdon Rewnue Year Bonds ~ Bonds ______Bonds ______1997 $ 1,465 $ 135,910 S H5,395 $ 45,1~ 1998 1.275 132,886 1-4,900 39,393 19QQ 1,086 12:g,715 13,340 33,345 2000 885 209,510 11,895 26,962 2001 675 204,540 9,960 79,"31!1 2002 456 199,600 8,190 71,425 2003 215 203,670 7,040 62,971 2004 195,265 6,835 58,402 2005 188, 1'40 4,15M 1511,370 2006 180,760 3,205 55,265

Source: Slfflia Clam \lallay Water Ollllrk::! General Accouning Unffl

116 Total Percentaoa Primary of PelllClll.l Par Government lnoo~ _.Q!e!!!_ s 198,903 0.33115% s 123 188,463 0.2908"' 115 177,485 0.2430% 107 249,062 0.2725% 148 294,831 0.3'514% 174 279,870 0.3806% 163 273,896 0.3526% 158 257,502 0.3116"' 1,4g 249,075 nla U2 23U,230 IYll 135

117 !WffA CUill/1 11 /llUiY WA'IUI lllSTillCT ~tkm 00 Olraci Md 04~ ~ Jw'Wi131(), ~ llOOll- -- EIII bU•"" H__, __ 100% lll't!.ll1Q,.n Fr$mi:mi OO!on t¥ 9l:tlca ~ 100% 100,~,0IOO Otifflr Mi;h Eln:Jol [I_.. U.11::t'!·HJO'% 100,MI,~ ,_ 12,'IMJm! c...,.,,.., UAli>• - - 100% 1M,041!,!ID ~--E---,-•-•lll'F--.:i>lo,11:!-i 100% .,,~,791 100% 100,721,:2~ Lot---Ltm G$D Uniml: ~ ~ 100% 7i,2M,ll0t} -d-DllllJ'1:i 100% 10<,!ll!ll,B OililGr,,!1!7,S Uo!t>n Se:hoo! D~ 100% ~114,l!ai Ottmr Sciwol DiatJicta ~114,G;ffl c_. oc San Jml 1S.n~-1oo,b ~~,~ Cl!\' ol C...... l~O! P~ 100% 23,~,ffl Cl!' al Col!Or1i .. -•al~....,__. 100,, 11!,D,!IOO c.,o1--o1•- 100'% 45,9'00,000 c1tr al ~in Vls.w~! Ft-'~ 100% ~,£.'!2!!§,01:)t] Cl!' ol 5M""" -111 P•~ 100% 111,UJ.- Cl'>' al Sot,o, OliQ G,i-1 ~undot,fg,Oa,o iOO,, .,,,,.,000 CIIJ d ~l'l"lf'Y· a...... P-.-1 CIJlgilllll::Jla 1~ 32,345,000 OW.. Cl-; OiMIGJ ft\111111 Otlllflllln• 1!)0% ••111,0l:IO ~ll'lllllla 1111.,.,.1 ll'lrltDlilifote.ac-:d ~ fflU(t1% ~ TOTM.Mo•o-..-a-iva...-r ' 2.a.-,1N Lmu: awe of Ean~ Md~ v. ~ ai ~ (,CC'- -~aglfai wt ~mvfmtffi&) -.!l1MJ!l. TOTALlm:rO~fiMllRM.A.NlmBT ' .,,,.... ,, .. QROOll-ffllll,- I ~ffliFH (2) N!T C:OMllhE> l'MM.. ~ i t,lllllll,8,ffll (1)(2') ----·----•-olll0-&0llllilalmamt~----l'IIIMl. ....,...... ,...~•---.:1•....._.._. ... ~_...-~. B1111 ,__ -N 1 I XII_, C.Md:Olti ~11a:t,ISJ,Qq -~Talld-Cml Nt»WW:f!ititi tlr!,_,. G-OnbhldTMIII DIM * 0::l'rtilllN Talllltl Oltl s.1.a.n. ...,.Ai1111~--~ •

118 SANTA CLARA VALLEY WATER DISTRICT Revenue Bond Coverage Last Tan Fiscal Years (Dollars in Thousands)

Nel Adjusted Revenue Fiscal Adjusled Operating Available lor Debt Service Reguirements Covera11e Year Revenue Exeense Debt Sarv,ce Princiea1· Interest Total Factor 1997 $ 81,415 $ 49,225 $ 32,190 $ 8,045 $ 2,735 $ 8,780 3.6663 1998 74,186 38,639 35,547 6,230 2.466 8,696 4.0B77 1999 79,591 56,051 23,540 6,520 2,170 8,690 2.7089 2000 90,901 51,303 39,598 6,845 1,847 8,692 4.5557 2001 106,699 61,223 45,476 7,190 2,876 10,068 4.5169 2002 108,930 74,440 34,490 8,490 4,055 12,545 2.7493 2003 105,120 80,190 24,930 8,920 3,610 12,530 1.9896 2004 119,581 75,Q02 43,6711 7,025 3,197 10,222 4.2730 2005 113,239 79,QOQ 33,330 1,oeo 2,91)2 4,052 8.2256 2006 115,687 99,973 16,814 1,106 2,947 4,062 3.8534

Source: Santa Clara Valley Water District General Accounting Unit

Does not include debt service on '1Bnen1.I obligation debt

In July 1994, the District refunded Its outslending water revenue bonds and restructured its debt corwenants under a Master Resolution l)IJVeming the issuance of al Water Uttllty SyBlem debt obllgatlons. This restructuring of debt convenants included the method al c:e.lculatlng revenue bond coverage.

For fiscal year 2005106, operating revenue of $1 OQ,278 has been increased by $6,309 and operating expense of $131,422 has been decreased by $31,«9 as preacribed by the Master Resolution. These adjuatmante relate primarily lo intel"ljovemmental revenues and daprecilllion and amortization. The oomplata calculation can be ob1ained from the Finance Department at 5750 Almaden Expresaway, San Joie, CA 95118.

119 SANTA CLARA VALLEY WATER DISTRICT Computation of District Act Debt Margin June 30, 2000 (Dollars in Thoueande)

Authorized short-1enn debt under authorfy all District Ad. Section 25.& $8,000

Ouatending shorl-term debt under Section 25.6, June 30, 2006 0

District Act Seclton 25.6 debt margin on ,hor1-l•rm debt $8,000

Note: Callfomla law authorizta tha itllUlil'lC& CJ! debt that is not •ubject to the Section 25.6 Oietrict Act limlt and lhe Di81rlct hat illUecl commen::ial paper short term debt in a transaclion with the Santa Clara Vall,y Water District Publlc FacililiS:S Financing Corpo111tion and othera. See Note 7. Tha Santa Clara Valley Water Diltrict's debt iNUance praollce• are govemltd by the provisions of Calffomla law. The Codee do not set a famal debt limit for water districts. However, the ahor1 term borrowing authority set in Section 25.6 of the special legislation which fonned the Sama Clara Valley Water District (the District Act) provides a limit oo •hort tenn debt (maturty of less than five years) ot $8,000,000 that can be borrowed under authority of that Section. The Dlslrld is in compli1111ce with its Di•triot Act and the other prarisiona of California law provide addlllonal Independent authority for debt.

120 Santa Clara Valley Water Oistliel Oemographla and Eoonomlc Statilltics For Santa Cl!!B County Ul$1 T<11n Fl$01!tl Yee.Ill

PersOl"lllll Per Income O• ?ila Consumer Flsool (lhouoand• Personal Prioo Scl'lool TOO!II Unamplo!ilfflfflnl 111 YMr ~ af -i., lngoma lnd.,. Enrollmont''' ~ R-•- 1Q$7 1,812,700 S 80,003,813 37,'i!!/1 3.1% 248,377 1198,1!00 3.12% Hlffll 1,638,300 64,1150, 110 • 39,Sll4 3.4% 252,207 922,300 3.2% 19ll9 1,658,000 73,045,821 44,057 3.8% 253,987 1121,800 3.4% ,moo 1,682,5!15 91,385,181 54,313 4.2% 254,7112 !!06,100 3.5% 2001 1,697,800 83,838,707 49,:381 8.6% 254,004 898,200 4.9% 2002 1,719,600 77,548,912 45,097 1.2% 248.777 814,300 8.8% 2003 1.729.900 77.680.349 44,905 HI% 250,435 776,000 9.2% 2004 1,731,300 82,638,917 47,732 1.4% 251,198 773,'400 6.9% 2005 1,759,585 !l/a Ilia 1.1% 253,065 774,700 5.7% 2006 1,773,258 tl/a !'Ila 3.9% ilia 775,300 5.0%

Sou,oa; ''1 St"!" of California Di,partment of finan!lll "' U.S. Departmant al Commeroa Bureau of Economic ....,.ty.11 "' U.S. Department ol i..abo,- lluruea ol Lllbor Sl•ti•tioo San FranoioI S!lile ol California Eny...,._.t D-lop.,.nl O.par1ment

111• Cummt Information nOI available

121 Santa Clara Valley Water Di,trict Principal Emplo119ra Current year and Nine years ago (U1'1,1udll.:Q

f'lllclll YNr llGOI 1"1-1 YNr 1817 ~ of Perca.-ga of Total County Total County ~!lEP~Y£!!or:.fOrQll.!!:!!!!!!J.. ___ ~ Rink~~ Flank~ Cieco Systems, Inc. 13,000 1 1.67% Stanford Unlwn1ly 12,000 2 1.54% Hewlett-Packard Co. 11,400 3 1.21% 8.9fl() 3 1.13% Lockheed Martil1 Bs:i-oe 8Y1Mm• 1!1,000 4 1.03% 10.000 2 1.14% IBM Sto111ge Group 7,000 5 0.00% 5,11150 7 0.64% Stanfold Ho•pllall & Clinics 5,500 6 0.71% 5,600 8 0.63% Intel Corp 5,000 7 0.64% 1!1,000 5 0.68% Kaiser Permanente Medical Center 6,000 a o.64% Fujbu IT Holding11 Im:. 4,600 9 0.58% Applied IAaterilll• Inc, 4,130 10 0.153% Apple Computer 8,000 4 0.91% Sun Micro11ystem11, Inc. 13,000 1 VIS% Solectron Calilomi• Corp. 6,800 6 0.66% Tandem Computer• 6,000 9 0.57'% Amdahl Corp. 4,500 10 0.51%

Total 8.35%

Total County Emp1c¥nenl'''

Source: (1) Sime Emplayment Dwelapl'IWII Dep• rment, Labor Market lnlormalbn Dillillkm (2) Rich's Everyday Salee P1'09J!tolklg Onomry • 8.,... Cillnl County

122 Santa Clara Valley Water District Full-lime Equivalent District Employees by Func11on/Program Fiscal Year 2006

Fiscal Year

2006

Office of the CEO 16 Office of the District Counsel 4 Community & Government Relations 16 County-Wide Watershed Management 13-4 Capital Programs 153 Water Utility Operations 23 Water Supply 31 Water Conserwtlon 10 Surface & Groundwater Management 32 Water Quality 25 Control Systems 11 Water Utility Maintenance 31 Treated Water Operations 33 Raw Water Operationm 23 Administrative & Business Management 12 Clerk of the Board 7 Organizational Training & Development 6 Busineea Support Services 17 Library & Records 8 Budget Office 7 Accounting 20 Information & Systems Management 46 Technical Services 6 Wells & Water Production 15 Real Estate & Right-of-Way 9 Equipment Management 11 Warehouse & Inventory Control B Facilities Maintenance 14 Purchasing 10 Contracts Administration 5 Human Resources & Benefits 27 Health & Safety 8

Total 778

Source: SCVWD Human Resources & Benefit& Unit

123 Santa Clara Valley Water District Operating Indicators by Function/Program Fiscal Year 2008

Fiscal Year Functiol1/P gram 2006 ____ _ Well• & Groundwmr Production New Wells 713 Deslroyed Wais 707 Well Permits 1,955 Well Inspections 1,420 W•ten1t.d llanagern•nt Miles of Vegetation R1tmolM('.I/Managed 188 Cubic Yards of Sediment Remo"'9d 39,420 Milea of Bank Erosion Protection 1.2 Laboratory Service• Unit Water Samples Tested (approx.) 146,000 Water 01.&lily Violations 0

Water Measurement Division Meter Readings/Site Viska 6,627 Mater Repaira/Prevantative Maintenance 200 Backflow Device Teslinga 120 Community Prqeot• Review Permits l111aued 401 Land Development Review Requeets 2,3-42 Underground Service Alerts 40,356 Raqu91ta for Flood Zona Information 246 Environmental lmpect Reports RaYiewed 144 Ordinance 83-2 Violation Notlcea 23 Human Rnource• Permanent Positiona Hired 83 Temporary Workers Employed 150 Employment Application, Processed 1,445 Health & S.r.ty Ergonomic Asae1111mant11 42 Coofined Space Assessments 200 Employee Safety Committee Meetings 12 Projects Managed by Type: Capital Projecte 128 Operating Projects 62 Operations Projecta 350

Source: various Government Depanments

124 Santa Clara Valley Water Dietlict Capital Asset St!!litlll:ics by Function/Program Fiscal Year 2006

Fiscal Year 2006

WIier UUllty Entsrpl11e Acres ot groundwater recharge ponda 393 Milei. of canali. 17 Miles of pipeline 142 Miles of tunnels 8 Number of treatment plants 3 Number of pumping statione 3 Number of treated water reservoir, 1 Water Utlllty Openitlon, Proces11 Control Instrumentation 660 Mechanical Drives 47 Chemical Mixers 85 Electrical Motors 3-i1 Power Distribution Equipment 22 Pumps -436 Utlllty Vaults & Structures 968 Chemical & Water Storage Tanks 120 Transformers 4 Valves 678 Valve Operators 366 Generators 13 Flow Meters 188 Drive Engines 4 Electric DrivH 119 Watarsh•d• Miles al creeks and rivers managed for flood control 700 Number of reservoir, 10 Total District rasarvoir capacity ( acre.feet) 169,415 Fleet Equipment Class I Passenger Vehicles '227 Claes II Heavy Duty Trucks 70 Class Ill Tractors, Const. Equip., Generators, Forklifts 29 Class IV Misc. Small Tools & Engines 946

Sourc•: Various Government Departments

12S SANTA CLARA WATER

FIOO!I Control Sy1lom HilltoMQII Results Combined Slilt,,;,,,ml of l'lI S..11/ice Covel'llgo For 11>1! FillCIII Yeoro Elldi1111 June 30, (Doll.,. In Thlllloffllll)

2006 2003 Flood Cont,ol Sy•I""' Revon-: Benefit .atl!.:M!!lsam:e,nt, $ 19,«ll! s 18,:!1!1 $ 111,429 s 19,358 $ 19,335 Property ta• 14,4111 12,006 25,328 25,201 23,845

lnves:tment income 2,291 3,902 1,906 8,321 15,517 Rental income 1.395 1,338 1,359 1,045 1,008 Other T olal Flood Control Re11enw

Debi Servi"": 1004'\ C..rolicote• ol pamcipmion, $ s $ 6,353 s 10,049 $ 10,045 2000A O,mlicoteo ol l"'mci!lllllon 5,545 5,545 5,542 5,5-16 5,547 2003 Cllf'llfioalH of plfflidpafion 7,675 4,358 4,355 2004 Certlfi""""' of p1f'lldp11ion Tolal Debi Servlo,,

Coverage: Tola! F!ood Conlrol ovor Total Debi Sl!rvioe ~-·· 2.41 2.31 3.07 3.47 3,83

(1) Tho l>enelit •->1,11menl-- on lllo Slllllem1nl <>fR.,,onUN, ElO!l - are e,duded. Therefore, !he llenelit •-Ill _..nl

In w;ord1noe wlih \/Ole!' 1111horizllllons, lle!lelil UHH!Mnbt ""' 11!111 •I 1,25 oonlrol projodll fill

(2) The deb! """'""' PIYIMOI prnenllld on Ille bartloipali:m indudes 1m1ounm loOd comro1 Debi SeNi,:e Coven,go I\Jnd porllon ol lM p!inoi1>1I 1fld m-mil! ""ym,mt (7.11%) hu been exai1J<1e,L

Soun;;e; Santa Clara

126 5750 Almaden Expreuway Santa (1010 Volley San Jose, CA 95118-3686 Water District Telephone: -408-265-2600 www.vollaywoter.org [Tms PAGE INTENTIONALLY LEFT BLANK] APPENDIXB

SUMMARY OF PRINCIPAL LEGAL DOCUMENTS

The following is a summary of certain provisions of the Water Utility System Master Resolution which are not described elsewhere. This summary does not purport to be comprehensive and reference should be made to the respective agreement for a full and complete statement ofthe provisions thereof

DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF THE WATER UTILITY SYSTEM MASTER RESOLUTION

DEFINITIONS

Unless the context otherwise requires, capitalized terms used under the caption "DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF THE WATER UTILITY SYSTEM MASTER RESOLUTION" will have the meanings defined below. Unless the context otherwise requires, all capitalized terms used below and not defined below will have the meanings ascribed thereto in the Water Utility System Master Resolution and the Bond Resolution.

Bonds means all revenue bonds or notes of the District authorized, executed, issued and delivered by the District, the payments of which are on a parity with the payments due with respect to the 2006 Bonds, and which are secured by a pledge of and lien on the Net Water Utility System Revenues.

Business Day means any day other than a Saturday, Sunday or legal holiday or a day on which banking institutions are authorized or required by law to be closed in the State of New York, or in the State of California for commercial banking purposes.

Certificate of the District means an instrument in writing signed on behalf of the District by the Chairman of the Board of Directors of the District, or by the General Manager of the District, or by any other officer of the District duly authorized by the Board of Directors of the District to sign documents on its behalf with respect to matters referred to therein.

Contracts means any installment purchase agreement and all contracts of the District previously or hereafter authorized and executed by the District, the payments under which are on a parity with the payments due with respect to the Installment Purchase Agreement, and which are secured by a pledge and lien on the Net Water Utility System Revenues, including the DWR Loan but excluding contracts entered into for operation and maintenance of the Water Utility System.

Current Water Utility System Revenues means all gross income and revenue received or receivable by the District from the ownership or operation of the Water Utility System, determined in accordance with Generally Accepted Accounting Principles, including all rates, fees, charges (including connection fees, contributions in aid of construction legally available for debt service, and charges and standby or water availability charges) and business interruption insurance proceeds received by the District for the Water Service and the other services of the Water Utility System and all other income and revenue howsoever derived by the District from the ownership or operation of the Water Utility System or arising from the Water Utility System, and also including (I) all income from the deposit or investment of any money in the Water Utility System Revenue Fund and the Rate Stabilization Reserve Fund, (2) all income from the deposit or invest of money held in any Bond or Contract or any fund (including without limitation a construction or acquisition fund) established pursuant to a Trust Agreement to the extent such income is required to be available to pay Bond Payments, obligation payments or other parity obligation payments or is required to be deposited in the Water Utility System Revenue Fund; but excluding benefit assessments and proceeds of taxes, and excluding also any refundable deposits made to establish credit advances or contributions in aid of construction.

B-1 Debt Service means, for any period of calculation, the sum of: (I) the interest payable on all outstanding Bonds during such period, assuming that all outstanding serial Bonds are retired as scheduled and that all outstanding term Bonds are prepaid or paid from sinking fund payments as scheduled ( except to the extent that such interest is capitalized), (2) those portions of the principal amount of all outstanding serial Bonds maturing in such period, (3) those portions of the principal amount of all outstanding term Bonds required to be prepaid or paid in such period, and (4) those portions of the Contracts required to be made during such period, (except to the extent the interest evidenced and represented thereby is capitalized); but less the earnings to be derived from the investment of moneys on deposit in debt service reserve funds established for Bonds or Contracts; provided that, as to any such Bonds or Contracts bearing or comprising interest at other than a fixed rate, the rate of interest used to calculate Debt Service will, for all purposes, be assumed to bear interest at a fixed rate equal to the higher of: (i) the actual rate on the date of calculation, or if such Contract or Bond is not yet outstanding, the initial rate (if established and binding), and (ii) the highest average variable rate borne over a 3 month period of the preceding 12 months by outstanding variable rate debt issued by the District or, if no such variable rate debt is at the time outstanding, by variable rate debt of which the interest rate is computed by reference to an index comparable to that to be utilized in determining the interest rate for the debt then proposed to be issued; provided further that if any series or issue of such Bonds or Contracts have twenty-five percent (25%) or more of the aggregate principal amount of such series or issue due in any one year, Debt Service will be determined for the period of determination as if the principal of and interest on such series or issue of such Bonds or Contracts were being paid from the date ofincurrence thereof in substantially equal annual amounts over a period of twenty-five (25) years from the date of calculation; and provided further that if the Bonds or Contracts constitute Paired Obligations, the interest rate on such Bonds or Contracts will be the resulting linked rate or the effective fixed interest rate to be paid by the District with respect to such Paired Obligations; and provided further that the amount on deposit in a debt service reserve fund on any date of calculation of Debt Service will be deducted from the amount of principal due at the final maturity of the Bonds and Contracts for which such debt service reserve fund was established and to the extent the amount in such debt service reserve fund is in excess of such amount of principal, such excess will be applied to the full amount of principal due, in each preceding year, in descending order, until such amount is exhausted.

Defeasance Securities means and includes, if and to the extent the same are permitted by law, only such securities as are described in clauses (i), (ii) and (iii) below which will not be subject to redemption prior to their maturity other than at the option of the holder thereof, or as to which an irrevocable notice of redemption of such securities on a specified redemption date has been given and such securities are not otherwise subject to redemption prior to such specified date other than at the option of the holder thereof, as follows: (i) any bonds or other obligations which as to principal and interest constitute direct obligations of, or are unconditionally guaranteed by, the United States of America, including obligations of any of the Federal agencies to the extent unconditionally guaranteed by the United States of America, including obligations issued pursuant to paragraph 21B(d)(3) of the Federal Home Loan Bank Act, as amended by paragraph 5ll(a) of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or any successor provisions to paragraph 21B of the Federal Home Loan Bank Act, as so amended; (ii) any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state ( a) which are not callable prior to maturity or as to which irrevocable instructions have been given to the trustee of such bonds or other obligations by the obligor to give due notice of redemption and to call such bonds for redemption on the date or dates specified in such instructions, (b) which are secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or bonds or other obligations of the character described in the Water utility System Master Resolution, which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or date thereof or the redemption date or dates specified in the irrevocable instructions referred to in subclause (a) of this clause (ii), as appropriate, and (c) as to which the principal of and interest on the bonds and obligations of the character described in clause (i) above which have been deposited in such fund along with any cash on deposit in such fund are sufficient to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this clause (ii) on the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to in subclause (a) of this clause (ii), as appropriate; and (iii) certificates that evidence ownership of the right to payments of principal or interest on obligations described in

B-2 clause (i), provided that such obligations will be held in trust by a bank or trust company or a national banking association.

Delivery Date means the date on which a Series of Bonds is delivered to the original purchaser thereof

District means the Santa Clara Valley Water District, a water district duly organized and existing under and by virtue of the laws of the State of California.

Experienced Banker or Advisor means a reputable investment banker experienced in underwriting obligations of the type which is the subject of an opinion rendered in accordance with a provision of the Water Utility System Master Resolution, or a reputable financial advisor experienced in advising issuers in connection with such issuers' issuance of obligations of the type which is the subject of an opinion rendered in accordance with a provision of the Water Utility System Master Resolution.

Finance Manager means the Finance Manager of the District or his or her successor as designated by the Board of Directors of the District.

Fiscal Year means the period beginning on July I of each year and ending on the next succeeding June 30, or any other annual accounting period hereafter selected and designated by the Board of Directors of the District as the Fiscal Year of the District.

Generally Accepted Accounting Principles means the uniform accounting and reporting procedures set forth in publications of the American Institute of Certified Public Accountants or its successor, ofby any other generally accepted authority on such procedures, and includes, as applicable, the standards set forth by the Government Accounting Standards Board or its successor.

Law means the Santa Clara Valley Water District Act (Chapter 1405 of Statutes of 1951, as amended), and all laws amendatory thereof or supplemental thereto.

Maintenance and Operation Costs means (i) costs spent or incurred for maintenance and operation of the Water Utility System calculated in accordance with generally accepted accounting principles, including ( among other things) the reasonable expenses of management and repair and other expenses necessary to maintain and preserve the Water Utility System in good repair and working order, and including administrative costs of the District that are charged directly or apportioned to the Water Utility System, including but not limited to salaries and wages of employees, payments to the Public Employees Retirement System, overhead, insurance, taxes (if any), fees of auditors, accountants, attorneys, consultants or engineers and insurance premiums, and including all other reasonable and necessary costs of the District or charges ( other than Debt Service) required to be paid by it to comply with the terms of the Water Utility System Master Resolution or any other Bond or Contract or of any resolution or indenture authorizing the issuance of any Bonds or of such Bonds or the execution of such Contract and (ii) all costs of water purchased or otherwise acquired for delivery by the Water Utility System (including any interim or renewed arrangement therefor), but excluding in all cases depreciation, replacement and obsolescence charges or reserves therefor and amortization of intangibles or other bookkeeping entries of a similar nature.

Net Water Utility System Revenues means, for any Fiscal Year or other period, the Water Utility System Revenues during such Fiscal Year or period less the Maintenance and Operations Costs during such Fiscal Year or period.

Opinion of Counsel means a written opinion of counsel of national reputation, generally recognized to be well qualified in the field oflaw relating to municipal bonds, retained by the District.

B-3 Rating Agency means Moody's Investors Service or Standard & Poor's Ratings Group or such other nationally recognized securities rating agencies as may be so designated in writing to the Trustee by an authorized representative of the District.

Resolution means Resolution No. 06-80, adopted by the Board on November 28, 2006 under the Act, as originally adopted or as it may from time to time be supplemented or amended by any Supplemental Resolution adopted pursuant to the provisions thereof.

Series means one or more obligations issued at the same time, or sharing some other common term or characteristic, and designated as a separate Series under a Trust Agreement.

Trustee means the Trustee and/or any entity appointed by the District as a trustee or fiscal agent under any Trust Agreement.

Water Service means the water service furnished, made available or provided by the Water Utility System.

Water Utility System means (i) all property rights, contractual rights and facilities of the District relating to the water, including all facilities for the treatment, conservation, storage, transmission and distribution of water now owned by the District; and (ii) all other properties, structures or works for the treatment, conservation, storage, transmission and distribution of water and the generation and delivery of hydroelectric power in connection therewith hereafter acquired and construed by or for the District and determined by the District to be a part of the Water Utility System; and (iii) all additions, betterments, extensions or improvements to such facilities, properties, structures or works or any part thereof hereafter acquired and constructed.

Water Utility System Reserve Fund means the fund by that name established pursuant to the Water Utility System Master Resolution.

Water Utility System Revenues means, with respect to any Fiscal Year, (i) Current Water Utility System Revenues, plus (ii) deposits to the Water Utility System Revenue Fund from amounts on deposit in the Rate Stabilization Reserve Fund, representing Current Water Utility System Revenues, plus (iii) deposits to the Water Utility System Revenue Fund from amounts on deposit in the Rate Stabilization Reserve Fund, representing amount other than Current Water Utility System Revenues, but only up to 0.10 times the sum of all Debt Service on all parity obligations for any Fiscal Year, less (iv) any Current Water Utility System Revenues transferred from the Water Utility System Revenue Fund to the Rate Stabilization Reserve Fund.

WATER UTILITY SYSTEM REVENUES

Establishment of Funds.

The District has established and agreed to maintain, so long as any Bonds or Contracts remain outstanding, the Water Utility System Revenue Fund to be held by the Finance Manager. Amounts in the Water Utility System Revenue Fund will be disbursed, allocated and applied solely to the uses and purposes described in the Water Utility System Master Resolution, and will be accounted for separately and apart from all other accounts, funds, money or other resources of the District. The District will only have such beneficial right or interest in such money as is provided in the Master Resolution.

All Water Utility System Revenues and all amounts on deposit in the Water Utility System Revenue Fund are irrevocably pledged to the payment of the Bonds and Contracts as provided in the Water Utility System Master Resolution; and the Water Utility System Revenues will not be used for any other purpose while any of the Bonds and Contracts remain outstanding; provided that out of the Water Utility System Revenues and amounts on deposit in the Water Utility System Revenue Fund there may be apportioned such sums for such

B-4 purposes as are expressly permitted in the Water Utility System Master Resolution. Such pledge will constitute a first lien on Water Utility System Revenues and, subject to application of Water Utility System Revenues and all amounts on deposit therein as permitted in the Water Utility System Master Resolution, the Water Utility System Revenue Fund and other funds and accounts created under the Water Utility System Master Resolution for the payment of the Installment Purchase Agreement and all other Contracts and Bonds in accordance with the terms of the Water Utility System Master Resolution.

Allocation of Water Utility System Revenues.

In order to carry out and effectuate the obligations of the District to pay Debt Service, the District has agreed and covenanted that all Current Water Utility System Revenues received by it will be deposited when and as received in the Water Utility System Revenue Fund. The District will transfer or make payments from the Water Utility System Revenue Fund the amounts set forth below at the following times and in the following order of priority: (a) Such amounts at such times as the District will require to provide for the payment of Maintenance and Operation Costs; (b) To each Trustee to pay Debt Service at the times and in the amounts required by applicable Bonds or Contracts or the resolutions, Trust Agreements, indentures or other instruments securing each Bond or Contract; (c) To each Trustee for deposit in the applicable Bond or Contract or reserve fund with respect to such Bonds or Contracts an amount equal to the amount, if any, at such times as required to be deposited therein to build up or replenish such Bond or Contract reserve fund as and to the extent required by the applicable Bond or Contract or the resolutions, Trust Agreements, indentures or other instruments securing each Bond or Contract; (d) On any date prior to the last Business Day of each Fiscal Year, after making each of the foregoing payments, the balance of the money then remaining in the Water Utility System Revenue Fund may be used for any lawful purpose of the Water Utility System; and ( e) On the last Business Day of each Fiscal Year, the balance of the money then remaining in the Water Utility System Revenue Fund may be used for any lawful purpose of the District.

SEPARATE UTILITY SYSTEMS

Separate Utility Systems.

The District may create, acquire, construct, finance, own and operate one or more additional systems for water supply, transmission or other commodity or service. The revenue of that separate utility system will not constitute Current Water Utility System Revenues and may be pledged to the payment of revenue obligations issued to purchase, construct, condenm or otherwise acquire or expand such separate utility system. Neither the Water Utility System Revenues nor the Net Water Utility System Revenues will be pledged by the District to the payment of any obligations of a separate utility system except with respect to the Net Water Utility System Revenues, on a basis subordinate to the lien of the Bonds and Contracts on the Net Water Utility System Revenues.

COVENANTS OF THE DISTRICT

Against Liens and Encumbrances.

The District will pay or cause to be paid when due all sums of money that may become due or purporting to be due for any labor, services, materials, supplies or equipment furnished, to or for the District in, upon, about or relating to the Water Utility System and will keep the Water Utility System free of any and all liens against any portion of the Water Utility System. In the event any such lien attaches to or is filed against any portion of the Water Utility System, the District will cause each such lien to be fully discharged and released at the time the performance of any obligation secured by any such lien matures or becomes due, except that if the District desires to contest any such lien it may do so. If any such lien will be reduced to final judgment and such judgment or any process as may be issued for the enforcement thereof is not promptly stayed, or if so stayed and such stay thereafter expires, the District will forthwith pay or cause to be paid and discharged such judgment.

B-5 Against Sale or Other Disposition of Property.

The District will not sell, lease or otherwise dispose of the Water Utility System or any part thereof essential to the proper operation of the Water Utility System or to the maintenance of the Net Water Utility System Revenues, and will not enter into any agreement or lease which would impair the operation of the Water Utility System or any part thereof necessary to secure adequate Net Water Utility System Revenues for the payment of Bonds or Contracts or which would otherwise impair the rights of the holders of Bonds or Contracts with respect to the Net Water Utility System Revenues or the operation of the Water Utility System; provided, that any real or personal property which has become non-operative or which is not needed for the efficient and proper operation of the Water Utility System, or any material or equipment which has become worn out, may be sold if such sale will not reduce the Net Water Utility System Revenues below the requirements to be maintained under the Water Utility System Master Resolution.

Maintenance and Operation of the Water Utility System; Budgets.

The District will maintain and preserve the Water Utility System in good repair and working order at all times and will operate the Water Utility System in an efficient and economical manner and will pay all Maintenance and Operation Costs as they become due and payable. Not later than the first Business Day of each Fiscal Year, the District will adopt and, if requested, make available to each Trustee, a budget approved by the Board of Directors of the District setting forth the estimated Maintenance and Operation Costs, the estimated payments for Debt Service, the estimated reimbursement payments and the estimated debt service payments on all Bonds and Contracts for the then current Fiscal Year; provided, that any such budget may be amended at any time during any Fiscal Year and, if requested, such amended budget will be made available to each Trustee.

Compliance with Contracts.

The District will comply with, keep, observe and perform all material provisions of agreements, conditions, covenants and terms, express or implied, required to be performed by it contained in all contracts for the purchase of water for, and the provision of water service from the Water Utility System and all other material provisions of contracts affecting or involving the Water Utility System to the extent that the District is a party thereto.

No Superior Liens.

The District will not create or allow any lien on the payment from the Net Water Utility System Revenues or any part thereof prior or superior to the obligation to pay Bonds or Contracts as provided the Water Utility System Master Resolution or which might impair the security of any Bonds or Contracts.

Insurance.

The District will procure and maintain such insurance relating to the Water Utility System which it will deem advisable or necessary (based on the annual written report and approval of the District's risk manager or an independent insurance consultant) to protect its interests, which insurance will afford protection in such amounts and against such risks as are usually covered in connection with facilities, properties, structures and works similar to the Water Utility System; provided, the District will not be required to procure or maintain any such insurance unless such insurance is commercially available at reasonable cost; provided, further, that any such insurance may be maintained under a self-insurance program so long as such self-insurance is maintained in the amounts and manner usually maintained in connection with facilities, properties, structures and works similar to the Water Utility System. All policies of insurance required to be maintained under the Water Utility System Master Resolution will provide that each Trustee will be given thirty (30) days' written notice of any intended cancellation thereof or reduction of coverage provided thereby.

B-6 Accounting Records and Financial Statements.

The District will keep appropriate accounting records in which complete and correct entries will be made of all transactions relating to the Water Utility System, which records will be available for inspection by each Trustee at reasonable hours and under reasonable conditions. The District will prepare and file with each Fiscal. Agent aunually within two hundred and ten (210) days after the close of each Fiscal Year financial statements of the District for the preceding Fiscal Year prepared in accordance with Generally Accepted Accounting Principles, certified by the Independent Certified Public Accountant who examined such financial statements stating that nothing came to his or her attention in connection with such examination that caused him or her to believe that the District was not in compliance with any of the agreements or covenants contained the Water Utility System Master Resolution.

Payment of Taxes and Compliance with Governmental Regulations.

The District will pay and discharge all taxes, assessments and other governmental charges which may hereafter be lawfully imposed upon the Water Utility System or any part thereof when the same become due. The District will duly observe and conform with all valid regulations and requirements of any governmental authority relative to the operation of the Water Utility System or any part thereof, but the District will not be required to comply with any regulations or requirements so long as the validity or application thereof will be contested in good faith.

Collection of Rates, Fees and Charges.

The District will charge and collect or cause to be collected the rates, fees and charges applicable to the Water Service and will not permit any part of the Water Utility System or any facility thereof to be used or taken advantage of free of charge by any corporation, firm or person, or by any public agency (including the United States of America, the State of California and any city, county, district, political subdivision, public corporation or agency of any thereof); provided, that the District may, without charge, use the Water Service.

Eminent Domain and Insurance Proceeds.

If all or any part of the Water Utility System will be taken by eminent domain proceedings, or if the District receives any insurance proceeds resulting from a casualty loss to the Water Utility System, the proceeds thereof will be used to substitute other components for the condemned or destroyed components of the Water Utility System or applied to the payment of Bonds and Contracts.

MISCELLANEOUS

Benefits of Water Utility System Master Resolution Limited to Parties.

Nothing contained in the Water Utility System Master Resolution, expressed or implied, is intended to give any person other than the District, the Trustees, or the owners of Bonds and Contracts any right, remedy or claim under or pursuant to the Water Utility System Master Resolution, and any agreement or covenant required in the Water Utility System Master Resolution to be performed by or on behalf of the District will be for the sole and exclusive benefit of such other party.

Partial Invalidity.

If any one or more of the agreements or covenants or portions thereof required in the Water Utility System Master Resolution to be performed by or on the part of the District will be contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof will be null and void and will be deemed separable from the remaining agreements and covenants or portions thereof and will in no way affect the validity therof. The District declares that it would have adopted the Water Utility System Master Resolution,

B-7 and each and every other article, section, paragraph, subdivision, sentence, clause and phrase of the Water Utility System Master Resolution irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases of the Water Utility System Master Resolution or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid.

Funds.

Any fund required to be established and maintained under the Water Utility System Master Resolution by the Finance Manager may be established and maintained in the accounting records of the Finance Manager either as an account or a fund, and may, for the purpose of such accounting records, any audits thereof and any reports or statements with respect thereto, will be treated either as an account or a fund; but all such records with respect to any such fund will at all times be maintained in accordance with sound accounting practice and with due regard for the protection of the security of the rights of the holders of Bonds and Contracts.

Investments.

Any money held by the District in any of the funds provided in the Water Utility System Master Resolution will be invested in lawful investments of District funds, provided that money held in any fund established under a Trust Agreement with respect to Bonds and Contracts will be invested in lawful investments which will, as nearly as practicable, mature on or before the dates on which such money is anticipated to be needed to pay Bonds and Contracts.

The following is a summary of certain provisions of the Installment Purchase Agreement which are not described elsewhere. This summary does not purport to be comprehensive and reference should be made to the Installment Purchase Agreement for a full and complete statement ofthe provisions thereof

DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF THE INSTALLMENT PURCHASE AGREEMENT

Unless the context otherwise requires, the terms defined under this caption "DEFINITIONS AND SUMMARY OF INSTALLMENT PURCHASE AGREEMENT" will for all purposes hereof and of any amendment hereof or supplement hereto and of any report or other document mentioned herein have the meanings defined therein, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein. Unless the context otherwise requires, all capitalized terms used herein and not defined herein will have the meanings ascribed thereto in the Trust Agreement or in the Water Utility System Master Resolution.

Authorized District Representative means the Chair of the Board of Directors or Finance Manager of the District or such other officer or employee of the District or other person who has been designated as such representative by resolution of the Board of Directors of the District.

Component means Component A and Component B of the Project as more particularly described in the Installment Purchase Agreement, including such components as may be added, deleted or substituted from time­ to-time as provided therein.

Component A means those components of the Project related to the financing of certain equipment and facilities within the District Water Utility System as more particularly described in the Installment Purchase Agreement including such components as may be added, deleted or substituted from time-to-time as provided therein.

Component B means those components of the Project related to reimbursement to the District for costs previously expended by the District to finance certain equipment and facilities within the District Water Utility System as more particularly described in the Installment Purchase Agreement.

B-8 Continuing Disclosure Agreement means the Continuing Disclosure Agreement, dated as of September 1, 2007, by and between the District and US. Bank National Association, as dissemination agent, as originally executed and as it may from time to time be amended or supplemented in accordance therewith.

Corooration means the Santa Clara Valley Water District Public Facilities Financing Corporation.

Event of Default means an event described in under the caption "EVENTS OF DEFAULT AND REMEDIES OF THE CORPORATION" herein the Installment Purchase Agreement.

Installment Payment Date means, with respect to the Series 2007A Certificates, three Business Days prior to June 1 and December 1 of each year, commencing three Business Days prior to December 1, 2007 and, with respect to the 2007B Certificates, three Business Days prior to March 1, June 1, September 1, and December 1 of each year, commencing three Business Days prior to December 1, 2007.

Installment Payments means the Installment Payments scheduled to be paid by the District under and pursuant to the Installment Purchase Agreement.

Installment Purchase Agreement means the Installment Purchase Agreement, dated as of September 1, 2007, by and between the District and the Corporation, as originally executed and as it may from time to time be amended or supplemented in accordance with the Installment Purchase Agreement.

Law means the Santa Clara Valley Water District Act, Chapter 1405 of Statutes of 1951 of the State of California, as amended.

Net means, when used with respect to any insurance, self insurance or condenmation award, the proceeds from such award remaining after payment of all expenses (including attorneys fees) incurred in the collection of such proceeds.

Project means those certain public facilities, consisting of Component A and Component B described in the Installment Purchase Agreement.

Purchase Price means the amount to be paid by the District to the Corporation for the purchase of the Project under the terms of the Installment Purchase Agreement.

Series 2007A Acquisition and Construction Fund means the fund referred to by that name established pursuant to the Installment Purchase Agreement.

Series 2007B Acquisition and Construction means the fund referred to by that name established pursuant to the Installment Purchase Agreement.

Special Counsel means a firm of attorneys which are nationally recognized as experts in the area of municipal finance.

Water Utility System Master Resolution means Resolution No. 94-58, adopted by the Board of Directors of the District on June 23, 1994, entitled "A Resolution of the Board of Directors of the Santa Clara Valley District Providing for the Allocation of Water Utility System Revenues and Establishing Covenants to Secure the Payment of Obligations Payable from Net Water Utility System Revenues" as amended from time-to­ time, including but not limited by Resolution 06-80, adopted by the Board of Directors of the District on November 28, 2006.

B-9 Definitions in the Water Utility System Master Resolution.

Except as otherwise defined in the Installment Purchase Agreement and unless the context otherwise requires, each of the capitalized terms used therein will have the same meaning set forth therefor in the Water Utility System Master Resolution. With respect to any defined term which is given a different meaning under the Installment Purchase Agreement than under the Water Utility System Master Resolution as used in the Installment Purchase Agreement such term will have the meaning described therein. ACQUISITION AND/OR CONSTRUCTION, SALE AND CONVEYANCE OF THE PROJECT

Acquisition and/or Construction, Sale and Conveyance of the Project. (a) The Corporation has agreed to acquire and/or construct each and all Components of the Project, as applicable, for and to sell and convey each and all such Components of the Project to the District. In order to implement such provision, the Corporation has appointed the District as its agent for the purpose of acquisition and construction of all Components of the Project and, subject to such construction, the District has agreed to enter into such construction contracts and purchase orders as may be necessary, as agent for the Corporation, to provide for the acquisition and construction of the Project. The District has further agreed that it will cause the acquisition and construction of the Project to be diligently prosecuted with all practical dispatch and in an expeditious manner. After the execution and delivery of the Certificates and the deposit of the proceeds of such Certificates with the Trustee, the District will, as agent of Corporation, use its best efforts to cause the acquisition and construction of the Project to be completed as soon as possible, unforeseeable delays beyond the reasonable control of the District only excepted.

(b) The District may add, delete or substitute other improvements for the facilities listed as Components of the Project in the Installment Purchase Agreement but only if the District first files with the Corporation and Trustee a statement of the District: (!) identifying the improvements to be substituted and the improvements to be added; and, (2) stating that the estimated costs of construction, acquisition and installation of the added, deleted or substituted improvements are not less than such costs for the previously planned and/or the Corporation has sufficient funds advanced by the District or Certificates proceeds to construct and/or acquire the substituted or added improvements; and, (3) stating that such added, deleted or substituted improvements will not reduce the Installment Payments payable under the Installment Purchase Agreement or adversely affect the payment of principal and interest evidenced by the Certificates.

Notwithstanding the foregoing, it has been expressly understood and agreed that the Corporation will be under no liability of any kind or character whatsoever for the payment of any cost or expenses incurred by the District for the acquisition and construction of each Component of the Project and that all such costs and expenses will be paid by the District.

Sale and Purchase of Component B of the Project. In consideration for the Corporation's assistance in financing Component B of the Project, the District has agreed to sell, and has sold to the Corporation, and the Corporation has agreed to purchase and has purchased, from the District, Component B of the Project at the Purchase Price specified in the Installment Purchase Agreement and otherwise in the manner and in accordance with the provisions therein.

Purchase and Sale of the Project. In consideration for the Installment Payments as set forth in the Installment Purchase Agreement, the Corporation has agreed to sell, and has sold, to the District, and the District has agreed to purchase, and has purchased, from the Corporation, the Project at the Purchase Price specified in the Installment Purchase Agreement and otherwise in the manner and in accordance with the provisions therein.

Title. All right, title and interest in each Component B of the Project will vest in the District immediately upon execution and delivery of the Installment Purchase Agreement. All right, title and interest in each Component A of the Project will vest in the District immediately upon acquisition thereof Such vesting

B-10 will occur without further action by the Corporation or the District and the Corporation will, if requested by the District or, if necessary to assure such automatic vesting, deliver any and all documents required to assume such vesting.

Series 2007 A Acquisition and Construction Fund and Series 2007B Acquisition and Construction Fund. There will be established with the District the Series 2007 A Acquisition and Construction Fund and the Series 2007B Acquisition and Construction Fund. Amounts on deposit in the Series 2007A Acquisition and Construction Fund may be used and withdrawn by the District for the payment for the payment of Costs of Issuance, for the costs of the acquisition or construction of the Project or to reimburse the District for previous costs expended in the acquisition or construction of the Project. Amounts on deposit in the Series 2007B Acquisition and Construction Fund may be used and withdrawn by the District for the payment for the payment of Costs of Issuance, for the costs of the acquisition or construction of the Project or to reimburse the District for previous costs expended in the acquisition or construction of the Project.

Within the Series 2007A Acquisition and Construction Fund and the Series 2007B Acquisition and Construction Fund the District may establish such accounts therein as it may determine in order to provide for the accounting of any component or group of components constituting a portion of the Project, including Costs of Issuance Accounts.

When all Costs of Issuance have been paid and the acquisition and construction of the Project has been completed, the District will transfer any remaining balance of money in the Series 2007 A Acquisition and Construction Fund to the Trustee and request that the Trustee deposit in the Series 2007 A Certificate Rebate Fund an amount to the extent necessary to pay Rebatable Arbitrage, then to the Series 2007 A Reserve Fund to the extent necessary at that time to restore the Series 2007 A Reserve Fund to the Series 2007 A Reserve Requirement and any remaining balance will be deposited by the Trustee in the Series 2007 A Payment Fund and applied as provided in the Trust Agreement.

When all Costs of Issuance have been paid and the acquisition and construction of the Project has been completed, the District will transfer any remaining balance of money in the Series 2007B Acquisition and Construction Fund to the Trustee and request that the Trustee deposit in the Series 2007B Reserve Fund an amount necessary at that time to restore the Series 2007B Reserve Fund to the Series 2007B Reserve Requirement, if any, and then any remaining balance will be deposited by the Trustee in the Series 2007B Payment Fund and applied as provided in the Trust Agreement.

INSTALLMENT PAYMENTS

Purchase Price. The Purchase Price to be paid by the District under the Installment Purchase Agreement to the Corporation is the sum of the principal amount of the District's obligations thereunder plus the interest to accrue on the unpaid balance of such principal amount from the effective date thereof over the term thereof, subject to prepayment as provided in the Installment Purchase Agreement. The principal amount of the payments to be made by the District thereunder is set forth in the Installment Purchase Agreement. The interest to accrue on the unpaid balance of such principal amount is as specified in the Installment Purchase Agreement and will be paid by the District as and constitute interest paid on the principal amount of the District's obligations thereunder.

Installment Payments. (a) The District will, subject to any rights of prepayment provided in the Installment Purchase Agreement, pay to the Corporation, from available Water Utility System Revenues as provided therein, and in the Water Utility System Master Resolution, the Purchase Price in Installment Payments to such date in the amounts and on the Installment Payment Dates to be determined upon execution and delivery of the Certificates. Upon execution and delivery of the Certificates, the Installment Payments are to be applied to the payment of the principal and interest evidenced and represented by the Certificates and Installment Payments will be made in amounts that are sufficient, but no more than sufficient, to pay the scheduled payments of principal and interest evidenced and represented by the outstanding Certificates. If and to the

B-11 extent that, on any Installment Payment Date, there are amounts on deposit in a fund established under the Trust Agreement for the payment of principal and interest represented by the Certificates, which amounts are not being held for the payment of specific Certificates, said amounts will be credited against the Installment Payment due on such date. If all or a portion of the Certificates are no longer outstanding as a result of prepayment, early retirement through purchase by the District or the Corporation or defeasance of such Certificates, the schedule of Installment Payments to be determined upon execution and delivery of the Certificates will be deemed to have been modified so that the Installment Payments are sufficient, but no more than sufficient, to pay the scheduled payments of principal and interest evidenced and represented by the outstanding Certificates. Upon any such prepayment, purchase or defeasance, the District will recalculate Installment Payments and will provide the Trustee with a modified schedule of Installment Payments.

(b) Each Installment Payment to be paid upon execution and delivery of the Certificates will be paid to the Trustee, as assignee of the Corporation, on or before the tenth calendar day prior to the applicable Installment Payment Date, in lawful money of the United States of America, in funds which will be immediately available following payment. In lieu of depositing with such Trustee all cash to meet its Installment Payment due and payable on the next succeeding Installment Payment Date, the District may deposit with the Trustee, securities or investments, which will mature on or before the next succeeding Interest Payment Date in an amount which, together with the cash then available to pay the principal and interest represented by the Certificates, will be sufficient to pay the interest and principal due on said Interest Payment Date. In the event the District fails to make any of the payments required to be made by it under the Installment Purchase Agreement such payment will continue as an obligation of the District until such amount has fully paid and, to the extent permitted by law, the District has agreed to pay the same with interest accruing thereon at the rate of ten percent ( 10%) per aunum.

( c) Upon execution and delivery of the Certificates, the obligation of the District to make the Installment Payments will become absolute and unconditional, and until such time as the Purchase Price has been paid in full ( or provision for the payment thereof has been made pursuant to Installment Purchase Agreement), the District will not discontinue or suspend any Installment Payments required to be made by it under the Installment Purchase Agreement when due, whether or not the Project or any Component thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payments will not be subject to reduction whether by offset or otherwise and will not be conditional upon the performance or nonperformance by any party of any agreement for any cause whatsoever.

WATER UTILITY SYSTEM REVENUES

Pledge. The Water Utility System Revenues are pledged to the payment of the Installment Payments as provided in the Installment Purchase Agreement, subject however to the pledge thereon securing other Bonds and Contracts, and such remaining Water Utility System Revenues will not be used for any other purpose while any of the Installment Payments payable under the Installment Purchase Agreement remain unpaid. Such pledge will constitute a lien on the Water Utility System Revenues for the payment of the Installment Payments payable under the Installment Purchase Agreement, which Installment Payments are payable on a parity with payments made with respect to other Contracts and Bonds, and such other obligations which are payable prior to the Installment Payments thereunder, all as provided in the Water Utility System Master Resolution.

Allocation. In order to carry out and effectuate the pledge contained in the Installment Purchase Agreement, the District has agreed and covenanted in the Water Utility System Master Resolution that all Water Utility System Revenues will be received by the District in trust and will be deposited when and as received in the Water Utility System Revenue Fund. All moneys in the Water Utility System Revenue Fund will be so held in trust and applied and used solely as provided in the Water Utility System Master Resolution. Upon execution and delivery of the Certificates, the District will pay from the Net Water Utility System Revenues to the Trustee, as assignee of the Corporation, the Installment Payments as and when due under the Installment Purchase Agreement.

B-12 COVENANTS OF THE DISTRICT Compliance with Installment Purchase Agreement and Water Utility System Master Resolution. The District will punctually pay the Installment Payments in strict conformity with the terms of the Installment Purchase Agreement, and will faithfully observe and perform all the agreements, conditions, covenants and terms contained therein required to be observed and performed by it, and will not terminate the Installment Purchase Agreement for any cause including, without limiting the generality of the foregoing, any acts or circumstances that may constitute failure of consideration, destruction of or damage to the Project, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State of California or any political subdivision of either or any failure of the Corporation to observe or perform any agreement, condition, covenant or term contained therein required to be observed and performed by it, whether express or implied, or any duty, liability or obligation arising out of or connected therewith or the insolvency, or deemed insolvency, or bankruptcy or liquidation of the Corporation or any force majeure, including acts of God, tempest, storm, earthquake, war, rebellion, riot, civil disorder, acts of public enemies, blockade or embargo, strikes, industrial disputes, lock outs, lack of transportation facilities, fire, explosion, or acts or regulations of governmental authorities. The District will faithfully observe and perform all the agreements, conditions, covenants and terms contained in the Water Utility System Master Resolution and in the Installment Purchase Agreement required to be observed and performed by it, and it is expressly understood and agreed by and between the parties to the Installment Purchase Agreement that, subject to the Installment Purchase Agreement, each of the agreements, conditions, covenants and terms contained the Water Utility System Master Resolution and the Installment Purchase Agreement is an essential and material term of the purchase of and payment for the Project by the District pursuant to, and in accordance with, and as authorized under, the Law.

Tax Covenants. The District has covenanted and agreed to contest by court action or otherwise any assertion by the United States of America or any department or agency thereof that the interest evidenced and represented by the Series 2007A Certificates is includable in gross income of the recipient under federal income tax laws. Notwithstanding any other provision of the Trust Agreement, absent an opinion of Special Counsel that the exclusion from gross income of interest evidenced and represented by the Series 2007 A Certificates will not be adversely affected for federal income tax purposes, the District has covenanted to comply with all applicable requirements of the Code necessary to preserve such exclusion from gross income and specifically covenants, without limiting the generality of the foregoing, as follows:

(a) Private Activity. The District will take no action or refrain from taking any action or make any use of the proceeds of the Series 2007 A Certificates or of any other moneys or property which would cause the Series 2007A Certificates to be "private activity bonds" within the meaning of Section 141 of the Code;

(b) Arbitrage. The District will make no use of the proceeds of the Series 2007A Certificates or of any other amounts or property, regardless of the source, or take any action or refrain from taking any action which will cause the Series 2007 A Certificates to be "arbitrage bonds" within the meaning of Section 148 of the Code.

(c) Federal Guaranty. The District will make no use of the proceeds of the Series 2007A Certificates or take or omit to take any action that would cause the Certificates to be "federally guaranteed" within the meaning of Section 149(b) of the Code;

(d) Information Reporting. The District will take or cause to be taken all necessary action to comply with the informational reporting requirement of Section 149(e) of the Code;

(e) Hedge Bonds. The District will make no use of the proceeds of the Series 2007A Certificates or any other amounts or property, regardless of the source, or take any action or refrain from taking any action that would cause either the Series 2007A Certificates to be considered "hedge bonds" within the meaning of Section 149(g) of the Code unless the District takes all necessary action to assure compliance with the

B-13 requirements of Section 149(g) of the Code to maintain the exclusion from gross income of interest evidenced and represented by the Series 2007A Certificates for federal income tax purposes; and

(f) Miscellaneous. The District will take no action or refrain from taking any action inconsistent with its expectations stated in that certain Tax Certificate executed by the District in connection with the execution and delivery of the Series 2007 A Certificates and will comply with the covenants and requirements stated therein and incorporated by reference into the Installment Purchase Agreement.

Against Encumbrances. The District will pay or cause to be paid when due all sums of money that may become due or purporting to be due for any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to or for the District, in, upon, about or relating to the Project and will keep the Project free of any and all liens against any portion of the Project or the Corporation interest therein. In the event any such lien attaches to or is filed against any portion of the Project or the Corporation interest therein, the District will cause each such lien to be fully discharged and released at the time the performance of any obligation secured by any such lien matures or becomes due, except that if the District desires to contest any such lien it may do so. If any such lien is to be reduced to final judgment and such judgment or any process as may be issued for the enforcement thereof is not promptly stayed, or if so stayed and such stay thereafter expires, the District will forthwith pay or cause to be paid and discharged such judgment. The District will, to the maximum extent permitted by law, indemnify and hold the Corporation harmless from, and defend each of them against, any claim, demand, loss, damage, liability or expense (including attorneys' fees) as a result of any such lien or claim of lien against any portion of the Project or the Corporation interest therein.

Payment of Claims. The District will pay and discharge any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien on the Water Utility System Revenues or any part thereof or on any funds in the hands of the District which might impair the security of the Installment Payments, but the District will not be required to pay such claims if the validity thereof is contested in good faith.

Compliance with Contracts. The District will comply with, keep, observe and perform all agreements, conditions, covenants and terms, express or implied, required to be performed by it contained in all contracts for the use of the Project and all other contracts affecting or involving the Project to the extent that the District is a party thereto.

Protection of Security and Rights of the Corporation. The District will preserve and protect the security of the Installment Purchase Agreement and the rights of the Corporation to the Installment Payments under the Installment Purchase Agreement and will warrant and defend such rights against all claims and demands of all persons.

Additional Protection for Officers of the Corporation. The District will, to the maximum extent permitted by law, indemnify and hold the Corporation and each of its directors and officers harmless from, and defend each of them against, any claim, demand, loss, damage, liability or expense (including attorneys' fees) as a result of entering into the Installment Purchase Agreement.

Further Assurances. The District will adopt, deliver, execute and make any and all further assurances, instruments and resolutions as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of the Installment Purchase Agreement and for the better assuring and confirming unto the Corporation of the rights and benefits provided to it therein.

Continuing Disclosure. The District will comply with and carry out all of its obligations under the Continuing Disclosure Agreement to be executed and delivered by the District in connection with the delivery of the Certificates. Notwithstanding any other provision of the Installment Purchase Agreement, failure of the District to comply with the Continuing Disclosure Agreement will not be considered an Event of Default; however, any Owner or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations

B-14 under the Installment Purchase Agreement. For purposes of the Installment Purchase Agreement, "Beneficial Owner" means any person who has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Certificates (including persons holding Certificates through nominees, depositories or other intermediaries).

EVENTS OF DEFAULT AND REMEDIES OF THE CORPORATION

Events of Default. If one or more of the following Events of Default happens, that is to say (1) if default is be made in the due and punctual payment of the Installment Payments as the same become due and payable; (2) if default is made by the District in the performance of any of the agreements or covenants required to be performed by it under the Installment Purchase Agreement (other than as specified in (I) above), and such default will have continued for a period of thirty (30) days after the District has been given notice in writing of such default by the Corporation; provided, however, that in the event the failure stated in the notice cannot be corrected within such period, then no event of default will be deemed to have occurred under the Installment Purchase Agreement so long as the District has instituted corrective actions within such period and is diligently pursuing to correct such default; or; (3) if the District files a petition or answer seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if a court of competent jurisdiction approves a petition filed with or without the consent of the District seeking arrangement or reorganization under the federal bankruptcy laws or any other applicable law of the United States of America or any state therein, or if under the provisions of any other law for the relief or aid of debtors any court of competent jurisdiction assumes custody or control of the District or of the whole or any substantial part of its property.

Remedies of the Corporation. The Corporation will have the right (a) by mandamus or other action or proceeding or suit at law or in equity to enforce its rights against the District or any member of the District's Board of Directors, officer or employee thereof, and to compel the District or any such member of the District's Board of Directors, officer or employee to perform and carry out its or his duties under the Law and the agreements and covenants required to be performed by it or him contained in the Installment Purchase Agreement; (b) by suit in equity to enjoin any acts or things which are unlawful or violate the rights of the Corporation; or (c) by suit in equity upon the happening of an Event of Default to require the District and any member of the District's Board of Directors, officers and employees to account as the trustee ofan express trust.

Non-Waiver. Nothing in the Installment Purchase Agreement will affect or impair the obligation of the District, which is absolute and unconditional, to pay the Installment Payments to the Corporation at the respective due dates from the Water Utility System Revenues and the other amounts therein committed for such payment, or will affect or impair the right of the Corporation, which is also absolute and unconditional, to institute suit to enforce such payment by virtue of the contract embodied therein.

A waiver of any default or breach of duty or contract by the Corporation will not affect any subsequent default or breach of duty or contract or impair any rights or remedies on any such subsequent default or breach of duty or contract. No delay or omission by the Corporation to exercise any right or remedy accruing upon any default or breach of duty or contract will impair any such right or remedy or will 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 Corporation by the Law or by the Installment Purchase Agreement may be enforced and exercised from time to time and as often as will be deemed expedient by the Corporation.

If any action, proceeding or suit to enforce any right or exercise any remedy is abandoned or determined adversely to the Corporation, the District and the Corporation will be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken.

Remedies Not Exclusive. No remedy conferred upon or reserved to the Corporation is intended to be exclusive of any other remedy, and each such remedy will be cumulative and will be in addition to every other remedy given under the Installment Purchase Agreement or now or thereafter existing in law or in equity or by

B-15 statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by law.

DISCHARGE OF OBLIGATIONS

Discharge of Obligations. If the Corporation pays or causes to be paid or there is otherwise paid to the Owners of all outstanding Certificates the interest and principal evidenced and represented thereby and the prepayment premiums, if any, thereon or if all outstanding Certificates are be deemed to have been paid at the times and in the manner stipulated in the Trust Agreement, then all agreements, covenants and other obligations of the District under the Installment Purchase Agreement will thereupon cease, terminate and become void and be discharged and satisfied.

MISCELLANEOUS

Liability of District Limited to Water Utility System Revenues. Notwithstanding anything contained in the Installment Purchase Agreement, the District will not be required to advance any moneys derived from any source of income other than the Water Utility System Revenues as provided therein for the payment of the Installment Payments or for the performance of any agreements or covenants required to be performed by it contained therein. The District may, however, but in no event will be obligated to, advance moneys for any such purpose so long as such moneys are derived from a source legally available for such purpose and may be legally used by the District for such purpose.

The obligation of the District to make the Installment Payments is payable from such Net Water Utility System Revenues as provided in the Installment Purchase Agreement and does not constitute a debt of the District or of the State of California or of any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction.

Benefits of Installment Purchase Agreement Limited to Parties. Nothing contained in the Installment Purchase Agreement, expressed or implied, is intended to give to any person other than the District, the Corporation or the assigns of the Corporation any right, remedy or claim under or pursuant thereto, and any agreement or covenant required therein to be performed by or on behalf of the District or the Corporation will be for the sole and exclusive benefit of the other party.

Amendments. The Installment Purchase Agreement may be amended in writing as may be mutually agreed by the District and the Corporation, and upon execution and delivery of the Certificates, by the Owners of a majority in aggregate amount of Certificates outstanding together with the written consent of the Insurer so long as the Policy is in full force and effect; provided that upon execution and delivery of the Certificates, no such amendment will (a) extend the payment date of any Installment Payment, or reduce the amount of any Installment Payment without the prior written consent of the Owner of each Certificate so affected, or (b) reduce the percentage of Certificates the consent of the Owners of which is required for the execution of any amendment of the Installment Purchase Agreement.

The Installment Purchase Agreement and the rights and obligations of the District and the Corporation thereunder may also be amended or supplemented at any time by an amendment thereof or supplement thereto which will become binding upon execution by the District and the Corporation, without the written consent of any Owners, but with written notice to the Insurer so long as the Policy is in full force and effect, but only to the extent permitted by law and only upon receipt of an unqualified opinion of Special Counsel selected by the District and approved by the Corporation to the effect that such amendment or supplement is permitted by the provisions of the Installment Purchase Agreement and is not inconsistent with the Installment Purchase Agreement and does not adversely affect the exclusion of interest on the Certificates received by the Owners from gross income for federal income tax purposes, and only for any one or more of the following purposes: (1) to add to the covenants and agreements of the Corporation or the District contained in the Installment Purchase Agreement other covenants and agreements thereafter to be observed or to surrender any right or power therein

B-16 reserved to or conferred upon the Corporation or the District, and which will not materially adversely affect the interests of the Owners of the Certificates; (2) to cure, correct or supplement any ambiguous or defective provision contained the Installment Purchase Agreement or in regard to questions arising thereunder as the Corporation or the District may deem necessary or desirable and which will not materially adversely affect the interests of the Owners of the Certificates; or (3) to make such other amendments or modifications which will not materially adversely affect the interests of the Owners of the Certificates.

The District will properly deliver by first class mail a copy of any amendment to the Installment Purchase Agreement to S&P.

Successor ls Deemed Included in all References to Predecessor. Whenever either the District or the Corporation is named or referred to in the Installment Purchase Agreement, such reference will be deemed to include the successor to the powers, duties and functions that are presently vested in the District or the Corporation, and all agreements and covenants required by the Installment Purchase Agreement to be performed by or on behalf of the District or the Corporation will bind and inure to the benefit of the respective successors thereof whether so expressed or not.

Waiver of Personal Liability. No official, officer or employee of the District will be individually or personally liable for the payment of the Installment Payments, but nothing contained in the Installment Purchase Agreement will relieve any official, officer or employee of the District from the performance of any official duty provided by any applicable provisions of law or the Installment Purchase Agreement.

Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required by the Installment Purchase Agreement to be performed by or on the part of the District or the Corporation is contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof will be null and void and will be deemed separable from the remaining agreements and covenants or portions thereof and will in no way affect the validity of the Installment Purchase Agreement.

Assignment. The Installment Purchase Agreement and any rights thereunder may be assigned by the Corporation, as a whole or in part, without the necessity of obtaining the prior consent of the District. The assignment of the Installment Purchase Agreement to the Trustee will be done solely in its capacity as Trustee under the Trust Agreement.

Net Contract. The Installment Purchase Agreement will be deemed and construed to be a net contract, and the District will pay absolutely net during the term thereof the Installment Payments and all other payments required thereunder, free of any deductions and without abatement, diminution or setoffwhatsoever.

Notice to the Insurer. Any notices to be given by any party under the Installment Purchase Agreement will also be given to the Insurer.

California Law. The Installment Purchase Agreement will be construed and governed in accordance with the laws of the State of California.

Effective Date. The Installment Purchase Agreement will become effective upon its execution and delivery, and will terminate when the Purchase Price has fully paid or when there are no longer any Certificates Outstanding.

B-17 The following is a summary of certain provisions of the Trust Agreement. This summary does not purport to be comprehensive and reference should be made to the Trust Agreement for a full and complete statement ofthe provisions thereof

DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT

DEFINITIONS

Unless the context otherwise requires, the terms defined under this caption "DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF THE TRUST AGREEMENT" will for all purposes hereof and of any amendment hereof or supplement hereto and of the Certificates and of any certificate, opinion, request or other document herein or herein mentioned have the meanings herein specified, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined herein. Capitalized undefined terms used herein will, unless the context otherwise requires, have the meanings ascribed thereto in the Water Utility System Master Resolution or the Installment Purchase Agreement.

Authorized Denominations means $5,000 and any integral multiple thereof.

Beneficial Owners means those individuals, partnerships, corporations or other entities for whom the Participants have caused the Depository to hold Book-Entry Certificates.

Book-Entry Certificates means the Certificates registered in the name of the nominee of DTC, or any successor securities depository for the Certificates, as the registered owner thereof pursuant to the terms and provisions of the Trust Agreement.

Business Day means a day of the year which is not a Saturday or Sunday, or a day on which banking institutions located in California are required or authorized to remain closed, or on which the Federal Reserve system is closed.

Calculation Agent means the Calculation Agent for the Series 2007B Certificates, designated in the Trust Agreement or in a supplemental thereto, or its successor appointed by the District. The initial Calculation Agent will be the Trustee.

Capitalized Interest Fund means the Capitalized Interest Fund established pursuant to the Trust Agreement.

Certificate of the Corporation means an instrument in writing signed by the President or the Secretary of the Corporation, or by any other officer of the Corporation duly authorized for that purpose.

Certificate of the District means an instrument in writing signed by the Chairman of the Board of Directors or the Chief Executive Officer of the District, or by any other official of the District duly authorized for that purpose.

Certificate Payment Date means, with respect to any Certificate, the Certificate Payment Date designated therein, which is the June 1 on which the principal component of the Installment Payments becomes due and payable.

B-18 Certificates means the Santa Clara Valley Water District Revenue Certificates of Participation (Water Utility System Improvement Projects), Series 2007A and the Santa Clara Valley Water District Revenue Certificates of Participation (Water Utility System Improvement Projects), Taxable Series 2007B, delivered in the aggregate principal amount of$-----

Certificate Year means the period of twelve consecutive months from each September 2 to September I in any year during which Certificates are or will be Outstanding; provided, however, that the final Certificate Year will end on the date on which the Certificates are fully paid or prepaid.

Chief Executive Officer means the Chief Executive Officer of the District or, if there is no officer designated as the Chief Executive Officer, the highest ranking officer of the District (excluding members of the Board of Directors of the District).

Code means the Internal Revenue Code of 1986, as amended, and any regulations, rulings, judicial decisions, and notices, announcements, and other releases of the United States Treasury Department or Internal Revenue Service interpreting and construing it, or any applicable regulations adopted under the Internal Revenue Code of 1954, as amended.

Corporate Trust Office of the Trustee means the principal corporate trust office of the Trustee in San Francisco, California or such other or additional offices as may be specified to the District by the Trustee in writing.

Costs of Issuance means all items of expense directly or indirectly payable by or reimbursable to the District or the Corporation relating to the execution, sale and delivery of the Certificates and the execution and delivery of the Installment Purchase Agreement, including administrative fees, filing and recording costs, settlement costs, interest rate swap termination payments, printing costs, reproduction and binding costs, initial fees and charges of the Trustee (including legal fees), fmancing discounts, legal fees and charges, and surety premium, as applicable, fees and charges, financial and other professional consultant fees and expenses, costs of rating agencies or credit ratings, fees for transportation and safekeeping of the Certificates and charges and fees in connection with the foregoing.

Delivery Date means the date on which the Certificates are delivered to the original purchaser thereof

Defeasance Securities means, to the extent included in the definition of "Defeasance Securities" in the Master Resolution, U.S. Treasury Certificates, Notes, and Bonds (including State and Local Government Series - "SLGs"), Direct obligations of the Treasury which have been stripped by the Treasury itself or CATS, TIGRS or Obligations issued by the following agencies which are backed by the full faith and credit of the U.S.: (a) U.S. Export-Import Bank (Eximbank) Direct obligations or fully guaranteed certificates by beneficial ownership; (b) Farmers Home Administration (FmHA) Certificates of beneficial ownership; (c) Federal Financing Bank; (d) General Services Administration Participation Certificates; (e) U.S. Maritime Administration Guaranteed Title XI financing; and (f) 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 housing notes and bonds.

Depository means the securities depository acting as Depository pursuant to the Trust Agreement.

District means the Santa Clara Valley Water District, a flood control and water district duly organized and existing under and by virtue of the laws of the State of California.

DTC means The Depository Trust Company, New York, New York and its successors.

Event of Default will have the meaning described under the caption "EVENTS OF DEFAULT AND REMEDIES OF OWNERS".

B-19 Financial Guaranty Agreement means the Series 2007 A Financial Guaranty Agreement and the Series 2007B Financial Guaranty Agreement.

Fiscal Year means the period beginning on July 1 of each year and ending on the next succeeding June 30, or any other annual accounting period selected and designated by the Board of Directors of the District as the Fiscal Year of the District.

Index Rate means the interest rate with respect to the Series 2007B Certificates established as provided in the Trust Agreement.

Information Services means national information services that disseminate securities redemption notices; or, in accordance with then-current guidelines of the Securities and Exchange Commission, such other services providing information with respect to called bonds as the District may specify in a certificate to the Trustee.

Insurer means MBIA Insurance Corporation, a stock insurance company, incorporated under the laws of the State of New York, or any successor thereof

Interest Payment Date means, with respect to the Series 2007 A Certificates, each June 1 and December 1, commencing December 1, 2007, and, with respect to the Series 2007B Certificates, each March 1, June 1, September 1, and December 1, commencing on December 1, 2007, provided, however, if an Interest Payment Date with respect to the Series 2007B Certificates is not a Business Day, interest will be payable on the next succeeding Business Day, and provided further that the amount paid with respect to Series 2007B Certificates on such succeeding Business Day will be for the same number of days as if paid on the Interest Payment Date which was not a Business Day.

LIBOR Spread means the spread above the Index as set forth in the Trust Agreement.

London Banking 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.

Letter of Representations or Representation Letter means the letter of the Trustee and the District delivered to and accepted by the Depository on or prior to the Delivery Date as Book-Entry Certificates setting forth the basis on which the Depository serves as depository for such Book-Entry Certificates, as originally executed or as it may be supplemented or revised or replaced by a letter to a substitute Depository.

Maximum Annual Debt Service means the maximum annual principal and interest payments under the Installment Purchase Agreement allocable to a particular series of Certificates for any Fiscal Year.

Moody's or Moody's Investors Service means Moody's Investors Service, its successors and assigns, and if such corporation for any reason no longer perform the functions of a securities rating agency, such terms will be deemed to refer to any other nationally recognized rating agency designated by the District.

Nominee means the nominee of the Depository, which may be the Depository, as determined from time to time pursuant to the Trust Agreement.

Opinion of Counsel means a written opinion of special counsel, appointed and paid by the Corporation or the District.

Outstanding when used as of any particular time with reference to Certificates of each series, means (subject to the provisions of the Trust Agreement) all Certificates theretofore or thereupon executed by the Trustee pursuant thereto, except (1) Certificates theretofore cancelled by the Trustee or surrendered to the

B-20 Trustee for cancellation; (2) Certificates paid or deemed to have been paid within the meaning of the Trust Agreement; and; (3) Certificates in lieu of or in substitution for which other Certificates have been executed by the Trustee and delivered pursuant to the Trust Agreement.

Owner means any person who is the registered owner of any Outstanding Certificate, as shown on the registration books required to be maintained by the Trustee pursuant to the Trust Agreement.

Participants means those broker-dealers, banks and other financial institutions from time to time for which the Depository holds Book-Entry Certificates as securities depository.

Permitted Investments means any of the following to the extent then permitted by law:

(a) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and the interest on which are unconditionally guaranteed by the United States of America.

(b) Bonds, debentures, 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 such securities have been stripped by the agency itself): (I) U.S. Export-Import Bank (Eximbank) Direct obligations or fully guaranteed certificates or beneficial ownership; (2) Farmers Home Administration (FmHA) Certificates of beneficial ownership; (3) Federal Financing Board; (4) Federal Housing Administration Debentures (FHA); (5) General Services Administration Participation certificates; (6) Government National Mortgage Association (GNMA or "Ginnie Mae"), GNMA - guaranteed mortgage-backed bonds and GNMA - guaranteed pass-through obligations; (7) U.S. Maritime Administration Guaranteed Title XI financing; and (8) U.S. Department of Housing and Urban Development (HUD) Project Notes, Local Authority Bonds and New Communities Debentures - U.S. Government guaranteed debentures, U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds.

(c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-faith and credit U.S. government agencies (stripped securities are only permitted if such securities have been stripped by the agency itself): (I) Federal Home Loan Bank System Senior debt obligations; (2) Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") Participation Certificates and Senior debt obligations; (3) Federal National Mortgage Association (FNMA or "Fannie Mae") Mortgage-backed securities and senior debt obligations; (4) Resolution Funding Corp. (REFCORP) obligations; (5) Farm Credit System Consolidated systemwide bonds and notes

(d) 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 or AAAm-G; AAA-m; or AA-m and if rated by Moody's rated Aaa, Aal or Aa2.

(e) Certificates of deposit secured at all times by collateral described in (A) and/or (B) above and be issued by commercial banks, savings and loan associations or mutual savings banks with the collateral held by a third party and the Owners of the Certificates must have a perfected first security interest in the collateral.

(f) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by the FDIC, including BIF and SAIF.

(g) Investment Agreements, including guaranteed investment contracts, forward purchase agreements and reserve fund put agreements acceptable to the Insurer.

B-21 (h) Commercial paper rated, at the time of purchase, "Prime - l" by Moody's and "A-1" or better by S&P.

(i) Bonds or notes issued by any state or municipality which are rating by Moody's and S&P in one of the two highest rating categories assigned by such agencies.

(j) 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 - l" or "A3" or better by Moody's and "A-1" or "A" or better by S&P.

(1) Repurchase Agreements for 30 days or less must follow the following criteria. Repurchase Agreements which exceed 30 days must be acceptable to the Insurer.

(I) Repurchase Agreements must be between the District and a dealer bank or securities firm

(I) Primary dealers on the Federal Reserve reporting dealer list which are rated A ore better by Standard & Poor's Corporation and Moody's Investor Services, or

(2) Banks rated "A" or above by Standards & Poor's Corporation and Moody's Investor Services.

(2) The written Repurchase Agreement contract must include the following:

(I) Securities which are acceptable for transfer are:

a. Direct U.S. governments; or

b. Federal agencies backed by the full faith and credit of the U.S. government (and FNMA & FHLMC)

(2) The term of the Repurchase Agreement may be up to 30 days.

(3) The collateral must be delivered to the District, Trustee (if Trustee is not supplying the collateral) or third party acting as agent for the Trustee (if the Trustee is supplying the collateral) before or simultaneously with payment (perfection by possession or certificated securities).

(4) Valuation of Collateral

a. The securities must be valued weekly, marked-to-market at current market price accrued interest. The value of collateral must be equal to 104% of the amount of cash transferred by the District to the dealer bank or security firm under the Repurchase Agreement plus accrued interest. If the value of the securities held as collateral slips below 104% of the value of the cash transferred by the District, 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%.

(3) Legal opinion which must be delivered to the District:

(I) Repurchase Agreement meets guidelines under state law for legal investment of public funds.

B-22 (1) the Local Agency Investment Fund of the State of California; and

(m) any other investments in writing by the Insurer

Policy means the Series 2007A Policy and the 2007B Policy.

Prepayment Date means the date fixed for prepayment of Certificates.

Record Date means the fifteenth day of the month preceding an Interest Payment Date, whether or not such day is a Business Day.

S&P or Standard & Poor's Ratings Services means Standard & Poor's Ratings Services, its successors and assigns, and if such corporation for any reason no longer perform the functions of a securities rating agency, such terms will be deemed to refer to any other nationally recognized securities rating agency designated by the District.

Series 2007A Certificates means the Santa Clara Valley Water District Revenue Certificates of Participation (Water Utility System Improvement Projects), Series 2007A, delivered in the aggregate principal amount of$____ _

Series 2007A Certificate Rebate Fund means the Series 2007A Certificate Rebate Fund established pursuant to the Trust Agreement.

Series 2007A Financial Guaranty Agreement means the Financial Guaranty Agreement, dated October I, 2007, by and between the District and the Insurer, related to the Series 2007A Surety Bond as such may be amended or supplemented in accordance thereof.

Series 2007A Payment Fund means the Series 2007A Payment Fund established pursuant to the Trust Agreement.

Series 2007A Policy means the Series 2007A Financial Guaranty Insurance Policy issued by the Insurer which will provide for the payment of principal and interest with respect to the Series 2007A Certificates.

Series 2007A Reserve Fund means the Series 2007A Reserve Fund established pursuant to the Trust Agreement.

Series 2007A Reserve Requirement means, initially $____ and thereafter the lesser of $___ _ and Maximum Annual Debt Service with respect to the Series 2007A Certificates.

Series 2007A Surety Bond means the debt service reserve fund surety bond issued by the Insurer under which claims may be made in order to provide moneys in the 2007A Reserve Fund available for thereof

Series 2007B Certificates means the Santa Clara Valley Water District Revenue Certificates of Participation (Water Utility System Improvement Projects), Taxable Series 2007B, delivered in the aggregate principal amount of$----

Series 2007B Financial Guaranty Agreement means the Financial Guaranty Agreement, dated October I, 2007, by and between the District and the Insurer, related to the Series 2007B Surety Bond as such may be amended or supplemented in accordance thereof.

Series 2007B Payment Fund means the Series 2007B Payment Fund established pursuant to the Trust Agreement.

B-23 Series 2007B Policy means the Series 2007B Financial Guaranty Insurance Policy issued by the Insurer which will provide for the payment of principal and interest with respect to the Series 2007B Certificates.

Series 2007B Reserve Fund means the Series 2007B Reserve Fund established pursuant to the Trust Agreement.

Series 2007B Reserve Requirement means, initially $_____ and thereafter the lesser of $ _____ and Maximum Annual Debt Service with respect to the Series 2007B Certificates.

Series 2007B Surety Bond means the debt service reserve fund surety bond issued by the Insurer under which claims may be made in order to provide moneys in the 2007B Reserve Fund available for thereof

Securities Depositories means The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax 516/227-4039 or 4190 or, in accordance with then-current guidelines of the Securities and Exchange Commission, such other securities depositaries, or no such depositaries as the Corporation or the District may designate in a Certificate of the Corporation or a Certificate of the District, as the case may be, to the Trustee.

Securities Exchange Act means the Securities Exchange Act of 1934, as amended.

State means the State of California.

Surety Bond Provider means MBIA Insurance Corporation, a New York Stock insurance company, or any successors thereto or assignee thereof

Tax Certificate means the Tax Certificate related to the Series 2007A Certificates delivered by the District on the Delivery Date, as the same may be amended or supplemented in accordance with its terms.

Trust Agreement means the Trust Agreement, dated as of September I, 2007, by and among the District, the Corporation and the Trustee, as originally executed and as it may from time to time be amended or supplemented pursuant to the provisions of the Trust Agreement.

Trustee means U.S. Bank National Association, a national banking association existing under and by virtue of the laws of the United States, or any other association or corporation which may at any time be substituted in its place as provided in the Trust Agreement.

U.S Governmental Securities Business Day means any day except for a Saturday, a Sunday, or a day on which the Securities Industry and Financial Markets Association recommends that the fixed income departments of its members be closed for the entire day for purposes of trading U.S. government securities.

Written Request of the Corporation means an instrument in writing signed by the President or the Secretary of the Corporation, or by any other officer of the Corporation duly authorized for that purpose.

Written Request of the District means an instrument in writing signed by the Chairman of the Board of Directors or the Chief Executive Officer of the District, or by any other official of the District duly authorized for that purpose.

Equal Security. In consideration of the acceptance of the Certificates by the Owners thereof, the Trust Agreement will be deemed to be and will constitute a contract between the Trustee and the Owners to secure the full and final payment of the interest and principal and prepayment premiums, if any, evidenced and represented by the Certificates, subject to the agreements, conditions, covenants and provisions contained in the Trust Agreement and all agreements, conditions, covenants and provisions set forth therein to be performed by or on behalf of the Trustee will be for the equal and proportionate benefit, protection and security of all Owners

B-24 without distinction, preference or priority as to benefit, protection or security of any Certificates over any other Certificates by reason of the number or date thereof or the time of execution or delivery thereof or for any cause whatsoever, except as expressly provided therein or in the Trust Agreement.

CONDITIONS AND TERMS OF CERTIFICATES Transfer and Payment of Certificates. Any Certificate may, in accordance with its terms, be transferred in the books required to be kept pursuant to the provisions of the Trust Agreement by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender, at the Corporate Trust Office of the Trustee, of such Certificate for cancellation accompanied by delivery of a duly executed written instrument of transfer in a form approved by the Trustee. Whenever any Certificate or Certificates are surrendered for transfer, the Trustee will execute and deliver a new Certificate or Certificates of like series and of authorized denominations of the same Certificate Payment Date evidencing and representing the same aggregate principal amount. The Trustee will require the payment by the Owner requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer as a condition precedent to the exercise of such privilege.

The Trustee may deem and treat the Owner of any Certificate as the absolute owner of such Certificates for the purpose of receiving payment thereof and for all other purposes, whether such Certificates is overdue or not, and the Trustee will not be affected by any notice or knowledge to the contrary; and payment of the interest and principal and prepayment premium, if any, evidenced and represented by the Certificates will be made only to such Owner, which payments will be valid and effectual to satisfy and discharge liability on such Certificate to the extent of the sum or sums so paid.

The Trustee is not be required to register the transfer of (i) any Certificates during the period established by the Trustee for selection of Certificates for prepayment, or (ii) any Certificate which has been selected for prepayment in whole or in part.

Exchange of Certificates. Certificates may be exchanged at the Corporate Trust Office of the Trustee for a Certificate evidencing and representing a like aggregate principal amount of Certificates of authorized denominations of the same series and maturity. The Trustee will require the payment by the Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange as a condition precedent to the exercise of such privilege.

The Trustee will not be required to exchange (i) any Certificates during any period established by the Trustee for selection of Certificates for prepayment, or (ii) any Certificates which has been selected for prepayment in whole or in part.

Registration Books. The Trustee will keep at its office sufficient books for the registration of the ownership, transfer and exchange of the Certificates which will at all times be open to inspection by the District, the Corporation or any Owner or his agent duly authorized in writing during normal business hours with reasonable prior notice, and upon presentation for such purpose the Trustee will, under such reasonable regulations as it may prescribe, register the ownership or transfer and exchange of the Certificates in such books as provided in the Trust Agreement.

Mutilated, Destroyed, Stolen or Lost Certificates. If any Certificate becomes mutilated, the Trustee, at the expense of the Owner thereof, will thereupon execute and deliver a new Certificate of like series, tenor, and Authorized Denominations of the same Certificate Payment Date evidencing and representing the same aggregate principal amount in exchange and substitution for the Certificate so mutilated. Every mutilated Certificate so surrendered to the Trustee will be cancelled by the Trustee.

If any Certificate is lost, destroyed or stolen, evidence of such loss, destruction or theft may be submitted to the Trustee and, if such evidence is satisfactory to the Trustee and indemnity satisfactory to the

B-25 Trustee is given, the Trustee, at the expense of the Owner, will thereupon execute and deliver a new Certificate of like series, tenor and Authorized Denominations of the same Certificate Payment Date evidencing and representing the same aggregate principal amount in lieu of and in substitution for the Certificate so lost, destroyed or stolen.

The Trustee may require payment of a reasonable sum for each new Certificate executed and delivered under the Trust Agreement and of the expenses which may be incurred by the District and the Trustee in the premises. Any Certificate executed and delivered under the provisions of the Trust Agreement in lieu of any Certificate alleged to be lost, destroyed or stolen will be equally and proportionately entitled to the benefits of the Trust Agreement with all other Certificates executed and delivered under the Trust Agreement. Neither the District, the Corporation nor the Trustee will be required to treat both the original Certificate and any replacement Certificate as being Outstanding for the purpose of determining the principal amount of Certificates which may be executed and delivered under the Trust Agreement or for the purpose of determining any percentage of Certificates Outstanding thereunder, but both the original and replacement Certificate will be treated as one and the same.

Special Covenants as to Book-Entry Only System for Certificates. (a) Except as otherwise provided in the Trust Agreement, all of the Certificates initially executed and delivered will be registered in the name of Cede & Co., as nominee for DTC, or such other nominee as DTC requests pursuant to the Representation Letter. Payment of the interest with respect to any Certificates registered in the name of Cede & Co. will be made on each Interest Payment Date for such Certificates to the account, in the manner and at the address indicated in or pursuant to the Representation Letter.

(a) The Certificates initially will be executed and delivered in the form of a single executed fully registered certificate for each stated maturity of each series of such Certificates, representing the aggregate principal amount of the Certificates of such maturity. Upon initial issuance, the ownership of all such Certificates will be registered in the registration records maintained by the Trustee pursuant to the Trust Agreement in the name of Cede & Co., as nominee of DTC, or such other nominee as DTC will request pursuant to the Representation Letter. The Trustee, the District, the Corporation and any paying agent may treat DTC ( or its nominee) as the sole and exclusive owner of the Certificates registered in its name for the purposes of payment of the principal or prepayment price and interest evidenced and represented by the Certificates, selecting the Certificates or portions thereof to be prepaid, giving any notice permitted or required to be given to Owners under the Trust Agreement, registering the transfer of the Certificates, obtaining any consent or other action to be taken by Owners of the Certificates and for all other purposes whatsoever; and neither the Trustee, the District nor the Corporation or any paying agent will be affected by any notice to the contrary. Neither the Trustee, the District nor the Corporation or any paying agent will have any responsibility or obligation to any Participant (which means, for purposes of the Trust Agreement, securities brokers and dealers, banks, trust companies, clearing corporations and other entities, some of whom directly or indirectly own DTC), any person claiming a beneficial ownership interest in the Certificates under or through DTC or any Participant, or any other person which is not shown on the registration records as being an Owner, with respect to (i) the accuracy of any records maintained by DTC or any Participant, (ii) the payment by DTC or any Participant of any amount in respect of the principal or prepayment price or interest evidenced and represented by the Certificates, (iii) any notice which is permitted or required to be given to Owners of Certificates under the Trust Agreement, (iv) the selection by DTC or any Participant of any person to receive payment in the event ofa partial prepayment of the Certificates, or (v) any consent given or other action taken by DTC as Owner of Certificates. The Trustee will pay all principal and premium, if any, and interest evidenced and represented by the Certificates only at the times, to the accounts, at the addresses and otherwise in accordance with the Representation Letter, and all such payments will be valid and effective to satisfy fully and discharge the District's obligations with respect to the payment of the principal and premium, if any, and interest evidenced and represented by the Certificates to the extent of the sum or sums so paid. Upon delivery by DTC to the Trustee of written notice to the effect that DTC has determined to substitute a new nominee in place of its then existing nominee, the Certificates will be transferable to such new nominee in accordance with the Trust Agreement.

B-26 (b) In the event that the District determines that the Certificates should not be maintained in book- entry form, the Trustee will, upon the written instruction of the District, so notify DTC, whereupon DTC will notify the Participants of the availability through DTC of bond certificates. In such event, the Certificates will be transferable in accordance with the Trust Agreement. DTC may determine to discontinue providing its services with respect to the Certificates or a portion thereof, at any time by giving written notice of such discontinuance to the District or the Trustee and discharging its responsibilities with respect thereto under applicable law. In such event, the Certificates will be transferable in accordance with the Trust Agreement. If at any time DTC is no longer registered or in good standing under the Securities Exchange Act or other applicable statute or regulation and a successor securities depository is not appointed by the District within 90 days after the District receives notice or becomes aware of such condition, as the case may be, then to provisions described above will no longer be applicable and the Trustee will execute and deliver certificates representing the Certificates as provided below. Whenever DTC requests the District and the Trustee to do so, the Trustee and the District will cooperate with DTC in taking appropriate action after reasonable notice to arrange for another securities depository to maintain custody of all certificates evidencing the Certificates then Outstanding. In such event, the Certificates will be transferable to such securities depository in accordance with the Trust Agreement and thereafter, all references in the Trust Agreement to DTC or its nominee will be deemed to refer to such successor securities depository and its nominee, as appropriate.

(c) Notwithstanding any other provision of the Trust Agreement to the contrary, so long as all Certificates Outstanding are registered in the name of any nominee of DTC, all payments with respect to the principal of and premium, if any, and interest with respect to each such Certificate and all notices with respect to each such Certificate will be made and given, respectively, to DTC as provided in the Representation Letter.

(d) The Trustee is authorized under the Trust Agreement and requested to execute and deliver the Representation Letter and, in connection with any successor nominee for DTC or any successor depository, enter into comparable arrangements, and will have the same rights with respect to its actions thereunder as it has with respect to its actions under the Trust Agreement.

(e) In the event that any transfer or exchange of Certificates is authorized under the Trust Agreement, such transfer or exchange will be accomplished upon receipt by the Trustee from the registered owner thereof of the Certificates to be transferred or exchanged and appropriate instruments of transfer to the permitted transferee, all in accordance with the applicable provisions of the Trust Agreement. In the event the Certificates are issued to Owners other than Cede & Co., its successor as nominee for DTC as holder of all the Certificates, another securities depository as holder of all the Certificates, or the nominee of such successor securities depository, the provisions of the Trust Agreement will also apply to, among other things, the registration, exchange and transfer of the Certificates and the method of payment of principal, premium, if any, and interest evidenced and represented by the Certificates.

PREPAYMENT OF CERTIFICATE

Selection of Certificate for Prepayment. If less than all Outstanding Certificates maturing by their terms on any one date are to be prepaid at any one time, and no other method of selection has been specified in the Trust Agreement, the Trustee will select the Certificates of such maturity date to be prepaid in any manner that it deems appropriate and fair and will promptly notify the District in writing of the numbers of the Certificates so selected for prepayment. For purposes of such selection, Certificates will be deemed to be composed of $5,000 multiples and any such multiple may be separately prepaid or redeemed. In the event the term Certificates are designated for prepayment, the District may designate which sinking account payments are allocated to such prepayment.

INSTALLMENT PAYMENTS

Pledge of Installment Payments. All Installment Payments will be paid directly by the District to the Trustee and if received by the Corporation at any time will be deposited by the Corporation with the Trustee

B-27 within one Business Day after the receipt thereof. All Installment Payments received by the Trustee will be held in trust by the Trustee under the terms of the Trust Agreement. The Installment Payments with respect to the Series 2007A Certificates will be deposited by the Trustee as aud when received in the Series 2007A Payment Fund, which fuud the Trustee has established aud maintains so long as auy Certificates are Outstauding. The Installment Payments with respect to the Series 2007B Certificates will be deposited by the Trustee as aud when received in the Series 2007B Payment Fuud, which fuud the Trustee has established aud maintains so long as auy Certificates are Outstauding. All money in the Series 2007A Payment Fund will be held in trust by the Trustee for the benefit of the Owners of the Series 2007 A Certificates aud all the money in the Series 2007B Payment Fund will be held in Trust by the Trustee for the benefit of the owner of the Series 2007B Certificates. The District aud the Corporation have pledged aud grauted a lien on the Series 2007 A Payment Fund to the Trustee for the benefit of the Owners of the Series 2007A Certificates aud a lien on the Series 2007B Payment Fund to the Trustee for the benefit of the Owners of the Series 2007B Certificates.

Receipt aud Deposit of Installment Payments. (a) In order to carry out aud effectuate the pledge contained in the Trust Agreement, subject to the provisions on the prior paragraph, the Trustee will deposit the Installment Payments with respect to the Series 2007 A Certificates when aud as received in trust in the Series 2007A Payment Fund for the benefit of the Owners of the Series 2007A Certificates. All Installment Payments will be accounted for through aud held in trust. All lustallment Payments deposited with the Trustee as provided in the Trust Agreement will nevertheless be allocated, applied aud disbursed solely to the purposes aud uses thereinafter set forth, and will be accounted for separately and apart from all other accounts, funds, money or other resources of the Trustee.

(b) In order to carry out aud effectuate the pledge contained in the Trust Agreement, subject to the provisions described above, the Trustee will deposit the Installment Payments with respect to the Series 2007B Certificates when aud as received in trust in the Series 2007B Payment Fuud for the benefit of the Owners of the Series 2007B Certificates. All Installment Payments will be accounted for through aud held in trust. All Installment Payments deposited with the Trustee as provided in the Trust Agreement will nevertheless be allocated, applied aud disbursed solely to the purposes aud uses !hereinafter set forth, aud will be accounted for separately and apart from all other accounts, funds, money or other resources of the Trustee.

(f) Money in the Series 2007A Payment Fund will be used aud withdrawn by the Trustee for the purpose of paying (i) the interest evidenced aud represented by the Series 2007A Certificates as it will become due aud payable (including accrued interest evidenced aud represented by the Series 2007A Certificates purchased or prepaid prior to maturity), aud (ii) the principal evidenced aud represented by the Series 2007A Certificates as it will become due aud payable.

(g) Money in the Series 2007B Payment Fund will be used aud withdrawn by the Trustee for the purpose of paying (i) the interest evidenced aud represented by the Series 2007B Certificates as it will become due aud payable (including accrued interest evidenced aud represented by the Series 2007B Certificates purchased or prepaid prior to maturity), aud (ii) the principal evidenced aud represented by the Series 2007B Certificates as it will become due aud payable.

(h) Any moneys which, pursuaut the lustallment Purchase Agreement, are to be used to prepay the Series 2007A Certificates pursuaut to the Trust Agreement will be deposited by the Trustee in the Series 2007A Payment Fuud. The Trustee will, on the scheduled prepayment date, withdraw from the Series 2007 A Payment Fund aud pay to the Owners entitled thereto au amouut equal to the prepayment price of the Series 2007A Certificates to be prepaid on such date plus interest evidenced aud represented by the Certificates to the Prepayment Date.

(i) Any moneys which, pursuaut to the lustallment Purchase Agreement, are to be used to prepay the Series 2007B Certificates pursuaut to the Trust Agreement will be deposited by the Trustee in the Series 2007B Payment Fund. The Trustee will, on the scheduled prepayment date, withdraw from the Series 2007B Payment Fuud aud pay to the Owners entitled thereto au amount equal to the prepayment price of the Series

B-28 2007B Certificates to be prepaid on such date plus interest evidenced and represented by the Certificates to the Prepayment Date.

The Series 2007A Reserve Fund and the Series 2007B Reserve Fund. There has been created with the Trustee the "Series 2007 A Reserve Fund" which the Trustee will maintain and hold in trust separate and apart from other funds held by it.

The District will deposit the Surety Bond in the Series 2007 A Reserve Fund and will apply the Series 2007A Surety Bond in accordance with the Trust Agreement.

As long as the Series 2007 A Surety Bond will be in effect and the Surety Bond Provider has not defaulted in its payment obligations thereunder, the District and Trustee agree to comply with the following prov1s1ons:

(a) If prior to any Interest Payment Date the money in the Series 2007A Payment Fund is insufficient to make the payments with respect to the Certificates required by the Trust Agreement on such Interest Payment Date, the Trustee will provide notice to the Surety Bond Provider under the terms of the Series 2007 A Surety Bond at least three Business Days prior to such Interest Payment Date. The Surety Bond Provider will make payment under the Series 2007A Surety Bond to the Trustee on the Interest Payment Date or the Business Day next following the Business Day on which the Surety Bond Provider has received notice.

(b) All cash and investments in the Series 2007A Reserve Fund, if any, will be transferred to the Series 2007 A Payment Fund for payment of debt service or principal with respect to the Certificates before any drawing may be made on the Series 2007 A Surety Bond or any other credit facility credited to the Series 2007 A Reserve Fund in lieu of cash. Payment of any amounts under the Financial Guaranty Agreement will be made prior to replenishment of any such cash amounts. Draws on all credit facilities (including the Series 2007 A Surety Bond) on which there is available coverage will be made on a pro-rata basis ( calculated by reference to the coverage then available thereunder) after applying all available cash and investments in the Series 2007A Reserve Fund. Payment of amounts under the Financial Guaranty Agreement and reimbursement of amounts with respect to other credit facilities will be made on a pro-rata basis prior to replenishment of any cash drawn from the Series 2007 A Reserve Fund.

There has been created with the Trustee the "Series 2007B Reserve Fund" which the Trustee will maintain and hold in trust separate and apart from other funds held by it.

The District will deposit the Surety Bond in the Series 2007B Reserve Fund and will apply the Series 2007B Surety Bond in accordance with the Trust Agreement.

As long as the Series 2007B Surety Bond will be in effect and the Surety Bond Provider has not have defaulted in its payment obligations thereunder, the District and Trustee agree to comply with the following prov1s1ons:

(a) If prior to any Interest Payment Date the money in the Series 2007B Payment Fund is insufficient to make the payments with respect to the Certificates required by the Trust Agreement on such Interest Payment Date, the Trustee will provide notice to the Surety Bond Provider under the terms of the Series 2007B Surety Bond at least three Business Days prior to such Interest Payment Date. The Surety Bond Provider will make payment under the Series 2007B Surety Bond to the Trustee on the Interest Payment Date or the Business Day next following the Business Day on which the Surety Bond Provider has received notice.

(b) All cash and investments in the Series 2007B Reserve Fund, if any, will be transferred to the Series 2007B Payment Fund for payment of debt service or principal with respect to the Certificates before any drawing may be made on the Series 2007B Surety Bond or any other credit facility credited to the Series 2007B Reserve Fund in lieu of cash. Payment of any amounts under the Financial Guaranty Agreement

B-29 will be made prior to replenishment of any such cash amouuts. Draws on all credit facilities (including the Series 2007B Surety Bond) on which there is available coverage will be made on a pro-rata basis (calculated by reference to the coverage then available thereuuder) after applying all available cash and investments in the Series 2007B Reserve Fund. Payment of amounts under the Financial Guaranty Agreement and reimbursement of amounts with respect to other credit facilities will be made on a pro-rata basis prior to replenishment of any cash drawn from the Series 2007B Reserve Fund.

Investment of Moneys in Fuuds. Moneys in the funds established with the Trustee under the Trust Agreement will, in accordance with a Written Request of the District, be invested by the Trustee in Permitted Investments. The Trustee may conclusively rely on any direction contained in a Written Request of the District to invest in investments that such investments are Permitted Investments. In the absence of a Written Request of the District, the Trustee will invest moneys in clause (vii) of the definition of Permitted Investments. The obligations in which moneys in said funds are invested will mature on or prior to the date on which such moneys are estimated to be required to be paid out uuder the Trust Agreement. The obligations in which moneys in the Series 2007 A Reserve Fund or the Series 2007B Reserve Fuud are so invested will be invested in obligations maturing no later than five years after the date of investment; provided no such investment will mature later than the final Certificate Payment Date of the respective Certificates; provided further, if such investments may be redeemed at par so as to be available on each Interest Payment Date, any amount of the Series 2007 A Reserve Fund or the Series 2007B Reserve Fund may be invested in such redeemable investments of any maturity on or prior to the final Certificate Payment Date of the respective Certificates. The Trustee will sell at the best price obtainable or present for redemption any obligations so purchased whenever it may be necessary to do so in order to provide moneys to meet any payment required under the Trust Agreement. Notwithstanding anything in the Trust Agreement therein to the contrary, the Trustee will not be responsible for any loss from investments, sales or transfers undertaken in accordance with the Trust Agreement. Any interest, income or profits from the deposits or investments of money in the Series 2007A Reserve Fuud and the Series 2007B Reserve Fund (except to the extent required by the Trust Agreement will be deposited in the Series 2007 A Payment Fuud or Series 2007B Payment Fuud as the case may be. For purposes of determining the amount of deposit in any fund held under the Trust Agreement, all Permitted Investments credited to such fund will be valued at the market value thereof. Except as otherwise provided in the Trust Agreement, Permitted Investments representing an investment of moneys attributable to any fuud and all investment profits or losses thereon will be deemed at all times to be a part of said fund. To the extent that Permitted Investments are registrable securities, such Permitted Investments will be registered in the name of the Trustee.

The Trustee may act as principal or agent in the acquisition or disposition of investments and may commingle moneys in funds and accounts for the purpose of investment.

The Trustee is has been authorized, in making or disposing of any investment permitted by the Trust Agreement, to deal with itself (in its individual capacity) or with any one or more of its affiliates, whether it or such affiliate is acting as an agent of the Trustee or for any third person or dealing as principal for its own account.

The District acknowledges that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the District the right to receive brokerage confirmations of security transactions as they occur, the District will not receive such confirmations to the extent permitted by law. The Trustee will furnish the District periodic cash transaction statements which include detail for all investment transactions made by the Trustee under the Trust Agreement.

The Trustee or any of its affiliates may act as sponsor, advisor or manager in connection with any investments made by the Trustee under the Trust Agreement.

Application of the Series 2007A Certificate Rebate Fuud. (a) Absent an opinion of Special Couusel that the exclusion from gross income for federal income tax purposes of interest evidenced and represented by the Series 2007A Certificates will not be adversely affected, the District will cause to be deposited in the Series

B-30 2007A Certificate Rebate Fund such amounts as are required to be deposited therein pursuant to the Trust Agreement and the Tax Certificate. Within the Series 2007 A Certificate Rebate Fund, there will be established two separate accounts designated the "Rebate Account" and the "Alternative Penalty Account." All money at any time deposited in the Rebate Account or the Alternative Penalty Account will be held by the Trustee in trust for payment to the United States Treasury. All amounts on deposit in the Series 2007A Certificate Rebate Fund will be governed by the Trust Agreement and the Tax Certificate, unless and to the extent that the District delivers to the Trustee an opinion of Special Counsel that the exclusion from gross income for federal income tax purposes of interest evidenced and represented by the Series 2007A Certificates will not be adversely affected if such requirements are not satisfied.

(b) The following provisions relate to the Rebate Accounts and the Alternate Penalty Accounts of the Series 2007 A Certificate Rebate Fund:

(I) Rebate Account. The following requirements are required to be satisfied with respect to the Rebate Account:

(I) Annual Computation. Within 55 days of the end of each Certificate Year, the District will calculate or cause to be calculated the amount of rebatable arbitrage, in accordance with Section 148(!)(2) of the Code and Section 1.148-3 of the Treasury Regulations (taking into account any applicable exceptions with respect to the computation of the rebatable arbitrage, described, if applicable, in the Tax Certificate (e.g., the temporary investments exceptions of Section 148(f)(4)(B) and (C) of the Code), and taking into account whether the election pursuant to Section 148(f)(4)(C)(vii) of the Code (the "I½% Penalty") has been made), for this purpose treating the last day of the applicable Certificate Year as a computation date, within the meaning of Section 1.148-l(b) of the Treasury Regulations (the "Rebatable Arbitrage"). The District will obtain expert advice as to the amount of the Rebatable Arbitrage to comply with the Trust Agreement.

(2) Annual Transfer. Within 55 days of the end of each applicable Certificate Year, upon the written direction of a representative of the District, an amount will be deposited to the Rebate Account by the Trustee from any funds legally available for such purpose (as specified by the District in the aforesaid written direction), if and to the extent required so that the balance in the Rebate Account will equal the amount of Rebatable Arbitrage so calculated in accordance with (i) of this Subsection (b)(l). In the event that immediately following the transfer required by the previous sentence, the amount then on deposit to the credit of the Rebate Account exceeds the amount required to be on deposit therein, upon written instructions from a representative of the District, the Trustee will withdraw the excess from the Rebate Account and then credit the excess to the Series 2007 A Payment Fund.

(3) Payment to the Treasury. The Trustee will pay, as directed in writing by a representative of the District, to the United States Treasury, out of amounts in the Rebate Account,

(X) Not later than 60 days after the end of (A) the fifth Certificate Year, and (B) each applicable fifth Certificate Year thereafter, an amount equal to at least 90% of the Rebatable Arbitrage calculated as of the end of such Certificate Year; and

(Y) Not later than 60 days after the payment of all the Series 2007A Certificates, an amount equal to I 00% of the Rebatable Arbitrage calculated as of the end of such applicable Certificate Year, and any income attributable to the Rebatable Arbitrage, computed in accordance with Section 148(!) of the Code.

B-31 In the event that, prior to the time of any payment required to be made from the Rebate Account, the amount in the Rebate Account is not sufficient to make such payment when such payment is due, the District will calculate or cause to be calculated the amount of such deficiency and deposit an amount received from any legally available source equal to such deficiency prior to the time such payment is due. Each payment required to be made pursuant to this Subsection (b )(I) will be made to the Internal Revenue Service Center on or before the date on which such payment is due, and will be accompanied by Internal Revenue Service Form 8038-T, or will be made in such other manner as provided under the Code.

(2) Alternative Penalty Account.

(I) Six-Month Computation. If the I½% Penalty has been elected, within 85 days of each particular Six-Month Period, the District will determine or cause to be determined whether the I½% Penalty is payable ( and the amount of such penalty) as of the close of the applicable Six-Month Period. The District will obtain expert advice in making such determinations.

(2) Six-Month Transfer. Within 85 days of the close of each Six-Month Period, upon the written direction of a representative of the District, the Trustee will deposit in the Alternative Penalty Account from any legally available source of funds (as specified by the District in the aforesaid written direction), if and to the extent required, so that the balance in the Alternative Penalty Account equals the amount of I½% Penalty due and payable to the United States Treasury determined as provided in Subsection (b)(2)(i) above. In the event that immediately following the transfer provided in the previous sentence, the amount then on deposit to the credit of the Alternative Penalty Account exceeds the amount required to be on deposit therein to make the payments required by Subsection (b )(2)(iii) below, the Trustee, at the written direction of a representative of the District, will withdraw the excess from the Alternative Penalty Account and credit the excess to the Series 2007B Payment Fund.

(3) Payment to the Treasury. The Trustee will pay, as directed in writing by a representative of the District, to the United States Treasury, out of amounts in the Alternative Penalty Account, not later than 90 days after the close of each Six-Month Period the I½% Penalty, if applicable and payable, computed in accordance with Section 148(!)(4) of the Code. In the event that, prior to the time of any payment required to be made from the Alternative Penalty Account, the amount in such account is not sufficient to make such payment when such payment is due, the District will calculate the amount of such deficiency and direct the Trustee to deposit an amount received from any legally available source of funds equal to such deficiency into the Alternative Penalty Account prior to the time such payment is due. Each payment required to be made pursuant to the Trust Agreement will be made to the Internal Revenue Service on or before the date on which such payment is due, and will be accompanied by Internal Revenue Service Form 8038-T or will be made in such other manner as provided under the Code.

( c) Disposition of Unexpended Funds. Any funds remaining in the Series 2007 A Certificate Rebate Fund after prepayment and payment of the principal and interest evidenced and represented by the Series 2007A Certificates, the payments described in Subsection (b)(l)(iii) or (b)(2)(iii) (whichever is applicable), may be withdrawn by the District and utilized in any manner by the District.

(d) Survival of Defeasance. Notwithstanding anything in the Trust Agreement to the contrary, the obligation to comply with the requirements described above will survive the defeasance of the Series 2007 A Certificates.

B-32 ( e) Duty of Trustee. The Trustee will be fully protected and will be deemed to have complied with the provisions described above if it complies with the written directions of the District delivered pursuant to the Trust Agreement and the Trustee will have no responsibility to enforce compliance by the District with the Tax Certificate. Application of the Capitalized Interest Fund The Trustee will transfer amounts from the Capitalized Interest Fund to the Series 2007A Payment Fund and the Series 2007B Payment Fund in the amounts on the dates set forth in the Trust Agreement. All earnings derived from investment of funds on deposit in the Capitalized Interest Fund will be transferred pro rata to the Series 2007A Payment Fund and the Series 2007B Payment Fund. Any amounts on deposit in the Capitalized Interest Fund on June 2, 2010 will be transferred to the Series 2007 A Payment Fund and the Series 2007B Payment Fund. Payments Under the Series 2007 A Policy. In the event that, on the second Business Day, and again on the Business Day prior to the Interest Payment Date of the Series 2007A Certificates, the Trustee has not received sufficient moneys to pay all principal and interest with respect to the Series 2007 A Certificates due on the second following or following, as the case may be, Business Day, the Trustee will immediately notify the Insurer or its designee on the same Business Day by telephone or telegraph, confirmed in writing by registered or certified mail, of the amount of the deficiency. lfthe deficiency is made up in whole or in part prior to or on the Interest Payment Date, the Trustee will so notify the Insurer or its designee.

In addition, if the Trustee has notice that any owner ofa Series 2007A Certificate has been required to disgorge payments of principal or interest with respect to the Series 2007 A Certificates to a trustee in bankruptcy or creditors or others pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner of a Series 2007 A Certificate within the meaning of any applicable bankruptcy laws, then the Trustee will notify the Insurer or its designee of such fact by telephone or telegraphic notice, confirmed in writing by registered or certified mail.

The Trustee has been irrevocably designated, appointed, directed and authorized to act as attorney-in-fact for owners of the Series 2007A Certificate as follows:

(I) If and to the extent there is a deficiency in amounts required to pay interest with respect to the Series 2007A Certificates, the Trustee will (a) execute and deliver to U.S. Bank Trust National Association or its successors under the Series 2007 A Policy (the "Insurance Paying Agent"), in form satisfactory to the Insurance Paying Agent, an instrument appointing the Insurer as agent for such owners in any legal proceeding related to the payment of such interest and an assignment to the Insurer of the claims for interest to which such deficiency relates and which are paid by the Insurer, (b) receive as designee of the respective Series 2007 A Certificate ( and not as Trustee) in accordance with the tenor of the Series 2007 A 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.

(2) If and to the extent of a deficiency in amounts required to pay principal of the Series 2007A Certificates, the Trustee will (a) execute and deliver to the Insurance Paying Agent in form satisfactory to the Insurance Paying Agent an instrument appointing the Insurer as agent for such owner in any legal proceeding relating to the payment of such principal and an assignment to the Insurer of any of the Series 2007 A Certificates 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 will be delivered only if payment from the Insurance Paying Agent is received), (b) receive as designee of the respective owners (and not as Trustee) in accordance with the tenor of the Series 2007 A Policy payment therefor from the Insurance Paying Agent, and (c) disburse the same to such holders.

Payments with respect to claims for principal and interest with respect to the Series 2007A Certificates disbursed by the Trustee from proceeds of the Series 2007A Policy will not be considered to discharge the obligation of the Issuer with respect to such Series 2007 A Certificates, and the Insurer will become the owner of

B-33 such unpaid Series 2007 A Certificates and claims for the interest in accordance with tenor of the assignment made to it under the provisions of the Trust Agreement or otherwise.

Irrespective of whether any such assignment is executed and delivered, the District and the Trustee agree for the benefit of the Insurer that:

(1) They recognize that to the extent the Insurer makes payments, directly or indirectly (as by paying through the Trustee), on account of principal or interest with respect to the Series 2007A Certificates, the Insurer will be subrogated to the rights of such owners of Series 2007 A Certificates to receive the amount of such principal and interest from the District, with interest thereon as provided and solely from the sources stated in the Trust Agreement and the Series 2007 A Certificates; and

(2) They will accordingly pay to the Insurer the amount of such principal and interest (including principal and interest recovered under subparagraph (ii) of the first paragraph of the Series 2007A Policy which principal and interest will be deemed past due and not to have been paid), with interest with respect thereto as provided in the Trust Agreement and the Series 2007 A Certificates but only from the sources and in the manner provided therein for the payment of principal and interest with respect to the Series 2007A Certificates to owners, and will otherwise treat the Insurer as the owner of such rights to the amount of such principal and interest.

Payments Under the Series 2007B Policy. In the event that, on the second Business Day, and again on the Business Day prior to the Interest Payment Date of the Series 2007B Certificates, the Trustee has not received sufficient moneys to pay all principal and interest with respect to the Series 2007B Certificates due on the second following or following, as the case may be, Business Day, the Trustee will immediately notify the Insurer or its designee on the same Business Day by telephone or telegraph, confirmed in writing by registered or certified mail, of the amount of the deficiency. lfthe deficiency is made up in whole or in part prior to or on the Interest Payment Date, the Trustee will so notify the Insurer or its designee.

In addition, if the Trustee has notice that any owner of a Series 2007B Certificate has been required to disgorge payments of principal or interest with respect to the Series 2007B Certificates to a trustee in bankruptcy or creditors or others pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner of a Series 2007B Certificate within the meaning of any applicable bankruptcy laws, then the Trustee will notify the Insurer or its designee of such fact by telephone or telegraphic notice, confirmed in writing by registered or certified mail.

The Trustee is irrevocably designated, appointed, directed and authorized to act as attorney-in-fact for owners of the Series 2007B Certificate as follows:

(1) If and to the extent there is a deficiency in amounts required to pay interest with respect to the Series 2007B Certificates, the Trustee will (a) execute and deliver to U.S. Bank Trust National Association or its successors under the Series 2007B Policy (the "Insurance Paying Agent"), in form satisfactory to the Insurance Paying Agent, an instrument appointing the Insurer as agent for such owners in any legal proceeding related to the payment of such interest and an assignment to the Insurer of the claims for interest to which such deficiency relates and which are paid by the Insurer, (b) receive as designee of the respective Series 2007B Certificate (and not as Trustee) in accordance with the tenor of the Series 2007B 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.

(2) If and to the extent of a deficiency in amounts required to pay principal of the Series 2007B Certificates, the Trustee will (a) execute and deliver to the Insurance Paying Agent in form satisfactory to the Insurance Paying Agent an instrument appointing the Insurer as agent for such owner in any legal proceeding relating to the payment of such principal and an assignment to the Insurer of any of the Series 2007B Certificates 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 will be delivered only if payment from the Insurance

B-34 Paying Agent is received), (b) receive as designee of the respective owners (and not as Trustee) in accordance with the tenor of the Series 2007B Policy payment therefor from the Insurance Paying Agent, and (c) disburse the same to such holders.

Payments with respect to claims for principal and interest with respect to the Series 2007B Certificates disbursed by the Trustee from proceeds of the Series 2007B Policy will not be considered to discharge the obligation of the Issuer with respect to such Series 2007B Certificates, and the Insurer will become the owner of such unpaid Series 2007B Certificates and claims for the interest in accordance with tenor of the assignment made to it under the provisions of the Trust Agreement or otherwise.

Irrespective of whether any such assignment is executed and delivered, the District and the Trustee agree for the benefit of the Insurer that:

(1) They recognize that to the extent the Insurer makes payments, directly or indirectly (as by paying through the Trustee), on account of principal or interest with respect to the Series 2007B Certificates, the Insurer will be subrogated to the rights of such owners of Series 2007B Certificates to receive the amount of such principal and interest from the District, with interest thereon as provided and solely from the sources stated in the Trust Agreement and the Series 2007B Certificates; and

(2) They will accordingly pay to the Insurer the amouut of such principal and interest (including principal and interest recovered under subparagraph (ii) of the first paragraph of the Series 2007B Policy which principal and interest will be deemed past due and not to have been paid), with interest with respect thereto as provided in the Trust Agreement and the Series 2007B Certificates but only from the sources and in the manner provided therein for the payment of principal and interest with respect to the Series 2007B Certificates to owners, and will otherwise treat the Insurer as the owner of such rights to the amount of such principal and interest.

COVENANTS Compliance with Trust Agreement; Compliance of Laws and Regulations. The Trustee will not execute or deliver any Certificates in any manner other than in accordance with the provisions of the Trust Agreement and neither the Corporation nor the District will suffer or permit any default by them to occur thereunder, but each will faithfully observe and perform all the agreements, conditions, covenants and terms contained therein required to be observed and performed by them.

The Corporation and the District will faithfully observe and perform all lawful and valid obligations or regulations imposed on them by contract, or prescribed by any state or national law, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of each and every franchise right or privilege owned or acquired by them, including their right to exist and carry on their respective businesses, to the end that such franchises, rights and privileges will be maintained and preserved and will not be abandoned, forfeited or in any manner impaired.

Accouuting Records and Statements. The Trustee will keep proper books of record and accouut in accordance with industry standards in which complete and correct entries will be made of all transactions relating to the receipt, investment, disbursement, allocation and application of the Installment Payments and the proceeds of the Certificates or the obligation which they evidence and represent. Such records will specify the accouut or fuud to which each investment ( or portion thereof) held by the Trustee is to be allocated and will set forth, in the case of each investment, (a) its purchase price, (b) identifying information, including par amount, coupon rate, and payment dates, (c) the amount received at maturity or its sale price, as the case may be, and (d) the amouuts and dates of any payments made with respect thereto. Such records will be open to inspection by any Owner or his agent duly authorized in writing at reasonable hours and under reasonable conditions and upon reasonable written request during the regular business hours of the Trustee on any Business Day. As soon as available after June 30, 2007, and continuing after each June 30th so long as any Certificates are Outstanding, the Trustee will furnish to the Corporation and to any Owner who may so request (at the expense of such Owner) a complete statement covering the receipts, deposits and disbursements of the money held under the

B-35 Trust Agreement for the preceding fiscal year. In addition, the Trustee will provide the District with a monthly accounting of the funds and accounts held under the Trust Agreement provided, that the Trustee will not be obligated to provide an accounting for any fund or account that (a) has a balance of $0.00 and (b) has not had any activity since the last reporting date.

Installment Purchase Agreement. The Corporation will at all times maintain and vigorously enforce all of its rights under the Installment Purchase Agreement, and will promptly collect or cause to be collected all Installment Payments as the same become due under the Installment Purchase Agreement, and will promptly and vigorously enforce its rights against any person who does not pay such Installment Payments as they become due under the Installment Purchase Agreement. The Corporation and the District will not do or permit anything to be done, or omit or refrain from doing anything, in any case where any such act done or permitted to be done, or any such omission of or refraining from action, would or might be a ground for cancellation or termination of the Installment Purchase Agreement by the purchaser thereunder.

Other Liens. The District will keep the Project free from judgments, mechanics, and materialmen's liens (except those arising from the acquisition, construction and installation of the Project) and free from all liens, claims, demands and encumbrances of whatsoever prior nature or character to the end that the security for the Certificates provided in the Trust Agreement will at all times be maintained and preserved free from any claim or liability which might hamper the District in conducting its business or interfere with the District's operation of the Project, and the Trustee at its option (after first giving the District thirty (30) days written notice to comply therewith and failure of the District to so comply within such period) may (but will not be obligated to) defend against any and all actions or proceedings in which the validity thereof is or might be questioned, or may pay or compromise any claim or demand asserted in any such action or proceeding; provided, however, that in defending such actions or proceedings or in paying or compromising such claims or demands the Trustee will not in any event be deemed to have waived or released the District from liability for or on account of any of its agreements and covenants contained in the Trust Agreement, or from its liability thereunder to defend the validity thereof and the pledge of the Installment Payments made therein and to perform such agreements and covenants.

Prosecution and Defense of Suits. The District will promptly from time to time take or cause to be taken such action as may be necessary or proper to remedy or cure any defect in or cloud upon the title to the Project, existing or developing after the date of this Trust Agreement, and will prosecute or cause to be prosecuted all such suits, actions and other proceedings as may be appropriate for such purpose and will indemnify and hold the Trustee harmless from all loss, cost, damage and expense, including attorney's fees, which it may incur by reason of any such defect, cloud, suit, action or proceeding.

The District will defend against every suit, action or proceeding at any time brought against the Trustee upon any claim arising out of the receipt, application or disbursement of any of the Installment Payments or involving the rights of the Trustee under the Trust Agreement; provided that the Trustee at its election may appear in and defend any such suit, action or proceeding.

Further Assurances. Whenever and so often as requested to do so by the Trustee, the District 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 owners all rights, interests, powers, benefits, privileges and advantages conferred or intended to be conferred upon them by the Trust Agreement.

Recordation and Filing. The District will file, record, register, renew, refile and rerecord all such documents, including financing statements ( or continuation statements in connection therewith), as may be required by law in order to maintain at all times a security interest in the money in the Series 2007 A Payment Fund, the Series 2007B Payment and the Capitalized Interest Fund under the Trust Agreement in such manner, at such times and in such places as may be required in order to fully perfect, preserve and protect the benefit,

B-36 protection and security of the respective Owners and the rights of the Trustee thereunder (with copies of each such document being forwarded to the Trustee), and the District will do whatever else may be necessary or be reasonably required in order to perfect and continue the pledge of and lien on the money in the funds described in the Trust Agreement.

THE TRUSTEE

Employment and Duties of the Trustee. The Corporation and the District have appointed and employed U.S. Bank National Association, in San Francisco, California, as Trustee to receive, deposit and disburse the Installment Payments as provided in the Trust Agreement, to prepare, execute, deliver, transfer, exchange and cancel the Certificates as provided therein, to pay the interest and principal and prepayment premiums, if any, evidenced and represented by the Certificates to the Owners thereof as provided in the Trust Agreement and to perform the other obligations contained therein; all in the manner provided therein and subject to the conditions and terms thereof. By executing and delivering the Trust Agreement, the Trustee undertakes to perform such obligations ( and only such obligations) as are specifically set forth therein, and no implied covenants or obligations will be read therein against the Trustee.

Prior to any resignation by the Trustee pursuant to the Trust Agreement, the Trustee will faithfully observe and perform all lawful and valid obligations or regulations now or imposed on it by contract, or prescribed by any state or federal law, or by any officer, board or commission having jurisdiction or control over the Trustee, as a condition of the continued enjoyment of each and every franchise, right or privilege owned or acquired by it, including its right to exist and carry on its business, to the end that such franchises, rights and privileges will be maintained and preserved and will not be abandoned, forfeited or in any manner impaired.

Whenever provision is made in the Trust Agreement for the cancellation by the Trustee of any Certificates, the Trustee will destroy such Certificates and deliver a certificate of such destruction to the District.

Duties, Immunities and Liabilities of Trustee. (a) The Trustee will, prior to an Event of Default, and after the curing or waiver of all Events of Default which may have occurred, perform such duties and only such duties as are specifically set forth in the Trust Agreement and no implied duties or obligations will be read therein the Trust Agreement against the Trustee. The Trustee will, during the existence of any Event of Default (which has not been cured or waived), exercise such of the rights and powers vested in it by the Trust Agreement, 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 his own affairs.

(b) So long as no Event of Default has occurred and is continuing, upon thirty (30) days' written notice to the Trustee, the District may remove the Trustee at any time and will remove the Trustee at any time requested to do so by an instrument or concurrent instruments in writing, or in the case of the Certificates, the Owners of the Certificates of not less than a majority in aggregate amount of Certificates then Outstanding (or their attorneys duly authorized in writing) or if at any time the Trustee will cease to be eligible in accordance with the Trust Agreement or will become incapable of acting, or will commence a case under any bankruptcy, insolvency or similar law, or a receiver of the Trustee or of its property will be appointed, or any public officer will take control or charge of the Trustee or its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Trustee, and thereupon will appoint a successor Trustee by an instrument in writing.

(c) The Trustee may resign by giving written notice of such resignation to the District and by giving notice of such resignation by mail, first class postage prepaid, to the Owners at the addresses listed in the bond register. Upon receiving such notice of resignation, the District will promptly appoint a successor Trustee by an instrument in writing.

( d) Any removal or resignation of the Trustee and appointment of a successor Trustee will become effective upon acceptance of appointment by the successor Trustee. If no successor Trustee has been appointed

B-37 and accepted appointment within thirty (30) days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee, at the expense of the District, or any Owner ( on behalf of himself and all other Owners) may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Any successor Trustee appointed under the Trust Agreement will signify its acceptance of such appointment by executing and delivering to the District and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, will become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee therein; but, nevertheless, at the written request of the District or of the successor Trustee, such predecessor Trustee will execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under the Trust Agreement and will pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions therein set forth. Upon request of the successor Trustee, the District will execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Trustee as provided in the Trust Agreement, such successor Trustee will mail a notice of the succession of such Trustee to the trusts thereunder by first class mail, postage prepaid, to the Owners at their addresses listed in the bond register.

( e) Any Trustee appointed under the provisions of the Trust Agreement will be a trust company or bank having trust powers, having a corporate trust office in California, the combined capital, surplus and undivided profits of such trust company or bank ( or in the event that such trust company or bank is a member of a bank holding company system, of its bank holding company) of at least fifty million dollars ($50,000,000), and subject to supervision or examination by federal or state authority. If such bank 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 the Trust Agreement the combined capital and surplus of such bank or trust company will be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee will cease to be eligible in accordance with the provisions of the Trust Agreement, the Trustee will resign immediately in the manner and with the effect specified in therein.

(f) No provision in the Trust Agreement will require the Trustee to risk or expend its own funds or otherwise incur any financial liability in the performance of any of its duties thereunder.

(f) The Trustee will not be responsible for the sufficiency, timeliness or payment of the Installment Payments, the maintenance of insurance as required by the Installment Purchase Agreement or reviewing any report or certificate required to be provided under the Trust Agreement or the Installment Purchase Agreement.

(g) The Trustee will not be accountable for the use or application by the District, the Corporation or any other party of any funds which the Trustee has released under the Trust Agreement.

(h) The Trustee may employ attorneys, agents or receivers in the performance of any of its duties under the Trust Agreement and will not be answerable for the misconduct of any such attorney, agent or receiver selected by it with reasonable care.

Merger or Consolidation. Any company into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it is a party or any company to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided such company will be eligible under the Trust Agreement will succeed to the rights and obligations of such Trustee without the execution or filing of any paper or any further act, anything therein to the contrary notwithstanding.

B-38 Compensation and Indenmification. The District will pay the Trustee, or cause the Trustee to be paid, reasonable compensation for its services rendered under the Trust Agreement and will reimburse the Trustee for reasonable expenses (including reasonable fees and expenses of its attorneys) incurred by the Trustee in the performance of its obligations thereunder.

The District has agreed to the extent permitted by law, to indemnify the Trustee and its respective officers, directors, members, employees, attorneys and agents for, and to hold them hannless against, any loss, liability or expense incurred without negligence or willful misconduct on their part arising out of or in connection with the acceptance or administration of the trusts imposed by the Trust Agreement, including performance of their duties thereunder, including the costs and expenses of defending themselves against any claims or liability in connection with the exercise or performance of any of their powers or duties thereunder. Such indenmity will survive the termination or discharge of the Trust Agreement and resignation or removal of the Trustee.

Liability of Trustee. (a) The recitals of facts in the Trust Agreement and in the Certificates contained will be taken as statements of the District, and the Trustee assumes no responsibility for the correctness of the same, and makes no representations as to the validity or sufficiency of the Trust Agreement, the Installment Purchase Agreement or of the Certificates, and will incur no responsibility in respect thereof, other than in connection with the duties or obligations in the Trust Agreement or in the Certificates assigned to or imposed upon it. The Trustee will, however be responsible for its representations contained in its certificate of execution on the Certificates. The Trustee will not be liable in connection with the performance of its duties under the Trust Agreement, except for its own negligence or willful misconduct. The Trustee may become the Owner of Certificates with the same rights it would have if it were not Trustee or and, to the extent permitted by law, may act as depositary for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Owners, whether or not such committee represents the Owners of a majority in aggregate amount of Certificates then Outstanding.

(b) The Trustee will not be liable for any error of judgment made in good faith by a responsible officer, unless the Trustee has been negligent in ascertaining the pertinent facts.

( c) The Trustee will 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 Owners of the Certificates, of not less than 25% in aggregate amount of Certificates, at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under the Trust Agreement.

( d) The Trustee will not be liable for any action taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by the Trust Agreement, except for actions arising from the negligence or willful misconduct of the Trustee. The permissive right of the Trustee to do things enumerated thereunder will not be construed as a mandatory duty.

( e) The Trustee will not be deemed to have knowledge of any Event of Default under the Trust Agreement unless and until it has actual knowledge thereof, or has have received written notice thereof at the Corporate Trust Office of the Trustee. Except as otherwise expressly provided in the Trust Agreement and subject to certain provisions of the Trust Agreement. Trustee will not be bound to ascertain or inquire as to the performance or observance of any of the terms, conditions, covenants or agreements therein or of any of the documents executed in connection with the Certificates, or as to the existence of an Event of Default under the Trust Agreement. The Trustee will not be responsible for the validity or effectiveness of any collateral given to or held by it.

(f) The Trustee makes no representations with respect to any information, statement, or recital in, and will have no liability with respect to, any official statement, offering memorandum or any other disclosure material prepared or distributed with respect to the Certificates.

B-39 (g) The immunities extended to the Trustee also extend to its directors, officers, employees and agents.

(h) The permissive right of the Trustee to do things enumerated in the Trust Agreement will not be construed as a duty.

Right to Rely on Documents. The Trustee will be protected in acting, and may conclusively rely, upon any notice, resolution, request, requisition, consent, order, certificate, report, opinion, bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties and need not conduct any independent investigation of the matters covered therein. The Trustee may consult with counsel, who may be counsel but need not of or to the District, with regard to legal questions, and the opinion of such counsel will be full and complete authorization and protection in respect of any action taken or suffered by it under the Trust Agreement in good faith and in accordance therewith.

Whenever in the administration of the trusts imposed upon it by the Trust Agreement the Trustee will deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action thereunder, such matter (unless other evidence in respect thereof be therein specifically prescribed) may be deemed to be conclusively proved and established by a Certificate of the District, and such Certificate of the District will be full warrant to the Trustee for any action taken or suffered in good faith under the provisions of the Trust Agreement in reliance upon such Certificate of the District, but in its discretion the Trustee may, in lieu thereof, accept other evidence of such matter or may require such additional evidence as to it may seem reasonable.

Preservation and Inspection of Documents. All documents received by the Trustee under the provisions of the Trust Agreement will be retained in its possession and will be subject at all reasonable times to the inspection of the District and any Owner, and their agents and representatives duly authorized in writing, at reasonable hours and under reasonable conditions.

AMENDMENT OF THE TRUST AGREEMENT

Amendment of the Trust Agreement. (a) The Trust Agreement and the rights and obligations of the District and of the Owners of the Certificates and of the Trustee may be modified or amended at any time by an amendment thereto which will become binding when the written consents of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided in the Trust Agreement has been filed, together with the written consent of the Insurer so long as the Policy is in full force and effect, provided, however, that no such modification or amendment will (I) extend the stated maturities of the Certificates, or reduce the rate of interest or yields-to-maturity, as the case may be, represented thereby, or extend the time of payment of interest, or reduce the amount of principal represented thereby, or reduce any premium payable on the prepayment thereof, without the consent of the Owner of each Certificate so affected, or (2) reduce the aforesaid percentage of Owners of Certificates whose consent is required for the execution of any amendment or modification of the Trust Agreement, or (3) modify any of the rights or obligations of the Trustee or the Corporation without its written consent thereto.

(b) The Trust Agreement and the rights and obligations of the Corporation and the District and of the Owners of the Certificates may also be modified or amended at any time by an amendment to the Trust Agreement which will become binding upon adoption, without the consent of the Owners of any Certificates, but with written notice to the Insurer so long as the Policy is in full force and effect, but only to the extent permitted by law and only for any one or more of the following purposes ( 1) to add to the covenants and agreements of the Corporation or the District contained in the Trust Agreement other covenants and agreements thereafter to be observed or to surrender any right or power therein reserved to or conferred upon the Corporation or the District, and which will not adversely affect the interests of the Owners of the Certificates; (2) to cure, correct or supplement any ambiguous or defective provision contained in the Trust Agreement or in regard to questions arising thereunder as the Corporation or the District may deem necessary or desirable and

B-40 which will not adversely affect the interests of the Owners of the Certificates; and (3) to make such other amendments or modifications as may be in the best interests of the Owners of the Certificates. The Trustee will promptly upon execution and delivery of any amendment pursuant to the Trust Agreement send by first class mail a copy of such amendment to S&P.

Disqualified Certificates. Certificates owned or held by or for the account of the Corporation or the District will not be deemed Outstanding for the purpose of any consent or other action or any calculation of Outstanding Certificates provided in the Trust Agreement, and will not be entitled to consent to or take any other action provided therein.

Endorsement or Replacement of Certificates After Amendment. After the effective date of any action taken as provided in the Trust Agreement, the Corporation may determine that the Certificates may bear a notation by endorsement in form approved by the Corporation as to such action, and in that case upon demand of the Owner of any Outstanding Certificates and presentation of his Certificate for such purpose at the Corporate Trust Office of the Trustee a suitable notation as to such action will be made on such Certificate. If the Corporation or the District will so determine, new Certificates so modified as, in the opinion of the Corporation or the District, will be necessary to conform to such action will be prepared and executed, and in that case upon demand of the Owner of any Outstanding Certificate such new Certificates will be exchanged at the Corporate Trust Office of the Trustee without cost to each Owner for Certificates then Outstanding upon surrender of such Outstanding Certificates.

Amendment by Mutual Consent. The provisions of the Trust Agreement will not prevent any Owner from accepting any amendment as to the particular Certificates owned by him, provided that due notation thereof is made on such Certificates.

EVENTS OF DEFAULT AND REMEDIES OF OWNERS

Notice of Non-Payment. In the event of delinquency in the payment of any Installment Payments due by the District pursuant to the Installment Purchase Agreement, the Trustee will, after one business day following the date upon which such delinquent Installment Payment was due, as soon as practicable give written notice of the delinquency and the amount of the delinquency to the District, the Corporation and the Insurer.

Action on Default or Termination. Upon the occurrence of an Event of Default (as that term is defined in the Installment Purchase Agreement), which event will constitute a default under the Trust Agreement, and in each and every such case during the continuance of such Event of Default, the Trustee at the written direction of the Insurer will be entitled upon notice in writing to the District, to exercise the remedies provided to the Corporation in the Installment Purchase Agreement.

Upon declaration of the entire principal amount of the unpaid Installment Payments and the accrued interest thereon to be due and payable immediately and provided such declaration is not rescinded or annulled, all in accordance with the Installment Purchase Agreement, the Trustee will apply (i) all moneys received as Installment Payments and all moneys held in any fund or account under the Trust Agreement and (ii) to the payment of the entire principal amount of the Certificates and the accrued interest with respect thereto, with interest with respect to the overdue Certificates at the rate or rates of interest or yields-to-maturity applicable to the Certificates if paid in accordance with their terms.

Proceedings by Trustee. Upon the happening and continuance of any Event of Default the Trustee at the written direction of the Insurer will do the following: (a) by mandamus, or other suit, action or proceeding at law or in equity, to enforce its rights against the Corporation or the District or any director, officer or employee of the District, and to compel the Corporation or the District or any such director, officer or employee of the District to observe or perform its or his duties under applicable law and the agreements, conditions, covenants and terms contained in the Trust Agreement required to be observed or performed by it or him; (b) by action or suit in equity enjoin any acts or things which may be unlawful or in violation of the rights of the Owners; and (c)

B-41 by suit in equity upon the happening of an Event of Default under the Trust Agreement to require the Corporation and the District and the directors, officers and employees of the District to account as the trustee of an express trust.

Non-Waiver. A waiver of any default under the Trust Agreement of breach of any obligation by the Trustee thereunder or by the Corporation or the District under the Installment Purchase Agreement will not affect any subsequent default under the Trust Agreement or any subsequent breach of an obligation by the Trustee thereunder or impair any rights or remedies on any such subsequent default thereunder or on any such subsequent breach of an obligation by the Trustee thereunder. No delay or omission by the Trustee to exercise any right or remedy accruing upon any default thereunder will impair any such right or remedy or will be construed to be a waiver of any such default thereunder or an acquiescence therein, and every right or remedy conferred upon the Trustee by applicable law or thereby may be enforced and exercised from time to time and as often as will be deemed expedient by the Trustee.

If any action, proceeding or suit to enforce any right or to exercise any remedy is abandoned or determined adversely to the Trustee, the Corporation or the District, the Trustee, the Corporation and the District will be restored to their former positions, rights and remedies as if such action, proceeding or suit had not been brought or taken.

Application of Funds. All moneys on deposit in the funds and accounts held under the Trust Agreement ( other than the Series 2007A Certificate Rebate Fund) and all moneys received by the Trustee pursuant to any right given or action taken under the provisions therein or of the Installment Purchase Agreement will be deposited in segregated accounts in the Series 2007 A Payment Fund and the Series 2007B Payment Fund, and will be applied by the Trustee in the following order and upon presentation of the several Certificates and the stamping thereon of the payment if only partially paid, or upon the surrender thereof if fully paid.

First, Costs and Expenses: ratably to the payment of the costs and expenses of the Trustee and then of the Owners in declaring such Event of Default, including reasonable compensation to its or their agents, accountants and counsel;

Second, Interest: to the payment to the persons entitled thereto of all payments of interest evidenced and represented by the Certificates then due, and, if the amount available will not be sufficient to pay in full any payment or payments of interest coming due on the same date, then to the payment thereof ratably, according to the amounts due thereon, to the persons entitled thereto, without any discrimination or preference; and

Third, Principal: to the payment to the persons entitled thereto of the unpaid principal evidenced and represented by any Certificates which will have become due, whether on the Certificate Payment Date or by call for prepayment, in the order of their due dates, with interest on the overdue principal and interest evidenced and represented by the Certificates to be paid at a rate equal to the rate or rates of interest then applicable to the Certificates if paid in accordance with their terms, and, if the amount available will not be sufficient to pay in full all the amounts due with respect to the Certificates on any date, together with such interest, then to the payment thereof ratably, according to the amounts of interest, principal and prepayment premiums, if any, due on such date to the persons entitled thereto, without any discrimination or preference.

Remedies Not Exclusive. No remedy conferred in the Trust Agreement upon or reserved therein to the Trustee is intended to be exclusive and all remedies will be cumulative and each remedy will be in addition to every other remedy given thereunder or existing under applicable law or equity or by statute or otherwise and may be exercised without exhausting and without regard to any other remedy conferred by any other applicable law.

No Liability by the Corporation to the Owners. Except as expressly provided in the Trust Agreement, the Corporation will not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments by the District, or with respect to the observance or performance by the District of the

B-42 other agreements, conditions, covenants and terms contained in the Installment Purchase Agreement or the Trust Agreement to be observed or performed by it, or with respect to the performance by the Trustee of any obligation contained in the Trust Agreement required to be performed by it.

No Liability by the District to the Owners. Except for the payment when due of the Installment Payments and the observance and performance of the other agreements, conditions, covenants and terms contained in the Installment Purchase Agreement or the Trust Agreement required to be observed or performed by it, the District will not have any obligation or liability to the Owners with respect thereto or the preparation, execution, delivery, transfer, exchange or cancellation of the Certificates or the receipt, deposit or disbursement of the Installment Payments by the Trustee, or with respect to the performance by the Trustee of any obligation contained therein required to be performed by it.

No Liability by the Trustee to the Owners. Except as expressly provided in the Trust Agreements, the Trustee will not have any obligation or liability to the Owners with respect to the payment when due of the Installment Payments by the District, or with respect to the observance or performance by the District of the other agreements, conditions, covenants and terms contained in the Installment Purchase Agreement or the Trust Agreement required to be observed and performed by the District. The recitals of facts, covenants and agreements contained in the Trust Agreement and in the Certificates will be taken as statements, covenants and agreements of the District and the Corporation, and the Trustee neither assumes any responsibility for the accuracy of the same, nor makes any representations as to the validity or sufficiency of the Trust Agreement or of the certificates nor will incur any responsibility in respect thereof, other than in connection with the duties or obligations therein or in the Certificates assigned to or imposed upon the Trustee.

Actions by the Trustee as Attorney-in-Fact. Any suit, action or proceeding which any Owner has have the right to bring to enforce any right or remedy under the Trust Agreement may be brought by the Trustee for the equal benefit and protection of all Owners similarly situated, and the Trustee is appointed (and the successive respective Owners, by taking and holding the same, will be conclusively deemed so to have appointed the Trustee) the true and lawful attorney-in-fact of the respective Owners for the purpose of bringing any suit, action, or proceeding and to do perform any and all acts and things for and on behalf of the respective Owners, as a class or classes, as may be necessary or advisable in the opinion of the Trustee as such attomey-in­ fact; provided, that the Trustee need not institute any such suit, action or proceeding until it has been first provided with indemnity adequate to it.

Power of the Trustee to Control Proceedings. In the event that the Trustee, upon the occurrence of an Event of Default, takes any action, by judicial proceedings or otherwise, pursuant to its duties in the Trust Agreement whether upon its own discretion or upon the written request of the Insurer, it will have full power, in the exercise of its discretion for the best interests of the Owners of the Certificates with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, that the Trustee will not, unless there no longer continues an Event of Default under the Trust Agreement, discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, if at the time there has been filed with the Trustee a written direction of the Trustee opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation.

DEFEASANCE

Discharge of Certificates and Trust Agreement. (a) If the Trustee pays or cause to be paid or there has otherwise been paid to the Owners of any Outstanding Certificates the interest and principal and prepayment premiums, if any, evidenced and represented thereby at the times and in the manner stipulated in the Trust Agreement, then such Owners evidenced and represented thereby will cease to be entitled to the pledge of and lien on the moneys in the Series 2007A Payment Fund, Series 2007B Payment Fund, the Series 2007A Reserve Fund and the Series 2007B Reserve Fund, as provided in the Trust Agreement, and all agreements, covenants and other obligations of the Corporation and the District to said Owners thereunder will thereupon cease, terminate and become void and be discharged and satisfied. In such event, the Trustee will execute and deliver

B-43 to the Corporation and the District all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee will pay over or deliver to the District all money or securities held by it pursuant thereto which are not required for the payment of the interest and principal and prepayment premiums, if any, evidenced and represented thereby.

(b) Any Outstanding Certificates will on their Certificate Payment Dates or their dates of prepayment prior thereto be deemed to have been paid within the meaning of and with the effect expressed in the Trust Agreement if there is on deposit with the Trustee money held in trust for the benefit of the Owners of such Certificates which is sufficient to pay the interest and principal and prepayment premiums, if any, evidenced and represented by such Certificates payable on and prior to their Certificate Payment Dates or their dates of prepayment prior thereto, and all amounts arising to the Insurer pursuant to the terms of the Financial Guaranty Agreement have been paid.

(c) Any Outstanding Certificates will prior to their Certificate Payment Date or prepayment date thereof be deemed to have been paid within the meaning of and with the effect expressed in the Trust Agreement in case any of such Certificates are to be prepaid on any date prior to their respective Certificate Payment Date, the District will have given to the Trustee in form satisfactory to it irrevocable instructions to mail, on a date in accordance with the provisions of the Trust Agreement, notice of prepayment of such Certificates on said prepayment date, said notice to be given in accordance with the Trust Agreement, (2) there has been irrevocably deposited with the Trustee either (A) money in an amount which will be sufficient or (B) Defeasance Securities the interest on and principal of which when paid will provide money which, together with the money, if any, deposited with the Trustee at the same time, will, as verified by an independent certified public accountant, (a copy of which will be provided by the Insurer) be sufficient to pay when due the interest evidenced and represented by such Certificates on and prior to their respective Certificate Payment Date or prepayment date thereof, as the case may be, (3) in the event such Certificates are not by their terms subject to prepayment within the next succeeding sixty (60) days, the District will have given the Trustee in form satisfactory to it irrevocable instructions to mail as soon as practicable, a notice to the Owners of such Certificates that the deposit required by clause (2) above has been made with the Trustee and that such Certificates are deemed to have been paid in accordance with the Trust Agreement and stating the maturity date or prepayment date upon which money is to be available for the payment of the principal of and prepayment premiums, if any, on such Certificates, (4) an Opinion of Counsel is filed with the Trustee or such other fiduciary and the Insurer to the effect that the action taken pursuant to the Trust Agreement will not cause the interest paid with respect to the Series 2007 A Certificates to be includable in gross income for federal income tax purposes and (5) in the case of Book-Entry Certificates, the Trustee will give notice to the Depository of the prepayment of all or part of such Book-Entry Certificates on the date proceeds or other funds are deposited in escrow with respect to such Book-Entry Certificates.

( d) In connection with the discharge of a portion of the Certificates in accordance with the provisions described above, the District may deliver a Written Request to the Trustee to determine the excess to be on deposit in the Series 2007 A Reserve Fund or the Series 2007B Reserve Fund, as the case may be upon such discharge and the Trustee will make such determination and will transfer such excess in accordance with such Written Direction of the District.

(e) The District will deliver written notice of any advance refunding of Certificates to the Insurer within 15 Business Days of the date thereof.

Unclaimed Money. Anything contained in the Trust Agreement to the contrary notwithstanding, the Trustee will notify the District and the Corporation of any money held by the Trustee in trust for the payment and discharge of any of the Certificates which has remained unclaimed for two (2) years after the date when such Certificates have become due and payable, either at their stated maturity dates or by call for prepayment prior to maturity, 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. The Trustee will at the Written Request of the District repay such money to the District as its absolute property free from trust, and the Trustee will thereupon be

B-44 released and discharged with respect thereto and the Owners will look only to the District for the payment of such Certificates.

MISCELLANEOUS

Liability of District Limited to Installment Payments. Notwithstanding anything contained in the Trust Agreement to the contrary, the District will not be required to advance any money derived from any source of income other than the Installment Payments as provided in the Trust Agreement for the payment of the interest or principal or prepayment premiums, if any, evidenced and represented by the Certificates or for the performance of any agreements or covenants contained in the Trust Agreement. The District may, however, advance funds for any such purpose so long as such funds are derived from a source legally available for such purpose.

The Certificates will be payable solely from the Installment Payments and amounts on deposit in the funds established under the Trust Agreement ( other than amounts on deposit in the Series 2007 A Certificate Rebate Fund created pursuant to the Trust Agreement). The Certificates do not constitute a debt or liability of the District or of the State of California and neither the faith and credit of the District nor of the State are pledged to the payment of the principal, or interest evidenced and represented by the Certificates.

Benefits of the Trust Agreement Limited to Parties. Nothing contained in Trust Agreement, expressed or implied, is intended or will be construed to confer upon, or to give or grant to, any person or entity other than the Corporation, the District, the Trustee and the Owners any right, remedy or claim under or by reason thereof. Any agreement or covenant required therein to be performed by or on behalf of the Corporation, the District or any member, officer or employee thereof will be for the sole and exclusive benefit of the Trustee and the Owners.

Successor is Deemed Included in All References to Predecessor. Whenever in the Trust Agreement either the Corporation, the District or any member, officer or employee thereof is named or referred to, such reference will be deemed to include the respective successor to the powers, duties and functions with respect to the administration, control and management of the Project that are presently vested in the Corporation, the District or such member, officer or employee, and all agreements and covenants required by the Trust Agreement to be performed by or on behalf of the Corporation, the District or any member, officer or employee thereof will bind and inure to the benefit of the respective successors thereof whether so expressed or not.

Execution of Documents by Owners. Any declaration, request or other instrument which is permitted or required in the Trust Agreement to be executed by Owners may be in one or more instruments of similar tenor and may be executed by Owners in person or by their attorneys appointed in writing. The fact and date of the execution by any owner or his 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 he purports to act that the person signing such declaration, request or other instrument or writing acknowledged to him the execution thereof, or by an affidavit of a witness of such execution duly sworn before such notary public or other officer. The ownership of any Certificates and the amount, maturity, number and date of holding the same may be proved by the registration books relating to the Certificates at the Corporate Trust Office of the Trustee.

Any declaration, request or other instrument or writing of the Owner of any Certificate will bind all future Owners of such Certificate with respect to anything done or suffered to be done by the District in good faith and in accordance therewith.

Waiver of Personal Liability. No member, officer or employee of the District will be individually or personally liable for the payment of the interest or principal or prepayment premiums, if any, evidenced and represented by the Certificates by reason of their delivery, but nothing contained in the Trust Agreement will

B-45 relieve any member, officer or employee of the District from the performance of any official duty provided by any applicable provisions of law or thereby.

Acquisition of Certificates by District

All Certificates acquired by the District, whether by purchase or gift or otherwise, will be surrendered to the Trustee for cancellation.

Destruction of Cancelled Certificates. Whenever provision is made for the return to the District of any Certificates which have been cancelled pursuant to the provisions in the Trust Agreement. Trustee will destroy such Certificates and furnish to the District a certificate of such destruction.

Funds. Any fund required in the Trust Agreement to be established and maintained by the Trustee may be established and maintained in the accounting records of the Trustee either as an account or a fund, and may, for the purposes of such accounting records, any audits thereof and any reports or statements with respect thereto, be treated either as an account or a fund; but all such records with respect to all such accounts and funds will at all times be maintained in accordance with sound industry practice and with due regard for the protection of the security of the Certificates and the rights of the Owners. The Trustee may establish such funds and accounts under the Trust Agreement as it deems necessary or appropriate to perform its obligations thereunder.

Article and Section Readings and References. The headings or titles of the several articles and sections of the Trust Agreement and the table of contents appended thereto will be solely for convenience of reference and will not affect the meaning, construction or effect thereof All references in the Trust Agreement to "Articles," "Sections" and other subdivisions or clauses are to the corresponding articles, sections, subdivisions or clauses thereof; and the words "hereby," "herein," "hereof," "hereto," "herewith," "hereunder" and other words of similar import refer to the Trust Agreement as a whole and not to any particular article, section, subdivision or clause thereof

Partial Invalidity. If any one or more of the agreements or covenants or portions thereof required by the Trust Agreement to be performed by or on the part of the District, the Corporation or the Trustee is contrary to law, then such agreement or agreements, such covenant or covenants or such portions thereof will be null and void and will be deemed separable from the remaining agreements and covenants or portions thereof and will be in no way affect the validity of the Trust Agreement or of the Certificates, and the Owners will retain all the benefit, protection and security afforded to them thereunder or any applicable provisions of law. The District, the Corporation and the Trustee have declared that they would have executed and delivered the Trust Agreement and each and every other article, section, paragraph, subdivision, sentence, clause and phrase thereof and would have authorized the delivery of the Certificates pursuant thereto irrespective of the fact that any one or more articles, sections, paragraphs, subdivisions, sentences, clauses or phrases thereof or the application thereof to any person or circumstance may be held to be unconstitutional, unenforceable or invalid.

Execution in Several Counterparts. The Trust Agreement may be executed in any number of counterparts and each of such counterparts will for all purposes be deemed to be an original; and all such counterparts, or as many of them as the District, the Corporation and the Trustee will preserve undestroyed, will together constitute but one and the same instrument.

Law Governing. The Trust Agreement will be governed exclusively by the provisions thereof and by the laws of the State as the same from time to time exist.

Notice to the Insurer. Any notices required to be given to any party under the Trust Agreement will also be given to the Insurer.

B-46 Insurer as Owner of Certificates. The Insurer will be recognized as the registered owner of all Certificates for purpose of exercising all rights and privileges available to Certificate Owners under the Trust Agreement.

B-47 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIXC

BOOK-ENTRY SYSTEM

The Depository Trust Company, New Yark, NY ("DTC") will act as securities depository for the Certificates. The Certificates will be issued as fully-registered securities without coupons registered in the name of Cede & Co. (DTC's partuership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Certificate will be issued for each annual maturity of each series of the Certificates, each in the aggregate principal amount of such annual maturity of each series, and will be deposited with DTC.

DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17 A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in tum, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation, and Emerging Markets Clearing Corporation (NSCC, FICC and EMCC, also subsidiaries of DTCC), as well as by the New Yark Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. and www.dtcc.org.

Purchases of the Certificates under the DTC system must be made by or through Direct Participants, which will receive a credit for the Certificates on DTC 's records. The ownership interest of each actual purchaser of each Certificate ("Beneficial Owner") is in tum to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase, but Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Certificates are to be accomplished by entries made on the books of Participants acting on behalf of the Beneficial Owner(s). Beneficial Owner(s) will not receive certificates representing their ownership interests in the Certificate, except in the event that use of the book entry system for the Certificates is discontinued.

To facilitate subsequent transfers, all Certificates 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 Certificates with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Certificates; DTC's records reflect only identity of the Direct Participants to whose accounts such Certificates are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

C-1 Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Prepayment notices shall be sent to Cede & Co. if less than all of the Certificates within a maturity are being prepaid. DTC 's practice is to determine, by lot, the amount of the interest of each Direct Participant in such maturity to be prepaid.

Neither DTC or Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Certificates unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its procedures, DTC mails an Onmibus 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 Certificates are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Prepayment proceeds, distributions, and dividend payments with respect to the Certificates will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from the District or the Trustee on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the Trustee, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of prepayment proceeds, distributions, and dividend payments to Cede & Co. ( or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

A Beneficial Owner shall give notice to elect to have its Certificates purchased or tendered, through its Participant, to the Trustee, and shall effect delivery of such Certificates by causing the Direct Participant to transfer the Participant's interest in the Certificates, on DTC's records, to the Trustee. The requirement for physical delivery of Certificates in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Certificates are transferred by Direct Participants on DTC's records and followed by a book-entry credit of tendered Certificates to the Trustee's DTC account.

DTC may discontinue providing its services as securities depository with respect to the Certificates at any time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, physical Certificates are required to be printed and delivered.

The District may decide to discontinue use of the system of book-entry transfers through DTC ( or a successor securities depository). In that event, physical Certificates will be printed and delivered.

The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof

THE TRUSTEE, AS LONG AS A BOOK-ENTRY ONLY SYSTEM IS USED FOR THE CERTIFICATES, WILL SEND ANY NOTICE OF PREPAYMENT OR OTHER NOTICES TO OWNERS ONLY TO DTC. ANY FAILURE OF DTC TO ADVISE ANY DTC PARTICIPANT, OR OF ANY DTC PARTICIPANT TO NOTIFY ANY BENEFICIAL OWNER, OF ANY NOTICE AND ITS CONTENT OR EFFECT WILL NOT AFFECT THE VALIDITY OF SUFFICIENCY OF THE PROCEEDINGS RELATING TO THE PREPAYMENT OF THE CERTIFICATES CALLED FOR PREPAYMENT OR OF ANY OTHER ACTION PREMISED ON SUCH NOTICE.

C-2 APPENDIXD

FORM OF SPECIAL COUNSEL OPINION

On the date of execution and delivery of the Certificates, Stradling Yocca Carlson & Rauth, a Professional Corporation, Sacramento, California, Special Counsel, proposes to issue its approving opinion in substantially the following form:

October , 2007

Santa Clara Valley Water District 5750 Almaden Expressway San Jose, California 95118

Re: $ _____ Santa Clara Valley Water District, Revenue Certificates ofParticipation (Water Utility System improvement Projects), Series 2007A and Taxable Series 2007B

Ladies and Gentlemen:

We have reviewed the Constitution and the laws of the State of California and certain proceedings taken by the Santa Clara Valley Water District (the "District") in connection with the authorization, execution and delivery by the District of that certain Installment Purchase Agreement dated as of September I, 2007, by and between the District and the Santa Clara Valley Water District Public Facilities Financing Corporation (the ''Corporation'') (the ''Installment Purchase Agreement''). We have also reviewed that certain Trust Agreement, dated as of September I, 2007 (the "Trust Agreement"), by and among U.S. Bank National Association, as trustee (the "Trustee"), the District and the Corporation, and such other information and documents as we consider necessary to render this opinion.

Pursuant to the Trust Agreement, the Trustee has agreed to execute and deliver certificates of participation hereinbefore described (the "Certificates") evidencing direct and proportionate interests of the registered owners of the Certificates in Installment Payments (as defined in the Trust Agreement) to be made by the District pursuant to the Installment Purchase Agreement.

In connection with our representation we have examined a certified copy of the proceedings relating to the Certificates. As to questions of fact material to our opinion, we have relied upon the certified proceedings and other certifications of public officials furnished to us without undertaking to verify the same by independent investigations.

Based upon the foregoing and after examination of such questions of law as we have deemed relevant in the circumstances, but subject to the limitations set forth herein, we are of the opinion that:

I. The proceedings show lawful authority for the execution and delivery by the District of the Trust Agreement under the laws of the State of California now in force, and the Trust Agreement has been duly authorized, executed and delivered by the District. Assuming due authorization, execution and delivery by the Trustee and the Corporation, as appropriate, the Installment Purchase Agreement and the Trust

D-1 Agreement are valid and binding obligations of the District enforceable against the District in accordance with their respective terms.

2. The Certificates, assuming due execution and delivery by the Trustee, are entitled to the benefits of the Trust Agreement.

3. The obligation of the District to make the Installment Payments from Water Utility System Revenues (as such terms are defined in the Installment Purchase Agreement) is an enforceable obligation of the District and does not constitute a debt of the District or of the State of California or any political subdivision thereof in contravention of any constitutional or statutory debt limitation or restriction.

4. The obligation of the District to pay the Installment Payments under the Installment Purchase Agreement from Net Water Utility System Revenues is on a parity with the lien securing the Santa Clara Valley Water District, Water Utility System Refunding Revenue Bonds, Series 2006A and Taxable Series 2006B, and on a parity with the lien securing a loan agreement by and between the State of California Department of Water Resources and the District in a not to exceed amount of $6,350,000.

5. Under existing statutes, regulations, rulings and judicial decisions, the portion of each Installment Payment constituting interest paid by the District and received by the Owners of the Series 2007A Certificates is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals and corporations; however, it should be noted that, with respect to corporations, the portion of each Installment Payment constituting interest with respect to the Series 2007 A Certificates may be included as an adjustment in the calculation of alternative minimum taxable income which may affect such corporation's alternative minimum tax liability of corporations.

6. The portion of each Installment Payment constituting interest is exempt from California personal income tax. We express no opinion regarding other tax consequences with respect to the Series 2007B Certificates or the receipt of interest thereon.

7. The difference between the issue price of a Series 2007A Certificate (the first price at which a substantial amount of the Series 2007 A Certificates of a maturity are to be sold to the public) and the stated redemption price at maturity with respect to such Series 2007A Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method, and original issue discount will accrue to a Certificate owner before receipt of cash attributable to such excludable income. The amount of original issue discount deemed received by a Certificate owner will increase the Certificate owner's basis in the applicable Series 2007 A Certificate. Original issue discount that accrues for the Certificate owner is excluded from the gross income of such owner for federal income tax purposes, is not an item of tax preference for purposes of calculating the federal alternative minimum tax imposed on individuals or corporations ( as described in paragraph ( 5) above) and is exempt from State of California personal income tax.

8. The amount by which a Certificate owner's original basis for determining loss on sale or exchange in the applicable Series 2007A Certificate (generally the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable bond premium which must be amortized under Section 171 of the Code; such amortizable Series 2007A Certificate premium reduces the Certificate Owner's basis in the applicable Series 2007A Certificate (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Series 2007A Certificate premium may result in a Certificate owner realizing a taxable gain when a Series 2007A Certificate is sold by the owner for an amount equal to or less (under certain circumstances) than the original cost of the Series 2007 A Certificate to the Owner.

9. The difference between the issue price of a Series 2007A Certificate (the first price at which a substantial amount of the Series 2007 A Certificates of a maturity are to be sold to the public) and the stated

D-2 redemption price at maturity with respect to such Series 2007A Certificate constitutes original issue discount. Original issue discount accrues under a constant yield method. The amount of original issue discount deemed received by a Certificate owner will increase the Certificate owner's basis in the applicable Series 2007B Certificate.

10. The amount by which a Certificate owner's original basis for determining loss on sale or exchange in the applicable Series 2007 A Certificate (generally the purchase price) exceeds the amount payable on maturity (or on an earlier call date) constitutes amortizable bond premium which a Certificate owner may elect to amortized under Section 171 of the Code; such amortizable Series 2007 A Certificate premium reduces the Certificate owner's basis in the applicable Series 2007A Certificate (and the amount of tax-exempt interest received), and is not deductible for federal income tax purposes. The basis reduction as a result of the amortization of Series 2007 A Certificate premium may result in a Certificate owner realizing a taxable gain when a Series 2007A Certificate is sold by the owner for an amount equal to or less (under certain circumstances) than the original cost of the Series 2007 A Certificate to the owner.

The opinions expressed herein are based on an analysis of existing statutes, regulations, rulings and judicial decisions. Such opinions may be affected by actions taken ( or not taken) or events occurring ( or not occurring) after the date hereof We have not undertaken to determine, or to inform any person, whether any such actions or events are taken or do occur.

The opinion expressed in paragraphs (5) and (7) above as to the exclusion from gross income for federal income tax purposes of interest (and original issue discount) on the Certificates is subject to the condition that the District complies with all requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied subsequent to the execution and delivery of the Certificates to assure that such interest (and original issue discount) will not become includable in gross income for federal income tax purposes. Failure to comply with such requirements of the Code might cause the portion of each Installment Payment constituting interest (and original issue discount) to be included in gross income for federal income tax purposes retroactive to the date of execution and delivery of the Certificates. The District has covenanted to comply with all such requirements. Except as set forth in paragraphs (5), (6), (7) (8) (9) and (10) above, we express no opinion as to any tax consequences related to the Certificates.

Certain agreements, requirements and procedures contained or referred to in the Trust Agreement and the Tax Certificate executed by the District and other documents related to the Certificates may be changed and certain actions may be taken or omitted, under the circumstances and subject to the terms and conditions set forth in such documents. We express no opinion as to the exclusion from gross income for federal income tax purposes of the portion of each Installment Payment constituting interest (and original issue discount) if any such change occurs or action is taken or omitted upon advice or approval of bond counsel other than Stradling Yocca Carlson & Rauth, a Professional Corporation.

The opinions expressed herein are based upon our analysis and interpretation of existing laws, regulations, rulings and judicial decisions and cover certain matters not directly addressed by such authorities. We call attention to the fact that the rights and obligations under the Trust Agreement, the Installment Purchase Agreement and the Certificates are subject to bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights, to the application of equitable principles if equitable remedies are sought, to the exercise of judicial discretion in appropriate cases and to limitations on legal remedies against public agencies in the State of California.

Respectfully submitted,

D-3 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIXE

FORM OF CONTINUING DISCLOSURE AGREEMENT

THIS CONTINUING DISCLOSURE AGREEMENT dated October _, 2007 (the "Disclosure Agreement") is executed and delivered by the Santa Clara Valley Water District (the "District") and U.S. Bank National Association, as dissemination agent (the "Dissemination Agent"), in connection with the execution and delivery of the Santa Clara Valley Water District, Revenue Certificates of Participation (Water Utility System Improvement Projects), Series 2007A (the "Series 2007A Certificates") and Santa Clara Valley Water District, Revenue Certificates of Participation (Water Utility System Improvement Projects), Taxable Series 2007B (the "Series 2007B Certificates" and together with the Series 2007 A Certificates, the "Certificates"). The Certificates are being executed and delivered pursuant to a Trust Agreement, dated as of September I, 2007, by and among the District, the Santa Clara Valley Water District Public Facilities Financing Corporation and U.S. Bank National Association, as trustee (the Trust Agreement) and Resolution No. 94-58 adopted on June 23, 1994 as supplemented, including as amended and supplemented by Resolution No. 06-80 (Third Supplemental Resolution to Water Utility Master Resolution) of the District adopted on November 28, 2006 (collectively, the "Resolution"). The District and Dissemination Agent, covenant as follows:

Section 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the District and U.S. Bank National Association, as Dissemination Agent, for the benefit of the Certificate owners and in order to assist the Participating Underwriter in complying with the Rule.

Section 2. Definitions. In addition to the definitions set forth in the Trust Agreement, which apply to any capitalized term used in this Disclosure Agreement 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 District pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

"Disclosure Representative" shall mean the Chief Administrative Officer of the District or his or her designee, or such other officer or employee as the District shall designate in writing to the Dissemination Agent from time to time.

"Dissemination Agent" shall mean, initially, U.S. Bank National Association, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the District and which has been filed with the then current Dissemination Agent a written acceptance of such designation.

"Listed Events" shall mean any of the events listed in Section 5(a) of this Disclosure Agreement.

''National Repository'' shall mean any Nationally Recognized Municipal Securities Information Repository for purpose of the Rule. The Current National Repositories approved by the Securities and Exchange Commission are included m a list which 1s maintained on the internet at: http ://www.sec.gov .info/municipal/nrmsir.htrn.

"Participating Underwriter" shall mean any of the original underwriters of the Certificates required to comply with the Rule in connection with offering of the Certificates.

"Repository" shall mean each National Repository and each State Repository.

E-1 "Rule" shall meau Rule 15c2-12(b )(5) adopted by the Securities aud Exchauge Commission under the Securities Exchauge Act of 1934, as the same may be amended from time to time.

"State Repository" shall meau auy public or private repository or entity designated by the State of California as a state repository for the purpose of the Rule aud recognized as such by the Securities aud Exchange Commission. As of the date of this Disclosure Agreement, there is no State Repository.

Section 3. Provision of Annual Reports.

(a) The District shall, or shall cause the Dissemination Agent to, not later thau each April I of each year, provide to each Repository au Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The first Annual Report shall be submitted not later thau April I, 2008. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited finaucial statements of the District may be submitted separately from aud later thau the balauce of the Annual Report if they are not available by the date required above for the filing of the Annual Report.

The District shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by it hereunder. The Dissemination Agent may conclusively rely upon such certification of the District aud shall have no duty or obligation to review such Annual Report.

The Annual Report shall be provided at least aunually commencing with the Annual Report for the fiscal year ending June 30, 2007 notwithstauding that auy fiscal year is longer thau 12 calendar months. The District's fiscal year is currently effective from July I to the immediately succeeding June 30 of the following year. The District will promptly notify each Repository or the Municipal Securities Rulemaking Board and, in either case, the Trustee and Dissemination Agent of a change in the fiscal year dates.

(b) Not later thau fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to Repositories, the District shall provide the Annual Report to the Dissemination Agent aud the Trustee (if the Trustee is not the Dissemination Agent). If by fifteen (15) Business Days prior to such date the Trustee has not received a copy of the Annual Report, the Trustee shall contact the District and the Dissemination Agent to determine if the District is in compliance with subsection (a).

( c) If the Dissemination Agent is unable to verify that au Annual Report has been provided to Repositories by the date required in subsection (a), the Dissemination Agent shall send a notice to each Repository, in substautially the form attached as Exhibit A.

( d) The Dissemination Agent shall:

(i) determine each year prior to the date for providing the Annual Report the name aud address of each National Repository aud each State Repository, if auy; aud

(ii) file a report with the District aud (if the Dissemination Agent is not the Trustee) aud the Trustee certifying that the Annual Report has been provided pursuaut to this Disclosure Agreement, stating the date it was provided aud listing all the Repositories to which it was provided. The Dissemination Agent's duties under this clause (ii) shall exist only if the District provides the Annual Report to the Dissemination Agent for filing.

Section 4. Content of Annual Reports. The District's Annual Report shall contain or include by reference the following:

E-2 (a) Annual Reports. The District's Annual Report shall contain or incorporate by reference (i) the audited financial statements of the District for the most recent fiscal year of the District then ended ( or, if not available at the time of filing, the unaudited financial statements) and (ii) if not included in the Annual Report, any change of the financial information and operating data with respect to the District, for most recent fiscal year of the District then ended, as described in the following tables under the caption entitled "THE DISTRICT" in the Official Statement:

(i) Schedule of Long-Term Indebtedness;

(ii) Historic Water Rates (Dollars per Acre-Foot);

(iii) Historic Sales Revenues; and

(iv) Santa Clara Valley Water District Historic Operating Results and Debt Service Coverage.

Audited financial statements, if any, of the District shall be audited by such auditor as shall then be required or permitted by State law. Audited financial statements shall be prepared in accordance with generally accepted accounting principles as prescribed for governmental units by the Governmental Accounting Standards Board; provided, however, that the District may from time to time, if required by federal or state legal requirements, modify the basis upon which its financial statements are prepared. In the event that the District shall modify the basis upon which its financial statements are prepared, the District shall provide a notice of such modification to each Repository, including a reference to the specific federal or state law or regulation specifically describing the legal requirements for the change in accounting basis.

(b) All Reports. 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 District or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. The District 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 5, the District shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Certificates, if material:

(i) principal and interest payment delinquencies;

(ii) non-payment related defaults;

(iii) unscheduled draws on the reserve funds reflecting financial difficulties;

(iv) unscheduled draws on any credit enhancements securing the Certificates reflecting financial difficulties;

(v) any change in the provider of any letter of credit or any municipal bond insurance policy securing the Certificates, or any failure by the providers of such letters of credit or municipal bond insurance policies to perform on the letter of credit or municipal bond insurance policy;

(vi) adverse tax opinions or events adversely affecting the Tax-exempt status of the Series 2007 A Certificates;

E-3 (vii) modifications to the rights of the Certificate owners;

(viii) unscheduled prepayment of any Certificate;

(ix) defeasances;

(x) any release, substitution, or sale of property securing repayment of the Certificates;

(xi) rating changes.

(b) The Trustee shall, promptly upon obtaining actual knowledge of the occurrence of any of the Listed Events, contact the District and request that the District promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to subsection (f).

( c) Whenever the District obtains knowledge of the occurrence of a Listed Event, whether because ofa notice from the Trustee pursuant to subsection (b) or otherwise, the District shall as soon as possible determine if such event would be material under applicable federal securities laws.

( d) If the District has determined that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the District shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f).

(e) If in response to a request under subsection (b), the District determines that the Listed Event would not be material under applicable federal securities laws, the District shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f).

(f) If the Dissemination Agent has been instructed by the District to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with (i) the Municipal Securities Rulemaking Board or (ii) the National Repository, and in either case, to each State Repository. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(4) and (5) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to the owners of affected Certificates. In each case of the Listed Events, the Dissemination Agent shall not be obligated to file a notice as required in this subsection (f) prior to the occurrence of such Listed Event.

(g) The District hereby agrees that the undertaking set forth in this Disclosure Agreement is the responsibility of the District and the Dissemination Agent shall not be responsible for determining whether the District's instructions to the Dissemination Agent under this Section 5 comply with the requirements of the Rule.

Section 6. Termination of Reporting Obligation. The obligation of the District, the Trustee, and the Dissemination Agent under this Disclosure Agreement shall terminate upon the legal defeasance, prior prepayment or payment in full of all of the Certificates. If such termination occurs prior to the final maturity of the Certificates, the District shall give notice of such termination in the same manner as for a Listed Event under Section 5.

Section 7. Dissemination Agent. The District may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under the Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. If at any time there is not any other designated Dissemination Agent, the Trustee shall be the Dissemination Agent.

E-4 The Dissemination Agent may resign at any time by providing at least 30 days' written notice to the District. The initial Dissemination Agent shall be U.S. Bank National Association.

Section 8. Amendment.

(a) This Disclosure Amendment may be amended, by written agreement of the parties, without the consent of the owners of the Certificates, if all of the following conditions are satisfied: (I) such amendment is made in connection with a change in circumstances that arises from a change in legal (including regulatory) requirements, a change in law (including rules or regulations) or in interpretations thereof, or a change in the identity, nature or status of the District or the type of business conducted thereby, (2) this Disclosure Agreement as so amended would have complied with the requirements of the Rule as of the date of this Disclosure Agreement, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances, (3) the District shall have delivered to the Trustee an opinion of a nationally recognized bond counsel or counsel expert in federal securities laws, addressed to the District and the Trustee, to the same effect as set forth in clause (2) above, (4) the District shall have delivered to the Dissemination Agent an opinion of nationally recognized bond counsel or counsel expert in federal securities laws, addressed to the Trustee, to the effect that the amendment does not materially impair the interests of the Certificate owners, and (5) the District shall have delivered copies of such opinion and amendment to each Repository.

(b) This Disclosure Agreement may be amended, by written agreement of the parties, upon obtaining consent of owners of Certificates constituting at least a majority in aggregate principal amount of the outstanding Certificates.

(c) To the extent any amendment to this Disclosure Agreement results in a change in the type of financial information or operating data provided pursuant to this Disclosure Agreement, the first Annual Report provided thereafter shall include a narrative explanation of the reasons for the amendment and the impact of the change.

( d) If an amendment is made to the basis on which financial statements are prepared, the Annual Report for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Such comparison shall include a quantitative and, to the extent reasonably feasible, qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information.

Section 9. Use of Central Post Office. The District may satisfy its obligations hereunder to file any notice, document or information with a National Repository or State Repository by filing the same with any agent which is responsible for accepting notices, documents or information for transmission to such National Repository or State Repository, to the extent permitted by the SEC or SEC staff (a "Central Post Office"). For this purpose, permission shall be deemed to have been granted by the SEC staff if and to the extent the Central Post Office has received an interpretive letter, which has not been revoked, from the SEC staff to the effect that using the Central Post Office to transmit information to the National Repositories and the State Repositories will be treated for purposes of the Rule as if such information were transmitted directly to the National Repositories and the State Repositories.

Section 10. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the District from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement 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 Agreement. If the District 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 Agreement, the District shall have no obligation under this Agreement to update such information or include it in any future Annual Report or notice if occurrence of a Listed Event.

E-5 The District acknowledges and understands that other state and federal laws, including but not limited to the Securities Act of 1933 and Rule I0b-5 promulgated under the Securities Exchange Act of 1934, may apply to the District, and that under some circumstances compliance with this Disclosure Agreement, without additional disclosures or other action, may not fully discharge all duties and obligations of the District under such laws.

Section 11. Default. In the event of a failure of the District to comply with any provision of this Disclosure Agreement, the Dissemination Agent, at the written request of any Participating Underwriter or the owners of at least 25% aggregate principal amount of outstanding Certificates, shall, but only to the extent indemnified to its satisfaction from any liability or expense, including fees of its attorneys, or any owner of Certificates may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the District to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Resolution, and the sole remedy under this Disclosure Agreement in the event of any failure of the District to comply with this Disclosure Agreement shall be an action to compel performance.

Section 12. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent (if other than the Trustee or Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in this Disclosure Agreement, and the District agrees to indenmify and save the Dissemination Agent, its officers, directors, employees and agents, hannless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent's negligence or willful misconduct. The obligations of the District under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Certificates. No person shall have any right to commence any action against the Trustee, as Dissemination Agent, seeking any remedy other than to compel specific performance of this Disclosure Agreement. The Dissemination Agent shall not be liable under any circumstances for monetary damages to any person for any breach under this Disclosure Agreement. The Dissemination Agent and the Trustee shall not be responsible in any manner for the format or content of any notice or Annual Report prepared by the District pursuant to this Disclosure Agreement. The Dissemination Agent shall be paid compensation by the District for its services provided hereunder in accordance with its schedule of fees and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder.

Section 13. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the District, the Trustee, the Dissemination Agent, the Participating Underwriter and owners from time to time of the Certificates, and shall create no rights in any other person or entity.

Section 14. Notices. Notices should be sent in writing to the following addresses. The following information may be conclusively relied upon until changed in writing.

Disclosure Representative: Chief Executive Officer Santa Clara Valley Water District 57 50 Almaden Expressway San Jose, California 95118-3686

Dissemination Agent: U.S. Bank National Association 1 California Street, Suite 2100 San Francisco, California 94111

Trustee: U.S. Bank National Association Attention: Corporate Trust Services 1 California Street, Suite 2100 San Francisco, California 94111

E-6 Section 15. Counteroarts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

SANTA CLARA VALLEY WATER DISTRICT

By: Its: Chief Executive Officer

U.S. BANK NATIONAL ASSOCIATION, as Dissemination Agent

By: Its: Authorized Officer

(seal)

Attest:

Clerk of the Board of Directors of Santa Clara Valley Water District

E-7 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIXF

FORM OF MUNICIPAL FINANCIAL GUARANTY INSURANCE POLICY [THIS PAGE INTENTIONALLY LEFT BLANK] FINANCIAL GUARANTY INSURANCE POLICY MBIA Insurance Corporation Armonk, New York 10504 Policy No. [NUMBER]

11 11 J\1BIA Insurance Cmporation (the Insurer ), in consideration of the payment of the premium and subject to the tenns of this policy, hereby llllconclitionally and irrevocably guarantees to any owner, as hereinafter defined, of the following described obligations, the full and complete payment required to be made by or on behalfof the Issuer to [PAYING AGENT/fRUSTEE] or its successor (the ''Paying Agent") of an amollllt equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fimd payment) and interest on, the Obligations (as that term is defined below) as snch payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of snch 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 fimd payment, the payments guaranteed hereby shall be made in snch amollllts and at snch times as such payments ofprincipal would have been due had there not been any such acceleration, unless the Insurer elects in its sole discretion, to pay in whole or in part any principal due by reason of such acceleration); and (ii) the reimbursement of a such payment which is subsequently recovered from any owner 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. The amollllts referred to in clauses (i) and (ii) ofthe preceding sentence shall be referred to herein collectively as the ''Insured Ammmts. 11 11 Obligations 11 shall mean:

IPARI ILEGAL NAME OF ISSUE I

Upon receipt of telephonic or telegraphic notice, such notice subsequently confinned in ,vriting by registered or certified mail, or upon receipt of\Vll.tten notice by registered or certified mail, by the !usurer from the Paying Agent or any owner of an Obligation the payment of an Insured Amollllt 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 ofnotice of such nonpayment, whichever is later, -will make a deposit of fi.mds, in an accmmt -with U.S. Bank Trust National Association, in New Yark, New Y mk, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and surrender of such Obligations or presentment of such other proof of ownership of the Obligations, together -with any appropriate instruments of assigrnnent to evidence the assigrnnent of the Insured Amounts due on the Obligations as are paid by the Insurer, and appropriate instruments to effect the appointment of the 1nsnrer as agent for snch owners ofthe Obligations in any legal proceeding related to payment oflusured Amollllts on the Obligations, such instruments being in a formsatisfuctoryto U.S. Bank Trust National Association, U.S. Bank Trust National Association shall disburse to snchowners, or the Paying Agent payment ofthe Iusured Amollllts due on snch Obligations, less any amollllt held by the Paying Agent for the payment of snch Iusured Amollllts and legally available therefor. This policy does not insnre against loss of any prepayment premium which may at any time be payable with respect to any Obligation. As used herein, the tenn 11owner11 shall mean the registered owner of any Obligation as indicated in the books maintained by the Paying Agent, the Issuer, or any designee of the Issuer for such putpose. The term owner shall not include the Issuer or any party whose agreement -with the Issuer constitutes the llllderlying security for the Obligations. Any service of process on the Insurer may be made to the Insure.rat its offices located at 113 Kmg Street, Annonk, New York 10504 and such service ofprocess shall be valid and binding. This policy is non-cancellable for any reason. The premium on this policy is not refundable for any reason including the payment prior to maturity of the Obligations. 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 Califontia Iusurance Guaranty Association, established pursuant to Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1 ofthe Califontia Iusurance Code. IN WITNESS WHEREOF, the !usurer has caused this policy to be executed in facsimile on its behalf by its duly authorized officers, this [DAY] day of [MONTI-I, YEAR].

l\1BIA Insurance Corporation

Attest: Assistant Secretary SID-R-CA-7 01/05

F-1 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK]

SA:.'l"TA CLARA VALLEY WATER DIS'IRICT • REVENUE: CE:RTIFICAn:s OF PAR'ITCIPATION (WATER lTTIU1Y Svs·mM IMPROVl<:::MEl\i"l' PRO.. JECTS) SE:RIE:S 2007A AND TAXABU::: SERIES 2007B

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