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Preliminary Official Statement - City of San Luis Obispo 2018 LRRBs 4160-7422-8751 v4
OH&S Draft 01/29/18 PRELIMINARY OFFICIAL STATEMENT DATED [___________], 2018 This Preliminary Official Statement and the information contained herein are subject to completion and amendment. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities, in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to theregistration or qualification under the securities laws of such jurisdiction. NEW ISSUE - FULL BOOK-ENTRY RATING: S&P: [___] (See “RATING” herein) In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal alternative minimum tax. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Bonds. See “TAX MATTERS” herein. $[_____________] San Luis Obispo Public Financing Authority Lease Revenue Refunding Bonds Series 2018 Dated: Date of Delivery Due: June 1, as shown on the inside cover The San Luis Obispo Public Financing Authority Lease Revenue Refunding Bonds, Series 2018 (the “Bonds”) are being issued by the San Luis Obispo Public Financing Authority (the “Authority”) to provide funds to (i) redeem and defease the Prior Bonds (as defined herein) and (ii) pay costs incurred in connection with the issuance, sale and delivery of the Bonds. See “THE PLAN OF REFUNDING AND THE LEASED PROPERTY” herein. Interest on the Bonds will be payable on June 1 and December 1 of each year, commencing [June 1, 2018]. The Bonds will be issued as fully-registered bonds without coupons and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds. Purchases of beneficial interests in the Bonds will be made in book-entry form through DTC participants and no physical delivery of the Bonds will be made to purchasers, except as otherwise described herein. Payment of principal, premium, if any, and interest will be made by U.S Bank National Association, as trustee (the “Trustee”), to DTC which is obligated to remit such payments to its participants for subsequent disbursement to the Beneficial Owners of the Bonds. See Appendix F - “DTC DESCRIPTION” attached hereto. The Bonds will be issuable in denominations of $5,000 or any integral multiple thereof. The Bonds are being issued pursuant to a Trust Agreement dated as of April 1, 2018 (the “Trust Agreement”), between the Authority and the Trustee. The Bonds are limited obligations of the Authority, payable solely from and secured by a pledge of Revenues and certain other moneys pledged therefor in the Trust Agreement. Revenues consist primarily of Base Rental Payments to be received by the Authority from the City pursuant to a Facility Lease between the Authority, as lessor, and the City, as lessee. Such Base Rental Payments are calculated to be sufficient to pay the principal of and interest on the Bonds when due. Base Rental Payments are payable from any source of legally available funds in each year the City has use and possession of the Leased Property. No debt service reserve fund will be established for the Bonds. The Bonds are subject to optional redemption, mandatory sinking account redemption and extraordinary redemption prior to maturity as more fully described herein.* See “THE BONDS – Redemption” herein. The Bonds are limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or any of its income or receipts, except the Revenues. Neither the full faith and credit of the Authority, the City nor any member of the Authority is pledged for the payment of the principal of or interest on the Bonds or for the payment of Base Rental Payments. Neither the payment of the principal of or interest on the Bonds nor the obligation to make Base Rental Payments constitutes a debt, liability or obligation of the Authority, the City or any member of the Authority for which any such entity is obligated to levy or pledge any form of taxation or for which any such entity has levied or pledged any form of taxation. The Authority has no taxing power. This cover page contains certain information for general reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision on the Bonds. The Bonds are offered when, as and if issued, subject to the approval of validity of the Bonds and certain other legal matters by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, and subject to certain other conditions. Orrick, Herrington & Sutcliffe LLP has also served as Disclosure Counsel. Certain legal matters will be passed upon for the Authority Preliminary, subject to change. and for the City by the City Attorney. Certain legal matters will be passed upon for the Underwriter by its counsel, Schiff Hardin LLP. It is expected that the Bonds will be available for delivery through the DTC book-entry system in New York, New York on or about [___________], 2018. [RAYMOND JAMES LOGO] Dated ______, 2018. $[____________]* San Luis Obispo Public Financing Authority Lease Revenue Refunding Bonds, Series 2018 MATURITY SCHEDULE $_______ Serial Bonds Maturity Date (June 1) Principal Amount Interest Rate Yield CUSIP Number† $________ ______% Term Bonds due June 1, 20__ – Yield _____%; CUSIP No.† ____________ $________ ______% Term Bonds due June 1, 20__ – Yield _____%; CUSIP No. † ____________ * Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP Global Services (“CGS”) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright© 2018 CUSIP Global Services. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CGS database. CUSIP® numbers are provided for convenience of reference only. None of the Authority, the City, the Underwriter or their agents or counsel assume responsibility for the accuracy of such numbers. Certain statements included or incorporated by reference in this Official Statement constitute “forward- looking statements.” Such statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The City does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based, change. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of its responsibilities to investors under, the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. No dealer, broker, salesperson or other person has been authorized by the Authority, the City or the Underwriter to give any information or to make any representations other than those contained herein and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement is not to be construed as a contract with the purchasers of the Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. The information set forth herein has been furnished by the Authority and the City and other sources as noted that the Authority and the City believe reliable. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Authority and the City since the date hereof. This Official Statement, including any supplement or amendment thereto, is intended to be deposited with one or more nationally recognized municipal securities information repositories. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THIS OFFICIAL STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE BONDS, NOR SHALL THERE BE ANY SALE OF ANY OF THE BONDS, BY ANY PERSON IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OR SALE. In making an investment decision, potential investors must rely on their own examination of the Authority and the City and the terms of the offering, including the merits and risks involved. The Bonds have not been registered or qualified under the securities laws of any state. These securities have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this Official Statement. Any representation to the contrary is a criminal offense. The summaries and references to the Trust Agreement, the Continuing Disclosure Certificate and statutes and other documents do not purport to be comprehensive or definitive and are qualified in their entireties by reference to each such document and statute. The Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon exemptions from the registration requirements contained in such Acts. The City maintains a website. Unless specifically indicated otherwise, the information presented in the website is not incorporated by reference as part of this Official Statement and should not be relied upon in making an investment decision with respect to the Bonds. CITY OF SAN LUIS OBISPO, CALIFORNIA City Council and San Luis Obispo Public Financing Authority Governing Board Heidi Harmon, Mayor/Chair Carlyn Christianson, Vice Mayor/Vice Chair Aaron Gomez, Council Member/Director Andy Pease, Council Member/Director Dan Rivoire, Council Member/Director City and Authority Staff Derek Johnson, City Manager/Executive Director J. Christine Dietrick, Esq., City Attorney/General Counsel Xenia Bradford, Finance Director/Chief Financial Officer Trustee U.S Bank National Association Municipal Advisor PFM Financial Advisors LLC San Francisco, California Bond Counsel Orrick, Herrington & Sutcliffe LLP Disclosure Counsel Orrick, Herrington & Sutcliffe LLP TABLE OF CONTENTS -i- INTRODUCTION ............................................. 3 Purpose ................................................. 3 Sources of Payment for the Bonds ....................................... 4 The City ................................................ 4 Summaries Not Definitive; Definitions ............................... 4 Continuing Disclosure .......................... 5 Other General Fund Obligations ........... 5 THE PLAN OF REFUNDING AND THE LEASED PROPERTY ................. 5 Refunding the Prior Bonds .................... 5 The Leased Property ............................. 7 ESTIMATED SOURCES AND USES OF PROCEEDS .................................... 8 THE BONDS ..................................................... 8 Redemption ........................................... 9 Notice of Redemption ......................... 10 Effect of Redemption .......................... 11 Transfer and Exchange of Bonds ..................................... 11 SOURCES OF PAYMENT FOR THE BONDS ............................................... 11 General ............................................... 11 Base Rental Payments ......................... 12 No Debt Service Reserve Fund .......... 13 Casualty Insurance .............................. 13 Rental Interruption Insurance ............. 13 Title Insurance .................................... 13 Insurance Proceeds.............................. 13 Eminent Domain Proceeds .................. 14 Remedies Upon Default ...................... 15 Additional Bonds ................................ 15 Limitations on the Issuance of Obligations Payable from Revenues ....................... 16 RISK FACTORS ............................................. 16 No Pledge of Revenues or Lien on Assets of the City .............. 16 Additional Obligations of the City ........................................ 16 Abatement ........................................... 17 Risk of Uninsured Loss ...................... 17 Limited Recourse on Default .............. 18 No Acceleration Upon Default ........... 18 Bankruptcy ......................................... 18 Risk of Tax Audit; Loss of Tax Exemption .............................. 19 Limited Secondary Market ................. 20 Hazardous Substances ........................ 20 Earthquake and Other Natural Disasters ................................ 20 Dependence on State for Certain Revenues ................................ 21 Changes in Law .................................. 21 City Pension Benefit Liability ............ 21 No Liability of Authority to the Owners ................................... 21 CERTAIN LIMITATIONS ON TAXES AND APPROPRIATIONS ................. 22 Article XIIIA of the State Constitution ........................... 22 Article XIIIB of the State Constitution ........................... 23 Articles XIIIC and XIIID of the State Constitution .................. 23 Proposition 62 ..................................... 25 Proposition 1A .................................... 26 Unitary Property ................................. 27 Future Initiatives ................................. 27 THE AUTHORITY ......................................... 27 THE CITY ....................................................... 27 CITY FINANCIAL INFORMATION ............ 28 TABLE OF CONTENTS (continued) -ii- Budgetary Process ............................... 28 Financial Statements ........................... 31 General Fund Balance Sheet ............... 31 General Fund Revenues, Expenditures and Changes in Fund Balances ................................. 32 Taxes and Other Revenues .................. 34 Sales and Use Taxes............................ 34 Property Taxes .................................... 37 Other Taxes and Revenues .................. 39 Outstanding General Fund Debt and Other Obligations ............ 40 Direct and Overlapping Bonded Debt ........................................ 41 Employee Relations ............................ 42 Insurance ............................................. 43 Employee Retirement System ............. 43 City Investment Policy and Portfolio ................................. 50 TAX MATTERS .............................................. 50 CERTAIN LEGAL MATTERS....................... 52 MUNICIPAL ADVISOR ................................. 52 LITIGATION ................................................... 53 CONTINUING DISCLOSURE ....................... 53 RATING .......................................................... 53 UNDERWRITING .......................................... 53 MISCELLANEOUS ........................................ 54 APPENDIX A – AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2017……………………………...A-1 APPENDIX B – CERTAIN INFORMATION REGARDING THE CITY OF SAN LUIS OBISPO ......................... B-1 APPENDIX C – SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS ................................. C-1 APPENDIX D – PROPOSED FORM OF BOND COUNSEL OPINION .......................................... D-1 APPENDIX E – FORM OF CONTINUING DISCLOSURE CERTIFICATE ................................. E-1 APPENDIX F – DTC DESCRIPTION ......... F-1 3 OFFICIAL STATEMENT $[_____________] San Luis Obispo Public Financing Authority Lease Revenue Refunding Bonds, Series 2018 INTRODUCTION This Introduction is qualified in its entirety by reference to the more detailed information included and referred to elsewhere in this Official Statement. The offering of the Bonds to potential investors is made only by means of the entire Official Statement. Capitalized terms used in this Introduction and not otherwise defined herein shall have the respective meanings assigned to them elsewhere in this Official Statement. Purpose The purpose of this Official Statement, including the appendices hereto, is to furnish information regarding the issuance and sale by the San Luis Obispo Public Financing Authority (the “Authority”) of $[_____________]* aggregate principal amount of its Lease Revenue Bonds, Series 2018 (the “Bonds”). The Bonds are being issued pursuant to the provisions of a resolution of the Authority adopted on February 20, 2018 (the “Resolution”) and a Trust Agreement dated as of April 1, 2018 (the “Trust Agreement”), between the Authority and U.S. Bank National Association, as trustee thereunder (the “Trustee”). The Bonds will be issued in full conformity with the Constitution and laws of the State of California (the “State”), including the Marks-Roos Local Bond Pooling Act of 1985, constituting Article 4 (commencing with Section 6584) of Chapter 5, Division 7, Title 1 of the California Government Code, as amended from time to time. The primary purpose of issuing the Bonds is to provide funds to redeem and defease the (i) City of San Luis Obispo Capital Improvement Board 2005 Refunding Lease Revenue Bonds (the “2005 Bonds”), (ii) City of San Luis Obispo Capital Improvement Board 2006 Lease Revenue Bonds (919 Palm Street Public Parking and City Office Project) (the “2006 Bonds”) and (iii) City of San Luis Obispo Capital Improvement Board 2009 Lease Revenue Bonds (Public Safety Communications and Emergency Operations Center Project) (the “2009 Bonds” and, collectively with the 2005 Bonds and the 2006 Bonds, the “Prior Bonds”). See “THE PLAN OF REFUNDING AND THE LEASED PROPERTY” herein. Proceeds of the Bonds will also be used to pay costs incurred in connection with the issuance, sale and delivery of the Bonds. Pursuant to a Site Lease (the “Site Lease”), between the City of San Luis Obispo (the “City”), as lessor and the Authority, as lessee, the City will lease to the Authority the real property and the improvements thereon (the “Leased Property”). Concurrently, the Authority will lease the Leased Property to the City pursuant to a Facility Lease (the “Lease”), between the Authority, as lessor and the City, as lessee. See “THE PLAN OF REFINANCE AND THE LEASED PROPERTY—The Leased Property” herein. Preliminary, subject to change. 4 Sources of Payment for the Bonds The Bonds are limited obligations of the Authority payable solely from and secured solely by the Revenues (as hereinafter defined) and certain other amounts pledged therefor in the Trust Agreement. “Revenues” consist primarily of the Base Rental Payments (the “Base Rental Payments”) payable by the City pursuant to the Lease for the use and occupancy of the Leased Property. Under the Trust Agreement, the Authority will assign to the Trustee all of the Revenues and all of the rights of the Authority in the Lease (except for the right to receive any Additional Payments to the extent payable to the Authority and certain rights to indemnification set forth therein). The Base Rental Payments are designed to be sufficient in both time and amount to pay, when due, the principal of and interest on the Bonds. The City has covenanted in the Lease to take such action as may be necessary to include the Base Rental Payments in its annual budget and has further covenanted to make the necessary annual appropriations for all such Base Rental Payments. However, the amount of Base Rental Payments which the City is obligated to pay under the Lease will be adjusted or abated during any period in which, by reason of damage, destruction or eminent domain there is substantial interference with the City’s use and occupancy of the Leased Property. Such adjustment or abatement will end with the substantial completion of the work of repair or reconstruction of the Leased Property. See “RISK FACTORS – Abatement” herein. The obligation of the City to pay the Base Rental Payments does not constitute an obligation for which the City is obligated to pledge any form of taxation or for which the City has pledged any form of taxation. The obligation of the City to pay the Base Rental Payments does not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. The City has assumed responsibility under the Lease for the operation, maintenance and repair of the Leased Property, and is required to maintain or cause to be maintained insurance on the Leased Property, including title insurance, fire and extended coverage, comprehensive public liability and property damage insurance, and rental income interruption insurance with respect to property damage risks in an amount sufficient to pay the maximum annual Base Rental Payments for any two year period. See “SOURCES OF PAYMENT FOR THE BONDS” herein. No debt service reserve fund will be established for the Bonds. The Authority The Authority is a joint exercise of powers authority established pursuant to an agreement between the City and the City of San Luis Obispo Parking Authority (the “Parking Authority”). See “THE AUTHORITY” herein. The City For certain information concerning the City, including the City’s current financial situation, see “CITY FINANCIAL INFORMATION” herein and Appendix A – “AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2017” attached hereto. Summaries Not Definitive; Definitions Brief descriptions of the Bonds, the Authority, the City, the Project and the Leased Property are included in this Official Statement, together with summaries of the Trust Agreement and the Lease. Such descriptions do not purport to be comprehensive or definitive. All references herein to the Bonds, the Trust Agreement, the Lease and the Site Lease are qualified in their entirety by reference to the actual 5 documents or with respect to the Bonds, the form of which is included in the Trust Agreement. Copies of all such documents are available for inspection at the corporate trust office of the Trustee in Los Angeles, California. Definitions of certain capitalized terms used in this Official Statement and not otherwise defined herein or in Appendix C hereto shall have the meanings set forth in the Trust Agreement and the Lease. The summaries of and references contained herein to the Trust Agreement, the Bonds, the Lease, statutes and other documents do not purport to be comprehensive or definitive and are qualified by reference to each such document, instrument or statute. Continuing Disclosure The City has covenanted for the benefit of owners of the Bonds to provide certain financial information and operating data and to provide notices of the occurrence of certain enumerated events in order to assist the Underwriter in complying with Securities Exchange Commission Rule 15c2-12(b)(5). See “CONTINUING DISCLOSURE” herein. Other General Fund Obligations The City has other obligations payable from its general fund and may enter into additional obligations payable from its general fund in the future. For additional detail, see Note 6 (“Long-Term Debt”) in Appendix A – “AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2017” attached hereto. THE PLAN OF REFUNDING AND THE LEASED PROPERTY Refunding the Prior Bonds A portion of the proceeds of the Bonds, together with other available moneys, will be applied to redeem and defease the Prior Bonds. The 2005 Bonds will be redeemed and defeased on or about April [__], 2018 (the “2005 Bonds Redemption Date”) pursuant to the legal documents under which the 2005 Bonds were issued. The 2006 Bonds will be also redeemed and defeased on or about April [__], 2018 (the “2006 Bonds Redemption Date”) pursuant to the legal documents under which the the 2006 Bonds were issued. The 2009 Bonds will be redeemed and defeased on or about June 1, 2018 (the “2009 Bonds Redemption Date”) pursuant to the legal documents under which the 2009 Bonds were issued. The Prior Bonds to be redeemed and defeased in whole upon issuance of the Bonds are set forth below. 6 $6,550,000 City of San Luis Obispo Capital Improvement Board 2005 Refunding Lease Revenue Bonds* 2005 Bonds Redemption Date: April [__], 2018* Redemption Price: 100% Maturity Date (June 1) Interest Rate Principal Amount CUSIP† (798596) 2018 4.000% $320,000 HE5 2019 4.000 330,000 HF2 2020 4.100 345,000 HG0 2021 4.250 360,000 HH8 2022 4.250 370,000 HJ4 2023 4.250 390,000 HK1 2024 4.375 405,000 HL9 2025 4.400 425,000 HM7 2026 4.500 565,000 HN5 $16,160,000 City of San Luis Obispo Capital Improvement Board 2006 Lease Revenue Bonds* (919 Palm Street Public Parking and City Office Project) 2006 Bonds Redemption Date: April [__], 2018* Redemption Price: 100% Maturity Date (June 1) Interest Rate Principal Amount CUSIP† (798596) 2018 4.200% $430,000 JA1 2019 4.250 450,000 JB9 2020 4.300 470,000 JC7 2021 4.400 490,000 JD5 2022 4.400 510,000 JE3 2023 4.400 530,000 JF0 2024 4.500 555,000 JG8 2025 4.500 580,000 JH6 2026 4.500 605,000 JJ2 2027 4.500 635,000 JK9 2028 4.600 660,000 JL7 2031 4.625 2,180,000 JM5 2036 4.700 4,360,000 JN3 * Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP Global Services (“CGS”) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright© 2018 CUSIP Global Services. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CGS database. CUSIP® numbers are provided for convenience of reference only. None of the Authority, the City, the Underwriter or their agents or counsel assume responsibility for the accuracy of such numbers. 7 $10,705,000 City of San Luis Obispo Capital Improvement Board 2009 Lease Revenue Bonds* (Public Safety Communications and Emergency Operations Center Project) 2009 Bonds Redemption Date: June 1, 2018* Redemption Price: 100% Maturity Date (June 1) Interest Rate Principal Amount CUSIP† (798596) 2018 4.250% $645,000 JX1 2019 4.500 665,000 JY9 2020 4.700 150,000 JZ6 2021 4.750 155,000 KA9 2022 4.750 165,000 KB7 2023 5.000 170,000 KC5 2024 5.000 180,000 KD3 2025 5.200 185,000 KE1 2026 5.250 195,000 KF8 2027 5.375 205,000 KG6 2028 5.500 215,000 KH4 2029 5.500 225,000 KJ0 2030 5.500 240,000 KK7 2031 5.700 250,000 KL5 2032 5.750 265,000 KM3 2033 5.750 280,000 KN1 2034 5.750 355,000 KP6 2039 5.750 1,735,000 KQ4 The Leased Property Pursuant to the Facility Lease, the City will sublease from the Authority the Leased Property, which consists of the facilities described below. City Administrative Offices and Parking Structure. The City administrative offices and parking structure, constructed in [2006], consists of an approximately 123,200 square foot, five-story reinforced concrete building, located at 919 Palm Street in the City, and is used for administrative offices and public parking. The ground floor includes approximately 16,100 square feet of office space which the City uses for its planning, building and engineering personnel, together with 45 dedicated below-grade parking spaces used to meet the needs of the City’s administrative offices. The upper four stories of the building are used for public parking, providing approximately 188 parking spaces. An additional five spaces of public parking are provided in the below-grade parking area, devoted to parking for the City administrative offices. The approximate value of land and improvements is estimated at $19.5 million based upon the City’s most recent valuation. * Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP Global Services (“CGS”) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright© 2018 CUSIP Global Services. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CGS database. CUSIP® numbers are provided for convenience of reference only. None of the Authority, the City, the Underwriter or their agents or counsel assume responsibility for the accuracy of such numbers. 8 [OTHER PROPERTY SELECTED]. [DESCRIPTION] No other property of the City or the Authority will initially be subject to the Lease. Under the Lease and the Trust Agreement, the City may change, or substitute other capital facilities for the Leased Property. See Appendix C – “SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS – Facility Lease – [Substitution]” attached hereto. ESTIMATED SOURCES AND USES OF PROCEEDS The proceeds of the sale of the Bonds are estimated to be applied as shown below: Sources of Funds: Principal Amount of Bonds [Net] Original Issue [Discount/Premium] Release of Prior Bonds’ Debt Service Reserve Funds Total Sources Uses of Funds: Deposit to Escrow Fund Underwriter’s Discount Deposit to Costs of Issuance Fund(1) Total Uses _______________ (1) Costs of Issuance includes rating fees, legal fees, advisory fees, printing costs and other miscellaneous expenses. THE BONDS The Bonds will be issued in fully registered form without coupons in denominations of $5,000 or any integral multiple thereof, so long as no Bond shall have more than one maturity date. The Bonds will be dated the date of delivery and will mature on June 1 in each of the years and in the amounts, and will bear interest (calculated on the basis of a 360-day year of twelve 30-day months) at the per annum rates, set forth on the inside cover page hereof. The Bonds will be delivered in fully registered form only and, when issued, will be authenticated and registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”), which has been appointed as securities depository for the Bonds, and registered ownership may not be transferred thereafter except as provided in the Trust Agreement. DTC will act as Securities Depository of the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only, in the denominations of $5,000 principal amount or any integral multiple thereof. Purchasers will not receive certificates representing their interests in the Bonds. Principal of and interest on the Bonds will be paid by the Trustee to DTC, which in turn is obligated to remit such principal and interest to its Participants for subsequent disbursement to indirect participants and beneficial owners of the Bonds as described herein. See Appendix F – “DTC DESCRIPTION” attached hereto. Interest on the Bonds will be payable semiannually on each June 1 and December 1, commencing [June 1, 2018] (each, an “Interest Payment Date”). The Bonds shall bear interest from the Interest Payment Date next preceding the date of authentication thereof, unless such date of authentication is an 9 Interest Payment Date or during the period from the sixteenth day of the month preceding an Interest Payment Date to such Interest Payment Date, in which event they shall bear interest from such Interest Payment Date, or unless such date of authentication is on or before the fifteenth day of the month immediately preceding the first Interest Payment Date (a “Record Date”), in which event they shall bear interest from the date of delivery; provided, however, that if at the time of authentication of any Bond interest is then in default on the Outstanding Bonds, such Bond shall bear interest from the Interest Payment Date to which interest has previously been paid or made available for payment on the Outstanding Bonds. Payment of interest on the Bonds due on or before the maturity or prior redemption thereof shall be made on the Interest Payment Date to the person whose name appears in the Bonds registration books kept by the Trustee as the registered owner thereof as of the close of business on the Record Date for an Interest Payment Date, whether or not such day is a Business Day, such interest to be paid by check mailed on the Interest Payment Date by first-class mail to such registered owner at the address as it appears in such books; provided that upon the written request of a Holder of $1,000,000 or more in aggregate principal amount of Bonds received by the Trustee prior to the applicable Record Date, interest shall be paid by wire transfer in immediately available funds. So long as the Bonds are registered in the name of Cede & Co., as nominee of DTC, references herein to the owners of the Bonds shall mean Cede & Co., and shall not mean the ultimate purchasers of the Bonds and so long as DTC or Cede & Co., as nominee of DTC, is the registered owner of the Bonds, disbursement of payments of principal and interest on the Bonds to DTC’s participants is the responsibility of DTC, and disbursements of such payments to the beneficial owners is the responsibility of DTC’s participants and indirect participants, as more fully described in Appendix F – “DTC DESCRIPTION” attached hereto. Redemption The Bonds are subject to optional redemption, mandatory sinking account redemption and extraordinary redemption as described below. Optional Redemption* The Bonds maturing on or before June 1, 20__ are not subject to optional redemption. The Bonds maturing on or after June 1, 20__, are subject to redemption prior to their respective stated maturities at the written direction of the Authority, from moneys deposited by the Authority or the City from optional prepayments made by the City pursuant to the Lease, as a whole or in part on any date on or after June 1, 20__ (in such maturities as are designated in writing by the Authority to the Trustee), at a redemption price equal to the principal amount thereof, without premium, plus interest accrued to the date fixed for redemption. 10 Mandatory Sinking Account Redemption The Bonds maturing on June 1, 20__, are subject to mandatory sinking account redemption prior to maturity, in part on June 1 of each year, on and after June 1, 20__, by lot, from and in the amount of the Mandatory Sinking Account Payments at a redemption price equal to the sum of the principal amount thereof plus accrued interest thereon to the redemption date, without premium, as follows: Term Bonds of June 1, 20__ Date (June 1) Mandatory Sinking Account Payment (1) (1) Maturity Date. Extraordinary Redemption The Bonds are subject to redemption by the Authority on any date prior to their respective stated maturities, upon notice as hereinafter provided, as a whole, or in part by lot within each stated maturity in integral multiples of five thousand dollars ($5,000) principal amount from prepayments made by the City pursuant to the Lease from certain insurance and eminent domain proceeds, at a prepayment price equal to the sum of the principal amount thereof, without premium, plus accrued interest thereon to the redemption date. See “SOURCES OF PAYMENT FOR THE BONDS – Insurance Proceeds” and “– Eminent Domain Proceeds” herein. See also Appendix C – “SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS – Facility Lease – Prepayment” attached hereto. Whenever less than all of the outstanding Bonds are to be redeemed on any one date, the Authority will designate to the Trustee in writing those maturities to be redeemed in part. In the event the Authority does not designate the maturities of the Bonds to be redeemed in part, the Trustee shall select the Bonds to be redeemed in part from the outstanding Bonds so that the aggregate annual Debt Service on Bonds which shall be payable after such redemption date shall be as nearly proportional as practicable to the aggregate annual Debt Service on Bonds Outstanding prior to such redemption date. Selection of Bonds If less than all Outstanding Bonds maturing by their terms on any one date are to be redeemed at any one time, the Authority will designate to the Trustee in writing those maturities to be redeemed in part. In the event the Authority does not designate the maturities of the Bonds to be redeemed in part, the Trustee will select the Bonds of such maturity date to be redeemed in any manner that it deems appropriate and fair and shall promptly notify the Authority in writing of the numbers of the Bonds so selected for redemption. For purposes of such selection, the Bonds shall be deemed to be composed of $5,000 multiples of principal or any such multiple may be separately redeemed. Notice of Redemption Notice of redemption shall be mailed by first-class mail by the Trustee, not less than 30 nor more than 60 days prior to the redemption date to (i) the respective Holders of the Bonds designated for redemption at their addresses appearing on the registration books of the Trustee, (ii) the Municipal Securities Rulemaking Board, and (iii) the Securities Depositories. Notice of redemption to the Securities Preliminary, subject to change. 11 Depositories shall be given by registered mail, electronic mail or overnight delivery or facsimile transmission. Each notice of redemption shall state the date of such notice, the redemption price, if any (including the name and appropriate address of the Trustee), the CUSIP number (if any) of the maturity or maturities, and, if less than all of any such maturity is to be redeemed, the distinctive certificate numbers of the Bonds of such maturity, to be redeemed and, in the case of the Bonds to be redeemed in part only, the respective portions of the principal amount to be redeemed. Each such notice shall also state that, unless the redemption is cancelled, on said date there will become due and payable on each of said Bonds the redemption price, if any, thereof and in the case of a Bond to be redeemed in part only, the specified portion of the principal amount to be redeemed, together with interest accrued thereon to the redemption date, and that from and after such redemption date interest thereon shall cease to accrue, and shall require that such Bonds be then surrendered at the address of the Trustee specified in the redemption notice. Failure to receive such notice shall not invalidate any of the proceedings taken in connection with such redemption. Any redemption may be cancelled if the notice of same has not been mailed to the registered Holders or if such notice expressly conditions the redemption upon the occurrence of one or more events. Any such cancellation shall be given by notice in the same manner as the notice of redemption at least three business days prior to the date scheduled for redemption. Effect of Redemption If notice of redemption has been given, and moneys for payment of the redemption price of the Bonds called for redemption are being held by the Trustee, on the redemption date designated in such notice, the Bonds so called for redemption will become due and payable and from and after the date so designated interest on the Bonds so called for redemption will cease to accrue and the Holders of said Bonds will have no rights in respect thereof except to receive payment of the redemption price thereof. All Bonds redeemed pursuant to the provisions of the Trust Agreement will be canceled by the Trustee upon surrender thereof and destroyed. Transfer and Exchange of Bonds So long as the Bonds are registered in the name of Cede & Co., as nominee of DTC, transfers of interests in the Bonds must be made under the DTC system by or through Direct Participants, as described in Appendix F – “DTC DESCRIPTION” attached hereto. SOURCES OF PAYMENT FOR THE BONDS General The Bonds are limited obligations of the Authority payable solely from and secured solely by the Revenues pledged under the Trust Agreement, together with amounts on deposit from time to time in the funds and accounts held by the Trustee, including proceeds of the sale of the Bonds. The term “Revenues” means (i) all Base Rental Payments and other payments paid by the City and received by the Authority pursuant to the Lease (but not Additional Payments), and (ii) all interest or other income from any investment of any money in any fund or account established pursuant to the Trust Agreement or the Lease (other than the Rebate Fund). Under the Trust Agreement, the Authority irrevocably pledges to the Trustee for payment of the interest and premium, if any, on and principal of the Bonds all Revenues and any other amounts (including proceeds of the sale of the Bonds) held by the Trustee in any fund or account established under the Trust Agreement (other than amounts on deposit in the Rebate Fund), and agrees with the Trustee that the Revenues are not to be used for any other purpose while any of the Bonds remain Outstanding; provided, however, that out of the Revenues and other moneys there may be applied such sums for such 12 purposes as are permitted under the Trust Agreement. The pledge under the Trust Agreement constitutes a pledge of and charge and lien upon the Revenues and all other moneys on deposit in the funds and accounts established under the Trust Agreement (excluding other amounts on deposit in the Rebate Fund) for the payment of the interest on and principal of the Bonds in accordance with the terms of the Trust Agreement. The Authority also assigns to the Trustee all of the Authority’s rights and remedies under the Lease, except for the Authority’s rights to give approvals and consents under the Lease. THE BONDS ARE LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM AND SECURED SOLELY BY THE REVENUES AND OTHER MONEYS PLEDGED THERETO IN THE TRUST AGREEMENT. THE BONDS ARE NOT A DEBT OF THE AUTHORITY, THE CITY, THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS AND NEITHER THE AUTHORITY, THE CITY, THE STATE NOR ANY OF ITS POLITICAL SUBDIVISIONS, EXCEPT THE AUTHORITY TO THE EXTENT DESCRIBED HEREIN, IS LIABLE THEREON. IN NO EVENT SHALL THE BONDS OR ANY INTEREST OR REDEMPTION PREMIUM THEREON BE PAYABLE OUT OF ANY FUNDS OR PROPERTIES OTHER THAN THOSE OF THE AUTHORITY AS SET FORTH IN THE TRUST AGREEMENT. THE BONDS DO NOT CONSTITUTE AN INDEBTEDNESS WITHIN THE MEANING OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. NEITHER THE MEMBERS OF THE AUTHORITY NOR ANY PERSONS EXECUTING THE BONDS ARE LIABLE PERSONALLY ON THE BONDS BY REASON OF THEIR ISSUANCE. Base Rental Payments The Lease requires the City to deposit with the Trustee, as assignee of the Authority, 15 days prior to each June 1 and December 1, commencing [June 1, 2018] (the “Base Rental Payment Dates”) an amount equal to the aggregate Base Rental Payment coming due and payable on each such Base Rental Payment Date. The Base Rental Payments are calculated to be sufficient to pay, when due, the principal of and interest on the Bonds. The Base Rental Payments payable in any Base Rental Payment period constitute payment for the use and occupancy of the Leased Property during such period. The obligation of the City to make Base Rental Payments is payable from annual appropriations of the City from funds lawfully available therefor. The obligation of the City to make Base Rental Payments under the Lease does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. Neither the full faith and credit nor the taxing power of the City, the State or any of its political subdivisions is pledged to make Base Rental Payments under the Lease. Pursuant to the Lease, the City covenants to take such action as may be necessary to include all Base Rental Payments due thereunder in its annual budgets and to make annual appropriations therefor. As provided in the Lease, the covenants of the City thereunder shall be deemed by the City to be and shall be duties imposed by law, and it shall be the duty of each and every public official of the City to take such action and to do such things as are required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements in the Lease agreed to be carried out and performed by the City. California law requires, and the Lease provides, that the Base Rental Payments shall be abated in whole or in part during any period in which there is substantial interference with the use and occupancy of the Leased Property by the City due to damage, destruction or taking in eminent domain proceedings. Under these circumstances, failure to make any Base Rental Payment will not be an event of default under the Lease. See “RISK FACTORS – Abatement” herein. 13 The ability of the City to pay the Base Rental Payment when due is dependent on the financial condition of the City. See “CITY FINANCIAL INFORMATION” herein for more information on the City’s finances. No Debt Service Reserve Fund No debt service reserve fund will be established for the Bonds. Amounts held in or credited to any other debt service reserve fund established in connection with the Prior Bonds do not secure, and are not available for, the payment of the Bonds. Casualty Insurance The Lease requires the City to procure and maintain, or cause to be procured and maintained, throughout the term of the Lease, casualty insurance against all loss or damage to all buildings situated on the Leased Property, in an amount at least equal to the lesser of (a) 100% of the replacement value of the insured buildings, or (b) 100% of the aggregate principal amount of the Outstanding Bonds. As required by the Lease, such insurance must, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance, but earthquake insurance, if any, will be provided at the discretion of the City. Such insurance may be subject to such deductibles as the City deems necessary and prudent. As an alternative to providing the insurance described above in this paragraph, the City may maintain such insurance in whole or in part in the form of the participation by the City in a joint powers agency or other program providing pooled insurance; provided that such insurance may not be maintained by the City in the form of self- insurance. See Appendix C – “SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS – Facility Lease – Insurance” attached hereto. Rental Interruption Insurance The Lease requires the City to procure and maintain, or cause to be procured and maintained throughout the term of the Lease, rental interruption or use and occupancy insurance to cover loss, total or partial, of the use of any portion of the Leased Property constituting buildings or improvements as a result of any of the hazards covered by the casualty insurance required under the Lease, in an amount at least equal to the maximum Base Rental Payments coming due and payable during any consecutive two Fiscal Years. Title Insurance The Lease requires the City to obtain and deliver, on the delivery date of the Bonds, title insurance on the Leased Property, in an amount not less than the aggregate principal amount of the Bonds, subject only to Permitted Encumbrances, as described in Appendix C – “SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS – Facility Lease – Insurance.” Proceeds of such insurance shall be delivered to the Trustee as a prepayment of Base Rental Payments and shall be applied by the Trustee to the redemption of Bonds. See “THE BONDS – Redemption” herein. Insurance Proceeds If any part of the Leased Property covered by insurance is damaged or destroyed, the Authority, except as described below, is required to utilize the insurance proceeds for the repair, reconstruction or replacement of the damaged or destroyed portion of the Leased Property. Under the Trust Agreement, the Trustee is required to hold the insurance proceeds in a fund established by the Trustee for such purpose 14 separate and apart from all other funds. The insurance proceeds are to be applied to the repair, reconstruction or replacement of the Leased Property to at least the same good order, repair and condition as it was in prior to the damage or destruction, to the extent that can be accomplished with such proceeds. Any balance of such proceeds not required for such repair, reconstruction or replacement and the proceeds of use and occupancy insurance shall be treated by the Trustee as Base Rental Payments. If the proceeds of such insurance together with any other available moneys are sufficient to prepay all, in case of damage or destruction in whole of the Leased Property, or that portion, in the case of partial damage or destruction of the Leased Property, of the Base Rental Payments relating to the damaged or destroyed portion of the Leased Property, the City may instead elect not to repair, reconstruct or replace the damaged or destroyed portion of the Leased Property. If the City makes that election, it is required to use such proceeds for the redemption of Outstanding Bonds pursuant to the Trust Agreement. See “THE BONDS – Redemption – Extraordinary Redemption” herein. The City may not apply the proceeds of insurance to redeem the Bonds in part due to damage or destruction of a portion of the Leased Property unless the Authority certifies that the Base Rental Payments on the undamaged portion of the Leased Property will be sufficient to pay the initially-scheduled principal and interest on the Bonds remaining unpaid after such redemption. If the Leased Property or portion thereof cannot be repaired or replaced during the period of time during which rental interruption insurance is available and Revenue Fund moneys are insufficient, the Base Rental Payments with respect to the Leased Property or portion thereof will be abated and the City will have no legal obligation to pay the abated amount. See “RISK FACTORS – Abatement,” below. No assurance can be given that available insurance proceeds will be sufficient under all circumstances to repair or replace any damaged or taken portion of the Leased Property as a whole or to prepay all Base Rental Payments with respect to the Leased Property. Also, the City makes no representation as to the sufficiency of any insurance awards or the adequacy of any self-insurance to pay, when and as due, amounts payable under the Lease or the Bonds. Eminent Domain Proceeds If all of the Leased Property or so much of it as to render the remainder unusable for City’s then- intended purposes is taken under the power or threat of eminent domain, the Lease will terminate when possession is taken. If less than all of the Leased Property is taken under the power or threat of eminent domain and the remainder is usable for the City’s then-intended purposes, then the Lease will continue in full force and effect as to such remainder. In such event there will be a partial abatement of the rental due under the Lease in an amount equivalent to the amount by which the annual payments of principal of and interest on the Bonds then Outstanding will be reduced by the application of the eminent domain award to the redemption of Outstanding Bonds, and the City will have no legal obligation to pay the abated amount. See “RISK FACTORS – Abatement,” below. No assurance can be given that any eminent domain proceeds will be sufficient to avoid partial abatement. So long as any of the Bonds shall be Outstanding, any award made in eminent domain proceedings for taking the Leased Property or any portion thereof is to be paid to the Trustee and applied to the prepayment of the Base Rental Payments. See “THE BONDS – Redemption – Extraordinary Redemption” herein. Any such award made after all of the Base Rental Payments and Additional Payments have been fully paid, or provision therefor made, is to be paid to the City. 15 Remedies Upon Default If the City defaults under the Lease, the Authority may enforce its remedies thereunder. In general, remedies under the Lease include the right (i) to maintain such Lease in full force and effect and receive all rent from the City as it becomes due or re-let the Leased Property, or (ii) to terminate such Lease and the City’s right of possession and recover damages recoverable at law. The Trust Agreement provides that any Holder of the Bonds may by legal action compel the Authority to carry out its duties under the Lease, including maintaining and enforcing its rights under the Lease. See Appendix C – “SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS – Trust Agreement” attached hereto. An abatement of rental in accordance with the terms of the Lease due to damage, destruction or eminent domain is not an event of default under the Lease and none of the foregoing remedies is available. See “RISK FACTORS – Abatement” herein. The Bonds are not subject to acceleration under any circumstances or for any reason, including without limitation upon the occurrence and continuance of an Event of Default under the Trust Agreement. See “RISK FACTORS – No Acceleration Upon Default” herein. Additional Bonds The Authority may at any time, issue Additional Bonds pursuant to a Supplemental Trust Agreement, payable from the Revenues as provided in the Trust Agreement and secured by a pledge of and charge and lien upon the Revenues as provided in the Trust Agreement equal to the pledge, charge and lien securing the Bonds and any other Additional Bonds theretofore issued under the Trust Agreement, and subject to the following specific conditions, which are thereby made conditions precedent to the issuance of any such Additional Bonds. The Authority shall be in compliance with all agreements and covenants contained in the Trust Agreement, and no Event of Default shall have occurred and be continuing. The Supplemental Trust Agreement shall require that the proceeds of the sale of such Additional Bonds shall be applied to the completion of the Leased Property, or for the refunding or repayment of any Bonds then Outstanding, including the payment of costs and expenses of and incident to the authorization and sale of such Additional Bonds. The Supplemental Trust Agreement may also provide that a portion of such proceeds shall be applied to the payment of the interest due or to become due on said Additional Bonds during the estimated period of any construction and for a period of not to exceed 12 months thereafter. The aggregate principal amount of Bonds issued and at any time Outstanding under the Trust Agreement shall not exceed any limit imposed by law, by the Trust Agreement or by any Supplemental Trust Agreement. The Lease shall have been amended, if necessary, so that the Base Rental Payments payable by the City under the Trust Agreement in each Fiscal Year shall at least equal Debt Service, including Debt Service on the Additional Bonds, in each Fiscal Year. Other requirements for the authorization of Additional Bonds are described in Appendix C – “SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS – Trust Agreement – Additional Bonds.” 16 Limitations on the Issuance of Obligations Payable from Revenues Under the Trust Agreement, the Authority agrees that it will not, so long as any of the Bonds are Outstanding, issue any obligations or securities, however denominated, payable in whole or in part from Revenues except (a) Additional Bonds of any Series authorized pursuant to the Trust Agreement; or (b) obligations which are junior and subordinate to the payment of the principal, premium, and interest requirements for the Bonds and Additional Bonds and which subordinated obligations are payable as to principal, premium, interest and reserve fund requirements, if any, only out of Revenues after the prior payment of all amounts then required to be paid under the Trust Agreement from Revenues for principal, premium, and interest requirements for the Bonds, as the same become due and payable and at the times and in the manner as required in the Trust Agreement. RISK FACTORS The following factors, along with the other information in this Official Statement, should be considered by potential investors in evaluating purchase of the Bonds. However, they do not purport to be an exhaustive listing of risks and other considerations which may be relevant to an investment in the Bonds. In addition, the order in which the following factors are presented is not intended to reflect the relative importance of any such risks. No Pledge of Revenues or Lien on Assets of the City The Base Rental Payments are not secured by any pledge of or lien on taxes or other revenue of the City, but are payable from all funds lawfully available to the City. The City has the capacity to enter into other obligations which may constitute additional charges against its revenues. In the event the City’s revenue sources are less than its total obligations, the City could choose to fund other obligations before making Base Rental Payments. The same result could occur if, because of State constitutional limits on expenditures, the City is not permitted to appropriate and spend all of its available revenues. The obligation of the City to pay the Base Rental Payments does not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation or for which the City has levied or pledged any form of taxation. The obligation of the City to pay Base Rental Payments and additional payments does not constitute a debt of the City, the State or any of its political subdivisions, and does not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. Although the Lease does not create a pledge, lien or encumbrance upon the funds of the City, the City is obligated under the Lease to make Base Rental Payments from any source of legally available funds (subject to certain exceptions and conditions), and the City has covenanted in the Lease to take such action as may be necessary to include all Base Rental Payments in its annual budgets and annually to appropriate amounts necessary to make such Base Rental Payments. The City is also liable for other obligations payable from any source of legally available funds. See “– Additional Obligations of the City” below, “CITY FINANCIAL INFORMATION” herein and Appendix A – “AUDITED FINANCIAL STATEMENT FOR FISCAL YEAR ENDED JUNE 30, 2017” hereto. Additional Obligations of the City The City has a significant amount of obligations payable from its General Fund, including but not limited to debt obligations, pension obligations, lease obligations and other obligations related to post employment retirement benefits as well as certain other liabilities. See Appendix A – “AUDITED FINANCIAL STATEMENT FOR FISCAL YEAR ENDED JUNE 30, 2017” attached hereto. The Lease 17 does not prohibit the City from incurring additional lease and other obligations payable from the City’s General Fund. In that regard, the City may, from time to time, incur various General Fund obligations to finance public improvements, which may also include lease obligations payable from its General Fund. To the extent such additional obligations are incurred by the City, the funds available to make Base Rental Payments may be decreased. Abatement The Base Rental Payments due under the Lease shall be abated proportionately during any period in which by reason of any damage or destruction (other than by eminent domain) there is substantial interference with the use and occupancy by the City of the Leased Property by the City, in the proportion in which the initial cost of that portion of the Leased Property rendered unusable bears to the initial cost of the whole of the Leased Property. Such abatement shall commence with such damage or destruction and end when use and occupancy or possession is restored. The Base Rental Payments due under the Lease shall also be abated during any period in which by reason of eminent domain there is substantial interference with the use and occupancy by the City of the Leased Property by the City. See “SOURCES OF PAYMENT FOR THE BONDS – Eminent Domain Proceeds” herein. It is not possible to predict the circumstances under which such an abatement of rental may occur. In addition, there is no statute, case or other law specifying how such an abatement of rental should be measured. For example, at the time of such abatement, the value of the Leased Property may be substantially higher or lower than its value at the time of issuance of the Bonds. Such a circumstance could have an effect on the amount of rental abated under the Lease and could have a material adverse effect on the security for and payment of the Bonds. If damage, destruction or eminent domain proceedings with respect to the Leased Property results in abatement of the Base Rental Payments related to such Leased Property and if such abated Base Rental Payments, if any, together with moneys from rental interruption or use and occupancy insurance (in the event of any insured loss due to damage or destruction), eminent domain proceeds, if any, and moneys available in the Revenue Fund are insufficient to make all payments of principal of and interest on the Bonds during the period that the Leased Property is being replaced, repaired or reconstructed, then all or a portion of such payments of principal and interest may not be made. Under the Lease and the Trust Agreement, no remedy is available to the Holders of the Bonds for nonpayment under such circumstances. Risk of Uninsured Loss The City covenants under the Lease to maintain certain insurance policies on the Leased Property. See “SOURCES OF PAYMENT FOR THE BONDS” herein. These insurance policies do not cover all types of risk. For example, the City is not required to maintain earthquake insurance. The Leased Property could be damaged or destroyed due to an earthquake or other casualty for which the Leased Property is uninsured. Additionally, a portion of the Leased Property could be the subject of an eminent domain proceeding. Under these circumstances, an abatement of Base Rental Payments could occur and could continue indefinitely. Moreover, there can be no assurance that the providers of the City’s liability and rental interruption insurance, among others, will in all events be able or willing to make payments under the respective policies for such loss should a claim be made under such policies. There can also be no assurances that amounts received as proceeds from insurance of the Leased Property will be sufficient to redeem the Bonds. Under the Lease, the City may obtain certain types of casualty insurance which provide for such a deductible as the City deems adequate and prudent. Should the City be unable to meet such deductible 18 expenses, the availability of General Fund revenues to make Base Rental Payments will be correspondingly affected. Limited Recourse on Default If the City defaults on its obligations to make Base Rental Payments with respect to the Leased Property, the Trustee, as assignee of the Authority, may (subject to the restrictions described herein) retain the Lease and hold the City liable for all Base Rental Payments on an annual basis and will have the right to re-enter and re-let the Leased Property. In the event such re-letting occurs, the City would be liable for any resulting deficiency in Base Rental Payments. Alternatively, the Trustee may terminate the Lease with respect to the Leased Property and proceed against the City to recover damages pursuant to the Lease. However, the Trustee may not sell or foreclose the Leased Property to obtain money for payment of the principal of or interest on the Bonds in the event of a default. See also “– No Acceleration Upon Default” below. Due to the specialized nature of the Leased Property, no assurance can be given that the Trustee will be able to re-let any portion of the Leased Property so as to provide rental income sufficient to make principal and interest payments with respect to the Bonds in a timely manner, and the Trustee is not empowered to sell the Leased Property for the benefit of the Owners of the Bonds. In addition, due to the governmental function of the Leased Property, it is not certain whether a court would permit the exercise of the remedies of repossession and re-letting with respect thereto. Any suit for money damages would be subject to limitations on legal remedies against public agencies in the State, including a limitation on enforcement of judgments against funds needed to serve the public welfare and interest. No Acceleration Upon Default If the City defaults on its obligations to make Base Rental Payments, the Trustee may have limited ability to re-let the Leased Property so as to preserve the tax exempt nature of the interest on the Bonds. In the event of default, there is no remedy of acceleration of any Base Rental Payments which have not come due and payable in accordance with the Lease. The City will continue to be liable for lease payments as they become due and payable in accordance with the Lease if the Trustee does not terminate the Lease, and the Trustee is required to seek a separate judgment each year for that year’s defaulted Base Rental Payments. Any such suit for money damages would be subject to limitations on legal remedies against cities in California, including a limitation on enforcement of judgments against funds or property needed to serve the public welfare and interest. Bankruptcy The City and the Authority are considered “municipalities” and therefore are not subject to the involuntary procedures of the United States Bankruptcy Code (the “Bankruptcy Code”). However, pursuant to Chapter 9 of the Bankruptcy Code, the City or the Authority may seek voluntary protection from its creditors for purposes of adjusting its debts. A City or Authority bankruptcy petition could have a material adverse effect on the payment of the Bonds. The following paragraphs present a discussion of certain potential consequences surrounding a potential City or Authority bankruptcy. It is not intended to be an exhaustive discussion of all potential adverse consequences or potential outcomes. In the event the City were to become a debtor under the Bankruptcy Code, the City would be entitled to all of the protective provisions of the Bankruptcy Code as applicable in a Chapter 9 proceeding. Among the adverse effects of such a bankruptcy might be: (1) the application of the automatic stay provisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the City or the commencement of any judicial or other action for the purpose of 19 recovering or collecting a claim against the City; (2) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (3) the existence of unsecured or court-approved secured debt which may have a priority of payment superior to that of Holders of the Bonds; and (4) the possibility of the adoption of a plan for the adjustment of the City’s debt (a “Plan”) without the consent of the Trustee or the Holders of the Bonds, which Plan may restructure, delay, compromise or reduce the amount of any claim of the Holders if the bankruptcy court finds that the Plan is fair and equitable. In addition, if the Lease were considered a true lease under the Bankruptcy Code, the City could either reject the Lease or assume the Lease despite any provision of the Lease which makes the bankruptcy or insolvency of the City an event of default thereunder. In the event the City rejects the Lease, the Trustee, on behalf of the Holders of the Bonds, would have a pre-petition claim that may be limited under the Bankruptcy Code and treated in a manner under a Plan over the objections of the Trustee or the Holders of the Bonds. Moreover, such rejection would terminate the Lease and the City’s obligation to make payments thereunder. If the Lease were instead considered a secured financing transaction under the Bankruptcy Code, it is possible that the Holders would have a secured claim for the value of the leasehold interest (as determined by the bankruptcy court) and an unsecured claim for any balance. The legal status of the Lease under the Bankruptcy Code is uncertain as there is currently no binding legal authority on the proper treatment of lease-leaseback transactions such as the one securing the Bonds. The Authority is a public agency and, like the City, is not subject to the involuntary procedures of the Bankruptcy Code. The Authority may also seek voluntary protection under Chapter 9 of the Bankruptcy Code. In the event the Authority were to become a debtor under the Bankruptcy Code, the Authority would be entitled to all of the protective provisions of the Bankruptcy Code as applicable in a Chapter 9 proceeding. Such a bankruptcy could adversely affect the payments under the Trust Agreement. Among the adverse effects might be: (1) the application of the automatic stay provisions of the Bankruptcy Code, which, until relief is granted, would prevent collection of payments from the Authority or the commencement of any judicial or other action for the purpose of recovering or collecting a claim against the Authority; (2) the avoidance of preferential transfers occurring during the relevant period prior to the filing of a bankruptcy petition; (3) the existence of unsecured or court-approved secured debt which may have priority of payment superior to that of the Holders of the Bonds; and (4) the possibility of the adoption of a plan for the adjustment of the Authority’s debt without the consent of the Trustee or all of the Holders of the Bonds, which plan may restructure, delay, compromise or reduce the amount of any claim of the Holders if the bankruptcy court finds that the plan is fair and equitable. Recent bankruptcies in the City of Stockton, the City of San Bernardino and the City of Detroit have brought scrutiny to municipal securities. Specifically, in the City of San Bernardino bankruptcy, the Court held that in the event of a municipal bankruptcy, payments on pension obligation bonds were unsecured obligations and not entitled to the same priority of payments made to the related pension system. A variety of events including, but not limited to, additional rulings adverse to the interests of bond owners in the City of San Bernardino, the City of Stockton and the City of Detroit bankruptcy cases or additional municipal bankruptcies, could prevent or materially adversely affect the rights of Owners to receive payments on the Bonds in the event the City files for bankruptcy. Accordingly, in the event of bankruptcy, it is likely that Owners may not recover their principal and interest. Risk of Tax Audit; Loss of Tax Exemption The Internal Revenue Service (the “IRS”) has an ongoing program of examining tax-exempt obligations to determine whether, in the view of the IRS, interest on such obligations is properly excluded from gross income for federal income tax purposes. It is possible that the Bonds or other tax-exempt 20 obligations of the City may be selected for examination under such program. There is no assurance that an IRS examination of the Bonds or other tax-exempt obligations of the City will not adversely affect the market value of the Bonds. See “TAX MATTERS” herein. As discussed under the caption “TAX MATTERS,” in order to maintain the exclusion from gross income for federal income tax purposes of the interest on the Bonds, the City has covenanted in the Lease not to take any action, or fail to take any action, if such action or failure to take such action would adversely affect the exclusion from gross income of interest on the Bonds under Section 103 of the Internal Revenue Code of 1986 (the “Code”). Interest on the Bonds could become includable in gross income for purposes of federal income taxation retroactive to the date the Bonds were issued, as a result of acts or omissions of the City or the Authority in violation of the Code. Should such an event of taxability occur, the Bonds are not subject to early redemption and will remain outstanding to maturity or until prepaid under the optional redemption provisions of the Trust Agreement. Limited Secondary Market As stated herein, investment in the Bonds poses certain economic risks which may not be appropriate for certain investors, and only persons with substantial financial resources who understand the risk of investment in the Bonds should consider such investment. There can be no guarantee that there will be a secondary market for purchase or sale of the Bonds or, if a secondary market exists, that the Bonds could be sold for any particular price. Hazardous Substances The existence or discovery of hazardous materials may limit the beneficial use of the Leased Property. In general, the owners and lessees of the Leased Property may be required by law to remedy conditions of such parcel relating to the release or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as “CERCLA” or the “Superfund Act,” is the most well-known and widely applicable of these laws, but State laws with regard to hazardous substances are also similarly stringent. Under many of these laws, the owner or lessee is obligated to remedy a hazardous substance condition on the property whether or not the owner or lessee had anything to do with creating or handling the hazardous substance. Further, it is possible that the beneficial use of the Leased Property may be limited in the future resulting from the current existence on the Leased Property of a substance currently classified as hazardous but which has not been released or the release of which is not presently threatened, or may arise in the future resulting from the current existence on the Leased Property of a substance not presently classified as hazardous but which may in the future be so classified. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method in which it is handled. All of these possibilities could significantly limit the beneficial use of the Leased Property. The City is unaware of the existence of hazardous substances on the Leased Property site which would materially interfere with the beneficial use thereof. Earthquake and Other Natural Disasters The financial stability of the City can be adversely affected by a variety of factors, particularly those which might affect infrastructure and other public improvements and private improvements and the continued habitability and environment of such improvements. Such additional factors include, without limitation, geological conditions (such as earthquakes), topographic conditions (such as earth movements, wildfires and floods) and climate conditions (such as droughts and tornadoes). The area in and 21 surrounding the City, like all communities in the State, may be subject to unpredictable seismic activity [and information about Nacimiento Dam – to be confirmed]. In the event of a severe earthquake, fire, flood or other natural disaster, there may be significant damage to both property and infrastructure in the City, which could impact the ability of the City to make Base Rental Payments when due and, accordingly, could have an adverse effect on the Authority’s ability to make timely payments of principal and interest on the Bonds. The City is not required under the Lease to maintain earthquake or flood insurance on the Leased Property. If severe seismic activity occurred in or around the City, there could be substantial damage to and interference with the City’s right to use and occupy all or a portion of the Leased Property, which could result in abatement of Base Rental Payments. See “RISK FACTORS – Abatement” herein. Dependence on State for Certain Revenues A number of the City’s revenues are collected and disbursed by the State (such as sales tax and motor-vehicle license fees) or allocated in accordance with State law (most importantly, property taxes). As a result, State budget decisions can have an impact on City finances. In the event of a material economic downturn in the State, there can be no assurance that any resulting revenue shortfalls to the State will not reduce revenues to local governments (including the City) or shift financial responsibility for programs to local governments as part of the State’s efforts to address any such related State financial difficulties. Changes in Law There can be no assurance that the electorate of the State will not at some future time adopt additional initiatives or that the Legislature will not enact legislation that will amend the laws or the Constitution of the State resulting in a reduction of the General Fund revenues of the City and, consequently, having an adverse effect on the security for the Bonds. City Pension Benefit Liability Many factors influence the amount of the City’s pension benefit liability, including, without limitation, inflationary factors, changes in statutory provisions of applicable law, changes in the levels of benefits provided or in the contribution rate of the City, increases or decreases in the number of covered employees, changes in actuarial assumptions or methods and differences between actual and anticipated investment experience of the California Public Employees’ Retirement System (“CalPERS”). Any of these factors could give rise to additional liability of the City to CalPERS as a result of which the City would be obligated to make additional payments to CalPERS over the amortization schedule for full funding of the City’s obligations to CalPERS. The City expects its pension benefit liability to increase in future years as a result of the CalPERS Board-approved new investment return methodology. See also “CITY FINANCIAL INFORMATION – Employee Retirement System” herein. No Liability of Authority to the Owners Except as expressly provided in the Trust Agreement, the Authority shall not have any obligation or liability to the Owners of the Bonds with respect to the payment when due of the Base Rental Payments by the City, or with respect to the performance by the City of other agreements and covenants required to be performed by it contained in the Lease or the Trust Agreement, or with respect to the performance by the Trustee of any right or obligation required to be performed by it contained in the Trust Agreement. 22 CERTAIN LIMITATIONS ON TAXES AND APPROPRIATIONS While the Lease does not obligate the City to impose any new taxes or increase any existing taxes to pay Base Rental Payments, limitations on the City’s ability to impose taxes or appropriate funds could adversely affect the City’s ability to raise and spend revenues. In such event, City funds which would otherwise be available absent such limitation might not be available to make Base Rental Payments. The following is a description of certain legal limitations related to the City’s ability to impose taxes or appropriate funds. Article XIIIA of the State Constitution Section 1(a) of Article XIIIA of the State Constitution limits the maximum ad valorem tax on real property to 1% of full cash value (as defined in Section 2 of Article XIIIA), to be collected by counties and apportioned according to law. Section 1(b) of Article XIIIA provides that the 1% limitation does not apply to ad valorem taxes to pay interest or redemption charges on (1) indebtedness approved by the voters prior to July 1, 1978 or (2) any bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast by the voters voting on the proposition. Section 2 of Article XIIIA defines “full cash value” to mean “the County assessor’s valuation of real property as shown on the 1975-76 tax bill under full cash value or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment.” The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction or reduced in the event of declining property value caused by substantial damage, destruction or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that notwithstanding any other law, local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above. The voters of the State subsequently approved various measures which further amended Article XIIIA. One such amendment generally provides that the purchase or transfer of (i) real property between spouses or (ii) the principal residence and the first $1,000,000 of the full cash value of other real property between parents and children, do not constitute a “purchase” or “change of ownership” triggering reassessment under Article XIIIA. This amendment could serve to reduce the property tax revenues of the City. Other amendments permitted the State Legislature to allow persons over 55 or “severely disabled homeowners” who sell their residence and buy or build another of equal or lesser value within two years in the same city, to transfer the old residence’s assessed value to the new residence. In the November 1990 election, the voters approved an amendment of Article XIIIA to permit the State Legislature to exclude from the definition of “new construction” seismic retrofitting improvements or improvements utilizing earthquake hazard mitigation technologies constructed or installed in existing buildings after November 6, 1990. Article XIIIA has also been amended to permit reduction of the “full cash value” base in the event of declining property values caused by damage, destruction or other factors, provided that there would be no increase in the “full cash value” base in the event of reconstruction of property damaged or destroyed in a disaster. 23 Article XIIIB of the State Constitution Article XIIIB of the State Constitution limits the annual appropriations of the State and of any city, county, school district, authority or other political subdivision of the State to the level of appropriations for the prior Fiscal Year, as adjusted for changes in the cost of living, population and services for which the fiscal responsibility is shifted to or from the governmental entity. The “base year” for establishing this appropriations limit is the 1978-79 fiscal year, and the limit is adjusted annually to reflect changes in population, consumer prices and certain increases or decreases in the cost of services provided by the applicable public agency. Appropriations of an entity of local government subject to Article XIIIB generally include authorizations to expend during a Fiscal Year the proceeds of taxes levied by or for the entity and the proceeds of State subventions, exclusive of certain State subventions, refunds of taxes, and benefit payments from retirement, unemployment insurance and disability insurance funds. “Proceeds of taxes” include, but are not limited to, all tax revenues, most State subventions and the proceeds to the local governmental entity from (1) regulatory licenses, user charges, and user fees (to the extent that such proceeds exceed the cost reasonably borne by such entity) and (2) the investment of tax revenues. Article XIIIB provides that if a governmental entity’s revenues in any year exceed the amounts permitted to be spent, the excess must be returned by revising tax rates or fee schedules over the subsequent two years. Article XIIIB does not limit the appropriation of moneys to pay debt service on indebtedness existing or authorized as of January 1, 1979, or for bonded indebtedness approved thereafter by a vote of the electors of the issuing entity at an election held for that purpose. Furthermore, in 1990, Article XIIIB was amended to exclude from the appropriations limit “all qualified capital outlay projects, as defined by the Legislature” from proceeds of taxes. The Legislature has defined “qualified capital outlay project” to mean a fixed asset (including land and construction) with a useful life of 10 or more years and a value which equals or exceeds $100,000. As a result of this amendment, the appropriations to pay the lease payments on the City’s long-term General Fund lease obligations (including the Base Rental Payments) are generally excluded from the City’s appropriations limit. Articles XIIIC and XIIID of the State Constitution On November 5, 1996, the voters of the State approved Proposition 218, known as the “Right to Vote on Taxes Act.” Proposition 218 adds Articles XIIIC and XIIID to the California Constitution and contains a number of interrelated provisions affecting the ability of the City to levy and collect both existing and future taxes, assessments, fees and charges. Article XIIIC requires that all new local taxes be submitted to the electorate before they become effective. Taxes for general governmental purposes of the City require a majority vote and taxes for specific purposes, even if deposited in the City’s General Fund, require a two-thirds vote. Further, any general purpose tax which the City imposed, extended or increased without voter approval after December 31, 1994 may continue to be imposed only if approved by a majority vote in an election held within two years after November 5, 1996. The voter approval requirements of Article XIIIC reduce the flexibility of the City to raise revenues for the General Fund, and no assurance can be given that the City will be able to impose, extend or increase such taxes in the future to meet increased expenditure needs. Article XIIID also adds several provisions making it generally more difficult for local agencies to levy and maintain fees, charges, and assessments for municipal services and programs. These provisions include, among other things, (i) a prohibition against assessments which exceed the reasonable cost of the proportional special benefit conferred on a parcel, (ii) a requirement that assessments must confer a 24 “special benefit,” as defined in Article XIIID, over and above any general benefits conferred, (iii) a majority protest procedure for assessments which involves the mailing of notice and a ballot to the record owner of each affected parcel, a public hearing and the tabulation of ballots weighted according to the proportional financial obligation of the affected party, and (iv) a prohibition against fees and charges which are used for general governmental services, including police, fire or library services, where the service is available to the public at large in substantially the same manner as it is to property owners. Article XIIID conditions the imposition or increase of any “fee” or “charge” upon there being no written majority protest after a required public hearing and, for fees and charges other than for sewer, water or refuse collection services, voter approval. Article XIIID defines “fee” or “charge” to mean levies (other than ad valorem or special taxes or assessments) imposed by a local government upon a parcel or upon a person as an incident of the ownership or tenancy of real property, including a user fee or charge for a “property-related service.” One of the requirements of Article XIIID is that before a property related fee or charge may be imposed or increased, a public hearing upon the proposed fee or charge must be held and mailed notice sent to the record owner of each identified parcel of land upon which the fee or charge is proposed for imposition. In the public hearing, if written protests of the proposed fee or charge are presented by a majority of the owners of affected identified parcel(s), an agency may not impose the fee or charge. Article XIIIC also removes limitations on the initiative power in matters of reducing or repealing local taxes, assessments, fees or charges. No assurance can be given that the voters of the City will not, in the future, approve an initiative or initiatives which reduce or repeal local taxes, assessments, fees or charges currently comprising a substantial part of the City’s General Fund. If such repeal or reduction occurs, the City’s operations could be adversely affected. The City believes its fees, charges, assessments and taxes are in compliance with Articles XIIIC and XIIID. Proposition 22 In November 2010, California voters adopted Proposition 22 (“Proposition 22”), which prohibits the State, even during a period of severe fiscal hardship, from delaying the distribution of tax revenues for transportation, redevelopment, or local government projects and services and prohibits fuel tax revenues from being loaned for cash–flow or budget balancing purposes to the State general fund or any other State fund. Due to the prohibition with respect to the State’s ability to delay and reallocate taxes collected for local government purposes, Proposition 22 supersedes certain provisions of Proposition 1A discussed below. See “—Proposition 1A” below. Proposition 26 On November 2, 2010, the voters of the State approved Proposition 26 (“Proposition 26”), which revises certain provisions of Articles XIIIA and XIIIC of the California Constitution. Proposition 26 re- categorizes many State and local fees as taxes, requires local governments to obtain two–thirds voter approval for taxes levied by local governments, and requires the State to obtain the approval of two–thirds of both houses of the State Legislature to approve State laws that increase taxes. Furthermore, pursuant to Proposition 26, any increase in a fee beyond the amount needed to provide the specific service or benefit is deemed to be a tax and the approval thereof will require a two-thirds vote. In addition, for State- imposed charges, any tax or fee adopted after January 1, 2010, with a majority vote which would have required a two-thirds vote if Proposition 26 were effective at the time of such adoption is repealed as of November 2011 absent the re-adoption by the requisite two-thirds vote. 25 Proposition 26 amends Article XIIIC of the State Constitution to state that a “tax” means a levy, charge or exaction of any kind imposed by a local government, except: (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property or the purchase, rental, or lease of local government property; (5) a fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government as a result of a violation of law, including late payment fees, fees imposed under administrative citation ordinances, parking violations, etc.; (6) a charge imposed as a condition of property development; or (7) assessments and property related fees imposed in accordance with the provisions of Article XIIID. Fees, charges and payments that are made pursuant to a voluntary contract that are not “imposed by a local government” are not considered taxes and are not covered by Proposition 26. Proposition 26 applies to any levy, charge or exaction imposed, increased, or extended by local government on or after November 3, 2010. Accordingly, fees adopted prior to that date are not subject to the measure until they are increased or extended or if it is determined that an exemption applies. If the local government specifies how the funds from a proposed local tax are to be used, the approval will be subject to a two–thirds voter requirement. If the local government does not specify how the funds from a proposed local tax are to be used, the approval will be subject to a 50% voter requirement. Proposed local government fees that are not subject to Proposition 26 are subject to the approval of a majority of the governing body. In general, proposed property charges will be subject to a majority vote of approval by the governing body although certain proposed property charges will also require approval by a majority of property owners. Proposition 62 A statutory initiative (“Proposition 62”) was adopted by the voters voting in the State at the November 4, 1986 General Election which (1) requires that any tax for general governmental purposes imposed by local governmental entities be approved by resolution or ordinance adopted by two-thirds vote of the governmental agency’s legislative body and by a majority of the electorate of the governmental entity, (2) requires that any special tax (defined as taxes levied for other than general governmental purposes) imposed by a local governmental entity be approved by a two-thirds vote of the voters within that jurisdiction, (3) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax was imposed, (4) prohibits the imposition of ad valorem taxes on real property by local governmental entities except as permitted by Article XIIIA, (5) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities and (6) requires that any tax imposed by a local governmental entity on or after March 1, 1985 be ratified by a majority vote of the electorate within two years of the adoption of the initiative or be terminated by November 15, 1988. Following its adoption by the voters, various provisions of Proposition 62 were declared unconstitutional at the appellate court level. On September 28, 1995, however, the California Supreme Court, in Santa Clara City Local Transportation Authority v. Guardino, upheld the constitutionality of the portion of Proposition 62 requiring a two-thirds vote in order for a local government or district to impose a special tax, and, by implication, upheld a parallel provision requiring a majority vote in order for a local 26 governmental or district to impose any general tax. The Santa Clara decision did not address the question of whether or not it should be applied retroactively. In response to the Santa Clara decision, the California Legislature adopted Assembly Bill 1362, which provided that the Santa Clara decision should apply only prospectively to any tax that was imposed or increased by an ordinance or resolution adopted after December 14, 1995. Assembly Bill 1362 was vetoed by the Governor, hence the application of the Santa Clara decision on a retroactive basis remains unclear. Proposition 62, as an initiative statute, does not have the same level of authority as a constitutional initiative, but is analogous to legislation adopted by the State Legislature, except that it may be amended only by a vote of the State’s electorate. However, Proposition 218, as a constitutional amendment and supersedes many of the provisions of Proposition 62. The City does not believe that it imposes any tax or fee which is subject to the provisions of Proposition 62. Proposition 1A Proposition 1A, proposed by the Legislature in connection with the State's Fiscal Year 2004-05 Budget, approved by the voters in November 2004 and generally effective in Fiscal Year 2006-07, provides that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition 1A generally prohibits the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any fiscal year, as set forth under the laws in effect as of November 3, 2004. Any change in the allocation of property tax revenues among local governments within a county must be approved by two-thirds of both houses of the Legislature. Proposition 1A provides, however, that beginning in Fiscal Year 2008-09, the State may shift to schools and community colleges up to 8% of local government property tax revenues, which amount must be repaid, with interest, within three years, if the Governor proclaims that the shift is needed due to a severe state financial hardship, the shift is approved by two-thirds of both houses and certain other conditions are met. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also provides that if the State reduces the motor vehicle license fee rate currently in effect, 0.65 percent of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition 1A requires the State, as of July 1, 2005, to suspend State mandates affecting cities, counties and special districts, excepting mandates relating to employee rights, schools or community colleges, in any year that the State does not fully reimburse local governments for their costs to comply with such mandates. Proposition 1A may result in increased and more stable City revenues. The magnitude of such increase and stability is unknown and would depend on future actions by the State. However, Proposition 1A could also result in decreased resources being available for State programs. This reduction, in turn, could affect actions taken by the State to resolve budget difficulties. Such actions could include increasing State taxes, decreasing spending on other State programs or other action, some of which could be adverse to the City. The State’s ability to delay and shift proceeds of taxes is limited by Proposition 22 discussed above. See “– Proposition 22” above. 27 Unitary Property AB 454 (Chapter 921, Statutes of 1987) provides that revenues derived from most utility property assessed by the State Board of Equalization (“Unitary Property”), commencing with the fiscal year ended June 30, 1989, will be based on a uniform rate within each county and allocated as follows: (a) each jurisdiction will receive up to 102% of its prior year State assessed revenue; and (b) if county wide revenues generated from Unitary Property are less than the previous year’s revenues or greater than 102% of the previous year’s revenues, each jurisdiction will share the burden of the shortfall or excess revenues by a specified formula. This provision applies to all Unitary Property except railroads, whose valuation will continue to be allocated to individual tax rate areas. The provisions of AB 454 do not constitute an elimination of the assessment of any State assessed properties nor a revision of the methods of assessing utilities by the State Board of Equalization. Generally, AB 454 allows valuation growth or decline of Unitary Property to be shared by all jurisdictions in a county. Future Initiatives Articles XIIIA, XIIIB, XIIIC and XIIID and Propositions 22, 26, 62 and 1A were each adopted as measures that qualified for the ballot pursuant to the State’s initiative process. From time to time other initiative measures could be adopted, further affecting the City’s revenues or the City’s ability to expend revenues. THE AUTHORITY The San Luis Obispo Public Financing Authority was established pursuant to a Joint Exercise of Powers Agreement dated September 8, 2014, by and between the City and the Parking Authority in accordance with provisions of the California Joint Exercise of Powers Act. The Authority was created for the purpose of providing financing for public capital improvements of the City and the Parking Authority. The Authority has no independent staff and consequently will be dependent upon the City’s officers and employees to administer the Bonds on its behalf. The Governing Board of the Authority is comprised of the members of the City Council of the City. THE CITY The City is a charter city, incorporated on February 19, 1856 and chartered on May 1, 1876 under the laws of the State of California. The City is located on the central coast of California, about 200 miles northwest of Los Angeles and 235 miles southeast of San Francisco. The City is the county seat of San Luis Obispo County (the “County”), and had a population estimated at 46,724 as of January 1, 2017. The City is the largest city in the County. The City operates under a council-mayor-city manager form of government. City Council members are elected at large for staggered four-year terms; the Mayor serves a two-year term. The City Manager, the City Attorney, and all advisory boards, committees and commissions are appointed by the City Council. The City Manager serves as the administrative head of the City, and is responsible for the day-to-day operations of the City staff, implementing the policies of the City Council. The City is a “full-service” city, providing public safety, public utilities, transportation, leisure, cultural, social and community development services to its residents. 28 For additional demographic information regarding the City and the County, see Appendix B attached hereto. CITY FINANCIAL INFORMATION Budgetary Process The City of San Luis Obispo has received national recognition for its use of a two-year Financial Plan and budgetary process that emphasizes long-range planning and effective program management. Significant features of the City’s two-year Financial Plan include the integration of Council goal-setting into the budgetary process and the extensive use of formal policies and measurable objectives. The Financial Plan includes operating budgets for two years and a Capital Improvement Plan (the “CIP”) covering ten years. Under this multi-year approach, appropriations continue to be made annually; however, the Financial Plan is the foundation for preparing the budget for the second year. Additionally, unexpended operating appropriations from the first year may be carried over for specific purposes into the second year with the approval of the City Manager. Management Policies. The overall goal of the City’s Financial Plan is to establish and maintain effective management of the City’s financial resources. Formal statements of budgetary policies and major objectives provide the foundation for achieving this goal. Key budget principles include: continuing basic services at current levels and adequately funding them; maintaining fund balances at levels which will protect the City from future uncertainties; estimating revenues at realistic levels; making all current expenditures with current revenues; finding solutions to the City’s financial challenges which maintain and promote a quality community; maintaining the City’s traditional commitment to a strong General Fund; and complying with provisions of the State Constitution, City Charter, municipal code and sound fiscal policy. Key revenue policies include: maintaining a diversified and stable revenue base; setting enterprise fund rates at levels that fully recover the total cost of providing services; charging fees for General Fund programs in accordance with adopted user fee cost recovery goals; and ensuring that new development pays its fair share of the cost of constructing necessary community facilities. Financial Plan Policies. Formally articulated budget and fiscal policies provide the foundation for preparing and implementing the Financial Plan while assuring the City’s long-term fiscal health. Included in the Financial Plan itself, these policies cover a broad range of areas such as investments, capital improvement management, debt management, capital financing, fund balance and reserves, human resource management, and productivity. Fund Balance and Reserves. The City’s policy on fund balance and reserves requires the City to maintain a minimum fund balance of at least 20% of operating expenditures in the General Fund in order to adequately provide for economic uncertainties, contingencies for unseen needs and cash flow requirements. The City's fund balance as a percent of General Fund operating expenditures was 45.1% as of December 31, 2017. The City's fund balance as a percent of General Fund operating expenditures was 46.9%, 60.6% and 45.0% as of June 30, 2015, June 30, 2016 and June 30, 2017, respectively. Budget Process. The City Manager is responsible for preparing the budget and submitting it to the Council for approval. Although specific steps will vary from year to year, the following is an overview of the general approach used under the City’s two-year budgetary process: 29 First Year. The Financial Plan process begins with a Council goal-setting session to determine major objectives to be accomplished over the next two years. These are incorporated into the budget instructions issued to the operating departments, who are responsible for submitting initial budget proposals. After these proposals are comprehensively reviewed and a detailed financial forecast is prepared, the City Manager issues the Preliminary Financial Plan for public comment. A series of study sessions and public hearings are then held leading to Council adoption of the Budget by June 30. Second Year. Before the beginning of the second year of the two-year cycle, the Council reviews the progress during the first year, makes adjustments as necessary, and approves appropriations for the second Fiscal Year. Unspent operating appropriations from the first year may be carried over for specific purposes into the second year with the approval of the City Manager. Unspent operating program appropriations lapse at the end of the second year. Fiscal Year 2016-17, was the second year of the two- year cycle. Mid-Year Reviews. The Council formally reviews the City’s financial condition and amends appropriations, if necessary, each February. Status Reports. On-line access to “up-to-date” financial information is provided to staff throughout the organization. Additionally, comprehensive financial reports are prepared monthly to monitor the City’s fiscal condition. Additionally, more focused reports are issued monthly on transient occupancy tax and quarterly reports are prepared on the performance of investments and the portfolio’s overall compliance with the City’s investment policy. The status of major program objectives and goals, including CIP projects, is formally reported to the Council on an ongoing basis. Accounting. Budgets are prepared for each fund in accordance with its respective basis of accounting. All governmental funds have legally adopted budgets, including capital project funds. While budgets are prepared for the City’s capital project funds, the CIP projects generally span more than one year and are effectively controlled at the project level; accordingly, budgetary comparisons are not presented in the accompanying basic financial statements for capital projects. Administration. As provided under the City Charter, the City Council may amend or supplement the budget at any time after its adoption by majority vote of the Council. The City Manager has the authority to make or approve administrative adjustments to the budget as long as those changes will not have a significant policy impact nor affect the budgeted year-end fund balances. The level for which expenditures are not to exceed appropriations is at the fund level. 30 Comparison of General Fund Budgets. The table below sets forth a comparison of the City’s General Fund budgets for the current and prior fiscal years. TABLE 1 CITY OF SAN LUIS OBISPO GENERAL FUND BUDGETS FOR FISCAL YEARS 2015-16 THROUGH 2017-18 2015-16 Final Budget 2015-16 Actual 2016-17 Final Budget 2016-17 Actual 2017-18 Adopted Revenues Tax and franchise fees $55,584,290 $56,318,547 $57,044,259 $56,767,653 $58,035,218 Fines and forfeitures 156,000 172,353 156,000 139,534 147,600 Use of money and property 281,700 582,993 281,700 160,340 264,798 Subventions and grants 1,107,922 1,538,869 925,671 1,014,859 316,000 Charges for services 8,058,089 9,322,456 8,559,270 9,112,989 9,596,384 Other Revenues 82,042 149,220 63,297 239,321 130,660 Total Revenues $65,270,043 $68,084,438 $67,030,197 $67,434,696 $68,490,660 Expenditures Operating Programs Community Safety $27,356,157 [$26,914,137 $29,396,416 [$28,738,924 $29,535,213 Infrastructure & Transportation 9,289,520 9,152,805 9,975,426 9,847,414 11,167,151 Culture & Recreation 5,874,084 5,710,446 6,169,353 5,742,067 3,689,143 Environmental Health & Open Space 1,533,937 1,528,318 1,535,467 1,605,618 1,018,313 Community & Neighborhood Livability 6,736,807 5,979,367 7,200,683 6,599,520 8,649,650 Fiscal Health & Governance 11,853,518 10,093,591] 13,802,824 10,449,544] 18,356,021 Total Program Expenditures $62,644,023 $59,378,660 $68,080,169 $62,983,089 $72,415,491 Debt Service: Principal -- 86,778 -- 87,667 Debt Service: Interest -- 7,465 -- 6,575 Reimbursed Expenditures (4,008,992) (4,008,992) (3,933,992) (4,164,633) (4,264,633) Total Expenditures $58,635,031 $55,463,911 $64,146,177 $58,912,698 $68,150,858 Other Sources (Uses) Operating transfers in $2,341,093 $2,920,748 $2,371,404 $2,043,830 $5,056,700 Operating transfers out (6,964,744) (9,772,930) (4,108,451) (13,695,206) (6,496,114) Expenditure Savings 1,452,966 -- 1,469,667 -- 1,268,462 Total Other Financing Sources (Uses) $(3,170,685) $(6,852,182) $(267,380) $(11,651,376) (170,952) Net Change in Fund Balance $3,464,327 5,768,345 $2,616,640 $(3,129,378) $168,850 Transfer to Local Revenue Measure Fund (2,426,279) -- -- -- Fund Balance, Beginning of Year $23,847,381 $24,566,807 $13,151,493 $29,625,532 $14,182,431 Prior year restatement(1) -- (709,620) -- -- -- Fund Balance, Beginning of Year, as Restated 23,847,381 23,857,187 13,151,493 29,625,532 14,182,431 Fund Balance, End of Year $24,885,429 $29,625,532 $15,768,133 $26,496,154 $14,351,281 _______________ (1) Prior year restatement reflects excess development services revenue that should have been recorded in a prior period. Source: City of San Luis Obispo. 31 Financial Statements Accounting Policies. The accounting policies of the City of San Luis Obispo conform to generally accepted accounting principles. The Governmental Accounting Standards Board (“GASB”) published its Statement No. 34 “Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments” on June 30, 1999. Statement No. 34 provides guidelines to auditors, state and local governments and special purpose governments such as school districts and public utilities, on new requirements for financial reporting for all governmental agencies in the United States. Generally, the basic financial statements and required supplementary information should include (i) Management’s Discussion and Analysis; (ii) financial statements prepared using the economic measurement focus and the accrual basis of accounting and (ii) fund financial statements prepared using the current financial resources measurement focus and the modified accrual method of accounting and (iii) required supplementary information. Accounts of the City are organized on the basis of funds each of which is considered a separate accounting entity. The operation of each fund is accounted for with a separate set of self-balancing accounts. The various funds are grouped into broad categories, as follows: Governmental Funds (General, Special Revenue, Capital Projects and Debt Service), Proprietary Funds (Enterprise Funds, including the Water, Sewer, Parking, Transit and Golf Funds) and Fiduciary Funds (Agency). Basis of Accounting. All Governmental Funds and Fiduciary Funds use the modified accrual basis of accounting. The Proprietary Funds use the accrual basis of accounting. Audited Financial Statements. The City’s most recent audited financial statements for the Fiscal Year ending June 30, 2017, are attached as Appendix A to this Official Statement, which were prepared by the City and audited by Glenn Burdette, Certified Public Accountants, San Luis Obispo, California (the “Auditor”). The financial statements should be read in their entirety. The City has not requested nor did the City obtain permission from the Auditor to include the audited financial statements as an appendix to this Official Statement. Accordingly, the Auditor has not performed any post-audit review of the financial condition or operations of the City or the General Fund. In addition, the Auditor has not reviewed this Official Statement. General Fund Balance Sheet Set forth on the following page are the City’s General Fund balance sheets for the Fiscal Years 2014-15 through 2016-17. 32 TABLE 2 CITY OF SAN LUIS OBISPO GENERAL FUND BALANCE SHEET AS OF JUNE 30 FOR FISCAL YEARS 2014-15 THROUGH 2016-17 (AUDITED) ASSETS: 2014-15 2015-16 2016-17 Cash and cash equivalents $ 9,042 $ 244,357 $ 326,898 Investments 18,044,854 23,715,900 19,639,015 Receivables: Taxes 1,649,947 3,900,847 6,294,199 Accounts 489,554 326,356 321,204 Accrued interest 50,201 62,993 77,309 Other 109,353 249,287 308,329 Due from other governments 3,357,005 4,543,211 -- Due from other funds 3,412,891 517,788 128,102 Prepaid items 60,181 56,020 3,173,248 Cash held by fiscal agent 303,126 -- -- Total assets $ 27,486,154 $ 33,616,759 $ 30,268,304 LIABILITIES AND FUND BALANCES: Liabilities: Accounts payable $ 1,290,573 $ 1,360,116 $ 1,843,719 Accrued liabilities 1,560,175 1,923,927 584,679 Due to other funds 30,774 -- -- Other liabilities 37,825 117,566 138,921 Unearned revenue -- 589,618 1,204,831 Total liabilities $2,919,347 $3,991,227 $3,772,150 Fund Equity and other Credits: Fund balances: Nonspendable $ 60,181 $ 56,020 $ 3,173,248 Restricted for debt service 303,126 489,056 128,102 Committed to general governmental programs 6,570,959 7,185,397 9,428,034 Assigned to subsequent years expenditures 12,432,556 11,475,178 11,043,478 Unassigned 5,199,985 10,419,881 2,723,292 Total fund balances $24,566,807 $29,625,532 $26,496,154 Total liabilities and fund balance $ 27,486,154 $ 33,616,759 $ 30,268,304 _______________ Source: City of San Luis Obispo Audited Financial Statements. General Fund Revenues, Expenditures and Changes in Fund Balances The General Fund is the general operating fund of the City and is used to account for all financial resources except those required to be accounted for in another fund. In Fiscal Year 2016-17, the major General Fund revenues included: Taxes and Franchise Fees 84% Charges for Services 14% Subventions and Grants 2% 33 In Fiscal Year 2016-17, the major General Fund expenditures included: Public Safety 46% General Government 20% Leisure, Cultural and Social Services 13% Set forth below is a statement of revenues, expenditures and changes in fund balances for the City’s General Fund for the last three fiscal years. TABLE 3 CITY OF SAN LUIS OBISPO STATEMENT OF GENERAL FUND REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES FISCAL YEAR ENDED JUNE 30 2014-15 2015-16 2016-17 Revenues: Taxes and franchise fees(1) $53,608,226 $56,318,547 $56,767,653 Fines, forfeitures and penalties 184,320 172,353 139,534 Use of money and property 378,644 582,993 160,340 Subventions and grants 1,278,374 1,538,869 1,014,859 Charges for services 9,031,718 9,322,456 9,112,989 Other revenues 134,264 149,220 239,321 Total revenues $64,615,546 $68,084,438 $67,434,696 Expenditures: General Government $10,459,658 $10,977,571 $11,485,833 Public Safety 24,056,077 25,576,604 27,262,887 Transportation 2,969,111 3,317,177 3,780,804 Leisure, Cultural and Social Services 7,250,398 7,428,198 7,712,834 Community Development 7,605,168 8,070,118 8,576,098 Debt service: Principal 84,682 86,778 87,667 Interest 9,559 7,465 6,575 Total expenditures $52,434,653 $55,463,911 $58,912,698 Excess of revenues over (under) expenditures $12,180,893 $12,620,527 $8,521,998 Other financing sources (uses): Transfers in $1,504,842 $2,920,748 $2,043,830 Transfers out (9,938,312) (9,772,930) (13,695,206) Total other financing sources (uses) $(8,433,470) $(6,852,182) $(11,651,376) Net Change in Fund Balance $3,747,423 $5,768,345 $(3,129,378) Fund balance - July 1 $20,317,179 $24,566,807 $29,625,532 Prior Year Restatement(2) 502,205 (709,620) Fund balance - June 30 $24,566,807 $29,625,532 $26,496,154 _______________ (1) For a breakdown of each component of taxes and franchise fees, see the following table. (2) Fiscal Year 2014-15 prior year restatement reflects excess development services revenue that should have been recorded in a prior period; Fiscal Year 2015-16 prior year restatement corrects a missed recording of required transfer to the Capital Outlay fund in the prior year. Source: City of San Luis Obispo Audited Financial Statements. 34 4160-7422-8751 Taxes and Other Revenues Taxes and other sources of revenue received by the City are listed in the table below. Certain general taxes currently imposed by the City are affected by Proposition 218. See “CERTAIN LIMITATIONS ON TAXES AND APPROPRIATIONS – Article XIIIC And Article XIIID of the State Constitution” herein. The following table presents the tax revenues and franchise revenues of the City’s General Fund for the last three fiscal years. TABLE 4 CITY OF SAN LUIS OBISPO GENERAL FUND TAX AND FRANCHISE REVENUES BY SOURCE 2014-15 2015-16 2016-17 2016-17 % of Total Sales and use tax- general $ 15,272,683 $ 17,498,218 $ 16,737,005 29.5% Sales and use tax- Local Revenue Measure 7,136,297 7,178,159 7,331,660 12.9 Sales tax- Prop 172 409,590 405,066 405,512 0.70 Property tax 9,631,890 10,186,858 10,756,477 18.9 Transient occupancy tax 6,805,742 7,127,756 7,381,989 13.0 Utility users tax 5,211,207 5,413,720 5,539,407 9.8 Property tax in lieu of VLF 3,849,341 4,113,244 4,353,912 7.7 Franchise fees 2,790,077 1,537,922 1,557,128 2.7 Business tax 2,203,208 2,491,516 2,372,249 4.2 Real property transfer tax 298,191 366,088 332,314 0.6 Total Tax and Franchise Revenues $ 53,608,226 $ 56,318,547 $ 56,767,653 100% _______________ Numbers may not add due to rounding. Source: City of San Luis Obispo. Sales and Use Taxes Sales and use taxes represent the largest source of tax revenue to the City. This section describes the current system for levying, collecting and distributing sales and use tax revenues in the State. See “CERTAIN LIMITATIONS ON TAXES AND APPROPRIATIONS” herein for a description of certain limitations on the collection of taxes. State Sales and Use Tax Law. The City collects 1.0% of taxable sales in the City (minus certain administrative costs imposed by the CDTFA, as defined below) pursuant to the Bradley-Burns Uniform Local Sales and Use Tax (the “Sales and Use Tax Law”). Local Revenue Measure. In November 2006, the qualified voters of the City passed Measure Y with 64.77% voter approval. Effective April 1, 2007, this 1/2 percent sales tax was in effect for eight years, providing the City’s General Fund with additional revenues to support essential services and capital infrastructure. In November 2014, the qualified voters of the City passed Measure G with 70.32% voter approval, extending this local tax measure for another 8 years as a general tax. During Fiscal Year 2016-17, $7.3 million in Local Revenue Measure revenues were available for use, including carryovers from prior years. This general purpose revenue measure generated approximately $7.2 million in Fiscal Year 2015-16 and approximately $7.3 million in 2016-17. 35 4160-7422-8751 Sales Tax Rates. Currently, taxable transactions in the City are subject to the following sales and use tax, of which the City’s share is only a portion. The State collects and administers the tax, and makes distributions on taxes collected within the City, as follows. TABLE 5 CITY OF SAN LUIS OBISPO SALES TAX RATES AS OF APRIL 1, 2017 State (General Fund) 3.6875% State (Fiscal Recovery Fund) 0.25 State (Local Revenue Fund) 1.5625 State (Local Public Safety Fund) 0.50 Local (City and County Operations) 1.00 Local (County transportation funds) 0.25 Local (Local Revenue Measure) 0.50 Total Sales Tax Rate 7.75% _______________ Source: State Board of Equalization. Application of Sales Tax. Sales and use taxes are complementary taxes; when one applies, the other does not. In general, the statewide sales tax applies to gross receipts of retailers from the sale of tangible personal property in the State. The use tax is imposed on the purchase, for storage, use or other consumption in the State of tangible personal property from any retailer. The use tax generally applies to purchases of personal property from a retailer outside the State where the use will occur within the State. The Sales Tax is imposed upon the same transactions and items as the statewide sales tax and the statewide use tax. Certain transactions are exempt from the State sales tax, including sales of the following products: • food products for home consumption; • prescription medicine; • certain newspapers and periodicals; • animal life or feed for animal life, seeds, and plants; • wheelchairs, crutches, cane and walkers; and • gas, electricity, water and steam when delivered to consumers through mains, lines or pipes. This is not an exhaustive list of exempt transactions. A comprehensive list can be found in the State Board of Equalization’s February 2017 publication entitled “Sales and Use Taxes: Exemptions and Exclusions,” which can be found on the State Board of Equalization’s website at http://www.boe.ca.gov/. Sales Tax Collection Procedures. Collection of the sales and use tax is administered by the California Department of Tax and Fee Administration (“CDTFA” formerly the State Board of Equalization). According to the CDTFA, it distributes quarterly tax revenues to cities, counties and special districts using the following method: Using the prior year’s like quarterly tax allocation as a starting point, the CDTFA first eliminates nonrecurring transactions such as fund transfers, audit payments and refunds, and then adjusts for growth, in order to establish the estimated base amount. The CDTFA disburses 90% to each local jurisdiction in three monthly installments (advances) prior to the final computation of the quarter’s actual receipts. Ten 36 4160-7422-8751 percent is withheld as a reserve against unexpected occurrences that can affect tax collections (such as earthquakes, fire or other natural disaster) or distributions of revenue such as unusually large refunds or negative fund transfers. The first and second advances each represent 30% of the 90% distribution, while the third advance represents 40%. One advance payment is made each month, and the quarterly reconciliation payment (clean-up) is distributed in conjunction with the first advance for the subsequent quarter. Statements showing total collections, administrative costs, prior advances and the current advance are provided with each quarterly clean-up payment. Under the Sales and Use Tax Law, all sales and use taxes collected by the CDTFA under a contract with any city, city and county, redevelopment agency, or county are required to be transmitted by the CDTFA to such city, city and county, redevelopment agency, or county periodically as promptly as feasible. These transmittals are required to be made at least twice in each calendar quarter. Under its procedures, the CDTFA projects receipts of the sales and use tax on a quarterly basis and remits an advance of the receipts of the sales and use tax to the City on a monthly basis. The amount of each monthly advance is based upon the CDTFA’s quarterly projection. During the last month of each quarter, the CDTFA adjusts the amount remitted to reflect the actual receipts of the sales and use tax for the previous quarter. The CDTFA receives an administrative fee based on the cost of services provided by the CDTFA to the City in administering the City’s sales tax, which is deducted from revenue generated by the sales and use tax before it is distributed to the City. History of Taxable Transactions. The following table presents a summary of historic taxable sales reported within the City for calendar year 2011 through calendar year 2015, as compiled by the State Board of Equalization. Figures are not yet available for 2016 and 2017. 37 4160-7422-8751 TABLE 6 CITY OF SAN LUIS OBISPO TAXABLE RETAIL SALES (DOLLARS IN THOUSANDS) 2012 2013 2014 2015 2016(1) Retail and Food Services Motor Vehicle and Parts Dealers $ 226,483 $ 265,732 $ 280,691 $ 292,390 $ 290,520 Home Furnishings/Appliances 65,835 66,335 70,932 75,209 72,214 Bldg. Materials/Garden Equip. 88,910 101,278 105,193 109,427 112,412 Food and Beverage Stores 59,262 59,613 60,112 61,475 61,550 Gasoline Stations 107,593 102,774 101,518 88,119 78,039 Clothing and Accessories Stores 85,042 87,897 86,460 91,236 89,652 Gen. Merchandise Stores 175,233 177,324 182,829 147,340 145,341 Food Services, Drinking Places 146,733 155,497 166,137 180,747 186,795 Other Retail Stores 131,388 129,910 133,284 138,261 145,878 Retail Store Totals 1,086,480 1,146,360 1,187,157 1,184,204 1,182,401 All Other Outlets 192,049 198,256 206,948 228,768 247,156 TOTAL ALL OUTLETS $ 1,278,529 $ 1,344,616 $ 1,394,105 $ 1,412,972 $ 1,429,557 _______________ (1) Preliminary. Source: State Board of Equalization. Additional information regarding taxable retail sales is set forth in Appendix B. Property Taxes General. Property taxes represent the second largest source of tax revenue to the City. This section describes property tax levy and collection procedures and certain information regarding historical assessed values and major property tax payers in the City. See “CERTAIN LIMITATIONS ON TAXES AND APPROPRIATIONS” herein. Property taxes have historically been the primary revenue source affected by voter initiatives and legislative actions. With approval of Proposition 13, property tax revenues were first curtailed almost 30 years ago when they were reduced by two-thirds and thereafter limited to 2% annual increases or the CPI, whichever was less. ERAF Shift. Certain property taxes have been shifted from local government agencies to schools by the State Legislature for deposit in the Education Revenue Augmentation Fund (“ERAF”), a shift that periodically has resulted in diversion of City property taxes since Fiscal Year 1992-93. See “CERTAIN LIMITATIONS ON TAXES AND APPROPRIATIONS” herein. Levy and Collection. Property taxes are levied for each fiscal year on taxable real and personal property as of the preceding January 1. For assessment and collection purposes, property is classified either as “secured” or “unsecured” and is listed accordingly on separate parts of the assessment roll. The “secured roll” is that part of the assessment roll containing State-assessed public utilities property and real property the taxes on which are a lien sufficient, in the opinion of the County Assessor, to secure payment of the taxes. Other property is assessed on the “unsecured roll.” Property taxes on the secured roll are due in two installments, on November 1 and February 1 of each fiscal year, and become delinquent on December 10 and April 10, respectively. A penalty of 10% 38 4160-7422-8751 attaches immediately to all delinquent payments. Property on the secured roll with respect to which taxes are delinquent become tax defaulted on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of a penalty of 1% per month to the time of redemption, plus costs and a redemption fee. If taxes are unpaid for a period of five years or more, the property is deeded to the State and may be sold at public auction. Property taxes on the unsecured roll are due as of the January 1 lien dates and become delinquent on August 31. A 10% penalty attaches to delinquent unsecured taxes. If unsecured taxes are unpaid at 5:00 p.m. on October 31, an additional penalty of 1% attaches to them on the first day of each month until paid. The County has four ways of collecting delinquent unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a judgment in the office of the County Clerk specifying certain facts in order to obtain a lien on certain property of the taxpayer; (3) filing a certificate of delinquency for record in the County Recorder’s office in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests belonging or assessed to the assessee. Beginning in 1978-79, Proposition 13 and its implementing legislation shifted the function of property tax allocation to the counties, except for levies to support prior voted debt, and prescribed how levies on county-wide property values are to be shared with local taxing entities within each county. Teeter Plan. San Luis Obispo County has implemented the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the “Teeter Plan”), pursuant to Sections 4701 through 4717 of the State Revenue and Taxation Code, which applies to taxes levied for the City. Under the Teeter Plan, the County guarantees that the City will receive 100% of the taxes levied for it. Any delinquencies are borne by the County, which in return collects and retains all penalties and interest which accrue on the delinquent taxes. Consequently, the City’s tax receipts do not reflect any delinquencies. The Teeter Plan, once adopted by a county, remains in effect unless the county board of supervisors orders its discontinuance or unless, prior to the commencement of any fiscal year, the board of supervisors receives a petition for its discontinuance from two-thirds of the participating revenue districts in the county. A board of supervisors may, after holding a public hearing on the matter, discontinue the procedures under the Teeter Plan with respect to any tax levying agency in the county when delinquencies for taxes levied by that agency exceed 3%. Assessed Valuation. 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, non-profit hospitals, and charitable institutions. See “CERTAIN LIMITATIONS ON TAXES AND APPROPRIATIONS” herein. Future assessed valuation growth allowed under Article XIIIA (new construction, certain changes of ownership, 2% inflation) will be allocated on the basis of “situs” among the jurisdictions that serve the tax rate area within which the growth occurs. Local agencies and schools will share the growth of “base” revenues from the tax rate area. Each year’s growth allocation becomes part of each agency’s allocation in the following year. Assessed Valuation History. The summary below presents a 10-year history of the assessed value of property within the City. 39 4160-7422-8751 TABLE 7 CITY OF SAN LUIS OBISPO ASSESSED VALUATION FISCAL YEARS 2008-09 THROUGH 2017-18 Fiscal Year Local Secured Utility Unsecured Total 2008-09 $ 5,828,492,800 $ 5,582,800 $ 274,186,700 $ 6,108,262,300 2009-10 6,008,936,600 4,904,100 277,718,500 6,291,559,200 2010-11 5,985,294,700 5,505,000 279,434,500 6,270,234,200 2011-12 5,894,189,700 6,842,300 275,800,100 6,176,832,100 2012-13 5,964,248,670 5,382,272 279,327,968 6,248,958,910 2013-14 6,153,784,758 5,300,173 295,750,397 6,454,835,328 2014-15 6,512,370,260 5,032,204 297,325,321 6,814,727,785 2015-16 6,965,233,454 4,883,115 305,427,553 7,275,544,122 2016-17 7,393,890,993 5,269,573 303,122,262 7,702,282,828 2017-18 7,867,781,716 4,639,188 331,008,465 8,203,159,369 _______________ Source: 2008-09 through 2016-17: City of San Luis Obispo Audited Financial Statements; 2017-18: California Municipal Statistics, Inc. Major Property Taxpayers. The following table shows the top 10 local secured property taxpayers for the current fiscal year. TABLE 8 CITY OF SAN LUIS OBISPO TOP TEN LOCAL SECURED TAXPAYERS FISCAL YEAR 2017-18 Property Owner Primary Land Use 2017-18 Assessed Valuation % of Total(1) 1. Jamestown Premier SLO Commercial –Retail $ 111,017,870 1.41% 2. CAP VIII-Mustang Village LLC Apartments 90,677,099 1.15 3. Sierra Vista Hospital Inc. Hospital 79,938,176 1.02 4. SLO Promenade DE LLC Shopping Center 66,134,672 0.84 5. Charles Pasquini Jr. Trust Shopping Center 63,237,741 0.80 6. Irish Hills Plaza West II LLC Shopping Center 37,623,147 0.48 7. Costco Wholesale Corp. Shopping Center 34,853,109 0.44 8. BRE Atlas Property Owner LLC Hotel 31,991,984 0.41 9. Marigold Center LLC Shopping Center 30,987,149 0.39 10. Target Corporation Commercial - Retail 30,153,525 0.38 $ 576,614,472 7.32% _______________ (1) 2017-18 Local Secured Assessed Valuation: $7,867,781,716. Source: California Municipal Statistics, Inc. Other Taxes and Revenues Transient Occupancy Tax. Transient occupancy taxes generated approximately $7,381,989 of the City’s General Fund receipts in Fiscal Year 2016-17 based on audited results (10.9% of 2016-17 General Fund revenues). The City’s transient occupancy tax is imposed on overnight visitors who occupy a room or rooms in a hotel, inn, motel, bed & breakfast, or other lodging facility within the City’s limits for stays of less than 30 consecutive days. 40 4160-7422-8751 The amount of the tax is 10% of the total rental amount and was increased from 9% to 10% on October 1, 1993. This increase was not approved by majority vote of the electorate, but is not governed by Proposition 62 because the City is a charter city. See “CERTAIN LIMITATIONS ON TAXES AND APPROPRIATIONS – Proposition 62” herein. The tax does not have a sunset provision. Utility Users Tax. The City levies a utility users tax which accounted for $5,539,407 or approximately 8.2% of the City’s General Fund receipts in Fiscal Year 2016-17. Adopted by the [voters/City Council] in 1972, the City levies a 5% tax on all residences and businesses using the following utilities: telephone, electricity, natural gas, water and cable television. Although the tax is collected for the City by the utility companies, it is a tax on the user, not the utility. [Sunset date, if applicable.] Vehicle License Fee. The State imposes the vehicle license fee, which is the fee paid annually in lieu of personal property taxes on a vehicle, and distributed to cities and counties. The vehicle license fee is based on vehicle value (originally in the amount of 2% of the market value of the vehicle) and declines as the vehicle ages. Since 1998 the fee has been incrementally reduced from 2% of a vehicle’s current estimated value, but any such reductions were “backfilled” to local governments by the State from other sources. However, under the 2004-05 State Budget, the VLF was permanently reduced to 0.65% of the estimated value, and backfill by the State to local governments was eliminated, and instead will be met by an increased property tax apportionment to cities and counties. This amounts to approximately $4.4 million annually as a revenue neutral swap for the City. TABLE 9 CITY OF SAN LUIS OBISPO STATE OF CALIFORNIA MOTOR VEHICLE IN-LIEU PAYMENTS FISCAL YEARS 2012-13 THROUGH 2016-17 Source 2012-13 2013-14 2014-15 2015-16 2016-17 Motor Vehicle In-Lieu $ 3,533,200 $ 3,645,692 $ 3,849,341 $ 4,113,244 $ 4,353,912 _______________ Source: City of San Luis Obispo. Outstanding General Fund Debt and Other Obligations For additional information regarding the City’s outstanding General Fund debt and lease obligations, see Appendix A attached hereto. Capital Leases. In July 2010, the City entered into an equipment lease-purchase agreement with the City of San Luis Obispo Capital Improvement Board (the “Board”) to provide financing for a new 100-foot aerial ladder fire apparatus whereby the City would lease the fire truck from the Board in exchange for lease payments equal to the semiannual lease amounts due to Chase Equipment Finance, Inc. The lease payments are based on an interest rate of 2.99% and a principal amount of $1,080,000 for a term of 10 years. The lease purchase agreement ends July 2020. In November 2013, the City entered into a lease purchase agreement with Oshkosh Capital to provide financing of a new fire engine. The amount financed over five years was $548,350 and the interest rate is 2.108%. The lease purchase agreement ends November 2018. In August 2015, the City entered into a lease purchase agreement with Bank of the West to provide financing to purchase mobile data computers for police and fire department vehicles. The amount financed over four years was $688,500 and the interest rate is 1.55%. The lease purchase agreement ends August 2019. 41 4160-7422-8751 In April 2016, the City entered into a lease purchase agreement with PNC Equipment Finance, LLC to provide financing to purchase a fire truck and street sweeper. The amount financed over four years was $1,141,468 and the interest rate is 1.69%. The lease purchase agreement ends April 2021. In December 2017, the City entered into a lease purchase agreement with ZB, N.A. to provide financing to purchase a street sweeper and dump truck. The amount financed over five years was $600,000 and the interest rate is 1.94%. The lease purchase agreement ends December 2022. Energy Sources Conservation State Loan. In 2014, the City obtained a note in the amount of $850,775 for purchase of streetlights. The note bears an interest rate of 1% due in semi-annual installments on December 22 and June 22 through December 22, 2023 in the amount of $92,242. Long-Term Obligations. The City is currently obligated to make lease payments supporting debt service on the following outstanding lease revenue bonds previously issued by the Board. (The table below does not include the Bonds currently being issued, which are payable in whole or in part from lease payments secured by General Fund revenue sources.) Bond Caption Issuance Original Principal Amount Outstanding Principal Amount (as of 1/01/2018) Final Maturity 2005 Refunding Lease Revenue Bonds(1) May 10, 2005 $6,550,000 $3,510,000 June 1, 2026 Capital Improvement Board 2006 Lease Revenue Bonds(1) April 26, 2006 $16,160,000 $12,455,000 June 1, 2036 Capital Improvement Board 2009 Lease Revenue Bonds(1) March 26, 2009 $10,705,000 $6,280,600 June 1, 2039 Capital Improvement Board 2012 Refunding Lease Revenue Bonds June 7, 2012 $5,050,000 $3,725,000 Dec. 1, 2029 San Luis Obispo Public Financing Authority Lease Revenue Bonds (Los Osos Valley Road Interchange Project), Series 2014 October 23, 2014 $7,580,000 $7,130,000 Nov. 1, 2044 _______________ (1) To be refunded by the Bonds. Direct and Overlapping Bonded Debt Set forth below is a direct and overlapping debt report (the “Debt Report”) prepared by California Municipal Statistics, Inc. and dated [___________]. The Debt Report is included for general information purposes only. The City has not reviewed the Debt Report for completeness or accuracy and makes no representation in connection therewith. The Debt Report generally includes long-term obligations sold in the public credit markets by public agencies whose boundaries overlap the boundaries of the City in whole or in part. Such long-term obligations generally are not payable from revenues of the City (except as indicated) nor are they necessarily obligations secured by land within the City. In many cases, long-term obligations issued by a public agency are payable only from the general fund or other revenues of such public agency. The contents of the Debt Report are as follows: (1) the first column indicates the public agencies which have outstanding debt as of the date of the Debt Report and whose territory overlaps the City; (2) the second column shows the percentage of the assessed valuation of the overlapping public agency identified in column 1 which is represented by property located within the City; and (3) the third column is an apportionment of the dollar amount of each public agency’s outstanding debt (which amount is not 42 4160-7422-8751 shown in the table) to property in the City, as determined by multiplying the total outstanding debt of each agency by the percentage of the City’s assessed valuation represented in column 2. TABLE 10 CITY OF SAN LUIS OBISPO STATEMENT OF DIRECT AND OVERLAPPING BONDED DEBT 2017-18 Assessed Valuation: $8,203,159,369 OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 2/1/18 San Luis Obispo Community College District 16.107% $9,571,585 San Luis Coastal Unified School District 50.348 45,859,476 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $55,431,061 DIRECT AND OVERLAPPING GENERAL FUND DEBT: San Luis Obispo County General Fund Obligations 16.170% $3,929,310 San Luis Obispo County Pension Obligation Bonds 16.170 14,029,803 San Luis Community College District Certificates of Participation 16.107 1,041,318 City of San Luis Obispo Lease Revenue Bonds 100.000 33,100,000(1) TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT $52,100,431 Less: City of San Luis Obispo obligations supported by enterprise revenues 7,686,540 TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT $44,413,891 GROSS COMBINED TOTAL DEBT $107,531,492(2) NET COMBINED TOTAL DEBT $99,844,952 (1) Excludes the Bonds to be sold. (2) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Ratios to 2017-18 Assessed Valuation: Overlapping Tax and Assessment Debt ............................................... 0.68% Gross Combined Direct Debt ($33,100,000) .................................... 0.40% Net Combined Direct Debt ($25,413,460) ........................................ 0.31% Gross Combined Total Debt ................................................................ 1.31% Net Combined Total Debt .................................................................... 1.22% _____________________ Source: California Municipal Statistics, Inc. Employee Relations The City has 391.8 authorized regular positions for Fiscal Year 2017-18. City employees are represented by four labor organizations, the principal of which is San Luis Obispo City Employees Association, which represents approximately 44% of all City employees in a variety of classifications. There have been no work stoppages by City employees. Approximately 77% of all regular City employees are covered under negotiated agreements, summarized and with the expiration dates set forth below: Bargaining Units Number of Employees Agreement Expiration Date San Luis Obispo City Employees Association June 30, 2018 Police Officers Association June 30, 2018 Police Staff Officers Association June 30, 2019 Firefighters December 31, 2017 43 4160-7422-8751 Management and Confidential employees of the City are not represented and make up the remaining 23% of the regular City employees. The Unrepresented Management agreement expires June 30, 2018 and the Unrepresented Confidential agreement expired December 31, 2017. Negotiations with Firefighters and Unrepresented Confidential for new agreements are ongoing. Insurance A summary of insurance coverage for the City, effective as of June 30, 2017, is provided below. General Liability and Workers’ Compensation. The City is a member of the California Joint Powers Insurance Authority (“CJPIA”), which provides joint protection programs and group purchased insurance for public entities covering liability, errors and omission losses, auto liability, employment practices liability, crime, pollution, workers’ compensation injuries and coverage for city-owned property. The City has a retained limit of $500,000 per occurrence for liability and no retained limit for workers’ compensation. Liabilities of the City are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The result of the process to estimate the claims liability is not an exact amount as it depends on many complex factors, such as inflation, changes in legal doctrines and damage awards. Accordingly, claims are reevaluated periodically to consider the effects of economic and social factors. The estimate of the claims liability also includes amounts for incremental claim adjustment expenses related to specific claims and other claim adjustment expenses regardless of whether or not they are attributable to specific claims. Estimated recoveries, for example from salvage or subrogation, are another component of the claims liability estimate. During the past three fiscal years, none of the protection programs experienced settlements or judgments that exceeded pooled or insured coverage. There were also no significant reductions in pooled or insured coverage in 2016-17. CJPIA covers workers’ compensation claims up to a pooled limit of $2 million per occurrence and provides excess coverage to statutory limits with a group purchased commercial insurance policy. The City pays an annual contribution to CJPIA and may share in any member refunds in the event that pooled funding exceeds the cost of pooled claims and claim-related expenses, or the City may be required to pay additional contributions based upon CJPIA’s operating results. Financial statements of CJPIA may be obtained from its administrative office located at 8081 Moody Street, La Palma, California 90623, or by calling (562) 467-8700. Additional claims and lawsuits have been filed against the City in the normal course of business. It is reasonably possible that the City may be liable for claims not to exceed $500,000. In the opinion of management, the resolution of these matters will not have a material adverse effect on the financial condition of the City. See Appendix A – “AUDITED FINANCIAL STATEMENT FOR FISCAL YEAR ENDED JUNE 30, 2017 – Note 10: Risk Management” attached hereto. Employee Retirement System Retirement Plan. General. The City contributes to CalPERS under an agent-multiple employer public employee retirement plan (for miscellaneous members, the “Miscellaneous Plan”) and cost-sharing employer public employee retirement plans (for safety members, the “Safety Plans”) that acts as a common investment and 44 4160-7422-8751 administrative agent for participating entities within the State of California. Benefit provision and all other requirements are established by State statute and City ordinance. Copies of CalPERS’ annual financial report are available from their Executive Office, 400 P Street, Sacramento, California 95814. CalPERS is a separate and distinct legal entity from the City and serves as an independent fiduciary in managing the City’s retirement plan assets. Eligibility. All full-time and part-time benefited City employees are eligible to participate in the retirement program. Benefits vest after five years of service. In addition to basic retirement benefits, the retirement program also provides death and survivor’s benefits. These benefit provisions and all other requirements are established by State statute and City ordinance. About CalPERS. Along with over 3,000 other cities and local agencies, the City contracts with the California Public Employees Retirement System (CalPERS) for its “defined benefit” retirement plan, which covers all of its regular employees (except in rare circumstances, temporary employees are not covered by the CalPERS plan). Due to changes made by the City and through legislation, there are several CalPERS retirement benefit programs. The City enacted a 2nd Tier benefit plan program which provides a lower level of benefits than the original plan. This plan is available to eligible new employees who are hired after August 30, 2012 (for sworn fire personnel plan members) and after December 6, 2012 for miscellaneous and sworn police safety plan members. A 3rd Tier program was created following the enactment of the Public Employee Pension Reform Act (AB 340) in January 2013. Under this program, employees who are considered new to the CalPERS retirement program are enrolled as required by the new law. The 3rd Tier program provides the lowest level of benefit of the three plans that are now in effect. The following chart summarizes these benefits which reflect the benefit earned each year, as a percentage of the employees qualifying salary and the normal retirement age for the program: 1st Tier 2nd Tier 3rd Tier Miscellaneous 2.7% @ 55 2% @ 60 2% @ 62 Fire Sworn 3% @ 50 3% @ 55 2.7% @ 57 Police Sworn 3% @ 50 2% @ 50 2.7% @ 57 Contribution Rates. All employees contribute the full amount of the required member contribution. For safety employees, the required contribution is either 8%, 9% or 12.5% of annual covered salary depending on the plan they participate in. For miscellaneous plan members the required contribution is either 6.25%, 7% or 8% of annual covered salary depending upon which plan they participate in. The City’s required contribution to CalPERS is shown below for Fiscal Years 2017-18 and 2018-19. As of the Fiscal Year 2017-18 contribution, CalPERS no longer determines the employer contribution toward the Unfunded Liability as a percentage of payroll, but as a flat dollar contribution. The employer contribution toward the Normal Cost is still provided as a percentage of payroll: 45 4160-7422-8751 Fiscal Year 2017-18 Employer Normal Cost Unfunded Liability Payment Miscellaneous Plan* 10.387% $4,341,995 Safety Plan Tier 1 21.418 3,791,497 Police Safety Tier 2 16,498 75 Fire Safety Tier 2 18.487 0 Safety Tier 3 12.729 360 *CalPERS provides a blended rate for all 3 tiers. Fiscal Year 2018-19 Employer Normal Cost Unfunded Liability Payment Miscellaneous Plan* 10.497% $4,919,847 Safety Plan Tier 1 22.346 4,322,392 Police Safety Tier 2 17.334 767 Fire Safety Tier 2 19,353 1,317 Safety Tier 3 12.965 1,156 *CalPERS provides a blended rate for all 3 tiers. Annual Pension Cost and Required Contribution. For the Fiscal Year ended June 30, 2017, the City’s annual pension cost for the employer’s contribution to CalPERS was $5,584,518 for miscellaneous employees and $4,650,871, for safety employees. The required employer contribution was determined as part of the actuarial valuation dated June 30, 2016 using the entry age normal actuarial cost method. PERS reports that the lag time is necessary due to the amount of time needed for them to extract and test the membership and financial data, and due to the need to provide public agencies with their employer contribution rates well in advance of the start of the fiscal year. The actuarial assumptions included: (i) 7.375% investment rate of return (net of investment and administrative expenses); (ii) projected salary increases that vary by duration of service ranging from 3.1% to 20% for both miscellaneous and safety members; (iii) an inflation factor of 2.75% compounded annually, and (iv) 2.0% annual cost-of-living adjustments for miscellaneous and safety members. The unfunded liability is amortized as a “level percent of pay.” Commencing with the June 30, 2013 valuation, all new gains or losses are amortized over a fixed 30-year period with a 5-year ramp up at the beginning and a 5-year ramp down at the end of the amortization period. On April 17, 2013 the CalPERS Board of Administration approved a recommendation to change the CalPERS amortization and rate smoothing policies. Beginning with the June 30, 2013 valuations that set the 2015-16 rates, CalPERS no longer uses an actuarial value of assets and employs an amortization and smoothing policy that pays for all gains and losses over a fixed 30-year period with the increases or decreases in the rate spread directly over a 5-year period. On February 18, 2014 CalPERS’ Retirement and Health Benefit Program Committee approved additional changes in plan assumptions that reflect the impacts to the retirement program costs from the increased rate of service retirements and a decrease in retiree mortality. The resulting rate increases began to take effect in 2016-17. CalPERS also initiated a change to their pooled retirement plan program 46 4160-7422-8751 by combining all safety plan pools into a single pool to increase the benefits of pooling. CalPERS determined that agencies participating in the pools will no longer pay their contribution to offset the unfunded liability based on a percentage of payroll but rather by paying a fixed amount specified in the valuation reports, beginning with the June 30, 2013, valuation report. An additional change was made to the methodology used to allocate gains and losses so that an agency’s unfunded liability is the basis for the allocation instead of their percent of total pool payroll. The effect of these changes on employer contributions took effect in 2015-16. On December 21, 2016, the CalPERS Board of Administration lowered the discount rate from 7.50% to 7.00% using a three year phase-in beginning with the June 30, 2016 actuarial valuations. The minimum employer contributions for Fiscal Year 2018-19 determined in that valuation were calculated using a discount rate of 7.375%. The valuation assumes that employer contributions for Fiscal Years 2019-20 and 2020-21 will be calculated using a discount rate of 7.25% and 7.00%, respectively, as adopted by CalPERS. Required unfunded liability payments are expected to increase through Fiscal Year 2031-32 according to amortization schedules. This lowered discount rate is expected to result in an approximate increase of $8 million in pension costs in total between 2017-18 and 2024-25 based on preliminary cost estimates. To address these increases, the City made prepayments against the safety side fund liability in the total amount of $2.75 million since May 2014. This had the effect of lowering the outstanding safety side fund liability and the City’s required annual contribution for the first tier safety plan members. However, given the rapid increase in required payments, the City Council is implementing a Fiscal Health Response Plan to lower overall City operating expenditure by $8.9 million over a period of three years, beginning in Fiscal Year [201-__-__] and will set funding aside in a trust fund to work toward a structurally balanced budget and provide funds to pay for future increases in required contributions. Three-Year Trend Information. The following table provides three-year trend information on the City’s annual pension cost and the funded status of the Tier 1 plans. 47 4160-7422-8751 TABLE 11 CITY OF SAN LUIS OBISPO Three-Year Trend Information for CALPERS Actuarial Valuation Date Accrued Liability (AL) Market Value of Assets (MVA)(1) Unfunded Liability(2) Funded Ratio (MVA/AL) Annual Covered Payroll Safety Plan Tier 1 6/30/14 $165,802,305 $113,883,710 $51,918,595 68.7% $9,267,609 6/30/15 170,941,856 111,864,348 59,077,508 65.4 8,626,630 6/30/16 178,704,179 109,934,016 68,770,163 61.5 8,261,385 Police Safety Tier 2 6/30/14 70,238 76,850 (6,612) 109.4 470,009 6/30/15 192,395 188,157 4,238 97.8 627,619 6/30/16 253,248 225,739 27,509 89.1 642,968 Fire Safety Tier 2 6/30/14 136,690 161,457 (24,767) 118.1 451,475 6/30/15 284,351 315,550 (31,199) 111.0 656,504 6/30/16 490,130 481,064 9,066 98.2 666,730 Safety Tier 3 Plan 6/30/14 48,795 50,866 (2,071) 104.2 344,755 6/30/15 124,316 116,563 7,753 93.8 422,376 6/30/16 255,828 225,866 29,962 88.3 734,196 Miscellaneous Plan 6/30/14 178,138,303 117,762,482 60,375,821 66.1 19,194,172 6/30/15 185,019,896 118,042,660 66,977,236 63.8 19,902,590 6/30/16 196,412,994 116,863,088 79,549,906 59.5 21,205,671 CalPERS PLAN FUNDING LEVELS LAST THREE YEARS (DOLLARS IN THOUSANDS) Actuarial Valuation Date Accrued Liabilities (AL) Market Value of Assets (MVA) Unfunded Accrued Liabilities (UAL) Funded Ratio (MVA/AL) Annual Covered Payroll UAL as a % of Payroll CalPERS Safety Risk Pool(3) 6/30/14 $17,648,059 $13,948,832 $3,699,227 79.0% $1,276,291 289.8% 6/30/15 18,467,887 13,992,020 4,475,867 75.8 1,316,113 340.1 6/30/16 19,698,756 13,911,092 5,787,664 70.6 1,372,492 421.7 CalPERS Miscellaneous Risk Pool 6/30/14 13,137,020 10,686,755 2,450,265 81.3 1,982,241 123.6 6/30/15 13,889,939 10,919,135 2,970,804 78.6 2,055,683 144.5 6/30/16 14,775,288 10,897,708 3,877,580 73.8 2,153,643 180.0 _______________ (1) For each of the Safety Plans, represents the Share of Pool’s Market Value of Assets. (2) For each of the Safety Plans, represents the Plan’s share of Unfunded Liability. (3) Information presented represents the entire PERS Safety 3% at 50 risk pool, not City-specific plan. Source: CalPERS actuarial valuation reports as of June 30, 2016 for the respective plans and risk pools. Net Pension Liability. The City recognizes a net pension liability for the Miscellaneous Plan, measured as the total pension liability, less the pension plan’s fiduciary net position. The net pension 48 4160-7422-8751 liability was measured as of June 30, 2016, using an actuarial valuation as of June 30, 2015 rolled forward to June 30, 2016 using standard update procedures. The changes in net pension liability for the Miscellaneous Plan is provided below: TABLE 12 CITY OF SAN LUIS OBISPO Changes in Net Pension Liability – Miscellaneous Plan Total Pension Liability Plan Fiduciary Net Position Net Pension Liability/(Asset) Balance at June 30, 2015 $183,043,680 $118,212,543 $64,831,137 Changes during the year: Service Cost 3,580,882 3,580,882 Interest on total pension liability 13,688,523 13,688,523 Differences between expected and actual experience (1,160,933) (1,160,933) Contribution - employer 6,122,173 6,122,173 Contribution - employee 1,666,606 1,666,606 Net investment income 677,557 677,557 Benefit payments, including refunds of employee contributions (9,476,508) (9,476,508) -- Administrative changes (72,028) 72,028 Net Changes 6,631,964 (1,082,200) 7,714,164 Balance at June 30, 2016 $189,675,644 $117,130,343 $72,545,301 Source: City of San Luis Obispo Audited Financial Statements. The City recognizes a net pension liability for each of the Safety Plans, measured as a proportionate share of the net pension liability of the CalPERS Safety Risk Pool. The net pension liability of each of the Safety Plans was measured as of June 30, 2016, and the total pension liability for each Safety Plan used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2015 rolled forward to June 30, 2016 using standard update procedures. The City’s proportion of the net pension liability was based on a projection of the City’s long-term share of contributions to the Safety Plans relative to the projected contributions of all participating employers in the CalPERS Safety Risk Pool, actuarially determined. The City’s proportionate share of the net pension liability for the Safety Plans as of June 30, 2017 was $64,792,760. The City’s percentage share of the net pension liability for the Safety Plans as of June 30, 2015 and June 30, 2016 were as follows: TABLE 13 CITY OF SAN LUIS OBISPO Changes in Net Pension Liability – Safety Plan Proportionate Share Percentage share at 6/30/15 1.365393% Percentage share at 6/30/16 1.251014% Change – Increase/(Decrease) -0.11438% Source: City of San Luis Obispo Audited Financial Statements. Other Post-Employment Benefits. The City’s primary Other Post-Employment Benefits (“OPEB”) are for retiree health benefits under the City’s election to participate in the CalPERS Health Benefit 49 4160-7422-8751 Program. The City entered the CalPERS medical insurance program in 1993 under the Public Employees’ Medical and Hospital Care Act. The required employer contribution is $128.00 per month in 2017 and $133.00 per month in 2018. Retirees pay the differential monthly amount of the premium, which varies depending on the health benefits they select. Additionally, the City has established certain post-retirement health care benefits available to executive management employees appointed prior to August 2000 (together with the City’s participation in the CalPERS Health Benefit Program, the “Plan”). Two retirees remain eligible for this benefit. The City pays one-half of the retiree health insurance premiums for these employees. For one of these retirees, this benefit terminates at age 65. One retiree will receive this benefit until death. During the Fiscal Year ended June 30, 2009, the City entered into an agreement with California Employers’ Retiree Benefit Trust (“CERBT”) to pre-fund the City’s OPEB liability. The contribution requirement of the plan members and the City are established and may be amended by the City. The City prefunds the plan through CERBT by contributing at least 100% of the annual required contribution including fully funding implied subsidy (the “ARC”). The ARC is an amount actuarially determined in accordance with the parameters of GASB standards. The City’s ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize the unfunded liability over a period of 30 years. For Fiscal Year 2016-17, the City contributed $1,432,000 to the Plan, which fully funded the annual required contribution. The City paid a total of $253,500 to the CalPERS Health Benefit Program and retirees during the year and $604,500 to the CERBT. In addition, the City contributed an additional $574,000 to prefund benefits and pay down a portion of the implied subsidy of the Plan. CERBT is a tax-qualified irrevocable trust organized under Internal Revenue Code Section 115 and established to pre-fund retiree healthcare benefits. CERBT issues a publicly available financial report including GASB disclosure information in aggregate with other CERBT participating employers. That report may be obtained by contacting CalPERS, 400 P Street, Sacramento, CA 95814. For the Fiscal Years ended June 30, 2015, 2016 and 2017, the City’s annual OPEB costs (expense) of $588,000, $607,000 and $1,187,000, respectively, were equal to the annual required contribution. Trend and funding status information is as follows, based on the Plan’s most recent actuarial valuation date of June 30, 2015. Fiscal Year Ending June 30 Annual OPEB Cost (AOC) Actual Contributions % of AOC Contributed Net OPEB Obligation (Asset) 2017 $1,182,000 $1,432,000 121% $(495,000) 2016 607,000 857,000 141% (250,000) 2015 588,000 588,000 100% -- Actuarial accrued liability (AAL) $ 13,173,000 Actuarial value of plan assets $ 4,788,000 Unfunded AAL $ 8,385,000 Funded ratio (actuarial value of plan assets/AAL) 36.3% Covered payroll (active plan members) $ 29,989,000 UAAL as % of covered payroll 28.0% 50 4160-7422-8751 City Investment Policy and Portfolio The City Council approves the City’s investment policy [annually]. The City’s primary investment objective is to achieve a reasonable rate of return while minimizing the potential for capital losses arising from market changes or issuer default. Safety, liquidity and yield are the factors considered, in priority order, in determining individual investment placements. In [_________], 20[__], an Investment Oversight Committee was formed to advise the Treasurer on investment policy and compliance. Investment policies are reviewed annually and the Investment Oversight Committee, consisting of the City Manager, City Treasurer, staff and investment advisor, meets quarterly to review compliance. The composition of investments in the City pool will vary from time-to-time depending on cash flow needs of the City, the maturity of investments, purchases of new securities, and due to fluctuations in interest rates. All investments are in compliance with the City’s investment policy. Market values are based on [______________]. Based on revenue and expenditure projections and information known to the Department of Finance, the treasury will be able to meet its pooled expenditure requirements for the next six months. The weighted average maturity of the investments within the City pool, assuming all callable bonds are held to maturity, is [___] days. As of December 31, 2017, the investments in the City pool were as follows: TABLE 14 CITY OF SAN LUIS OBISPO INVESTMENT POOL SUMMARY OF ASSETS HELD Local Agency Investment Fund – Money Market Fund City $22,520,684 Local Agency Investment Fund – Money Market Fund CIB 68,313 Heritage Oaks Bank – Collateralized Certificate of Deposit 1,000,000 Heritage Oaks Bank – Money Market 1,016,073 TOTAL INVESTMENTS $24,605,070 Bank Balance 17,559,697 TOTAL TREASURY BALANCE $42,164,767 Source: City of San Luis Obispo. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal alternative minimum tax. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix D hereto. 51 4160-7422-8751 To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner’s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The Authority and the City have made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel’s attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of amounts treated as interest on, the Bonds may otherwise affect a Beneficial Owner’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject, directly or indirectly, in whole or in part, to 52 4160-7422-8751 federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation as to which Bond Counsel is expected to express no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority or the City, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The Authority and the City have covenanted, however, to comply with the requirements of the Code. Bond Counsel’s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority, the City or the Beneficial Owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the Authority and the City and their appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Authority or the City legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the Authority, the City or the Beneficial Owners to incur significant expense. CERTAIN LEGAL MATTERS The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix D hereto. Certain matters will be passed upon for the Authority and for the City by the City Attorney. Certain legal matters will be passed upon for the Underwriter by Schiff Hardin LLP, Underwriter’s Counsel. Orrick, Herrington & Sutcliffe LLP has also served as Disclosure Counsel. Orrick, Herrington & Sutcliffe LLP, Bond Counsel and Disclosure Counsel, undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. MUNICIPAL ADVISOR The City has retained PFM Financial Advisors LLC, of San Francisco, California, as municipal advisor (the “Municipal Advisor”) in connection with the issuance of the Bonds. The Municipal 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. The Municipal Advisor is an independent financial advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities. 53 4160-7422-8751 LITIGATION There is no action, suit, or proceeding known by the Authority or the City to be pending or threatened at the present time restraining or enjoining the delivery of the Bonds or in any way contesting or affecting the validity of the Bonds, the Trust Agreement, the Facility Lease, the Site Lease or any proceedings of the Authority or the City taken with respect to the execution or delivery thereof. CONTINUING DISCLOSURE The City has covenanted for the benefit of owners of the Bonds to provide certain financial information and operating data relating to the City by not later than nine months after the end of the City’s fiscal year (which is currently June 30) in each year commencing with the report for the fiscal year ended June 30, 2018 (the “Annual Report”) and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed with each Nationally Recognized Municipal Securities Information Repository. The notices of material events will be filed by the City with the Municipal Securities Rulemaking Board. These covenants have been made in order to assist the Underwriters in complying with Securities Exchange Commission Rule 15c2-12(b)(5) (the “Rule”). The specific nature of the information to be contained in the Annual Report or the notices of material events by the City is set forth in Appendix E – “FORM OF CONTINUING DISCLOSURE CERTIFICATE.” [The City recently discovered that it failed to file with EMMA notices of rating upgrades on certain of its outstanding bonds. All such notices have now been filed. The City is not aware of any failure to comply in the last five years in all material respects with any previous undertakings with regard to Rule 15c2-12 to provide annual reports or notices of material events.] [Add info on disclosure policy.] RATING S&P Global Ratings has assigned the rating of “[__]” to the Bonds. Certain information was supplied by the Authority and the City to the rating agency to be considered in evaluating the Bonds. Such rating express only the view of the rating agency and is not a recommendation to buy, sell or hold the Bonds. There is no assurance that such rating will continue for any given period of time or that it will not be reduced or withdrawn entirely by the rating agency if in its judgment circumstances so warrant. The Authority, the City and the Trustee undertake no responsibility to oppose any such revision or withdrawal. Any such downward revision or withdrawal may have an adverse effect on the market price of the Bonds. UNDERWRITING The Bonds were purchased by Raymond James & Associates, Inc. (the “Underwriter”). The Underwriter has agreed to purchase the Bonds at a purchase price of $__________ (calculated as the principal amount of the Bonds, [plus/less] a net original issue [premium/discount] of $__________ and less an Underwriter’s discount of $__________). The initial public offering prices set forth on the cover page may be changed by the Underwriter. The Underwriter may offer and sell the Bonds to certain dealers and others at prices lower than the public offering prices set forth on the cover page hereof. 54 4160-7422-8751 MISCELLANEOUS The purpose of this Official Statement is to supply information to prospective buyers of the Bonds. Quotations from and summaries and explanations of the Bonds and of statutes and other documents contained in this Official Statement do not purport to be complete, and reference should be made to the Bonds and such statutes and other documents for full and complete statements of their provisions. The preparation and distribution of this Official Statement have been authorized by the Authority and the City. SAN LUIS OBISPO PUBLIC FINANCING AUTHORITY By: Executive Director CITY OF SAN LUIS OBISPO By: City Manager A-1 4160-7422-8751 APPENDIX A AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2017 B-1 4160-7422-8751 APPENDIX B CERTAIN INFORMATION REGARDING THE CITY OF SAN LUIS OBISPO The Bonds do not constitute an indebtedness of the City within the meaning of any constitutional, statutory or charter provisions or limitations and the City is not obligated to levy any ad valorem taxes therefor or to use any other funds of the City to pay the Bonds or the interest thereon. The following information with respect to the City and the County is presented for information purposes only. The following information regarding the City and the surrounding area is presented as general background data. The Bonds are payable solely from the sources described in this Official Statement (see “SECURITY FOR THE BONDS”). General The City of San Luis Obispo, California (the “City”) is located approximately 235 miles south of downtown San Francisco and 200 miles north of Los Angeles, on the central coast of California. The City is situated along State Route 101 and is the county seat of San Luis Obispo County. The City is located 315 feet above sea level in gentle mountain valley. San Luis Obispo has mild summers with an average high temperature of 70 degrees. San Luis Obispo County (the “County”) is the twenty-third largest county in the State and is located on the central coast of California. The County borders the Pacific Ocean, with Monterey County to the north, Santa Barbara County to the south and Kern County to the east. Population The following table summarizes the population estimates for the City, the County and State of California as of January 1, for the years 2013 through 2017. TABLE B-1 CITY OF SAN LUIS OBISPO 2013 THROUGH 2017 POPULATION ESTIMATES Calendar Year City of San Luis Obispo County of San Luis Obispo State of California 2013 45,561 273,417 38,238,492 2014 45,843 275,762 38,572,211 2015 46,130 276,862 38,915,880 2016 46,298 278,480 39,189,035 2017 46,724 280,101 39,523,613 _______________ Source: State Department of Finance. Employment The following table summarizes the labor force, employment and unemployment figures over the past five years for the City, the County, the State of California and the United States. B-2 4160-7422-8751 TABLE B-2 LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT CITY OF SAN LUIS OBISPO, SAN LUIS OBISPO COUNTY, STATE OF CALIFORNIA AND UNITED STATES 2012 THROUGH 2016 Area Labor Force Employment Unemployment Rate 2012 City of San Luis Obispo 25,011 22,834 8.7% San Luis Obispo County 137,362 126,037 8.2 California 18,523,793 16,602,672 10.4 United States 154,975,000 142,469,000 8.1 2013 City of San Luis Obispo 25,283 23,462 7.2 San Luis Obispo County 138,254 128,828 6.8 California 18,624,325 16,958,735 8.9 United States 155,389,000 143,929,000 7.4 2014 City of San Luis Obispo 25,625 24,115 5.9 San Luis Obispo County 140,501 132,670 5.6 California 18,755,025 17,348,645 7.5 United States 155,922,000 146,305,000 6.2 2015 City of San Luis Obispo 25,568 24,297 5.0 San Luis Obispo County 139,604 133,044 4.7 California 18,893,152 17,723,266 6.2 United States 157,130,000 148,834,000 5.3 2016 City of San Luis Obispo 25,701 24,542 4.5 San Luis Obispo County 140,365 134,383 4.3 California 19,102,726 18,065,043 5.4 United States 159,187,000 151,436,000 4.9 _______________ Source: U.S. Department of Labor – Bureau of Labor Statistics. The County comprises the San Luis Obispo-Paso Robles Metropolitan Statistical Area (the “MSA”), reported by the State Employment Development Department. The following table summarizes employment information for the MSA, including unemployment rate and employment by industry. B-3 4160-7422-8751 TABLE B-3 METROPOLITAN STATISTICAL AREA (SAN LUIS OBISPO COUNTY) CIVILIAN LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT CALENDAR YEARS 2012 THROUGH 2016 ANNUAL AVERAGES 2012 2013 2014 2015 2016 Civilian Labor Force(1) 137,400 138,300 140,500 139,600 140,400 Employment 126,000 128,800 132,700 133,000 134,400 Unemployment 11,300 9,400 7,800 6,600 6,000 Unemployment Rate 8.2% 6.8% 5.6% 4.7% 4.3% Wage and Salary Employment(2) Agriculture 5,100 4,500 4,700 5,000 4,900 Natural Resources/Mining/Construction 5,500 6,100 6,400 6,700 7,200 Manufacturing 6,400 6,500 6,800 7,000 6,900 Wholesale Trade 2,600 2,600 2,800 2,800 2,900 Retail Trade 13,700 13,800 13,800 13,900 14,100 Trans., Warehousing, Utilities 3,800 4,000 4,000 4,000 4,100 Information 1,200 1,400 1,400 1,500 1,400 Financial and Insurance 2,400 2,300 2,200 2,300 2,200 Real Estate, Rental & Leasing 1,700 1,900 1,900 1,900 1,900 Professional and Business Services 9,000 9,300 9,400 10,100 10,300 Educational and Health Services 13,000 14,000 14,500 14,600 15,000 Leisure and Hospitality 15,700 16,200 16,800 17,600 18,500 Other Services 4,700 4,800 5,300 5,700 5,800 Federal Government 600 600 500 500 500 State Government 9,600 9,500 9,900 10,200 10,300 Local Government 10,600 11,400 12,500 12,900 13,000 Total All Industries(3) 105,600 108,800 112,900 116,700 119,100 _______________ (1) Labor force data is by place of residence; includes self-employed individuals, unpaid family workers, household domestic workers, and workers on strike. (2) Industry employment is by place of work; excludes self-employed individuals, unpaid family workers, household domestic workers, and workers on strike. (3) Totals may not add due to rounding. Source: State of California Employment Development Department. B-4 4160-7422-8751 The principal employers in or immediately adjacent to the City are shown in the following table. TABLE B-4 CITY OF SAN LUIS OBISPO PRINCIPAL EMPLOYERS FISCAL YEAR 2016-17 Employer Name Number of Employees Rank % of Total City Employment Cal Poly State University 3,000 1 11.95% County of San Luis Obispo 2,920 2 11.63 Dept of State Hospitals – Atascadero 2,000 3 7.97 P.G. & E. (Diablo Canyon) 1,866 4 7.43 California Men’s Colony 1,517 5 6.04 Cal Poly Foundation (Corporation) 1,400 6 5.58 Tenet Health Care Corp. 1,305 7 5.20 Compass Health 1,200 8 4.78 Lucia Mar Unified School District 1,000 9 3.98 Paso Robles Public Schools 935 10 3.73 TOTAL: 17,143 68.30% _______________ Source: City of San Luis Obispo Audited Financial Statements. Personal Income The following table summarizes the per capita personal income for the City, the County, the State and the United States for the period 2011 through 2016. TABLE B-5 CITY OF SAN LUIS OBISPO, SAN LUIS OBISPO COUNTY, CALIFORNIA AND UNITED STATES PER CAPITA PERSONAL INCOME CALENDAR YEARS 2011 THROUGH 2016 Year City of San Luis Obispo San Luis Obispo County State of California United States 2011 $25,775 $30,204 $29,634 $27,915 2012 27,400 30,218 29,551 28,051 2013 26,129 29,594 29,527 28,155 2014 26,377 30,392 29,906 28,555 2015 27,416 31,060 30,318 28,930 2016 27,823 32,335 31,458 29,829 _______________ Source: U.S. Census Bureau. Commercial Activity Preliminary total taxable sales during calendar year 2016 in the City were reported to be approximately $1,429,557,000, a 1.2% increase over the total taxable sales of approximately $1,412,972,000 reported during calendar year 2015. The valuations of taxable transactions in the City are presented in the following table. B-5 4160-7422-8751 TABLE B-6 CITY OF SAN LUIS OBISPO TAXABLE RETAIL SALES NUMBER OF PERMITS AND VALUATION OF TAXABLE TRANSACTIONS (DOLLARS IN THOUSANDS) Year Retail Permits on July 1 Retail Stores Taxable Transactions Total Permits on July 1 Total Outlets Taxable Transactions 2010 1,176 $906,649 1,864 $1,080,238 2011 1,147 990,623 1,803 1,188,454 2012 1,201 1,086,480 1,867 1,278,529 2013 1,272 1,146,360 1,936 1,344,616 2014 1,333 1,187,157 2,011 1,394,105 2015 1,299 1,184,204 2,158 1,412,972 2016 1,326 1,182,401 2,198 1,429,557 _______________ (1) Preliminary. Source: State of California Board of Equalization. [REMAINDER OF PAGE LEFT BLANK] B-6 4160-7422-8751 Construction Activity The following tables show a six-year summary of the number and valuation of building permits issued in the City. TABLE B-7 CITY OF SAN LUIS OBISPO BUILDING PERMIT VALUATION (VALUATION IN THOUSANDS OF DOLLARS) 2011 2012 2013 2014 2015 2016 Permit Valuation New Single-family 607.0 3,278.2 15,698.9 26,906.2 38,549.7 16,011.2 New Multi-family 6,404.7 3,847.6 1,560.5 16,088.7 11,434.0 19,522.1 Res. Alterations/Additions 4,819.6 5,335.6 8,706.2 7,053.3 6,511.4 10,398.5 Total Residential 11,831.3 12,461.4 25,965.6 50,048.2 56,495.1 45,931.8 New Commercial 16,608.4 5,142.5 1,935.4 3,739.3 15,556.9 49,084.6 New Other 0.0 0.0 0.0 0.0 602.9 0.0 Com. Alterations/Additions 11,128.9 11,251.6 12,055.4 16,169.1 17,473.7 16,488.4 Total Nonresidential 27,737.3 16,394.1 13,990.8 19,908.4 33,633.5 65,573.0 New Dwelling Units Single Family 2 17 19 102 146 56 Multiple Family 65 17 73 115 71 51 TOTAL 67 34 92 217 217 107 _______________ Source: Construction Industry Research Board, Building Permit Summary. Education and Community Facilities The City is adjacent to Cal Poly, one of the more prominent campuses in the California State University system. Cal Poly offers a wide variety of degree programs at both undergraduate and graduate levels. Current enrollment at this four-year school is estimated at 21,306 students. Cuesta Community College schedules day and evening courses where residents can complete a two-year degree, obtain vocational training or take general education courses. Current enrollment is approximately 11,355 full-time students. San Luis Coastal Unified School District provides 10 elementary schools, two middle schools, three senior high schools and two adult schools. The total enrollment is nearly 8,000 students. The boundaries of the San Luis Coastal Unified School District are significantly larger than the City. Medical facilities include Sierra Vista Regional Medical Center with approximately 164 licensed beds and a designated trauma center and French Hospital with approximately 103 licensed beds. Recreational facilities in close proximity include 12 golf courses within a 30 minute drive of the City’s downtown, Lake Lopez, Lake Nacimiento and Montana De Oro State Park. B-7 4160-7422-8751 Community facilities include the Performing Arts Center located on the campus of Cal Poly, Mission San Luis Obispo de Tolosa, San Luis Obispo County Historical Museum and San Luis Obispo Art Center. The City has seven designated open spaces and owns 18 parks and 14 playgrounds. The City operates a 10-hole municipal golf course and the San Luis Obispo Swim Center that offers participants a full range of aquatic programs. Transportation Primary access to the City is provided by State Route 101, which is a major transportation corridor that extends in a general north-south direction from Los Angeles to San Francisco. San Luis Obispo can be accessed at various off-ramps from the highway. This network of roads provides access to the various neighborhoods and business areas dispersed throughout the community. The San Luis Obispo County Airport is within ten minutes from downtown. Commercial service is offered to San Francisco, Los Angeles, Denver, Seattle and Phoenix International Airports. Rail passenger service is provided by AMTRAK, which has a station in the City. Six trains daily pass through each direction and stop at the San Luis Obispo Station. Union Pacific Transportation Company provides freight rail service to the City. Local bus service is provided by SLO Transit and is linked to a trolley line which operates in the City’s downtown area, and to the County-run RTA bus service. C-1 4160-7422-8751 APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL LEGAL DOCUMENTS [TO COME] D-1 4160-7422-8751 APPENDIX D PROPOSED FORM OF BOND COUNSEL OPINION Upon issuance of the Bonds, Orrick, Herrington & Sutcliffe LLP, Bond Counsel, proposes to render its final approving opinion with respect to the Bonds in substantially the following form: April ___, 2018 San Luis Obispo Public Financing Authority San Luis Obispo, California San Luis Obispo Public Financing Authority Lease Revenue Refunding Bonds, Series 2018 (Final Opinion) Ladies and Gentlemen: We have acted as bond counsel to the San Luis Obispo Public Financing Authority (the “Authority”) in connection with issuance of $_________ aggregate principal amount of its Lease Revenue Refunding Bonds, Series 2018 (the “Bonds”), issued pursuant to the Trust Agreement, dated as of April 1, 2018 (the “Trust Agreement”), between the Authority and U.S. Bank National Association, as trustee (the “Trustee”). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Trust Agreement. In such connection, we have reviewed the Trust Agreement, the Facility Lease, the Site Lease, the Tax Certificate, certificates of the Authority, the City, the Trustee and others, opinions of counsel to the Authority, the City, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the Authority and the City. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Trust Agreement, the Facility Lease, the Site Lease and the Tax Certificate, including (without limitation) covenants and agreements compliance D-2 4160-7422-8751 with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Bonds, the Trust Agreement, the Facility Lease, the Site Lease and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against cities and joint powers agencies in the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the real or personal property described in or as subject to the lien of the Facility Lease, the Site Lease or the Trust Agreement or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such property. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Bonds constitute the valid and binding limited obligations of the Authority. 2. The Trust Agreement has been duly executed and delivered by, and constitutes the valid and binding obligation of, the Authority. 3. The Site Lease and the Facility Lease have been duly executed and delivered by, and constitute the valid and binding obligations of, the City. 4. Interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the Bonds is not a specific preference item for purposes of the federal alternative minimum tax. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Bonds. Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE LLP per E-1 4160-7422-8751 APPENDIX E FORM OF CONTINUING DISCLOSURE CERTIFICATE [TO COME] F-1 4160-7422-8751 APPENDIX F DTC DESCRIPTION The description that follows of the procedures and recordkeeping with respect to beneficial ownership interests in the Bonds, payment of principal of, premium, if any, and interest on the Bonds to Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interests in the Bonds, and other related transactions by and between DTC, Participants and Beneficial Owners, is based on information furnished by DTC which the City and the Authority believe to be reliable, but the City and the Authority do not take responsibility for the completeness or accuracy thereof. The City and the Authority cannot and do not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners either (a) payments of principal, premium, if any, and interest with respect to the Bonds or (b) certificates representing ownership interests in or other confirmation of ownership interests in the Bonds, or that they will so do on a timely basis or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Official Statement. The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered bond will be issued for each maturity (and each yield in the case of bifurcated maturities) of the Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC. DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of 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 is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com; provided that nothing contained in such website is incorporated into this Official Statement. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their F-2 4160-7422-8751 purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Trust Agreement. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City and the Authority 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 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the City, the Authority 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, the Trustee, the City or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City, the Authority 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. F-3 4160-7422-8751 The City and the Authority may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, bond certificates will be printed and delivered to DTC. NEITHER THE CITY, THE AUTHORITY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS WITH RESPECT TO THE PAYMENTS OR THE PROVIDING OF NOTICE TO DTC PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS OR THE SELECTION OF Bonds FOR REDEMPTION. DTC (or a successor securities depository) may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the City and the Authority. The City and the Authority, in their sole discretion and without the consent of any other person, may terminate the services of DTC (or a successor securities depository) with respect to the Bonds. The City and the Authority undertake no obligation to investigate matters that would enable the City and the Authority to make such a determination. In the event that the book-entry system is discontinued as described above, the requirements of the Trust Agreement will apply. THE CITY, THE AUTHORITY AND THE UNDERWRITERS CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC, THE PARTICIPANTS OR OTHERS WILL DISTRIBUTE PAYMENTS OF PRINCIPAL, INTEREST OR PREMIUM, IF ANY, WITH RESPECT TO THE Bonds PAID TO DTC OR ITS NOMINEE AS THE REGISTERED OWNER, OR WILL DISTRIBUTE ANY REDEMPTION NOTICES OR OTHER NOTICES, TO THE BENEFICIAL OWNERS, OR THAT THEY WILL DO SO ON A TIMELY BASIS OR WILL SERVE AND ACT IN THE MANNER DESCRIBED IN THIS OFFICIAL STATEMENT. THE CITY, THE AUTHORITY AND THE UNDERWRITERS ARE NOT RESPONSIBLE OR LIABLE FOR THE FAILURE OF DTC OR ANY PARTICIPANT TO MAKE ANY PAYMENT OR GIVE ANY NOTICE TO A BENEFICIAL OWNER WITH RESPECT TO THE Bonds OR AN ERROR OR DELAY RELATING THERETO. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the City and the Authority deem reliable, but the City and the Authority take no responsibility for the accuracy thereof. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the City, the Authority or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered as described in the Trust Agreement. The City and the Authority may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered as described in the Trust Agreement and payment of interest to each Owner who owns of record $1,000,000 or more in aggregate principal amount of Bonds may be made to such Owner by wire transfer to such wire address within the United States that such Owner may request in writing for all Interest Payment Dates following the 15th day after the Trustee’s receipt of such request.