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HomeMy WebLinkAboutLEGISLATIVE & LEGAL CAPITAL IMPROVEMENT BOARD AGREEMENTS/WATER PROJECT FINANLegislative & legal Capital Improvement Board 706-03 Agreements/water project Finan FPVAP *BV.L I`I�I�Iyllll�lllllllll I. MEETING DATE: BB ill�ll C� 0 San`�(,()S �B'Sp� November 15, 1 MOZO COUNCIL AGENDA REPORT STEM � ���n���Hi�u�llllll��i�u�u�► �U city Of San L IS OBISPO 1IMmeCOUNCIL AGENDA REPORT CONSEQUENCES OF NOT TAKING THE RECOMMENDED ACTION Failure to adopt the attached resolutions at this time will: s Delay the implementation of approved water projects, which are dependent upon the proceeds from the issue for funding as identified in the 1987-89 Financial Plan, Draft Water Management Plan, and recent water rate review. • Result in a lost opportunity to conduct a small issue financing during 1988, which provides significant record keeping and interest earning advantages to the City. • Result in a potential lost opportunity to benefit from current market conditions which are especially favorable at this time for an issuance of this type. BACKGROUND At their November 1, 1988 meeting the City Council authorized staff to initiate proceedings for the issuance of $5 million in Certificates of Participation in order to provide financing for approved water projects. As indicated at that time, actions required to initiate the proceedings included the selection of bond counsel, approval of financing documents, selection of a competitive or negotiated sale, and closing date/award of bid. The following is a summary of the status of each of these actions: Bond Counsel Services - As noted in the November 1, 1988 report to the City Council, legal services are required in conjunction with any project financing. Customary services include the preparation of documents and opinions related to the financing; consultation regarding federal tax and state public finance laws; and advice on other legal matters which may arise in the course of planning and conducting debt financings. Authorization was provided at the November 1, 1988 meeting for the CAO, with the concurrence of the City Attorney, to enter into an agreement for bond counsel services. A Request for Proposals (RFP) was distributed to five of the top California bond counsel firms on October 10, 1988. Four proposals were received by the closing date of October 20, 1988, which were reviewed by an evaluation committee composed of the City Attorney, Director of Finance, Director of Utilities, Financial Systems Manager, and the City's Financial Advisor, Evensen Dodge. The proposals were evaluated using the criteria provided in the RFP as well as reference checks and a follow-up interview with the finalist. Based on this review process, the firm of Jones Hall Hill & White (Jones Hall) was selected to serve as the City's bond counsel. In addition to their responsiveness to the City's RFP and competitive fee structure, Jones Hall has direct experience with the City and its financing needs, having served as Bond Counsel for the City's 1986 Lease Revenue Bond issue. Approval of Financing Documents - As noted in the November 1, 1988 report to the City Council, and as referenced in the attached resolutions, the formal approval by the City Council and Board of a variety of documents is required at this time in order to proceed with the project financing. Described in greater detail below, these documents have been prepared by the City's Bond Counsel (Jones Hall) and Financial Advisor (Evensen Dodge) and are on file in the City Clerk's office. 6 -A -A N City Of san luis OBispo COUNCIL AGENDA REPORT Competitive Sale - The project financing can be placed with an underwriter (the purchaser of the Certificates who provides the City with the net proceeds from the financing) through either a negotiated or competitive sale. Under a negotiated sale, the City and its Financial Advisor negotiate directly with the prospective underwriter for the placement terms such as discount, underwriter fees, and interest rate. Under a competitive sale, the City awards the placement to an underwriter based on a competitive bid process. Depending on the complexity of the issuance, improvements to be funded, time constraints, debt instruments, repayment structure, and market conditions, there are advantages and drawbacks to each approach. Based on a review of these factors by the Financial Advisor and City staff, a competitive sale is recommended for this project financing. Closing Date and Award of Bid - Under the competitive sale approach, it is anticipated that the closing date and award of bid for the placement of the debt issuance will be made on December 13, 1988. Award at that time should allow sufficient time for the preparation of closing documents and receipt of net proceeds prior to the end of 1988. As referenced in the attached resolutions, the Director of Finance (who also serves as the Chief Financial Officer of the Board) is authorized to accept bids and award the sale subject to the following parameters: the underwriter's discount (fee) does not exceed 2% of the par value of the certificates ($5 million); and the net interest rate does not exceed 8.75%. DESCRIPTION OF THE PROPOSED FINANCING STRUCTURE Under the proposed financing structure, the debt service payments on the Certificates will be funded through lease payments from the City to the Board. As security for the lease payments, the City will transfer its ownership of selected existing water fixed assets to the Board, which will in turn lease the facilities back to the City. As discussed in the November 1, 1988 report to the City Council, the "asset transfer" and lease -purchase nature of the proposed issue is almost identical to the approach used in structuring the 1986 Lease Revenue Bonds which were used to finance street and parking structure improvements. FUNDING SOURCE It is intended that the lease payments to the Board will be funded exclusively through the resources of the water enterprise fund. As noted in the November 1, 1988 report to the City Council, the water rate structure approved by the City Council on June 6, 1988 has been designed to generate sufficient revenues to cover the anticipated debt service/lease payments estimated at $490,000 annually. However, in order to strengthen the credit rating of the issue, the City may need to commit to appropriating on an annual basis any legally available funds in order to meet this annual lease obligation. Any such commitment would end whenever net revenues from the water system equal 1 10% of lease payments for three consecutive years. However, it should be emphasized that the exclusive use of water enterprise fund resources is intended in funding the debt service/lease payments, and the use of a back-up funding source would only be incorporated in the final certificate documents if required by the credit rating agency. DESCRIPTION OF FINANCING DOCUMENTS As noted above, the attached resolutions approve a variety of financing documents which are required in order to proceed with the project financing. Prepared by the City's Bond C -A-3 ���n�i�►i��illllllll u��'�� City of San u) I S OBISPO ��IIUI COUNCIL AGENDA REPORT Counsel (Jones Hall) and Financial Advisor (Evensen Dodge), the following is a brief description of these documents which are on file in the City Clerk's office: Acauisition Agreement - This is the agreement under which the Board agrees to buy selected water distribution assets (referred to as Facilities in the Agreement) from the City. The purchase will take place at the Certificate closing in December, and the full purchase price will be paid from the Certificate proceeds at that time. Title to the Facilities vests in the Board immediately. Lease Agreement - This document serves as the basic security for the financing. Under the Lease Agreement, the Board leases the Facilities back to the City for a term equal to the term of the Certificates. Since the City's obligation to pay Lease Payments is a tax-exempt obligation, it is necessary to identify the portion of each Lease Payment which constitutes interest. The City pledges the Net Revenues of the water enterprise to pay the Lease Payments, with a back-up promise to pay out of other legally available sources if required. During the term of the Lease, the City covenants to set rates and charges for the water enterprise so as to yield Net Revenues sufficient to provide a coverage factor for annual debt service. The Lease Agreement also contains terms relating to insurance, maintenance, and similar matters. Assignment Agreement - Because the Certificates are payable from the Lease Payments, it is necessary for the Lease Payments (and various other rights of the Board under the Lease Agreement) to be assigned to the Trustee; and this is the sole purpose of the Assignment Agreement. Trust Agreement - This document contains all of the terms and provisions relating to the Certificates, including prepayment provisions, maturity schedules, rights, and remedies of the Certificate owners and the Trustee in the event of a default under the Lease Agreement. Official Notice of Sale - The Official Notice of Sale provides all of the terms upon which the City will receive bids from potential investors for the purchase of the Certificates. Official Statement - Prepared by the Financial Advisor, the Official Statement (OS) describes the financing for prospective purchasers of the Certificates, and constitutes the primary marketing document for the financing. As reflected in the attached resolutions of the Board and City approving these financing documents, the City Administrative Officer (who also serves as the Executive Director for the Board) is authorized to make minor amendments to these documents as recommended by Bond Counsel, and to execute the final documents. SUMMARY The City Council conceptually approved the issuance of $5 million in Certificates of Participation at their November 1, 1988 meeting in order to provide financing for approved water projects. In order to proceed with this financing, it is recommended that the City Council and the Board of Directors of the San Luis Obispo Capital Improvement Board adopt the attached resolutions authorizing the sale of Certificates and approving related financing documents. Attachments: Draft Resolutions a� Certificates of Participation in Council Office. "� SUMMARY OF PROPOSED PROJECT FINANCING • Policy links: • Issue Size: • Anticipated net proceeds after debt service reserve requirements and issuance costs: • Project cost summary: Source of supply Distribution system Treatment plant Total estimated project costs • Type of debt instrument: • Issued through: • Maturity period: • Estimated interest rate: • Estimated annual debt service: • Schedule of key events: Initiate selection process for bond counsel City Council authorization to initiate proceedings for debt issuance; authorization for CAO, with concurrence of the City Attorney, to enter into an agreement for bond counsel services Formal City Council approval of financing documents and authorization to solicit underwriter bids Closing date; award of bid by Director of Finance * Public facilities financing corporation established on April 15, 1986; the City Council serves as its Board of Directors. ATTACHMENT A 1987-89 Financial Plan Draft Water Management Plan Water Rate Review, June 6,1988 $5,000,000 $4,350,000 575,000 2,050,000 1,739,300 $4,364,300 Certificates of Participation San Luis Obispo Capital Improvement Board 20 years 8.0% to 8.5% 8490,000 October 10, 1988 November 1, 1988 November 15, 1988 December 13, 1988 N RESOLUTION NO. _ • A RESOLUTION OF THE BOARD OF DIRECTORS OF THE CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD APPROVING THE PURCHASE OF WATER ENTERPRISE IMPROVEMENTS FROM THE CITY OF SAN LUIS OBISPO AND THE LEASE OF SUCH IMPROVEMENTS BACK TO THE. CITY, APPROVING RELATED AGREEMENTS, OFFICIAL STATEMENT, AND COMPETITIVE SALE OF $5,000,000 CERTIFICATES OF PARTICIPATION WHEREAS, the City of San Luis Obispo (the "City") is currently proceeding to finance the costs of various capital improvements. with respect to the water enterprise of the City (the "Enterprise"); and WHEREAS, the City of San Luis Obispo Capital Improvement Board (the "Board") has been formed for the purpose of assisting the City in financing the acquisition, construction, and improvement of property which is of benefit to the City; and WHEREAS, to accomplish such financing the City has proposed to sell certain facilities of the Enterprise (the "Facilities") to the Board pursuant to the Acquisition Agreement dated as of December 1, 1988, (the "Acquisition Agreement") and to lease the Facilities back from the Board pursuant to the Lease Agreement dated as of December 1, 1988 (the "Lease Agreement"); and WHEREAS, for the purpose of obtaining the moneys_required to finance the acquisition of the Facilities under the Acquisition Agreement, the Board proposes to assign and transfer certain of its rights under the Lease Agreement to a trustee bank (the "Trustee") pursuant to that certain Assignment Agreement dated as of December 1, 1988, (the "Assignment Agreement") by and between the Board and the Trustee; and WHEREAS, in consideration of such assignment and the execution of that certain Trust Agreement dated as of December 1, 1988, (the "Trust Agreement") by and among the Board, the City, and the Trustee, the Trustee will execute and deliver Certificates of Participation in the principal amount of $5,000,000 (the "Certificates of Participation"), each evidencing an undivided fractional interest in the Lease Payments made by the City under the Lease Agreement; and WHEREAS, the City and the Board have determined to sell the Certificates of Participation at competitive sale, and the firm of Evensen. Dodge, Inc. (the "Financial Adviser") is assisting the City and the Board in such sale of the Certificates of Participation and has caused to be prepared an Official Statement describing the Certificates of Participation, to be used in connection with such sale; and WHEREAS, the Board of Directors approves of said transactions as being in the public interests of the Board; NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the City of San Luis Obispo Capital Improvement Board as follows: SECTION 1. Purchase of Facilities: Approval of Acouisition Agreement, The Board of Directors hereby approves the purchase of the Facilities by the Board from the City pursuant to, and subject to the terms and conditions of, the Acquisition Agreement in substantially the form on file with the Secretary, together with any changes therein or additions thereto deemed advisable by the Executive Director, whose execution thereof shall be conclusive evidence of his approval of such changes and additions. The Board hereby authorizes and directs the Executive Director, and the Secretary to attest and affix the seal of the Board to, said form of the Acquisition Agreement for and in the name of the Board. SECTION 2. Lease of Facilities: Approval of Lease Agreement, The Board of Directors hereby approves the lease of the Facilities by the Board to the City pursuant to and subject to the terms and conditions of, the Lease Agreement in substantially the form on file with the Secretary, together with any changes therein or additions thereto deemed advisable by the Executive Director, whose execution thereof shall be conclusive evidence of his approval of such changes and additions. The Board of Directors hereby authorizes and directs the Executive Director to execute; and the . Secretary to attest and affix the seal of the Board to, said form of the Lease Agreement for and in the name of the Board. The schedule of lease payments set forth in the Lease Agreement shall conform to the schedule of principal and interest payments represented by the Certificates of Participation as determined pursuant to Section 5 hereof.. SECTION 3. _Assistnment Agreement. The Board of Directors hereby approves the Assignment Agreement in substantially the form on file with the Secretary together with any changes therein or additions thereto deemed advisable by the Executive Director, whose execution thereof shall be conclusive evidence of his approval of such changes and additions. The Board of Directors hereby authorizes and directs the Executive Director to execute, and the Secretary to attest and affix the seal of the Board to, said form of the Assignment Agreement for and in the name of the.Board. SECTION 4. Trust Agreement. The Board of Directors hereby approves the Trust Agreement in substantially the form on file with the Secretary together with any changes therein' or additions thereto deemed advisable by the Executive Director, whose execution thereof shall be conclusive evidence of his approval of such changes and additions. The Board of Directors hereby authorizes and directs the Executive Director to execute, and the Secretary to attest and affix the seal of the Board to, said form of the Trust Agreement for and in the name of the Board. SECTION 5. Sale of Certificates of Participation. The Board of Directors hereby approves the competitive sale of the Certificates of Participation, and hereby calls for the receipt of bids on the Certificates of Participation on Tuesday, December 13, 1988, at the hour of 10:00 a.m. in the office of Jones Hall Hill & White at Four Embarcadero Center, Suite 1950, San Francisco, California. The Chief Financial Officer is hereby authorized and directed for an in the name and on behalf of the Board to accept the bid of the best responsible bidder; provided that the purchase price to be paid for the Certificates of Participation shall be at least ninety-eight percent (98%) of the par value thereof, and the weighted average rate of interest represented by the Certificates of Participation shall not exceed eight and three-quarters percent (8-3/446) per annum. The Certificates of Participation shall be sold pursuant to and in accordance with the provisions of the Official Notice of Sale in substantially the form on file with the Secretary, which is hereby approved as the official notice of sale of the Certificates of Participation. SECTION 6. Official Statement, The Board of Directors hereby approves the preliminary Official Statement describing the Certificates of Participation, in the form submitted by the Financial Adviser and on file with the Secretary, together with any changes therein or additions thereto deemed advisable by the Chief Financial Officer, whose execution thereof shall be conclusive evidence of his approval of any such changes or additions. The Board of Directors hereby approves and authorizes the distribution by the Financial Adviser and by the purchaser of the Certificates of Participation of said Official Statement to prospective purchasers of the Certificates of Participation. The Chief Financial Officer is hereby authorized and directed to approve any changes in or additions to the final form of such Official Statement as the Chief Financial Officer shall deem advisable, and to execute said final Official Statement for and in the name and on behalf of the Board. SECTION 7. Official Actions, The Executive Director, the Chief Financial Officer, the Secretary, the Board Attorney, and all other officers and representatives of the Board are each authorized and directed in the name and on behalf of the Board to make any and all assignments, certificates, requisitions, agreements, notices, consents, instruments of conveyance, warrants, and other documents, which they or any of them might deem necessary or appropriate in order to consummate any of the transactions contemplated by the documents approved pursuant to this Resolution. SECTION 8. Effective Date, This Resolution shall take effect from and after the date of its passage and adoption. On motion of seconded by and on the following roll call vote: AYES: NOES: ABSENT: the foregoing Resolution was passed and adopted this 15th day of November, 1988. EO President ATTEST: Secretary APPROVED: Executive D ector Board Attrney Chief Financial Officer • RESOLUTION NO. _ A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS OBISPO APPROVING THE SALE OF WATER ENTERPRISE IMPROVEMENTS TO THE CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD AND THE LEASE OF SUCH IMPROVEMENTS BACK FROM SUCH BOARD, APPROVING RELATED AGREEMENTS, OFFICIAL STATEMENT, AND COMPETITIVE SALE OF $5,000,000 CERTIFICATES OF PARTICIPATION WHEREAS, the City of San Luis Obispo (the "City") is currently proceeding to finance the costs of various capital improvements with respect to the water enterprise of the City (the "Enterprise"); and WHEREAS, the City of San Luis Obispo Capital Improvement Board (the "Board") has been formed for the purpose of assisting the City in financing the acquisition, construction, and improvement of property which is of benefit to the City; and WHEREAS, to accomplish such financing the City has proposed to sell certain facilities of the Enterprise (the "Facilities") to the Board pursuant to the Acquisition Agreement dated as of December 1, 1988, (the "Acquisition Agreement") and to lease the Facilities back from the Board pursuant to the Lease Agreement dated as of December 1, 1988 (the "Lease Agreement"); and WHEREAS, for the purpose of obtaining the moneys required to finance the acquisition of the Facilities under the Acquisition Agreement, the Board proposes to assign and transfer certain of its rights under the Lease Agreement to a trustee bank (the "Trustee") pursuant to -that certain Assignment Agreement dated as of December 1, 1988, (the "Assignment Agreement") by and between the Board and the Trustee; and WHEREAS, in consideration of such assignment and the execution of that certain Trust Agreement dated as of December 1, 1988, (the "Trust Agreement") by and among the Board, the City, and the Trustee, the Trustee will execute and deliver Certificates of Participation in the principal amount of $5,000,000 (the "Certificates of Participation"), each evidencing an undivided fractional interest in the Lease Payments made by the City under the Lease Agreement; and WHEREAS, the City and the Board have determined to sell the Certificates of Participation at competitive sale, and the firm of Evensen Dodge, Inc. (the "Financial Adviser") is assisting the City and the Board in such sale of the Certificates of Participation. and has caused to be prepared an Official Statement describing the Certificates of Participation, to be used in connection with such sale; and WHEREAS, the City Council approves of said transactions as being in the public interests of the City; NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of San Luis Obispo as follows: SECTION 1. Sale of Facilities• Aooroval of Acauisition Agreement The City hereby approves the sale of the Facilities by the City to the Board pursuant to, and subject to the terms and conditions of, the Acquisition Agreement in substantially the form on file with the City Clerk, together with any changes therein or additions thereto deemed advisable by the City Administrative Officer, whose execution thereof shall be conclusive evidence of his approval of such changes and additions. The Board hereby authorizes and directs the City Administrative Officer to execute, and the City Clerk to attest and affix the seal of the City to, said form of the Acquisition Agreement for and in the name of the City. . SECTION 2. _Lease of Facilities• Approval of Lease Agreement The City Council hereby approves the lease of the Facilities by the City from the Board pursuant to, and subject to the terms and conditions of, the Lease Agreement in substantially the form on file with the City Clerk, together with any changes therein or additions thereto deemed advisable by the City Administrative Officer, whose execution thereof shall be conclusive evidence of his approval of such changes and additions. The City Council hereby authorizes and directs the City Administrative Officer to execute, and the City Clerk to attest and affix the seal of the City to, said form of the Lease Agreement for and in the name of the City. The schedule of lease payments set forth in the Lease Agreement shall conform to the schedule of principal and interest payments represented by the Certificates of Participation as determined pursuant to Section 4 hereof. SECTION 3. Trust Agreement. The City Council hereby approves the Trust Agreement in substantially the form on file with the City Clerk together with any changes therein or additions thereto deemed advisable by the City Administrative Officer, whose execution thereof shall be conclusive evidence of his approval of such changes and additions. The City Council hereby authorizes and directs the City Administrative Officer to execute, and the City Clerk to attest and affix the seal of the City %to, said form of the Trust Agreement for and in the name of the City. SECTION 4. Sale of Certificates of Participation The City Council hereby approves the Competitive sale of the Certificates of Participation, and hereby calls for the receipt of bids on the Certificates of Participation on Tuesday, December 13, 1988, at the hour of 10:00 a.m. in the office of Jones Hall Hill & White at Four Embarcadero Center, Suite 1950, San Francisco, California. The Director of Finance is hereby authorized and directed for and in the name on behalf of the City to accept the bid of the best responsible bidder; provided that the purchase price to be paid for the Certificates of Participation shall be at least ninety-eight (98%) of the par value thereof, and the weighted average rate of interest represented by the Certificates shall not exceed eight and three-quarters percent (8-3/4%) per annum. The Certificates of Participation shall be sold pursuant to and in accordance with the provisions of the Official Notice of Sale in substantially the form on file with the City Clerk, which is hereby approved as the official notice of sale of the Certificates of Participation. -2- G -0-// SECTION 5. Publication of Notice of Intention. In accordance with the requirements of Section 53692 of the California Government Code, the Director of Finance is hereby authorized and directed to execute, and Jones Hall Hill & White, A Professional Law Corporation, as bond counsel to the City, is hereby authorized and directed to cause to be published, the Notice of Intention to Sell Certificates of Participation in substantially the form on file with the City Clerk. Such publication shall be made once no later than November 28, 1988, in a financial journal published in the State of California. SECTION 6. Official Statement, The City Council hereby approves the. preliminary Official Statement describing the Certificates of Participation, in the form submitted by the Financial Adviser and on file with the City Clerk, together with any changes therein or additions thereto deemed advisable by the Director of Finance, whose execution thereof shall be conclusive evidence of his approval of any such changes or additions. The City Council hereby approves and authorizes the distribution by the Financial Adviser and by the purchaser of the Certificates of Participation of said Official Statement. to prospective purchasers of the Certificates of Participation. The Director of Finance is hereby authorized and directed to approve any changes in or additions to the final form of such Official Statement as the Director of Finance shall deem advisable, and to execute said final Official Statement for and in the name and on behalf of the City. SECTION 7. Official Actions. The City Administrative Officer, the Director of Finance, the City Clerk, the City Attorney, and all other officers and representatives of the City are each authorized and directed in the name and on behalf of the City to make any and all assignments, certificates, requisitions, agreements, notices, consents, instruments of conveyance, warrants, and other documents, which they or any of them might deem necessary or.appropriate in order to consummate any of the transactions contemplated by the documents approved pursuant to this Resolution. SECTION 8. Effective Date, This Resolution shall take effect from and after the date of its passage and adoption. On motion of , by and on the following vote: AYES: NOES: ABSENT: seconded roll call the foregoing Resolution was passed and adopted this 15th day of November, 1988. -3- e Mayor ATTEST: City Clerk APPROVED: City Ad inistrative Officer Director of Finance -4- (!�] - ;?t -13 ��IIB�IbIII�IIiIIIIII� LU�J � 1 i � MEETING GATE: city o san Lues osispo November 1, 1988 COUNCIL AGENDA REPORT 11 NUMBER • Q FROM: William C. Statler, Director of FinanceWl-' SUBJECT: WATER PROJECT FINANCING CAO RECOMMENDATION Authorize staff to initiate proceedings for the issuance of $5 million in Certificates of Participation/Lease Revenue Bonds in order to provide financing for approved water projects. OVERVIEW The proposed project financing is in conformance with the policies, objectives, and projects outlined in the 1987-89 Financial Plan, and is recommended for implementation at this time due to the following factors: • Enables all approved water projects to proceed expeditiously. • Record keeping and investment earning advantages associated with completing a small debt issuance (defined by the IRS as $5 million or less) prior to the close of 1988. • Favorable market conditions for an issuance of this type. The following summaries of the proposed financing and improvement projects are provided in Attachments A, B, and C: • Attachment A provides an overview of the proposed financing including issue size, anticipated net proceeds, project summary, maturity term, type of issue, projected interest rate, and tentative calendar. • Attachment B provides a summary of the proposed projects to be financed. . • Attachment C is a memorandum from the Director of Utilities describing the project scope in greater detail using tables excerpted from the Capital Improvement Section of the Draft Water Management Plan. FISCAL IMPACT The use of debt proceeds for the financing of the proposed projects was identified and approved in the 1987-89 Financial Plan. Additionally, the estimated cost of the debt service on an issuance of approximately $5 million was included in the water rate analysis approved by the City Council on June 6, 1988. As such, there is no adverse fiscal impact associated with this action, and approval of the recommended action would be consistent with the City's adopted financial plans. CONSEQUENCES OF NOT TAKING THE RECOMMENDED ACTION Failure to initiate proceedings at this time will: • Delay the implementation of approved water projects, which are dependent upon the proceeds from the issue for funding as identified in the 1987-89 Financial Plan, Draft Water Management Plan, and recent water rate review. -007 111 i1111ll$$11011III city o f San 'ut s OBI SPO Wa7wAI� COUNCIL AGENDA REPORT • Result in a lost opportunity to conduct a small issue financing during 1988, which provides significant record keeping and interest earning advantages to the City. • Result in a potential lost opportunity to benefit from current market conditions which are especially favorable at this time for an issuance of this type. BACKGROUND In preparing the workscope for the Financial Services Study currently in progress, it was originally anticipated that the need for any water project financings and related water rate increases would be addressed as an integral part of the study. However, significant progress has already been made in this area: as part of the water rate increase approved by the City Council on June 6, 1988, provisions were made to fund the operating and capital needs of the water system, and accordingly, the debt service on an issue of approximately $5 million (estimated at $490,000 annually) was reflected in the water rate analysis. As summarized in Attachment B, this size issue would provide funding for those projects addressed in the 1987-89 Financial Plan and Draft Water Management Plan, with the exception of the construction component of the Salinas Reservoir Expansion and Balancing Reservoir projects, which were not included at this time due to uncertainties regarding cost and feasibility. Initial presentation of the Financial Services Study to the City Council is currently scheduled for a study session in early January as part of the 1989-91 Financial Plan preparation process. Rather than waiting for the completion of the Financial Services Study, it is recommended that the City initiate proceedings for the issuance of $5 million in Certificates of Participation/Lease Revenue Bonds (COP's/LRB's) to be completed prior to the end of 1988. As noted previously, one of the primary benefits of proceeding at this time includes the record keeping and investment earning advantages associated with completing a small debt issuance (defined by the IRS as $5 million or less) prior to the close of 1988. Under the Tax Reform Act of 1986, there are significant restrictions on the investment of proceeds from any debt issuances that exceed $5 million cumulatively during any calendar year. Under these provisions, the issuing agency is prohibited from earning investment revenues greater than the net interest cost of the financing. In addition to limiting the investment earning potential from bond proceeds (which prior to the restrictions were used to reduce the size of the issue and related annual debt service costs), these arbitrage restrictions place significant record keeping burdens on the issuing entity in determining and documenting any such variances. Due to the significant penalties associated with any violation of these provisions (including the withdrawal of tax benefits to the bond holder, which is the primary incentive for them to purchase local agency securities), most agencies contract annually with a Big 8 accounting firm to provide this service at costs ranging from $5,000 to $20,000 per year per issue. By completing this issuance prior to the close of the current calendar year, the City can take advantage of the reduced record keeping and interest earning requirements associated with a small debt issuance. RECENT FINANCING EXPERIENCE The City's most recent project financing was completed on July 15, 1986, with the issuance of $13,970,000 in Lease Revenue Bonds related to the Madonna Road and other street improvements ($5,000,000) and the construction of parking structures ($8,970,000). Net proceeds available for construction from the issue after debt service/i _ p- �un�ibu►�Iflllll�p►��'�►I �I city or sant is oBispo !I�COUNCIL AGENDA REPORT reserve requirements, capitalized interest, and issuance costs were $10,208,000. The bonds were issued through the San Luis Obispo Capital Improvements Board, which was established on April 15, 1986 as a public facilities financing authority. The City Council serves as the Board of Directors for this agency. The portion of the issue pertaining to road improvements was secured by the sale of property (City Hall and Police Station) to the Board from the City. The issuance of the COP's or LRB's through the Board is also anticipated for the proposed financing. Other recent uses of debt financing include lease -purchase agreements for construction of the corporation yard, acquisition of the City Hall telephone system, and purchase of the financial management information system computer. Historical uses of debt financing include the issuance of general obligation and revenue bonds in the late 1950's and early 1960's for the construction and implementation of various water and sewer facilities, including the City's share of the Whale Rock Reservoir. The City's current debt management policies are provided on page B-3 of the 1987-89 Financial Plan. As noted previously, the proposed financing is in accordance with these policies. ACTIONS REQUIRED TO INITIATE THE PROPOSED FINANCING As part of the workscope of the Financial Services Study currently in progress, the City Council selected the firm of Evensen Dodge to serve as the City's Financial Advisor for any project financings that may be initiated during the next five years. As such, a significant step in the project financing has already been accomplished. The following is a summary of additional City Council actions required to initiate the remaining proceedings: Bond Counsel Services - Legal services are required in conjunction with any project financing. Customary services include the preparation of documents and opinions related to the financing; consultation regarding federal tax and state public finance laws; and other legal matters which may arise in the course of planning and conducting debt financings. As noted above, a master agreement for Financial Advisor Services was an integral part of the City's Financial Services Study process. Although subject to annual renewal, the agreement with Evensen Dodge anticipates an ongoing relationship of at least five years. It is recommended that a similar approach also be used in selecting and retaining bond counsel services. This selection process has already been initiated, with RFP's sent to the top five California bond counsel firms on October 10, 1988. Pursuant to this RFP process, it is recommended that the City Council authorize the CAO, with the concurrence of the City Attorney, to enter into an agreement for bond counsel services with the selected f irm. Approval of Financing Documents - The formal approval by the City Council of a variety of documents is required prior to closing the project financing, including the bond indenture, trust agreement, and official statement. Prepared by the Financial Advisor and Bond Counsel, it is anticipated that these documents will be submitted for City Council approval at the November 15, 1988 meeting. In conjunction with the preparation and execution of these documents, the services of a trustee, paying agent, registrar, and transfer agent will also be required. It is anticipated that the City's Financial Advisor (Evensen Dodge) will assist in the selection of firms providing these services, and it is recommended that the City Council authorize the CAO to enter into any required agreements. ���n���ii�IVllllll�ll►►�u►I city of San Luis oBispo mGmIACOUNCIL AGENDA REPORT Comoetitive Sale - The project financing can be placed with an underwriter (the purchaser of the issue who provides the City with the net proceeds from the financing) through either a negotiated or competitive sale. Under a negotiated sale, the City and its Financial Advisor negotiate directly with the prospective underwriter for the placement terms such as discount, other underwriter fees, and interest rate. Under a competitive sale, the City awards the placement to an underwriter based on a competitive bid process. Depending on the complexity of the issuance, improvements to be funded, time constraints, debt instruments, repayment structure, and market conditions; there are advantages and drawbacks to each approach. For this project financing, a competitive sale is anticipated. Closing Date and Award of Bid - Under the competitive sale approach, it is anticipated that the award of bid for the placement of the debt issuance will be made on December 12, 1988, which has already been scheduled for a City Council study session. Award at that time should allow sufficient time for the preparation of closing documents and receipt of net proceeds prior to the end of 1988. SUMMARY In order to provide funding for currently approved water projects, it is recommended that the City Council authorize the following actions: • Authorize staff to initiate proceedings for the issuance of $5 million in Certificates of Participation/Lease Revenue Bonds. • Authorize the CAO, with the concurrence of the City Attorney, to enter into an agreement for bond counsel services. • Authorize the CAO to enter into agreements for other services incidental to the project financing, such as trustee services, paying agent, registrar, or transfer agent. CONCURRENCES: City AttorJoy Director of Utilities ATTACHMENTS Overview of the proposed financing (Attachment A). Summary of the proposed projects (Attachment B). Description of the project scope (Attachment Q. BOND COUNSEL/AGRPTWTR • ATTACHMENT A SUMMARY OF PROPOSED PROJECT FINANCING • Policy Links: • Issue Size: • Anticipated net proceeds after debt service reserve requirements and issuance costs: • Project cost summary (See Attachments B and C): Source of supply Distribution system Treatment plant Total estimated project costs • Type of debt instrument: • Issued through: • Maturity period: • Estimated interest rate: • Estimated annual debt service: • Schedule of key events: Initiate selection process for bond counsel City Council authorization to initiate proceedings for debt issuance; authorization for CAO, with concurrence of the City Attorney, to enter into an agreement for bond counsel services Formal City Council approval of bond documents and authorization to solicit underwriter bids Closing date; City Council award of bid (scheduled study session) * Public facilities financing corporation established on April 15, 1986; the City Council serves as its Board of Directors. 1987.89 Financial Plan Draft Water Management Plan Water Rate Review, June 6,1988 $5,000,000 54,400,000 575,000 2,050,000 1,739,300 84,364,300 Certificates of Participation or Lease Revenue Bonds San Luis Obispo Capital Improvement Board ' 20 years 8.0% to 8.5% 8490,000 October 10, 1988 November 1, 1988 November 15, 1988 December 12, 1988 OATTACHMENT B SUMMARY OF WATER CAPITAL PROJECTS BASED ON THE 1987-89 FINANCIAL PLAN AND DRAFT WATER MANAGEMENT PLAN SOURCE OF SUPPLY Golf course wells 75,000 Salinas Reservoir expansion Design 250,000 Construction 2,450,000 Groundwater wells 250,000 --------------- Total source of supply projects 3,025,000 --------------- DISTRIBUTION SYSTEM Pump and valve improvements Pump station - Hathway a Freeway 90,000 Pressure reducing valve relocation 8 Chorro & Foothill 80,000 Pressure reducing valve 8 Johnson & Buchon 30,000 Other pump/valve improvements 130,000 Water main reconstruction and upgrades Higuera - South of Marsh 160,000 George Street 100,000 Higuera California to Johnson 80,000 Monterey - Garfield to Freeway 150,000 Johnson to Henry 230,000 Monterey to Reservoir No. 1 180,000 Highway 1 8 Foothill 240,000 Other water main projects 580,000 Balancing reservoir 2,500,000 Total distribution system projects --------------- 4,550,000 --------------- WATER TREATMENT PLANT FLoculation basin improvements 235,900 Master control system 65,000 Telemetry system improvements 70,000 Improved backwash facilities 211,300 Chemical feed facilities 135,400 Standby emergency power 85,000 Filter media conversion/underdrain system 260,000 operations center 250,000 Other water treatment plant improvements 426,700 --------------- Total water treatment plant projects 1,739,300 --------------- TOTAL PROJECTS RECOMMENDED FOR FINANCING AT THIS TIME Source of supply 575,000 Distribution system 2,050,000 Water treatment plant 1,739,300 --------------- TOTAL 54,364,300 * Due to uncertainties regarding cost and feasibilty, financing for these projects is not recommended at this time. • ATTACHMENT C MEMORANDUM To: Bill Statler, Director of Finance OeFrom: William T. Hetland, Utilities Director Subject: Summary of Recommended Water Fund Projects Attached is a summary of recommended water fund projects and their estimated costs. The summary is divided into three catagories: A. Water Source of Supply $ 3,025,000 B. Water Treatment Plant 11739,300 C. Water Distribution 4.550.000 Total $ 91314,300 These projects were taken from the Draft Water Management Plan and the 1988/89 Financial Plan and Budget and are the basis for the Water Funds capital program over the next five years. * Water Source of Supply The Water Source of Supply projects include projects for development of additional water resources for the City. The emphasis is in two areas; groundwater and expansion of the Salinas Reservoir. The initial phases of the groundwater projects (including construction) are underway. The feasibility study and design phase of the Salinas Reservoir is under contract. * Water Treatment Plant The Stenner Canyon Water Treatment Plant was constructed in 1963 and was reviewed in the Draft Water Management Plan. The primary areas which were analyzed included plant flexibility and operational efficiency, replacement of outdated or deteriorated facilities, ability to meet State Health Department requirements and increase in plant capacity. The recommendation was to improve the flocculation and filtration processes plus address some hydraulic restrictions within the plant. Nineteen specific projects were identified in order to upgrade the plant. Summary of Recommended Water Fund Projects Page 2 * Water Distribution Parts of the City's water distribution system are over one hundred years old and are undersized to meet the needs of a modern community. As part of the development of the Draft Water Management Plan the City staff used a computer program to analyze our distribution system. The analysis looked at improving system reliability, reducing our pressure zones and minimizing our energy requirements in delivering water to our customers. The analysis showed that by restructuring our pressure zones the City could save on its energy costs. This is possible by the addition of new water lines and the replacement of some old undersized lines in addition to some new valve and pump system improvements. The analysis also showed that the southeastern portion of the City was deficient in treated water storage. It was proposed that a balancing reservoir be added to the,system in that area. The balancing reservoir has not been authorized by the council and additional justification will be necessary before it can proceed. watfunproj/n �' 9-0 EO • SUMMARY OF RECOMMENDED WATER FUND PROJECTS A. WATER SOURCE OF SUPPLY TOTAL 1. Golf Course design $ 10,000 construction $ 65,000 2. Salinas Reservoir Expansion study/design $ 250,000 construction $2,450,000 3. Water Well Location and Development study/design $ 60,000 construction $ 190.000 TOTAL WATER SOURCE OF SUPPLY PROJECTS $3,025,000 B. WATER TREATMENT PLANT TOTAL 1. Flocculation Basin Improvements $ 235,900 2. New Master Control System $ 65,000 3. Influent Rate Control $ 25,100 4. Improved Backwash Facilities $ 211,300 5. Surface Wash Piping and Valve Replacement $ 28,300 6. Clarifier Bypass Line $ 55,900 7. Chemical Feed Facilities $ 135,400 8. Filter Rate Control and Instrumentation $ 91,000 9. Clarifier Improvements $ 19,900 10. Expanded Laboratory Facilities $ 7,500 11. Standby Emergency Power $ 85,000 12. Cover Clarifier/Filter Influent Flume $ 8,000 13. Filter Media Conversion/Underdrain System $ 260,000 14. Influent Piping Modifications $ 86,700 15. Radio Telemetry Monitoring/Control System $ 70,000 16. Chemical Application and Flash Mixing $ 19,800 17. Direct Filtration Option $ 24,500 18. Miscellaneous Hydraulic Restrictions $ 60,000 19. Operations Center $ 250.000 7 TOTAL TREATMENT PLANT PROJECTS $1,739,300 RECOMMENDED WATER FUND PROJECTS Page 2 C. WATER DISTRIBUTION TOTAL 1. Balancing Reservoir $2,500,000 2. Water Main reconstruction/improvements California/Hathway $ 20,000 California/Foothill $ 20,000 Monterey/Andrews $ 20,000 Serrano Heights $ 20,000 Ella/Johnson $ 10,000 Oakridge/Ferrini Tank $ 90,000 Serrano/Ramona/Broad $ 20,000 Skylark/Wilding $ 60,000 Ramona/La Entrada $ 10,000 Johnson/Henry $ 230,000 Monterey to Reservoir 1 $ 180,000 Highway 1/Foothill $ 240,000 La Entrada/Catalina $ 20,000 Ella/Johnson to Sierra $ 20,000 Higuera/Marsh South $ 160,000 George St $ 100,000 Higuera/California/Johnson $ 80,000 Monterey/Garfield/Freeway $ 150,000 Buena Vista $ 80,000 Santa Ynez $ 70,000 Morro St. $ 30,000 Court St. $ 30,000 McCollum $ 60,000 3. Pump and Valve improvements Pressure Reduc Valve - Grand/Wilson $ 30,000 Check Valve - Warren Way/Patricia $ 10,000 Remove Air Compressor - Alrita $ 10,000 Check Valve - Alrita/Flora $ 20,000 Pump Station - Hathway/Freeway $ 90,000 Pressure Reduc Valve - Highland/Oakridge $ 30,000 Check Valve - Johnson/Bishop $ 10,000 Pressure Reducing Valve - Johnson/Buchon $ 30,000 Pressure Reducing Valve - Chorro/Foothill $ 80,000 Emergency Pumping Hydrants $ 20,000 TOTAL DISTRIBUTION PROJECTS $4,550,000 ef_ f -m 29026-10 Q JHHW:CFA:dffi NM90, 1888 F8202 MARKED TO SHOW CHANGES i ( 11/j o/16% ACQUISITION AGREEMENT THIS ACQUISITION AGREEMENT, dated as of December 1, 1988, is by and between the CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD, a public body corporate and politic duly organized and existing under Ordinance No. 10591986 Series) adopted by the City Council of the City of San Luis Obispo on April 15, 1� 986, and under the constitution and laws of the State of California (the "Board"), and the CITY OF SAN LUIS OBISPO, a charter city and municipal corporation duly organized and existing under the constitution and laws of the State of California (the "City"), WITNESSETH: WHEREAS, the City presently owns and operates certain facilities and property for the treatment and distribution of water to residents of the City and adjacent areas (the "Enterprise"), and the City wishes to provide funds for certain improvements to the Enterprise; and WHEREAS, to provide such funds to the City, the Board has proposed to acquire certain facilities constituting a portion of the Enterprise, as such facilities are described more fully in Exhibit A attached hereto and by this reference incorporated herein (the "Facilities"); and WHEREAS, to pay the costs acquiring the Facilities from the City pursuant hereto, the Board proposes to lease the Facilities back to the City pursuant to that certain Lease Agreement dated as of December 1, 1988, by and between the Board as lessor and the City as lessee (the "Lease Agreement'), and to assign its rights to receive lease payments payable by the City thereunder to Security Pacific National Bank as trustee (the "Trustee"), and to enter into that certain Trust Agreement dated as of December 1, 1988, by and among the Board, the City and the Trustee (the "Trust Agreement') under which the Trustee agrees to execute and deliver Certificates of Participation in the aggregate principal amount of $5,000,000 (the "Certificates") representing the direct, undivided fractional interests of the owners thereof in such lease payments; and WHEREAS, the City is authorized to enter into this Agreement pursuant to the municipal affairs power of the City as a charter city, and the Board is authorized to enter into this Agreement pursuant to the Ordinance pursuant to which the Board has been established; and WHEREAS, the Board and the City wish to enter into this Agreement to provide the terms and conditions relating to such acquisition of the Facilities by the Board from the City; NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants hereinafter contained, the parties hereto hereby agree as follows: M Section 1. Acquisition of Facilities. The City hereby grants, conveys and sells to the Board all right, title and interest of the City in and to all of the Facilities and the Board hereby acquires all of the right, title and interest of the City in and to all of the Facilities. The City hereby agrees to take any and all actions and to execute, deliver and record any and all deeds, instruments of conveyance and other documents which the Board may reasonably request to accomplish the sale of the Facilities to the Board pursuant hereto. Section 2. Warranty of Title. The City hereby represents and warrants to the Board that the City owns good and marketable fee title to the Facilities, subject only such encumbrances as do not materially affect the operation of the Facilities for the purposes served thereby. Section & Acquisition Price. In consideration of the acquisition by the Board of the City's right, title and interest in all of the Facilities pursuant to Section 1, the Board hereby agrees to pay to the City the amount of Dollars ($ ). The Board and the City hereby agreement that such amount is not in excess of the fair market value of the Facilities, as determined pursuant to the appraisal by Brown & Caldwell dated November _, 1988. The parties hereto agree that said purchase price constitute fair and adequate consideration for the interests of the City in the Facilities. Said purchase price shall be paid by the Board to the City on the date of delivery of the Certificates, and shall be paid from amounts deposited with the Trustee for such purpose from the proceeds of sale of the Certificates. Section 4. Use of Proceeds. The parties hereby agree that the acquisition by the Board of the City's right, title and interest in the Facilities pursuant to Section 1 serves the public purposes of the City by providing funds to enable the City to finance certain capital requirements of the City relating to the Enterprise. The City hereby agrees that the proceeds of sale of the Facilities shall be deposited in the Water Enterprise Fund of the Enterprise and shall be used solely for the purpose of paying the costs of capital improvements to the Enterprise, and that the City shall make no use of such proceeds which would cause the interest represented by the Certificates to be or to become includable in gross income for federal income tax purposes. -2- M • S IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, all as of the date first above written. Attest: By City Clerk Attest: By Secretary CITY OF SAN LUIS OBISPO By City Administrative Officer CITY OF SAN LUIS OBISPO CAPITAL MTROVEMENT BOARD . By Executive Director —3— ,S DESCRIPTION OF FACILITIES -4- 2901s-10 raw craam NA10,1988 WHEN RECORDED, RETURN TO: Jones Hall Hill & White . Four Embarmdero Center, Suite 1950 San Francisco, California 94111 Attention: MARKED TO SHOW CHANGES � n/rd/48 ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT, made and entered into as of December 1, 1988, by and between the CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD, a public body corporate and politic duly organized and existing under Ordinance No. 1059 (1988 Series) adopted by the City .Council of the City of San Luis Obispo on April 15, 1988, and under the constitution and laws of the State of California (the "Board"), and SECURITY PACIFIC NATIONAL BANK a national bank organized and existing under the laws of the United States of America as trustee (the 71'rustee' ); WITNESSETH: WHEREAS, the City presently owns and operates certain facilities and property for the treatment and distribution of water to residents of the City and adjacent areas (the "Enterprise'), and the City wishes to provide funds for certain improvements to the Enterprise; and WHEREAS, to that end the Board has proposed to acquire certain facilities constituting a portion of the Enterprise (the "Facilities") from the City pursuant to that certain Acquisition Agreement dated as of December 1, 1988, (the "Acquisition Agreement") by and between the City as seller and the Board as purchaser, and to lease. the Facilities back to the City pursuant to that certain Lease Agreement dated as of December 1, 1988, by and between the Board as lessor and the City as lessee (the "Lease Agreement"); and WRF.RF.AS, in order to provide funds sufficient to enable the Board to pay the purchase price of the Facilities under the Acquisition Agreement, the Board proposes to assign its rights to receive lease payments payable by the City thereunder to Security Pacific National Bank as trustee (the "Trustee"), and to enter into that certain Trust Agreement dated as of December 1, 1988, by and among the Board, the City and the Trustee (the "Trust Agreement") under which the Trustee agrees to execute and deliver Certificates of Participation in the aggregate principal amount of $5,000,000 (the "Certificates") representing the direct, undivided fractional interests of the owners thereof in such lease payments; and WHEREAS, the Board and the Trustee wish to enter into this Assignment Agreement to provide the terms and conditions relating to such assignment; NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants hereinafter contained, the parties hereto hereby agree as follows: Section 1. Assignment. The Board hereby transfers, assigns and sets over to the Trustee, for the benefit of the Owners of Certificates executed and delivered under the Trust Agreement, all of the Board's rights under the Lease Agreement (excepting only the Board's rights under Section,%. 6.3 and 8.4 of the Lease Agreement), including without limitation (a) the right to receive and collect all of the Lease Payments from the City under the Lease Agreement, (b) the right to receive and collect any proceeds of any insurance maintained thereunder, of any condemnation award rendered with respect to the Facilities, and (c) the right to exercise such rights and remedies conferred on the Board pursuant to the Lease Agreement as may be necessary or convenient (i) to enforce payment of the Lease Payments and any other amounts required to be deposited in the Certificate established under the Trust Agreement, or (ii) otherwise to protect the interests of the Owners in the event of a default by the City under the Lease Agreement. All rights assigned by the Board shall be administered by the Trustee in accordance with the provisions of the Trust Agreement and for the benefit of the Owners of Certificates. .Section 2. Acceptance. The Trustee hereby accepts the assignments made herein for the purpose of securing, equally and fractionally, the payments due pursuant to the Lease Agreement and Trust Agreement to, and the rights under the Lease Agreement and Trust Agreement of, the Insurer and the. Owners of the Certificates delivered pursuant to the Trust Agreement, all subject to the provisions of the Trust Agreement. Section & Conditions. This Assignment Agreement shall confer no rights or impose no duties upon the Trustee beyond those expressly provided in the Lease Agreement and Trust Agreement. IN WITNESS WHEREOF, the parties have executed this Assignment Agreement by their officers thereunto duly authorized as of the day and year first written above. Attest: By Secretary CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD Un Executive Director SECURITY PACIFIC NATIONAL BANK, as Trustee By Authorized Officer &a 79028-10 O JHHWCFA:df, Nm*, 1988 FUN { MARKED TO SHOW CHANGES t 11/10 96 TRUST AGREEMENT Dated as of December 1, 1988 by and among SECURITY PACIFIC NATIONAL BANK, as trustee CITY OF SAN LUIS OBISPO CAPITAL INTROVEMENT BOARD and the CITY OF SAN LUIS OBISPO Relating to $5,000,000 Certificates of Participation GLOW : Rumor- Fund = I,JdWFj){tr-F0,(e Fi)A4 K F8204 TABLE OF CONTENTS ARTICLE I DEFINITIONS • Page Section1.01. Definitions..................................................................................... 2 Section 1.02. Legal Authority............................................................................. 6 ARTICLE II THE CERTIFICATES OF PARTICIPATION Section 2.01. Authorization................................................................................ 7 Section2.02. Date.............................................................................................. 7 Section 2:03. Maturity; Interest Rates................................................................ 7 Section 2.04. Computation and Payment of Interest ........................................... 7 Section 2.05. Form and Execution of Certificates ................................................ 7 Section 2.06. Book Entry System........................................................................ 8 Section 2.07. Transfer and Exchange.................................................................. 10 Section 2.08. Certificates Mutilated, Lost, Destroyed or Stolen ........................... 10 Section2.09. Payment........................................................................................ 11 Section 2.10. Execution of Documents and Proof of Ownership ........................... 11 Section2.11. Temporary Certificates.................................................................. 12 Section 2.12. Registration Books.................:........................................................ 12 ARTICLE III PREPAYMENT OF CERTIFICATES Section3.01. Prepayment................................................................................... 13 Section 3.02. Selection of Certificates for Prepayment ........................................ 14 Section 3.03. Notice of Prepayment.................................................................... 14 Section 3.04. Partial Prepayment of Certificates ................................................. 14 Section 3.05. Effect of Notice of Prepayment....................................................... 15 ARTICLE IV DISPOSITION OF PROCEEDS; ACQUISITION FUND AND RESERVE FUND Section 4.01. Application of Proceeds ...... :........................................................... 16 Section 4.02. Acquisition Fund........................................................................... 16 X Page Section 4.03. Reserve Fund ....... .... .:............................. :......... ............................. 16 ARTICLE V LEASE PAYMENTS; CERTIFICATE FUND Section 5.01. Assignment of Rights in Lease Agreement ..................................... 18 Section 5.02. Establishment of Certificate Fund ................................................. 18 Section 5.03. Deposits......................................................................................... 18 Section 5.04. Application of Moneys ..................... :............. ................................ 18 Section5.05. Surplus.......................................................................................... 18 ARTICLE VI INVESTMENT PROVISIONS Section 6.01. Held in Trust...................:............................................................. 19 Section 6.02. Investments Authorized................................................................. 19 Section6.03. Accounting.................................................................................... 19 Section 6.04. Allocation of Earnings................................................................... 19 Section 6.05. Valuation and Disposition of Investments ...................................... 19 ARTICLE VII THE TRUSTEE Section 7.01. Appointment of Trustee .................. ........... :.................................. 20 Section7.02. Acceptance of Trusts..................................................................... 20 Section 7.03. Fees, Charges and Expenses of Trustee ......................................... 23 Section 7.04. Notice to Certificate Owners of Default ...:...................................... 23 Section 7.05. Intervention by Trustee ........................... :..................................... 23 Section 7.06. Removal of Trustee:....................................................................... 23 Section 7.07. Resignation by Trustee.................................................................. 23 Section 7.08. Appointment of Successor Trustee ................................................. 23 Section 7.09. Merger or Consolidation................................................................. 24 Section 7.10. Concerning any Successor Trustee ................................................. 24 Section 7.11. Appointment of Co-Trustge........................................................... 24 Section 7.12. Non -Liability of Trustee................................................................ 25 Section 7.13. Actions Through Agents................................................................ 25 Section 7.14. Nature of Trust Engagement 26 ......................................................... ARTICLE VIII MODIFICATION OR AMENDMENT OF AGREEMENTS ll C • ARTICLE IX COVENANTS; NOTICES Section 9.01. Compliance With and Enforcement of Lease Agreement........................................................................... 30 Section 9.02. Observance of Laws and Regulations ............................................. 30 Section 9.03. Prosecution and Defense of Suits ................................................... 30 Section 9.04. Recordation and Filing ...... ................. :............... ...:........................ 30 Section 9.05. Tax Covenants............................................................................... 30 Section 9.06. Further Assurances....................................................................... 32 Section 10.01. Section 10.02. Section 10.03. Section 10.04. Section 10.05. Section 11.01. Section 11.02. Section 11.03. Section 11.04. Section 11.05. Section 11.06. Section 11.07. Section 11.08. Section 11.09. "N9*1 LDMATION OF LIABILITY Limited Liability of City............................................................... 33 No Liability of the Board for Trustee Performance ....................... 33 Indemnification of Trustee........................................................... 33 Opinion of Counsel ....... :... :........................................... ............... 33 Limitation of Rights to Parties and Certificate Owners................................................................................ 33 ARTICLE XI EVENTS OF DEFAULT AND REMEDIES OF CERTIFICATE OWNERS Assignmentof Rights................................................................... 35 Remedies........................................................:............................ 35 Applicationof Funds....................................................4............... 35 Institution of Legal Proceedings................................................... 36 Non -waiver .... ................................ .............. :............................... 36 RemediesNot Exclusive............................................................... 36 Power of Trustee to Control Proceedings ...................................... 36 Limitation on Certificate Owners' Right to Sue ............................ 36 Possession of Certificates by Trustee Not Required ...................... 37 iii Page Section 8.01. Amendments Permitted................................................................. 27 Section 8.02. Procedure for Amendment with Written Consent of Certificate Owners............................................................... 27 Section 8.03. Effect of Supplemental Agreement ..... :.................. ......................... 28 Section 8.04. Endorsement or Replacement of Certificates Delivered After Amendments.............................................................. 28 Section 8.05. Amendatory Endorsement of Certificates ....................................... 29 ARTICLE IX COVENANTS; NOTICES Section 9.01. Compliance With and Enforcement of Lease Agreement........................................................................... 30 Section 9.02. Observance of Laws and Regulations ............................................. 30 Section 9.03. Prosecution and Defense of Suits ................................................... 30 Section 9.04. Recordation and Filing ...... ................. :............... ...:........................ 30 Section 9.05. Tax Covenants............................................................................... 30 Section 9.06. Further Assurances....................................................................... 32 Section 10.01. Section 10.02. Section 10.03. Section 10.04. Section 10.05. Section 11.01. Section 11.02. Section 11.03. Section 11.04. Section 11.05. Section 11.06. Section 11.07. Section 11.08. Section 11.09. "N9*1 LDMATION OF LIABILITY Limited Liability of City............................................................... 33 No Liability of the Board for Trustee Performance ....................... 33 Indemnification of Trustee........................................................... 33 Opinion of Counsel ....... :... :........................................... ............... 33 Limitation of Rights to Parties and Certificate Owners................................................................................ 33 ARTICLE XI EVENTS OF DEFAULT AND REMEDIES OF CERTIFICATE OWNERS Assignmentof Rights................................................................... 35 Remedies........................................................:............................ 35 Applicationof Funds....................................................4............... 35 Institution of Legal Proceedings................................................... 36 Non -waiver .... ................................ .............. :............................... 36 RemediesNot Exclusive............................................................... 36 Power of Trustee to Control Proceedings ...................................... 36 Limitation on Certificate Owners' Right to Sue ............................ 36 Possession of Certificates by Trustee Not Required ...................... 37 iii O ARTICLE XII MISCELLANEOUS Page Section 12.01. Defeasance................................................................................... 38 Section12.02. Records........................................................................................ 38 Section12.03. Notices......................................................................................... 38 Section 12.04. Disqualified Certificates............................................................... 39 Section 12.05. Payment of Certificates After Discharge of Trust Agreement........................................................................... 39 Section 12.06. Governing Law............................................................................ 39 Section 12.07. Binding Effect; Successors........................................................... 40 Section 12.08. Board and City Representatives................................................... 40 Section 12.09. Execution in Counterparts........................................................... 40 Section 12.10. Delivery of Cancelled Certificates ................................................. 40 Section12.11. Headings..................................................................................... 40 Section 12.12. Waiver of Notice......................................................................... 40 Section 12.13. Separability of Invalid Provisions ................................................ 40 -iv- TRUST AGREEMENT THIS AGREEMENT, made and entered into as of December 1, 1988, is by and among SECURITY PACIFIC NATIONAL BANK, a national bank organized and existing under the laws of the United States of America (the "Trustee"), the CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD, a public body corporate and politic duly organized and existing under Ordinance No. 1059 1986 Series) adopted by the City Council of the City of San Luis Obispo on April 15,,,1986, and under the constitution and laws of the State of California (the "Board"), and the CITY OF SAN LUIS OBISPO, a charter city and municipal corporation duly organized and existing under the constitution and laws of the State of California (the "City"); WITNESSETH: WHEREAS, the City presently owns and operates certain facilities and property for the treatment and distribution of water to residents of the City and adjacent areas (the "Enterprise"), and the City wishes to provide funds for certain improvements to the Enterprise; and WHEREAS, to provide such funds to the City, the Board has proposed to acquire certain facilities constituting a portion of the Enterprise (the "Facilities') pursuant to the Acquisition Agreement dated as of December 1, 1988, (the "Acquisition Agreement") by and between the City as seller and the Board as purchaser; and WHEREAS, the Board has proposed to lease the Facilities to the City pursuant to the Lease Agreement dated as of December 1, 1988, (the "Lease Agreement") by and between the Board as lessor and the City as lessee, and the City is authorized pursuant to the laws of the State of California to enter into leasehold agreements for such purposes; and WHEREAS, in order to provide funds to finance the acquisition of the Facilities under the Acquisition Agreement, the Board proposes to assign and transfer to the Trustee certain of its rights under the Lease Agreement, and .in consideration of such assignment and the execution of this Trust Agreement the Trustee has agreed to execute and deliver Certificates of Participation, each evidencing a direct, undivided fractional interest in the Lease Payments to be made by the City under the Lease Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. Unless the context otherwise requires, the terms defined in this Section shall, for all purposes of this Trust Agreement, have the meanings herein specified. In addition, all terms defined in the Lease Agreement and not otherwise defined herein shall have the respective meanings specified in the Lease Agreement. "Acquisition Fund" means the fund by that name established and held by the Trustee pursuant to Section 4.02. "Assignment Agreement" means the Assignment Agreement, dated as of December 1, 1988, by and between the Board as assignor and the Trustee as assignee, as originally executed or as thereafter amended pursuant to any duly authorized and executed amendments thereto. "Board" means the City of San Luis Obispo Capital Improvement Board, a public body corporate and politic duly organized and existing under Ordinance No. 1059,(L986 Series) adopted by the City Council of the City of San Luis Obispo on April 15,1986, and under the constitution and laws of the State of California. "Board Representative" means the President, Executive Director, Chief Financial Officer or Secretary of the Board, or any other person authorized by resolution of the governing body of the Board to act on behalf of the Board under or with respect to this Agreement. "Bond Counsel" means any attorney or firm of attorneys of nationally recognized expertise with respect to legal matters relating to obligations the interest on which is excludable from gross income pursuant to Section 103 of the Tax Code. "Business Day" means a day of the week on which the Trustee is not required or authorized to remain closed and on which the New York Stock Exchange is open. "Certificate Proceeds", when used with reference to the Certificates, means the face amount of the Certificates, plus accrued. interest and premium, if any, less original issue discount and less the proceeds thereof deposited in the Reserve Fund. "Certificates" means the $5,000,000 aggregate principal amount of Certificates of Participation to be executed and delivered pursuant hereto. "City" means the City of San Luis Obispo, a charter city and municipal corporation duly organized and existing under the constitution and laws of the State of California. "City Representative" means the Mayor, City Administrative Officer or the Director of Finance of the City or any other person authorized by resolution of the City Council of the City, to act on behalf of the City under or with respect to this Agreement. -2- "Closing Date" means December" 29, 1988, being the day when the Certificates of Participation, duly executed by the Trustee, are delivered to the Original Purchaser. "Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to the City or the Board relating to the execution and delivery of the Lease Agreement or the execution, sale and delivery of the Certificates, includiV but not limited to filing and recording costs, settlement costs, printing costs, reproduction and binding costs, initial fees and charges of the Trustee (which shall include the first annual administration fee of the Trustee), financing discounts, legal fees and charges, title insurance fees and charges relating to the Facilities, financial and other professional consultant fees, costs of rating agencies for credit ratings, fees for execution, transportation and safekeeping of the Certificates and charges and fees in connection with the foregoing. r" means the Securities De Section "DTC" means The Depository Trust Company, New York, New York, and its successors and assigns. "Event of Default" means an event of default under the Lease Agreement, as defined in Section 8.1 thereof. "Federal Securities" means any of the following which are noncallable and which at the time of investment are legal investments under the laws of the State of California for trust funds held by the Trustee: (a) direct general obligations of the United States of America (including obligations issued or held in book entry form on the books of the Department of the Treasury of the United States of America); and (b) obligations of any agency, department or instrumentality of the United States of America the timely.payment of principal of and interest on which are fully guaranteed by the United States of America. "Fiscal Year" means the twelve-month period beginning on July 1 and ending on the next succeeding June 30, or any other twelve-month period selected by the City as its fiscal year. "Information Services" means Financial Information, Inc.'s "Daily Called Bond Service', 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services' "Called Bond Service," 55 Broad Street, 28th Floor, New York, New York 10004; Moody's Investors Service "Municipal and Government," 99 Church Street, 8th Floor, New York, New York 10007, Attention: Municipal News Reports; Standard & Poor's Corporation "Called Bond Record," 25 Broadway, 3rd Floor, New York, New York 10004; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other services providing information with respect to called bonds as the City may designate in a written request delivered to the Trustee. 2M "Interest Payment Date" means June 1, 1989, and the first day of each June and December thereafter so long as any Certificates are Outstanding. "Lease Agreement" means the Lease Agreement dated as of December 1, 1988, by and between the Board as lessor and the City as lessee, as originally executed or as thereafter amended pursuant to any duly authorizers and executed amendments thereto. "Lease Payments" means all payments required to be paid by the City pursuant to Section 4.4 of the Lease Agreement, including any prepayment thereof pursuant to Article IX of the Lease Agreement. "Certificate Fund" means the fund by that name established and held by the Trustee pursuant to Section 5.02. "Minimum Rating" means means a rating of A or better by Moody's or S&P. In the event the rating system of Moody's or S&P with respect to any particular Permitted Investment does not including a rating category of A, the term "A or better" as used in the preceding sentence shall mean the highest general rating category applicable to such Permitted Investment (determined without regard to any refinement or gradation of such rating category by a numerical modifier, a plus or a minus sign, or otherwise). "Moody's' means Moody's Investors Service, its successors and assigns. "Original Purchaser" means , as original purchaser of the Certificates. "Outstanding", when used as of any particular time with respect to Certificates, means (subject to the provisions of Section 12.04) all Certificates theretofore executed and delivered by the Trustee under this Agreement except - (a) Certificates theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (b) Certificates for the payment or prepayment of which funds or Federal Securities in the necessary amount shall have theretofore been deposited with the Trustee pursuant to Section 12.01; and (c) Certificates in lieu of or in exchange for which other Certificates shall have been executed and delivered by the Trustee pursuant to Section 2.08. 'Owner", when used with respect to a Certificate means the person in whose name the ownership of such Certificate shall be registered on the Registration Books. "Permitted Investments" means any of the following which at the time of investment are legal investments under the laws of the State of California for the moneys proposed to be invested therein: (a) Federal Securities; -4- (b) any of the following obligations or indebtedness issued or guaranteed by any of the following federal agencies and entities: (i) senior debt obligations of the Federal Home Loan Bank System; (ii) participation certificates of the Federal Home Loan Mortgage Corporation; (iii) mortgage-backed securities or senior debt obligations of the Federal National Mortgage Association; or (iv) senior debt obligations of the Student Loan Marketing Association. (c) interest-bearing demand or time deposits (including certificates of deposit) in federal or state chartered savings and loan associations or in national or State banks (including the Trustee) provided that either: (i) the obligations of such association or bank or the obligations of the holding company of such association or bank have a Minimum Rating; or (ii) such deposits are fully insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation; (d) obligations issued by any corporation organized and operating within the United States of America having assets in. excess of $500,000,000, which obligations have a Minimum Rating; (e) commercial paper which has a Minimum Rating or backed by a letter of credit or line of credit which has a Minimum Rating, (fl money market funds either (i) the policy of which is to invest solely in Permitted Investments, or (ii) which have a Minimum Rating, (g) bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as bankers acceptances, which are eligible for purchase by the Federal Reserve System and the obligations of which commercial bank or the obligations of the holding company of which has a Minimum Rating, (h) obligations the interest on which is exempt from federal income taxation under Section 103 of the Tax Code, and which have a Minimum Rating; and (i) investment agreements which are the obligations of, or which are secured or guaranteed by the obligations of, a financial institution whose long-term obligations have a Minimum Rating. "Private Business Use" means use directly or indirectly in a trade or business carried on by a natural person or in any activity carried on by a person other than a natural person, excluding, however, use by a governmental unit and use as a member of the general public. "Record Date" means the close of business on the fifteenth (15th) day of the month preceding each Interest Payment Date, whether or not such fifteenth (15th) day is a Business Day. Im "Registration Books" means the records maintained by the Trustee pursuant to Section 2.12 for registration of the ownership and transfer of ownership of the Certificates. "Reserve Fund" means the fund by that name established and held by the Trustee pursuant to Section 4.03. "Reserve Requirement" means, as of the date of calculation, an amount equal to to the maximum amount of Lease Payments (excluding Lease Payments with respect to which the City shall have posted a security deposit pursuant to Section 9.1 of the Lease Agreement) coming due in the current or any future Fiscal Year. "Securities Depositories" means The Depository Trust Company, 711 Stewart Avenue, Garden City, New York 11530, Fax -(516) 227-4039 or 4190; Midwest Securities Trust Company, Capital Structures -Call Notification, 440 South LaSalle Street, Chicago, Illinois 60605, Fax -(312) 663-2343; Philadelphia Depository Trust Company, Reorganization Division, 1900 Market Street, Philadelphia, Pennsylvania 19103, Attention: Bond Department, Dex-(215) 496-5058; and, in accordance with then current guidelines of the Securities and Exchange Commission, such other addresses and/or such other securities depositories as the City may designate in a written request of the City delivered to the Trustee. "S&P" means Standard & Poor's Corporation, its successors and assigns. "Tax Code" means the Internal Revenue Code of 1986. Any reference herein to a provision of the Tax Code shall include all applicable Tax Regulations promulgated with respect to such provision. "Tax Regulations" means temporary and permanent regulations promulgated under the Tax Code. 'Term of the Lease Agreement' means the time during which the Lease Agreement is in effect, as provided in Section 4.2 of the Lease Agreement. "Trust Agreement" means this Trust Agreement, as originally executed or as . thereafter amended pursuant to any amendments hereto permitted to be made hereunder. "Trust Office" means the corporate trust office of the Trustee at 333 South Beaudry Avenue, Los Angeles, California 90017, or at such other address or addresses designated by the Trustee in written notice filed with the City, the Board and the Owners. "Trustee" means Security Pacific National Bank or any successor thereto acting as Trustee pursuant to this Trust Agreement. Section 1.02 Legal Authority. Each of the parties hereby represents and warrants that it has full legal authority and is duly empowered to enter into this Agreement, and has taken all actions necessary to authorize the execution of this Agreement by the officers and persons signing it. Elm AR77CLE H THE CERTIFICATES OF PARTICIPATION Section 2.01. Authorization. The Trustee is hereby authorized and directed upon written request from the Board to prepare, execute and deliver, to the Original Purchaser, Certificates in an aggregate principal amount of Five Million Dollars ($5,000,000) evidencing direct, undivided fractional ownership interests of the Owners thereof in the Lease Payments. Section 2.02. Date. Each Certificate shall be dated as of the date of its execution (except that each Certificate delivered to the Original Purchaser shall be dated as of December 1, 1988), and interest represented thereby shall be payable from the Interest Payment Date next preceding the date of execution thereof, unless: (a) it is executed after a Record Date and on or before the following Interest Payment Date, in which event interest represented thereby shall be payable from such Interest Payment Date; or (b) it is executed on or before the first Record Date, in which event interest represented thereby shall be payable from December 1, 1988; provided, however, that if, as of the date of any Certificate, interest represented by any Certificate is in default, interest represented by such Certificate shall be payable from the Interest Payment Date to which interest has previously been paid or made available for payment with respect to such Certificate. Section 2.03. Maturity; Interest Rates. Principal represented by the Certificates shall be payable on June 1 in each of the respective years and in the respective amounts, and interest represented thereby shall be computed at the respective rates, as follows: Maturity Date Principal Interest Maturity Date Principal Interest (June 1) Amount Rate (June 1) Amount Rate (TO COME) AV, Section 2.04. Computation and Payment of Interest. Interest represented by the Certificates shall be payable on each Interest Payment Date to and including the date of maturity or prepayment, whichever is earlier, as provided in Section 2.09. Said interest shall represent the portion of Lease Payments designated as interest and coming due on each of the respective Interest Payment Dates. The share of the portion of Lease Payments designated as interest with respect to any Certificate shall be computed by multiplying the portion of Lease Payments designated as principal represented by such Certificate by the rate of interest represented by such Certificate (on the basis of a 360 - day year of twelve 30 -day months). Section 2.05. Form and Execution of Certificates. The Certificates shall be themoL substantially as set forth in Exhibit A attached hereto. and by this reference incorporated herein. The Certificates shall be executed by and in the name of the Trustee -7- by the manual signature of an signatory officer of the. Trustee. If any person whose signature appears on any Certificate ceases to be an authorized signatory before the date of delivery of said Certificate, such signature shall nevertheless be as effective as if such person had remained an authorized signatory until such date. Section 206. Book Entry System. (a) Original Delivery. The Certificates shall be initially delivered in the form of a separate single fully registered Certificate (which may be typewritten) for each of the maturities of the Certificates. Upon initial delivery, the ownership of each such Certificate shall be registered in the registration books kept by the Trustee in the name of the nominee set forth in subsection (e) (the "Nominee"), as nominee of the Depository. Except as provided in subsection (c), the ownership of all of the Outstanding Certificates shall be registered in the name of the Nominee on the Registration Books. With respect to Certificates the ownership of which shall be registered in the name of the Nominee, the Board, the City and the Trustee shall have no responsibility or obligation to any participant in the Depository's book—entry system (a "Depository System Participant') or to any person on behalf of which such the City holds an interest in the Certificates. Without limiting the generality of the immediately preceding sentence, the Board, the City and the Trustee shall have no responsibility or obligation (unless the Board is at such time the Depository) with respect to (i) the accuracy of the records of the Depository, the Nominee, or any Depository System Participant with respect to any ownership interest in the Certificates, (ii) the delivery to any Depository System Participant or any other person, other than a Certificate Owner as shown in the Registration Books, of any notice with respect to the Certificates, including any notice of redemption, (iii) the selection by the Depository of the beneficial interests in the Certificates to be redeemed in the event the City elects to prepay the Lease Payments in part, (iv) the payment to any Depository System Participant or any other person, other than a Certificate Owner as shown in the Registration Books, of any amount with respect to principal, premium, if any, or interest represented by the Certificates or (v) any consent given or other action taken by the Depository as Owner of the Certificates. The Board, the City and the Trustee may treat and consider the person in whose name each Certificate is registered as the absolute owner of such Certificate for the purpose of payment of principal, premium and interest represented by such Certificate, for the purpose of giving notices of redemption and other matters with respect to such Certificate, for the purpose of registering transfers of ownership of such Certificate, and for all other purposes whatsoever. The Trustee shall pay all principal, premium, if any, and interest represented the Certificates only to or upon the order of the respective Owners, as shown in the Registration Books, or their respective attorneys duly authorized in writing, and all such payments shall be valid and effective to fully satisfy and discharge all obligations with respect to payment of principal, premium, if any, and interest with respect to the Certificates to the extent of the sum or sums so paid. No person other than a Certificate Owner, as shown in the Registration Books shall receive a Certificate evidencing the obligation of the City to make payments of principal, premium, if any, and interest pursuant to this Trust Agreement. Upon delivery by the Depository to the Nominee of written notice to the effect that the Depository has determined to substitute a new nominee in place of the Nominee, and subject to the provisions herein with respect to record dates, the word Nominee in this Trust Agreement shall refer to M2 such new nominee of the Depository; and upon receipt of such a notice the Board shall promptly deliver a copy of the same to the Trustee. (b) Representation Letter. In order to qualify the Certificates for the Depository's book -entry system, the Board, the City and the Trustee shall execute, seal, countersign and deliver to such Depository a letter representing such matters as shall be necessary to so qualify the Certificates (the "Representation Letter"). The execution and delivery of the Representation Letter shall not in any way limit the provisions of subsection (a) above or in any other way impose upon the Board or the City any obligation whatsoever with respect to persons having interests in the Certificates other than the Certificate Owners, as shown on the Registration Books. In the written acceptance of the Trustee, the Trustee shall agree to take all action necessary for all representations of the Board in the Representation Letter with respect to the Trustee to at all times be complied with. In addition to the execution and delivery of the Representation Letter, the City Representative may take any other actions, not inconsistent with this Trust Agreement, to qualify the Certificates for the Depository's book -entry program. (c) Transfers Outside Book -Entry System. In the event (i) the Depository determines not to continue to act as Securities Depository for the Certificates, or (ii) the Board or the City determine that the Depository shall no longer so act, then the Board and the City will discontinue the book -entry system with this Depository. In such event, the Depository shall cooperate with the Board, the City and the Trustee in the issuance of replacement Certificates by providing the Trustee with a list showing the interests of the Depository System Participants in the Certificates, and by returning the Certificates, registered in the name of the Nominee, on or before the date such replacement Certificates are issued. The Depository, by accepting delivery of the Certificates, agrees to be bound by this provision. If, prior to the termination of the Depository acting as Securities Depository, the Board and the City fail to identify another qualified Securities Depository to replace the Depository then the Certificates shall no longer be required to be registered in the Registration Books in the name of the Nominee, but shall be registered in whatever name or names the Owners transferring or exchanging Certificates shall designate, in accordance with the provisions of this Article II. In the event the Board determines that it is in the best interests of the beneficial owners of the Certificates that they be able to obtain certificated Certificates, the Board may notify the Depository System Participants of the availability of such through DTC of Certificates. In such event, the Trustee will issue, transfer and exchange Certificates as required by DTC and others in appropriate amounts; and whenever DTC requests, the Trustee, the Board and the City will cooperate with DTC in taking appropriate action (y) to make available one or more separate certificates evidencing the Certificates to any Depository System Participant having Certificates credited to its DTC account or (z) to arrange for another Securities Depository to maintain custody of a single certificate evidencing the Certificates, all at the Board's expense (subject to reimbursement therefor by the City). (d) Payments to the Nominee. Notwithstanding any other provision of this Trust Agreement to the contrary, so long as any Certificate is registered in the name of the Nominee, all payments with respect to principal of, premium, if any, and interest on such Certificate and all notices with respect to such Certificate shall be made and given, respectively, as provided in the Representation Letter or as otherwise .instructed by the Depository. (e) Initial Depository and Nominee. The initial Depository under this Section shall be DTC. The initial Nominee shall be CEDE & CO. as Nominee of DTC. Section 2.07. Transfer and Exchange. (a) Transfer of Certificates. The registration of any Certificate may, in accordance with its terms, be transferred upon the Registration Books by the person in whose name it is registered, in person or by his duly authorized attorney, upon surrender of such Certificate for cancellation at the Trust Office of the Trustee, accompanied by delivery of a written instrument of transfer in a form approved by the Trustee, duly executed. Whenever any Certificate or Certificates shall be surrendered for registration of transfer, the Trustee shall execute, authenticate and deliver a new Certificate or Certificates of the same maturity, interest rate and aggregate principal amount, in any authorized denominations. (b) Exchange of Certificates. Certificates may be exchanged at the Trust Office of the Trustee, for a like aggregate principal amount of Certificates of other authorized denominations of the same interest rate and maturity. The Trustee may require the payment by the Certificate Owner requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange. (c) Limitations on Transfer or Exchange. The Trustee may refuse to transfer or exchange either (i) any Certificate during the fifteen—day period prior to the date established by the Trustee for the selection of Certificates for redemption or (ii) the portion of any Certificate which the Trustee has selected for redemption pursuant to the provisions of Section 3.02. Section 2.08. Certificates Mutilated, Lost, Destroyed or Stolen. If any Certificate shall become mutilated, the Trustee, at the expense of the Owner of such Certificate, shall execute and deliver a new Certificate of like principal amount, interest rate and maturity in replacement for the Certificate so mutilated, but only upon surrender to the Trustee of the Certificate so mutilated. Every mutilated Certificate so surrendered to the Trustee shall be cancelled by it and redelivered by the Trustee to the City. If any Certificate shall be lost, destroyed or stolen, evidence of such loss, destruction or theft must be submitted to the Trustee, and, if such evidence is satisfactory to the Trustee and, if an indemnity satisfactory to the Trustee shall be given, the Trustee, at the expense of the Certificate Owner, shall execute and deliver a new Certificate of like principal amount, interest rate and maturity and numbered as the Trustee shall determine in lieu of and in replacement for the Certificate so lost, destroyed or stolen. The Trustee may require payment of an appropriate fee for each replacement Certificate delivered under this Section 2.08 and of the expenses which may be incurred by the Trustee in carrying out the duties under this Section 2.08. Any Certificate issued under the provisions of this Section 2.08 in lieu of any Certificate alleged to be lost, destroyed or stolen shall be equally entitled to the benefits of this Agreement with all other Certificates secured by this Agreement. The Trustee shall not be required to treat both the original Certificate and any replacement Certificate as being Outstanding for the purpose of determining the principal amount of Certificates which may be executed and M51M delivered. hereunder or for the purpose of determining any percentage of Certificates Outstanding hereunder, but both the original and replacement Certificate shall be treated as one and the same. Notwithstanding any other provision of this Section 2.08, in lieu of delivering a replacement for a Certificate which has been mutilated, lost, destroyed or stolen, and which has matured, the Trustee may make payment with respect to such Certificate upon• receipt of indemnity satisfactory to the Trustee. Section 2.09. Payment. Payment of interest represented by any Certificate on any Interest Payment Date shall be made to the person appearing on the Registration Books as the Owner thereof as of the close of business on the Record Date immediately preceding such Interest Payment Date, such interest to be paid by check or draft mailed to such Owner, by first class mail postage prepaid, at his address as it appears on the Registration Books. The principal and prepayment price represented by the Certificates at maturity or upon prior prepayment shall be payable in lawful money of the United States of America upon surrender of the Certificates at the Trust Office of the Trustee. Section 2.10. Execution of Documents and Proof of Ownership. Any request, direction, consent, revocation of consent, or other instrument in writing required or permitted by this Agreement to be signed or executed by Certificate Owners may be in any number of concurrent instruments of similar tenor, and may be signed or executed by such Owners in person or by their attorneys or agents appointed by an instrument in writing for that purpose, or by any bank, trust company or other depository for such Certificates. Proof of the execution of any such instrument, or of any instrument appointing any such attorney or agent, and of the ownership of Certificates shall be sufficient for any purpose of this Agreement (except as otherwise herein provided), if made in the following manner. (a) The fact and date of the execution by any Owner or his attorney or agent of any such instrument and of any instrument appointing any such attorney or agent, may be proved by a certificate, which need not be acknowledged or verified, of an officer of any bank or trust company located within the United States of America, or of any notary public, or other officer authorized to take acknowledgements of deeds to be recorded in such jurisdictions, that the persons signing such instruments acknowledged before him the execution thereof. Where any such instrument is executed by an officer of a corporation or association or a member of a partnership on behalf of such corporation, association or partnership, such certificate shall also constitute sufficient proof of his authority. (b) The fact of the ownership of Certificates by any person and the amount, the maturity and the numbers of such Certificates and the date of his holding the same shall be proved by the Registration Books. Nothing contained in this Section 2.10 shall be construed as limiting the Trustee to such proof, it being intended that the Trustee may accept any other evidence of the matters herein stated which the Trustee may deem sufficient. Any request or consent of the Owner of any Certificate shall bind every future Owner of the same Certificate in respect of anything done or suffered to be done by the Trustee in pursuant of such request or consent. -11- Section 2.11. Temporary Certificates. The Certificates may be issued in temporary form exchangeable for definitive Certificates when ready for delivery. Any temporary Certificates may be printed, lithographed or typewritten, shall be of Authorized Denominations, shall be in fully registered form without coupons and may contain such reference to any of the provisions of this Trust Agreement as may be appropriate. Every temporary Certificate shall be executed by the Trustee upon the same conditions and in substantially the same manner as the definitive Certificates. If the Trustee delivers temporary Certificates it will execute and deliver definitive Certificates as promptly thereafter as practicable, and thereupon the temporary Certificates may be surrendered, for cancellation; in exchange therefor at the Trust Office of the Trustee who shall execute and deliver in exchange for such temporary Certificates an equal aggregate principal amount of definitive Certificates of authorized denominations. Until so exchanged, the temporary Certificates shall be entitled to the same benefits under this Trust Agreement as definitive Certificates executed and delivered hereunder. Section 2.12. Registration Books. The Trustee shall keep or cause to be kept sufficient records for the registration and registration of transfer of the Certificates, which shall at all reasonable times be open to inspection by the City and the Board during regular business hours; and, .upon 'presentation for such purpose, the Trustee shall, under such reasonable regulations as it may prescribe, register or transfer or cause to be registered or transferred, on the Registration Books, Certificates as hereinbefore provided. -12- E ARTICLE III 0 PREPAYMENT OF CERTIFICATES Section 3.01. Prepayment. (a) Optional Prepayment. The Certificates maturing on or before June 1, 199_, are not subject to optional prepayment prior to the respective stated maturities. The Certificates maturing on or after June 1, 1998. are subject to optional prepayment in whole, or in. partAamong maturities in such respective amounts as the City shall designate in writing to the Trustee, and by lot within a maturity, on any date on or after June 1, 1997, from prepayments of the Lease Payments made at the option of the City pursuant to Section 9.2 of the Lease Agreement, at a prepayment price„eoual to 100% of the principal amount to be prepaid, together with accrued interest represented thereby to the date fixed for prepayment. A (b) Sinking Fund Prepayment. (i) Prepayment of .2003 Term Certificates. The Certificates maturing on June 1, 2003, are also subject to mandatory sinking fund prepayment by lot on June 1 in each year beginning June 1,A1, from the principal components of the Lease Payments required to be paid with respect to each of such dates, at a prepayment price equal to 100% of the principal amount to be prepaid, together with accrued interest represented thereby to the prepayment date, as follows: Sinking Fund Prepayment Date Principal Amount (June 1) To Be Prepaid 1999 $2359000 2000 255,000 2001 270,000 2002 295,000 2003 (Maturity) 315,000 (ii) Prepayment of 2008 Term Certificates. The Certificates maturing on June 1, 2008, are also subject to mandatory sinking fund prepayment by lot on June 1 in each year beginning June 1, 2004, from the principal components of the Lease Payments required to be paid with respect to each of such dates, at a prepayment price equal to 100° of the principal amount to be prepaid, together with accrued interest represented thereby to the prepayment date, as follows: Sinldng Fund Prepayment Date Principal Amount (June 1) To Be Prepaid 2004 $340,000 2005 365,000 2006 395,000 2007 425,000 2008 (Maturity) 455,000 -13- (c) Prepayment From Insurance and Condemnation Proceeds. The Certificates are subject to mandatory prepayment on any date, in whole, or in part among maturities on a pro rata basis and by lot within a maturity, from the proceeds of insurance or eminent domain proceedings credited towards the prepayment of the Lease Payments by the City pursuant to Section 9.3 of the Lease Agreement, at a prepayment price equal to 100% the principal amount to be prepaid, together with accrued interest represented thereby to the date fixed for prepayment. Section 3.02. _Selection of Certificates for Prepayment. Whenever provision is made in this Agreement for the prepayment of Certificates and less than all Outstanding Certificates of . any maturity are called for prepayment, the Trustee shall select Certificates of such maturity for prepayment by lot. For the purposes of such selection, Certificates shall be deemed to be composed of $5,000 portions, and any such portion may be separately prepaid. The Trustee shall promptly notify the City and the Board in writing of the Certificates or portions thereof so selected for prepayment. Section 3.03. Notice of Prepayment. When prepayment is authorized or required pursuant to Section 3.01, the Trustee shall give notice of the prepayment of the Certificates on behalf and at the expense of the City. Such notice shall state the prepayment date and prepayment price and, if less than all of the then Outstanding Certificates are to be called for prepayment, shall designate the numbers of the Certificates to be prepaid by giving the individual number of each Certificate or by stating that all Certificates between two stated numbers, both inclusive, have been called for prepayment or by stating that all of the Certificates of one or more maturities have been called for prepayment, and shall require that such Certificates be then surrendered, at the option of the respective Owners thereof, at the Trust Office of the Trustee for prepayment at said prepayment price, giving notice also that further interest represented by the Certificates will not accrue after the prepayment date. Such notice shall further state that on the specified date there shall become due and payable, the principal and premium, if any, represented by each Certificate together with accrued interest represented thereby to said date, and that from and after such date interest represented thereby shall cease to accrue and be payable. Notice of such prepayment shall be mailed by first class mail with postage prepaid, to the Information Services and to the Securities Depositories, and to the Owners of Certificates designated for prepayment at their respective addresses appearing on the Registration Books, at least thirty (30) days but not more than sixty (60) days prior to the prepayment date, which notice shall, in addition to setting forth the above information, set forth, in the case of each Certificate called only in part, the portion of the principal represented thereby which is to be prepaid; provided• that neither failure to receive such notice so mailed nor any defect in any notice so mailed shall affect the sufficiency of the proceedings for the prepayment of such Certificates or the cessation of accrual of interest represented thereby from and after the prepayment date. Section 3.04. Partial Prepayment of Certificates. Upon surrender of any Certificate prepaid in part only, the Trustee shall execute, authenticate and deliver to the Owner thereof, at the expense of the City, a new Certificate or Certificates of authorized denominations equal in aggregate principal amount to the unprepaid portion of the Certificate surrendered and of the same interest rate and the same maturity. -14- N • Section 3.05. Effect of Notice of Prepayment. Moneys for the prepayment (including the interest to the applicable date of prepayment), of Certificates having been set aside in the Certificate Fund, the Certificates shall become due and payable on the date of such prepayment, and, upon presentation and surrender thereof at the Trust Office of the Trustee, said Certificates shall be paid at the unpaid principal amount (or applicable portion thereof) represented thereby plus interest accrued and unpaid to said date of prepayment. If, on said date of prepayment, moneys for the prepayment of all the Certificates to be prepaid, together with interest to said date of prepayment, shall be held by the Trustee so as to be available therefor on such date of prepayment, then, from and after said date of prepayment, interest represented by the Certificates shall cease to accrue and become payable. All moneys held by the Trustee for the prepayment of Certificates shall be held in trust for the account of the Owners of the Certificates so to be prepaid. All Certificates paid at maturity or prepaid prior to maturity pursuant to the provisions of this Article III shall be cancelled upon surrender thereof and delivered to the City pursuant to Section 12.07. Dim ARTICLE IV DISPOSITION OF PROCEEDS; ACQUISITION FUND AND RESERVE FUND Section 4.01. Application of Proceeds. The proceeds received by the Trustee from the sale of the Certificates shall forthwith be set aside by the Trustee in the following respective funds and in the following order of priority: (a) The Trustee shall deposit in the amount of $ in the Certificate Fund, constituting accrued interest represented by the Certificates. (b) The Trustee shall deposit the amount of $ in the Reserve Fund, constituting the initial amount of the Reserve Requirement. (c) The Trustee shall deposit the amount of $ in the Acquisition Fund, constituting the remainder of such proceeds. Section 4.02. Acquisition Fund. The Trustee shall establish a special fund designated as the "Acquisition Fund". The Trustee shall disburse moneys in the Acquisition Fund upon receipt of a requisition signed by the Board Representative for the purpose of paying or reimbursing the payment of the Acquisition Costs, and to pay the Costs of Issuance upon receipt by the Trustee from time to time of a requisition signed by the City Representative, in each case which: (a) identifies the total amount of such costs to be paid pursuant to such requisition, including all items of cost in such detail as may be available to the Board or the City, as the case may be; and (b) states with respect to such disbursement (i) the requisition number, (ii) the amount to be disbursed for payment of such costs, (iii) the payee with respect to each cost to be disbursed and (iv) that each item of cost identified therein has been properly incurred, and is a proper charge against the Acquisition Fund and has not been the basis of any previous disbursement. Any amounts remaining on deposit in the Acquisition Fund on the date which is three (3) months following the Closing Date shall be withdrawn therefrom by the Trustee and transferred to the Certificate Fund. Section 4.03. Reserve Fund. The Trustee shall establish a special fund designated as the "Reserve Fund" to be held by the Trustee in trust for the benefit of the City and the Owners of the Certificates, and applied solely as provided herein. Moneys in the Reserve Fund shall be held in trust as a reserve for the payment when due -of the Lease Payments on behalf of the City. The Trustee shall deposit any moneys in the Reserve Fund in excess of the Reserve Requirement in the Certificate Fund from time to time, to be credited towards payment of the principal components of the Lease Payments. If on any Interest Payment Date the moneys available in the Certificate Fund do not equal the amount of the Lease Payment then coming due and payable, the Trustee shall apply the moneys available in the Reserve Fund to make such payments on behalf of the City by transferring the amount necessary for this purpose to the Certificate Fund. Upon receipt of any delinquent Lease Payment with respect to which moneys have been advanced from the Reserve Fund, such Lease Payment shall be deposited in the Reserve Fund to the extent of such advance. -16- If on any Interest Payment Date the moneys on deposit in the Reserve Fund and the Certificate Fund (excluding amounts required for payment of principal, interest and redemption premium, if any, represented by any Certificates theretofore.having come due but not presented for payment) are sufficient to pay. all Outstanding Certificates, including all principal, interest and redemption premiums (if any) represented thereby, and upon payment in full of all fees and expenses due and payable to the Trustee in connection with the Certificates, the Trustee shall, upon the written request of the City, transfer all amounts then on deposit in the Reserve Fund to the Certificate Fund to be applied for such purpose to the payment of the Lease Payments on behalf of the City. Any amounts remaining in the Reserve Fund on the date of payment in full, or provision for such payment as provided in Section 12.01, of all obligations represented by the Outstanding Certificates shall be withdrawn by the Trustee and at the written request of the City applied towards such payment or paid to the City. -17- ARTICLE V LEASE PAYMENTS; CERTIFICATE FUND Section 5.01. Assignment of Rights in Lease Agreement. The Board has in the Assignment Agreement transferred, assigned and set over to the Trustee certain of.its rights under the Lease Agreement, including but not limited to all of the Board's rights to receive and collect all of the Lease Payments and all other amounts required to be deposited in the Certificate Fund. All Lease Payments and such other amounts to which the Board may at any time be entitled shall be paid directly to the Trustee, and all of the Lease Payments collected or received by the Board shall be deemed to be held and to have been collected or received by the Board as the agent of the Trustee, and if received by the Board at any time shall be deposited by the Board with the Trustee within one Business Day after the receipt thereof, and all such Lease Payments and such other amounts shall be forthwith deposited by the Trustee upon the receipt thereof in the Certificate Fund, except as provided in Section 4.03. Section 5.02. Establishment of Certificate Fund. The Trustee shall establish a special fund designated as the "Certificate Fund". All moneys at any time deposited by the Trustee in the Certificate Fund shall be held by the Trustee in trust for the benefit of the City and the Owners of the Certificates. So long as any Certificates are Outstanding, neither the City nor the Board shall have any beneficial right or interest in the Certificate Fund or the moneys deposited therein, except only as provided in this Agreement, and such moneys shall be used and applied by the Trustee as hereinafter set forth. Section 5.03. Deposits. There shall be deposited in the Certificate Fund all Lease Payments received by the Trustee, including any moneys received by the Trustee for deposit therein pursuant to Sections 4.01(a), 4.02 or 5.01 hereof, or Article IX of the. Lease Agreement, and any other moneys required to be deposited therein pursuant to the Lease Agreement or pursuant to this Agreement. Section 5.04. Application of Moneys. All amounts in the Certificate Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the principal, interest and prepayment premiums (if any) represented by the Certificates as the same shall become due and payable, in accordance with the provisions of Articles II and III hereof. Section 5.05. Surplus. Any surplus remaining in the Certificate Fund, after prepayment and payment of all Certificates, including premiums and accrued interest (if any) and payment of any applicable fees and expenses to the Trustee, or provision for such prepayment or payment having been made to the satisfaction of the Trustee, shall be withdrawn by the Trustee and remitted to the City. -18- ARTICLE YI INVESTMENT PROVISIONS Section 6.01. Held in Trust. The moneys and investments held by the Trustee under this Agreement are irrevocably held in trust for the benefit of the City and the Owners of the Certificates solely for the purposes herein specified, and such moneys, and any income or interest earned thereon, shall be expended only as provided in this Agreement, and shall not be subject to levy or attachment or lien by or for the benefit of any creditor of the Board, the Trustee, the City or the Owner of any Certificates. Section 6.02. Investments Authorized. Upon the written request of the City filed with the Trustee from time to time, moneys held by the Trustee in any fund or account hereunder shall be invested and reinvested by the Trustee in Permitted Investments selected by the City and specified in such written request of the City, which mature not later than the date such moneys are required or estimated by the City to be required to be expended hereunder. In the absence of any written request of the City directing the investment of uninvested moneys held by the Trustee hereunder, the Trustee shall invest such moneys in Permitted Investments described in clause (e) of the definition thereof, which mature not later than the date such moneys are required or estimated by the Trustee to be required to be expended hereunder. Such investments, if registrable, shall be registered in the name of the Trustee, as trustee or in the name of its nominee, and shall be held by the Trustee. The Trustee may purchase or sell to itself or any affiliate, as principal or agent, investments authorized by this Section 6.02. Such investments and reinvestments shall be made giving full consideration to the time at which funds are required to be available. The Trustee may act as purchaser or agent in the making or disposing of any investment. Section 6.03. Accounting. The Trustee shall furnish to the City, not less than monthly, an accounting of all investments made by the Trustee. The Trustee shall not be responsible or liable for any loss suffered in connection with any investment of funds made by it in accordance with Section 6.02. Section 6.04. Allocation of Earnings. Subject to the provisions of Section 4.03, any income or profit on such investments shall be deposited in the respective funds from which such investments were made. Section 6.05. Valuation and Disposition of Investments. For the purpose of determining the amount in any fund, the value of Permitted Investments credited to such fund shall be calculated at the lesser of (a) theAmaturity value thereof, or (b) the cost thereof, excluding accrued interest and brokerage commissions, if any.p The Trustee may sell at the best price obtainable, or present for prepayment, any Permitted Investment so purchased by the Trustee whenever it shall be necessary in order to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund to which such Permitted Investment is credited, and the Trustee shall not be liable or responsible for any loss resulting from any such Permitted. Investment. WRM ARTICLE VII THE TRUSTEE Section 7.01. Appointment of Trustee. Security Pacific National Bank is hereby appointed Trustee by the Board and the City for the purpose of receiving moneys required to be deposited with the Trustee hereunder and to allocate, use and apply the same as provided in this Agreement. The Board and the City agree that so long as any Certificates are Outstanding they will maintain as Trustee hereunder a trust company or bank which (a) is in good standing located in or incorporated under the laws of the State of California, (b) has a corporate trust office in the State of California, (c) is duly authorized to exercise trust powers, (d) has a combined capital and surplus of at least Fifty Million Dollars ($50,000,000), and (e) is subject to supervision or. examination by Federal or state authority. If such bank or trust company publishes a report of condition at least annually pursuant to law or to the requirements of any supervising or examining authority above referred to then for the purpose of this Section 7.01 the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee is hereby authorized to pay or prepay the Certificates when duly presented for payment at maturity, or on prepayment, or on purchase by the Trustee as directed by the City prior to maturity in accordance with Section 3.06, and to cancel all Certificates upon payment thereof. The Trustee shall keep accurate records of all funds administered by it and of all Certificates paid and discharged. The Trustee shall be compensated for its services rendered pursuant to the provisions of this Agreement. Section 7.02. Acceptance of Trusts. The Trustee hereby accepts the trusts imposed upon it by this Trust Agreement, and agrees to perform said trusts, but only upon and subject to the following express terms and conditions: (a) The Trustee, prior to the occurrence of an Event of Default and after curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Trust Agreement. In case an Event of Default has occurred (which has not been cured or waived) the Trustee may exercise such of the rights and powers vested in it by this Trust Agreement, and shall use the same degree of care and skill in their exercise, as a prudent and reasonable man would exercise or use under the circumstances in the conduct of his or her own affairs. (b) No provision in this Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (c) The Trustee may execute any of the trusts or powers hereof and perform the duties required of it hereunder by or through attorneys, agents, or receivers and the Trustee shall not be responsible for any misconduct or negligence on the part of any attorney, agent or receiver appointed in accordance with the standard specified above, and shall be entitled to advice of counsel concerning all matters of trust and its duty hereunder. —20— (d) The Trustee shall not be responsible for any recital herein, or in the Certificates, or for any of the supplements thereto or instruments of further assurance, or for the sufficiency of the security for the Certificates issued hereunder or intended to be secured hereby and the Trustee shall not be bound to ascertain or inquire as to the observance or performance of any covenants, conditions or agreements on the part of the Board or the City under the Lease Agreement. The Trustee shall not be responsible or liable for any loss suffered in connection with any investment of funds made by it in accordance with Article VI of this Trust Agreement. (e) The Trustee shall not be accountable for the use of any Certificates delivered hereunder. The Trustee may become the Owner of Certificates secured hereby with the same rights which it would have if not the Trustee; may acquire and dispose of other bonds or evidence of indebtedness of the City with the same rights it would have if it were not the Trustee; and may act as a depository for and permit any of its officers or directors to act as a member of, or in any other capacity with respect to, any committee formed to protect the rights of Owners of Certificates, whether or not such committee shall represent the Owners of the majority in aggregate principal amount of the Certificates then Outstanding. (f) In the absence of bad faith on its part, Trustee shall be protected in acting upon any notice, request, consent, certificate, order, affidavit, letter, telegram or other paper or document believed by it to be genuine and correct and to have been signed or sent by -the proper person or persons. Any action taken or omitted to be taken by the Trustee in good faith pursuant to this Trust Agreement upon the request or authority or consent of any person who at the time of making such request or giving such authority or consent is the Owner of any Certificate, shall be conclusive and binding upon all future Owners of the same Certificate and upon Certificates issued in exchange therefor or in place thereof. The Trustee shall not be bound to recognize any person as an Owner of any Certificate or to take any action at his request unless such Certificate shall be deposited with the Trustee or satisfactory evidence of the ownership of such Certificate shall be furnished to the Trustee. (g) As to the existence or non—existence of any fact or as to the sufficiency or validity of any instrument, paper or proceeding, the Trustee shall be entitled to rely upon a certificate signed by a Board Representative or a City Representative as sufficient evidence of the facts therein contained and prior to the occurrence of an Event of Default of which the Trustee has been given notice or is deemed to have notice, as provided in Section 7.02(i) hereof, shall also be at liberty to accept a similar certificate to the effect that any particular dealing, transaction or action is necessary or expedient, but may at its discretion secure such further evidence deemed by it to be necessary or advisable, but shall in no case be bound to secure the same. The Trustee may accept a certificate of a Board Representative or a City Representative to the effect that an authorization in the form therein set forth has been adopted by the Board or the City, as the case may be, as conclusive evidence that such authorization has been duly adopted, and is in full force and effect. (h) The permissive right of the Trustee to do things. enumerated in this Trust Agreement shall not be construed as a duty and it shall not be answerable for other than its negligence or willful default. The immunities and exceptions from liability of the Trustee shall extend to its officers, directors, employees and agents. —21— (i) The Trustee shall not be required to take notice or be deemed to have notice of any Event of Default hereunder except failure by the City to make any of the Lease Payments to the Trustee required to be made by the City pursuant to the Lease Agreement or failure by the Board or the City to file with the Trustee any document required by this Trust Agreement or the Lease Agreement to be so filed subsequent to the delivery of the Certificates, unless the Trustee shall be specifically notified in writing of such default by the Board or the City and all notices or other instruments required by this Trust Agreement to be delivered to the Trustee must, in order to be effective, be delivered at the Trust Office of the Trustee, and in the absence of such notice so delivered the Trustee may conclusively assume there is no Event of Default except as aforesaid. 0) At any and all reasonable times the Trustee and its duly authorized agents, attorneys, experts, engineers, accountants and representatives, shall have the right fully to inspect the Facilities, including all books, papers and records of the Board or the City pertaining to the Facilities and the Certificates, and to take such memoranda from and with regard thereto as may be desired. (k) The Trustee shall not be required to give any bond or surety in respect of the execution of the said trusts and powers or otherwise in respect of the premises.. (1) Notwithstanding anything elsewhere in this Trust Agreement with respect to the execution of any Certificates, the, withdrawal of any cash, the release of any property, or any action whatsoever within the purview of this Trust Agreement, the Trustee shall have the right, but shall not be required, to demand any showings, certificates, opinions, appraisals or other information, or corporate action or evidence thereof, in addition so that by the terms hereof required as a condition of such action, by the Trustee deemed desirable for the purpose of establishing the right of the Board to the execution of any Certificates, the withdrawal of any cash, or the taking of any other action by the Trustee. (m) Before taking the action referred to in Section 11.02 hereof the Trustee may require that a satisfactory indemnity bond be furnished for the reimbursement of all expenses to which it may be put and to protect it against all liability, except liability which is adjudicated to have resulted from its negligence or wilful default in connection with any such action. (n) All moneys received by the Trustee shall, until used or applied or invested as herein provided, be held in trust for the purposes for which they were received but need not be segregated from other funds except to the extent required by law. The Trustee shall not be under any liability for interest on any moneys received hereunder except such as may be agreed upon. (o) The Trustee shall not be responsible for the sufficiency of the Lease Agreement, its right to receive moneys pursuant to the Lease Agreement, or the value of or title to the premises upon which the Facilities are located. (p) The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Owners of a majority in aggregate principal amount of the Outstanding Certificates relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Agreement. —22— Section 7.03. Fees, Charges and Expenses of Trustee. The Trustee shall be entitled to payment and reimbursement for reasonable fees for its services rendered hereunder and all advances, counsel fees (including expenses) and other expenses reasonably and .necessarily made or incurred by the Trustee in connection with such services. The Trustee shall have and is hereby granted alien upon all interest earnings on the investment of moneys on deposit in the Reserve Fund for the payment of any amounts due and owing to the Trustee pursuant to this Section 7.03 and, upon the occurrence of an Event of Default, for the payment of any amounts estimated by the Trustee to become due and payable pursuant to this Section 7.03 as a result of such Event of Default. Section 7.04. Notice to Certificate Owners of Default. If an Event of Default occurs of which the Trustee has been given or is deemed to have notice, as provided in Section 7.02(i), then the Trustee shall promptly give written notice thereof by first class mail to the Owner of each Certificate, unless such Event of Default shall have been cured before the giving of such notice. Section 7.05. Intervention by Trustee. In any judicial proceeding to which the Board or the City is a party which, in the opinion of the Trustee and its counsel, has a substantial bearing on the interests of the Owners of the Certificates; the Trustee may intervene on behalf of the Certificate Owners, and subject to Section 7.02(1), shall do so if requested in writing by the Owners of at least twenty-five percent .(25%) of the aggregate principal amount of Certificates then Outstanding. The rights and obligations of the Trustee under this Section 7.05 are subject to the approval of a court of competent jurisdiction. Section 7.06. Removal of Trustee. The City may, provided that no Event of Default shall have occurred and be continuing, upon at least thirty (30) days' prior written notice and with the consent of the Board, remove the Trustee initially appointed, and any successor thereto, by an instrument or concurrent instruments in writing delivered to the Trustee and the Board, and may appoint a successor or successors thereto; provided that any such successor shall be a bank or trust company meeting the requirements set forth in Section 7.01. Section 7.07. Resignation by Trustee. The Trustee and any successor Trustee may at any time resign by giving thirty days' written notice by registered or certified mail to the City and the Board. Upon receiving such notice of resignation, the City shall promptly appoint a successor Trustee. Any resignation or removal of the Trustee and appointment of a successor Trustee shall become effective upon acceptance of appointment by the successor Trustee. Upon such acceptance, the City shall mail notice thereof to the Certificate Owners at their respective addresses set forth on the Registration. Books. Section 7.08. Appointment of Successor Trustee. In the event of the removal or resignation of the Trustee pursuant to Sections 7.06 or 7.07, respectively, the City shall promptly appoint a successor Trustee. In the event the City shall for any reason whatsoever fail to appoint a successor Trustee within thirty (30) days following the delivery to the Trustee of the instrument described in Section 7.06 or within thirty (30) days following the receipt of notice by the City pursuant to Section 7.07, :the Trustee may apply to a court of competent jurisdiction for the appointment of a successor Trustee meeting the requirements of Section 7.01. Any such successor Trustee appointed by such court shall -23- become the successor Trustee hereunder notwithstanding any action by the City purporting to appoint a successor Trustee following the expiration of such ninety -day period. Section 7.09. Merger or Consolidation. Any company or association into which the Trustee may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which it shall be a party or any company or association to which the Trustee may sell or transfer all or substantially all of its corporate trust business, provided that such company or association shall be eligible under Section 7.01, shall be the successor to the Trustee and vested with all of the title to the trust estate and all of the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any paper or further act, anything herein to the contrary notwithstanding. Section 7.10. Concerning any Successor Trustee. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to its or his predecessor and also the Board and the City an instrument in writing accepting such appointment hereunder and thereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, trusts, duties and obligations of its predecessors; but such predecessor shall, nevertheless, on the written request of the Board, or of its successor, execute and deliver an instrument transferring to such successor all the estates, properties, rights, powers and trusts of such predecessor hereunder; and every predecessor Trustee shall deliver all securities and moneys held by it as the Trustee hereunder to its successor. Should any instrument in writing from the Board be required by any successor Trustee for more fully and certainly vesting in such successor the estate, rights, powers and duties hereby vested or intended to be vested in the predecessor, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Board. The resignation of any Trustee and the instrument or instruments removing any Trustee and appointing a successor hereunder, together with all other instruments provided for in this Article VII, shall be filed or recorded by the successor Trustee in each recording office where the Assignment Agreement shall have been filed or recorded. Section 7.11. Appointment of Co -Trustee. It is the purpose of this Trust Agreement, that there shall be no violation of any law of any jurisdiction (including particularly the law of the State of California) denying or restricting the right of banking corporations or associations to transact business as Trustee in such jurisdiction. It is recognized that in case of litigation under this Trust Agreement or the Lease Agreement, and in particular in case of the enforcement of either on default, or in case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee 'or hold title to the properties, in trust, as herein granted, or take any other action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co -trustee. The following provisions of this Section 7.11 are adapted to these ends. In the event that the Trustee appoints an additional individual or institution as a separate or co -trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Trust Agreement to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or co -trustee but only to the extent necessary to -24- enable such separate or co -trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or co -trustee shall run to and be enforceable by either of them. Should any instrument in writing from the Board or the City be • required by the separate trustee or co -trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to him or it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Board or the City, as the case may be. In case any separate trustee or co -trustee, or a successor to either, shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate trustee or co -trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new trustee or successor to such separate trustee or co -trustee. Section 7.12. Non -Liability of TYustee. The recitals, statements and representations by the City and the Board contained in this Trust Agreement or in the Certificates shall be taken and construed as made by and on the part of the City and the Board, as the case maybe, and not by the Trustee, and the Trustee does not assume, and shall not have, any responsibility or obligation for the correctness of any thereof. No provision of this Trust Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing repayment of such funds or adequate indemnity is not reasonably assured to it. The Trustee makes no representation or warranty, express or implied as to the title, value, design, compliance with specifications or legal requirements, quality, durability, operation, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the City or Board of the Facilities. In no event shall the Trustee be liable for special or consequential damages in connection with or arising from the Lease Agreement for the existence, furnishing or use of the Facilities. The Trustee shall not be: (a) responsible for the sufficiency or enforceability of the Lease Agreement or the assignment under the Assignment Agreement of its rights to receive Lease Payments; (b) deemed to have knowledge of any Event of Default unless and until it shall have actual knowledge thereof, and (c) accountable for the use or application by the City or Board of any funds which the Trustee has released to the City or the Board under and in accordance with this Trust Agreement. Section 7.13. Actions Through Agents. The Trustee may execute any of the trusts or powers hereof and perform the duties required of it hereunder by or through attorneys, agents, or receivers, and shall be entitled to advice of counsel concerning all matters of trust and its duty hereunder, and the Trustee shall not be answerable for the default or misconduct of any such attorney, agent, or receiver selected by it with reasonable care. The Trustee shall not be answerable for the exercise of any discretion or power under this Trust Agreement or for anythingwhatever in connection with the funds and accounts established hereunder, except only for its own negligence or willful misconduct. -25- u E Section 7.14. Nature of Trust Engagement. The Trustee undertakes to perform such duties and only such duties as are specifically set forth in the Trust Agreement and no implied covenants or obligations shall be read into the Trust Agreement against the Trustee. In accepting the trusts hereby created, the Trustee acts solely as Trustee and not in its individual capacity and all persons, including without limitation the Owners, City and Board having any claim against the Trustee arising from the Trust Agreement shall look only to the funds and accounts hereunder for payment except as otherwise provided herein. Under no circumstances shall the Trustee be liable in its individual capacity for the obligations represented by the Certificates. The permissive right of the Trustee to do things enumerated in this Trust Agreement shall not be construed as a duty. -26- N ARTICLE VIII • MODIFICATION OR AMENDMENT OF AGREEMENTS Section 8.01. Amendments Permitted. This Agreement and the rights ' and obligations of the Owners of the Certificates and the Lease Agreement and the rights and obligations of the parties thereto, may be modified or amended at any time by a supplemental agreement which shall become effective when the written consent of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding, exclusive of Certificates disqualified as provided in Section 8.03, shall have been filed with the Trustee. No such modification oramendment shall (a) extend or have the effect of extending the fixed maturity of any Certificate or reducing the interest rate represented thereby or extending the time of payment of interest, or reducing the amount of principal represented thereby or reducing any premium payable upon the prepayment thereof, without the express consent of the Owner of such Certificate, or (b) reduce or have the effect of reducing the percentage of Certificates required for the affirmative vote or written consent to an amendment or modification of the Lease Agreement, or (c) modify any of the rights or obligations of the Trustee without its written assent thereto. Any such supplemental agreement shall become effective as provided in Section 8.02. This Agreement and the rights and obligations of the Owners of the Certificates and the Lease Agreement and the rights and obligations of the respective parties thereto, may be modified or amended at any time by a supplemental agreement, without the consent of any such Owners, but only to the extent permitted by law and only (a) to add to the covenants and agreements of any party, other covenants to be observed, or to surrender any right or power herein or therein reserved to the Board or the City, (b) to cure, correct or supplement any ambiguous or defective provision contained herein or therein, (c) in regard to questions arising hereunder or thereunder, as the parties hereto or thereto may deem necessary or desirable and which shall not, in the opinion of Bond Counsel, materially adversely affect the interests of the Owners of the Certificates, (d) to modify the description of the Facilities to conform to the requirements of title insurance or otherwise to add or delete property descriptions to reflect accurately the description of the property intended to be included therein, or (e) if and to the extent permitted in the opinion of Bond Counsel filed with the Trustee, the City and the Board, to delete or modify any of the provisions hereof or thereof relating to the exemption from federal income taxation of interest represented by the Certificates. Any such supplemental agreement shall become effective upon execution and delivery by the parties hereto or thereto as the case may be. Section 8.02. Procedure for Amendment with Written Consent of Certificate Owners. This Agreement and the Lease Agreement may be amended by supplemental agreement as provided in this Section 8.02 in the event the consent of the Owners of the Certificates is required pursuant to Section 8.01. A copy of such supplemental agreement, together with a request to the Certificate Owners for their consent thereto, shall be mailed by the Trustee to each Owner of a Certificate at his address as set forth on the Registration Books, but failure to mail copies of such supplemental agreement and request shall not affect the validity of the supplemental agreement when assented to as in this Section provided. -27- Such supplemental agreement shall not become effective unless there shall be filed with the Trustee the written consent of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding (exclusive of Certificates disqualified as provided in Section 8.03) and a notice shall have been mailed as hereinafter in this Section provided. Each such consent shall be effective only if accompanied by proof of ownership of the Certificates for which such consent is given, which proof shall be such as is permitted by Section 2.10. Any such consent shall be binding upon the Owner of the Certificate giving such consent and on any subsequent Owner (whether or not such subsequent Owner has notice thereof) unless such consent is revoked in writing by the Owner giving such consent or a subsequent Owner by filing such revocation with the Trustee prior to the date when the notice hereinafter in this Section provided for has been mailed. After the Owners of the required percentage of Certificates shall have filed their consents to such supplemental agreement, the Trustee shall mail a notice to the Owners of the Certificates in the manner hereinbefore provided in this Section for the mailing of such supplemental agreement of the notice of adoption thereof, stating in substance that such supplemental agreement has been consented to by the Owners of the required percentage of Certificates and will be effective as provided in this Section (but failure to mail copies. of said notice shall not affect the validity of such supplemental agreement or consents thereto). A record, consisting of the papers required by this Section to be filed with the Trustee, shall be conclusive proof of the matters therein stated. Such supplemental agreement shall become effective upon the mail of such last—mentioned notice, and such supplemental agreement shall be deemed conclusively binding upon the parties hereto and the Owners of all Certificates at the expiration of sixty (60) days after such filing, except in the event of a final decree of a court of competent jurisdiction setting aside such consent in a legal action or equitable proceeding for such purpose commenced within such sixty (60) day period. Section 8.03. Effect of Supplemental Agreement. From and after the time any supplemental agreement becomes effective pursuant to this Article VIII, this Agreement or the Lease Agreement, as the case may be, shall be deemed to be modified and amended in accordance therewith, the respective rights, duties and obligations of the parties hereto or thereto and all Owners of Certificates Outstanding, as the case may be, shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modification and amendment, and all the terms and conditions of any supplemental agreement shall be deemed to be part of the terms and conditions of this Agreement or the Lease Agreement, as the case may be, for any and all purposes. Section 8.04. Endorsement or Replacement of Certificates Delivered After Amendments. The Trustee may determine that Certificates delivered after the effective date of any action taken as- provided in this Article VIII shall bear a notation, by endorsement or otherwise, in form approved by the Trustee, as to such action. In that'case, upon demand of the Owner of any Certificate Outstanding at such effective date and presentation of his Certificate for the purpose at the Trust Office of the Trustee, a suitable notation shall be made on such Certificate. The Trustee may determine that the delivery of substitute Certificates, so modified as in the opinion of the Trustee is necessary to conform to such Certificate Owners' action, which substitute Certificates shall thereupon be prepared, executed and delivered. In that case, upon demand of the Owner of any Certificate then Outstanding, such substitute Certificate shall be exchanged at the Trust Office of the Trustee, without cost to such Owner, for a Certificate of the same character then Outstanding, upon surrender of such Outstanding Certificate. IP:3 N • Section 8.05. Amendatory Endorsement of Certificates. The provisions of this Article VIII shall not prevent any Certificate Owner from accepting any amendment as to the particular Certificates held by him, provided that proper notation thereof is made on such Certificates. -29- ARTICLE IX COVENANTS; NOTICES Section 9.01. Compliance With and Enforcement of Lease Agreement. The City covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Lease Agreement. The Board covenants and agrees with the Owners of the Certificates to perform all obligations and duties imposed on it under the Lease Agreement. The City will not do or permit anything to be done, or omit or refrain from doing anything, in any .case where any such act done or permitted to be done, or any such omission of or refraining from action, would or might be a ground for cancellation or termination of the Lease Agreement by the Board thereunder. The Board and the City, immediately upon receiving or giving any notice, communication or other document in any way relating to or affecting their respective estates, or either of them, in the Facilities, which may or can in any manner affect such estate of the City, will deliver the same, or a copy thereof, to the Trustee. Section 9.02. Observance of Laws and Regulations. The City will well and truly keep, observe and perform all valid and lawful obligations or regulations now or hereafter imposed on it by contract, or prescribed by any law of the United States, or of the State, or by any officer, board or commission having jurisdiction or control, as a condition of the continued enjoyment of any and every right, privilege or franchise now owned or hereafter acquired by the City, including its right to exist and carry on business as a municipal corporation, to the end that such rights, privileges and franchises shall be maintained and preserved, .and shall not become abandoned, forfeited or in any manner impaired. Section 9.03. Prosecution and Defense of Suits. The City shall promptly, upon request of the Trustee or any Certificate Owner, from time to time take such action as may be necessary or proper to remedy or cure any defect in or cloud upon the title to the Facilities, whether now existing or hereafter developing and shall prosecute all such suits, actions and other proceedings as may be appropriate for such purpose and shall indemnify and save the Trustee and every Certificate Owner harmless from all loss, cost, damage and expense, including attorneys' fees, which they or any of them may incur by reason of any such defect, cloud, suit, action or proceeding. Section 9.04. Recordation and Filing. The City shall record and file the Lease Agreement or a memorandum thereof, the Assignment Agreement and all such documents as may be required by law (and shall take all further actions which may be necessary or be reasonably required by the Trustee), all in such manner, at such times and in such places as may be required by law in order fully to preserve, protect and perfect the security of the Trustee and the Certificate Owners. Section 9.05. Tax Covenants. (a) Private Business Use Limitation. The City shall assure that (i) not in excess of ten percent (10%) of the Certificate Proceeds is used for Private Business Use if, in addition, the payment of more than ten percent (10%) of the principal or ten percent (10%) of the interest due with respect to the Certificates during the term thereof is, under the terms of the Certificates or any underlying arrangement, directly -30- or indirectly, secured by any interest in property used or to be used for a Private Business Use or in payments it both (A) in excess of five percent (5%) of the Certificate Proceeds are used for a Private Business Use, and (B) an amount in excess of five percent (5%) of the principal or five percent (5%) of the interest due with respect to the Certificates due during the term of this Agreement is, under the terms of this Agreement or any underlying arrangement, directly or indirectly, secured by any interest in property used or to be used for said Private Business Use or in payments in respect of property used or to be used for a Private Business Use or is to be derived from payments, whether or not to the City, in respect of property or borrowed money used or to be used for a Private Business Use; and (ii) and that, in the event that both (A) in excess of five percent (5%) of the Certificate Proceeds are used for a Private Business Use, and (B) an amount in excess of five percent (5%) of the principal of five percent (5%) of the interest components of Lease Payments due during the term of this Agreement is, under the terms of this Agreement or any underlying arrangement, directly or indirectly, secured by any interest in property used or to be used for said Private Business Use or in payments in respect of property used or to be used for said Private Business Use or is to be derived from payments, whether or not to the City, in respect of property or borrowed money used or to be used for said Private Business Use, to said excess over said five percent (5%) of Certificate Proceeds used for a Private Business Use shall be used for a .Private Business Use related to the governmental use of the Facilities. (b) Private Loan Limitation. The City shall assure that no more than five percent (5%) of the Certificate Proceeds are used, directly or indirectly, to make or finance a loan (other than loans constituting nonpurpose obligations as defined in the Tax Code or constituting assessments) to persons other than state or local government units. (c) Federal Guarantee Prohibition. The City shall not take any action or permit or suffer any action to be taken if the result of the same would be to cause the obligations of the City under the Lease Agreement to be "federally guaranteed" within the meaning of Section 149(b) of the Tax Code. (d) No Arbitrage. The City shall not take, or permit or suffer to be taken by the Trustee or otherwise, any action with respect to the proceeds of the Certificates which, if such action had been reasonably expected to have been taken, or had been deliberately and intentionally taken, on the Closing Date, would have caused the obligations of .the City under the Lease Agreement to be "arbitrage bonds" within the meaning of Section 148(a) of the Tax Code. (e) Small Issuer Exemption from Bank Nondeductibility Restriction. The City hereby designates the Lease Agreement for purposes of paragraph (3) of Section 265(b) of the Tax Code and covenants that (i) the obligations of the City under the Lease Agreement do not constitute private activity bonds as defined in Section 141 of the Tax Code, and (ii) not more than $10,000,000 aggregate principal amount of obligations the interest on which is excludable (under Section 103(a) of the Tax Code) from gross income for federal income tax purposes (excluding, however, private activity bonds, as defined in Section 141 of the Tax Code, other than qualified 501(c)(3) bonds as defined in Section 145 of the Tax Code), including the obligations of .the City under the Lease Agreement, have been or shall be issued by the City, including all subordinate entities of the City, during the calendar year 1988. -31- (fl Small Issuer Exemption from Rebate Requirements. In accordance with Section 148(f)(4)(C) of the Tax Code, the City covenants that it is -a governmental unit with general taxing powers; that the Certificates are not private activity bonds as defined in Section 141 of the Tax Code; that ninety-five percent (95%) or more of the Certificate Proceeds are to be used for local governmental activities of the City (or of a governmental unit the jurisdiction of which is entirely within the jurisdiction of the City), and that the aggregate face amount of the all tax-exempt obligations (other than private activity bonds as defined in Section 141 of the Tax Code) issued by the City, including all subordinate entities of the City, during the calendar year 1988 will not exceed $5,000,000. Section 9.06. Further Assurances. The Board and the City will make, execute and deliver any and all such further resolutions, instruments and assurances as may be reasonably necessary or proper to carry out the intention or to facilitate the performance of this Agreement and the Lease Agreement, and for the better assuring and confirming unto the Owners of the Certificates the rights and benefits provided herein. -32- ARTICLE, % LI IITATION OF LIABILITY Section 10.01. Limited Liability of City. Except for the payment of Lease Payments when due in accordance with the Lease Agreement and the performance of the other covenants and agreements of the City contained in the Lease and this Trust Agreement, the City shall have no pecuniary obligation or liability to any of the other parties or to the Owners of the Certificates with respect to this Agreement or the terms, execution, delivery or transfer of the Certificates, or the distribution of Lease Payments to the Owners by the Trustee, except as expressly set forth herein. Section 10.02. No Liability of the Board for Trustee Performance. Neither the City nor the Board shall have any obligation or liability to any of the other parties or to the Owners of the Certificates with respect to the performance by the Trustee of any duty imposed upon it under this Agreement. Section 10.03. Indemnification of Trustee. The Board and the City shall indemnify and save the Trustee harmless from and against all claims, losses, costs, expenses, liability and damages, including legal fees and expenses, arising out of (a) the use, maintenance, condition or management of, or from any work or thing done on, the Facilities by the Board or the City, (b) any breach or default on the part of the Board or the City in the performance of any of their respective obligations under this Trust Agreement and any other agreement made and entered into for purposes of the Facilities, (c) any act of negligence of the Board or the City or of any of their respective agents, contractors, servants, employees, licensees with respect to the Facilities, (d) any act of negligence of any assignee of, or purchaser from the Board or the City or of any of its or their respective agents, contractors, servants, employees or licensees with respect to the Facilities, (e) the authorization of payments from the Acquisition Fund, (f) the actions .of any other partyrelating to the ownership, operation or use of the Facilities by the Board or the City, or (g) the Trustee's exercise and performance of its powers and duties hereunder. No indemnification will be made under this Section 10.03 or elsewhere in this Trust Agreement for willful misconduct, negligence, or breach of duty under this Trust Agreement by the Trustee, its officers, agents, employees, successors or assigns. The Board's and the City's obligations hereunder shall remain valid and binding notwithstanding maturity and payment of the Certificates. Section 10.04. Opinion of Counsel. Before being required to take any action, at the expense of the City the Trustee may require an opinion of counsel acceptable to the Trustee, or an opinion of Bond Counsel acceptable to the Trustee with respect to any federal tag matters, or a verified certificate of any party hereto, or both, concerning the proposed action. If it does so in good faith, Trustee shall be absolutely protected in relying on any such opinion or certificate obtained by the Trustee. Section 10.05. Limitation of Rights to Parties and . Certificate Owners. Nothing in this Agreement or in the Certificates expressed or implied is intended or shall be construed to give any person other than the City, the Board, the Trustee and the Owners of the Certificates, any legal or equitable right, remedy or claim under or in respect of this Agreement or any covenant, condition or provision hereof; and all such covenants, -33- E • conditions and provisions are and shall be for the sole and exclusive benefit of the City, the Board, the Trustee and said Owners. -34- ARTICLE M EVENTS OF DEFAULT AND REM] OF CERTIFICATE OWNERS Section 11.01. Assignment of Rights. Pursuant to the Assignment Agreement the Board has transferred, assigned and set over to the Trustee all of the Board's rights and duties in and to the Lease Agreement (excepting only the Board's rights under Sections 4.5, 5.11, 6.3 and 8.4 thereof), including without limitation all of the Board's rights to exercise such rights and remedies conferred on the Board pursuant to the Lease Agreement as may be necessary or convenient (a) to enforce payment of the Lease Payments and any other amounts required to be deposited in the Certificate Fund, and (b) otherwise to exercise the Board's rights and take any action to protect the interests of the Trustee or the Certificate Owners in an Event of Default. Section 11.02. Remedies. If an Event of Default shall happen, then and in each and every such case during the continuance of such Event of Default the Trustee may, and at the written direction of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding the Trustee shall, exercise any and allremedies available pursuant to law or granted pursuant to the Lease Agreement; provided, however, that notwithstanding anything herein or in the Lease Agreement to the contrary, there shall be no right under any circumstances to accelerate the maturities of the Certificates or otherwise to declare any Lease Payment not then in default to be due and payable. Section 11.03. Application of Funds. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of this Article M or Article VIII of the Lease Agreement shall be applied by the Trustee in the following order upon presentation of the Certificates, and the stamping thereon of the payment if only partially paid, or upon the surrender thereof if fully paid - First, to the payment of the costs and expenses of the Trustee and of the Certificate Owners in declaring such Event of Default and in taking any remedial action with respect thereto, including reasonable compensation to its or their agents, attorneys and counsel; and Second, to the payment of the whole amount then owing and unpaid with respect to the Certificates for principal. and interest, with interest on the overdue principal and installments of interest at the net effective rate per annum then represented by the Outstanding Certificates (but such interest on overdue installments of interest shall be paid only to the extent funds are available therefor following payment of principal and interest and interest on overdue principal, as aforesaid), and in case such moneys shall be insufficient to pay in full the whole amount so owing and unpaid with respect to the Certificates, then to the payment of such principal and interest without preference or .priority of principal over interest, or of interest over principal, or of any installment of interest over any other installment of interest, ratably to the aggregate of such principal and interest. -35- • Section 11.04. Institution of Legal Proceedings. If one or more Events of Default shall happen and be continuing, the Trustee in its discretion may, and upon the written request of the Owners of a majority in principal amount of the Certificates then Outstanding, and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of the Owners of Certificates by a suit in equity or action at law, either for the specific performance of any covenant or agreement contained herein, or in aid of the execution of any power herein granted, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee shall deem most effectual in support of any of its rights or duties hereunder. Section 11.05. Non—waiver. Nothing in this Article M or in any other provision of this Agreement or in the Certificates, shall affect or impair the obligation of the City, which is absolute and unconditional, to pay or prepay the Lease Payments as provided in the Lease Agreement. No delay or omission of the Trustee or of any Owner of any of the Certificates to exercise any right or power arising upon the happening of any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein, and every power and remedy given by this Article M to the Trustee or to the Owners of Certificates may be exercised from time to time and as often as shall be deemed expedient by the Trustee or the Certificate Owners. Section 11.06. Remedies Not Exclusive. No remedy herein conferred upon or reserved to the Trustee or to the Certificate Owners is intended to be exclusive of any other remedy, and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing, at law or in equity or by statute or otherwise. Section 11.07. Power of Trustee to Control Proceedings. In the event that the Trustee, upon the happening of an Event of Default, shall have taken any action, by judicial proceedings or otherwise, pursuant to its duties hereunder, whether upon its own discretion or upon the request of the Owners of a majority in aggregate principal amount of the Certificates then Outstanding, it shall have full power, in the exercise of its discretion for the best interests of the Owners of the Certificates, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Trustee shall not discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, without the consent of a majority in aggregate principal amount of the Certificates Outstanding. Section 11.08. Limitation on Certificate Owners' Right to Sue. No Owner of any Certificate issued hereunder shall have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon this Agreement, unless (a) such Owner shall have previously given to the Trustee written notice of the occurrence of an Event of Default hereunder, (b) the Owners of at least twenty-five percent (25%) in aggregate principal amount of all the Certificates then Outstanding shall have made written request upon the Trustee to exercise the powers hereinbefore granted or to institute such .action, suit or proceeding in its own name; (c) said Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (d) the Trustee shall have refused or omitted to comply with such request for a period of sixty (60) days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee. -36- Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of Certificates of any remedy hereunder, it being understood and intended that no one or more Owners of Certificates shall have any right in any manner whatever by his or their action to enforce any right under this Agreement, except in the manner herein provided, and that all proceedings at law or in equity with respect to an Event of Default shall be instituted, had and maintained in the manner herein provided and for the equal benefit of all Owners of the Outstanding Certificates. Section 11.09._ Possession of Certificates by Trustee Not Required. All rights and remedies granted to or exercisable by the Trustee hereunder or under the Lease Agreement may be exercised by the Trustee without possession of any of the Certificates or the production thereof at the trial or other proceeding relative thereto, and any suit, action or proceeding instituted by the Trustee hereunder or under the Lease Agreement shall be brought in its name for the benefit of all of the Owners of such Certificates, subject to the provisions of this Trust Agreement. -37- ARTICLE XII AMCELLAN •OUS Section 12.01. Defeasance. If and when the obligations represented by any Outstanding Certificates shall be paid and discharged in any one or more of the following ways: (a) by well and truly paying or causing to be paid the principal of and interest and redemption premiums (if any) represented by such Certificates Outstanding, as and when the same become due and payable; or (b) by depositing with the Trustee or any other fiduciary, under an escrow deposit and trust agreement, security for the payment of Lease Payments relating to such Certificates as more particularly described in Section 9.1 of the Lease Agreement, said security to be held by the Trustee or by such other fiduciary as agent for the City to be applied by the Trustee to pay or prepay such Lease Payments as the same become due, pursuant to Section 9.1 of the Lease Agreement - notwithstanding that such Certificates shall not have been surrendered for payment, all rights hereunder of the Owners of such Certificates and all obligations of the Board, the Trustee and the City with respect to such Certificates shall cease and terminate, except only the obligations of the Trustee under Sections 2.07 and 2.08, and the obligation of the Trustee to pay or cause to be paid, from Lease Payments paid by or on behalf of the City from funds deposited pursuant to paragraph (b) of this Section, to the Owners of such Certificates not so surrendered and paid all sums represented thereby when due and in the event of deposits pursuant to paragraph (b), such Certificates shall continue to represent direct, undivided fractional interests of the Owners thereof in the Lease Payments. Any fiords held by the Trustee, at the time of discharge of the obligations represented by all Outstanding Certificates as a result of one of the events described in paragraphs (a) or (b) of this Section, which are not required for the payment to be made to Owners, shall, upon payment in full of all fees and expenses of the Trustee (including attorneys' fees) then due, be paid over to the City. Section 12.02. Records. The Trustee shall keep complete and accurate records of all moneys received and disbursed under this Agreement, which shall be available for inspection by the City, the Board and any Owner, or the agent of any of them, at any reasonable time during regular business hours. Section 12.03. Notices. All written notices to be given under this Agreement shall be given by mail or personal delivery to the party entitled thereto at its address set forth below, or at such address as the party may provide to the other party in writing from time to time. Notice shall be effective upon deposit in the United States mail, postage prepaid or, in the case of personal delivery, upon delivery to the address set forth below: -38- C� E If to the City: Director of Finance City of San Luis Obispo 990 Palm Street San Luis Obispo, California 93401 If to the Board: Chief Financial Officer City of San Luis Obispo Capital Improvement Board 990 Palm Street San Luis Obispo, California 93401 If to the Trustee: Security Pacific National Bank 333 South Beaudry Avenue, 24th Floor Los Angeles, California 90017 Attention: Corporate Services Division W24-30 Section 12.04. Disqualified Certificates. In determining whether the Owners of the requisite aggregate principal amount of Certificates have concurred in any demand, request, direction, consent or waiver under this Indenture, Certificates which are owned or held by or for the account of the District (but excluding Certificates held in any employees' retirement fund) shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, provided, however, that for the purpose of determining whether the Trustee shall be protected in relying on any such demand, request, direction, consent or waiver, only Certificates which the Trustee knows to be so owned or held shall be disregarded. Section 12.05. Payment of Certificates After Discharge of Trust Agreement. Notwithstanding any provisions of this Trust Agreement, any moneys held by the Trustee in trust for the payment of the principal or interest represented by any Certificates and remaining unclaimed for six (6) years after the principal represented by all of the Certificates has become due and payable (whether at maturity or upon call for redemption or by acceleration as provided in this Trust Agreement), if such moneys were so held at such date, or sig (6) years after the date of deposit of such moneys if deposited after said date when all of the Certificates became due and payable, shall be repaid to the City free from the trusts created by this Trust Agreement upon receipt of an indemnification agreement acceptable to the City and the Trustee indemnifying the Trustee with respect to claims of Owners of Certificates which have not yet been paid, and all liability of the Trustee with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the City as aforesaid, the Trustee shall (at the cost of the City) first mail, by first class mail postage prepaid, to the Owners of Certificates which have not yet been paid, at the respective addresses shown on the Registration Books, a notice, in such form as may be deemed appropriate by the Trustee with respect to the Certificates so payable and not presented and with respect to the provisions relating to the repayment to the City of the moneys held for the payment thereof. Section 12.06. Governing Law. This Agreement shall be construed and governed in accordance with the laws of the State of California. Section 12.07. Binding Effect; Successors. This Agreement shall be'binding upon and inure to the benefit of the parties and their respective successors and assigns. -39- Whenever in this Agreement either the Board, the City or the Trustee is named or referred to, such reference shall be deemed to include the successors or assigns thereof, and all the covenants and agreements in this Agreement contained by or on behalf of the Board, the City or the Trustee shall bind and inure to the benefit of the respective successors and assigns thereof whether so expressed or not. Section 12.08. .Board and City Representatives. Whenever under the provisions of this Agreement the Board or the City is required or permitted to take some action, including but not limited to the giving of any approval or the execution of some request, direction or other instrument, such action shall be made on behalf of the Board by an Board Representative and on behalf of the City by a City Representative, and any party hereto shall be fully authorized to rely upon any such action by an Board Representative or a City Representative. Section 12.09. Execution in Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same agreement. Section 12.10. Delivery of Cancelled Certificates. Whenever in this Agreement provision is made for the surrender to or cancellation by the Trustee of any Certificates, the Trustee shall cancel and destroy such Certificates and shall deliver a certificate of destruction with respect thereto to the City. Section 12.11. Headings. The headings or titles of the several Articles and Sections hereof, and any table of contents appended to copies hereof, shall be solely for convenience of reference and shall not affect the meaning, construction or effect of this Agreement. All references herein to "Articles", "Sections", and other subdivisions are to the corresponding Articles, Sections or subdivisions of this. Agreement; and the words "herein", 'hereof', "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or subdivision hereof. Section 12.12 Waiver of Notice. Whenever in this Agreement the giving of notice by mail or otherwise is required, the giving of such notice may be waived in writing by the person entitled to receive such notice and in any case the giving or receipt of such notice shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. Section 1213. Separability of Invalid Provisions. In case any one or more of the provisions contained in this Agreement or in the Certificates shall for any reason be held to be invalid, illegal or unenforceable in any respect, then such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein. The parties hereto hereby declare that they would have entered into this Agreement and each and every other section, paragraph, sentence, clause or phrase hereof and authorized the delivery of the Certificates pursuant thereto irrespective of the fact that any one or more sections, paragraphs, sentences, clauses or phrases of this Agreement may be held illegal, invalid or unenforceable. -40- EO • IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. Attest: By: Secretary (S E A L) Attest: 0 City Clerk SECURITY PACIFIC NATIONAL BANK, as Trustee LM Authorized Representative CITY OF SAN LUIS OBISPO CAPITAL EWPROVEMENT BOARD By Executive Director CITY OF SAN LUIS OBISPO By City Administrative Officer -41- • (FORM OF CERTIFICATE OF PARTICIPATION) (TO COME) Exhibit A 29026-10 O 7HHW:CFA:Efs Novembe- 10, 1998 F8201 MARKED TO SHOW CHANGES ( IIA0L08 ) . LEASE AGREEMENT Dated as of December 1, 1988 by and between the CITY OF SAN LUIS OBISPO CAPITAL UVIPROVEMENT BOARD, as lessor and the CITY OF SAN LUIS OBISPO, as lessee (TUMLI. Revep0L Fvnd = Wafe✓ E'11"r se RIMA F8201 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS; EXHIBITS SECTION 1.1. Definitions........................................................................ 2 ARTICLE II COVENANTS, REPRESENTATIONS AND WARRANTIES SECTION 2.1. Covenants, Representations and Warranties ofthe City................:.:........................................................ 5 SECTION 2.2. Covenants, Representations and Warranties ofthe Board......................................................................... 6 SECTION 3.1. Deposit of Moneys ............................................................. 8 SECTION 3.2. Acquisition of the Facilities .............................................. 8 SECTION 3.3. Substitution of Facilities ................................................... 8 ARTICLE IV AGREEMENT TO LEASE; TERMINATION OF THIS LEASE; LEASE PAYMENTS SECTION4.1. Lease................................................................................ 9 SECTION 4.2. Term of Agreement........................................................... 9 SECTION4.3. Possession........................................................................ 9 SECTION4.4. Lease Payments................................................................ 9 SECTION 4.5. Pledge and Application of Net Revenues ........................... 10 SECTION 4.6. Special Obligation of the City; Obligations Absolute.............................................................................. 11 SECTION 4.7. Rates and Charges........................................................... 12 SECTION 4.8. Superior and Subordinate Obligations .............................. 13 SECTION 4.9. Issuance of Parity Obligations .......................................... 13 SECTION 4.10. Quiet Enjoyment............................................................. 13 SECTION4.11. Title................................................................................ 13 SECTION 4.12. Additional Payments...................................................... 14 ARTICLE V COVENANTS REGARDING ENTERPRISE 1— • Page SECTION 5.1. Maintenance, Utilities, Taxes and Assessments........................................................................ 15 SECTION 5.2. Modification of Facilities ................................................... 15 SECTION 5.3. Public Liability and Property Damage Insurance............................................................................ 16 SECTION 5.4. Casualty Insurance........................................................... 16 SECTION 5.5. Insurance Net Proceeds; Form of Policies ......................... 16 SECTION 5.6. Eminent Domain............................................................... 17 SECTION 5.7. Records and Accounts....................................................... 17 SECTION 5.8. Installation of City's Equipment ....................................... 17 SECTION5.9. Liens................................................................................ 17 ARTICLE VI DISCLAIMER OF WARRANTIES; ACCESS SECTION 6.1. Disclaimer of Warranties .................................................. 18 SECTION 6.2. Access to the Facilities..................................................... 18 SECTION 6.3. Release and Indemnification Covenants ............................ 18 ARTICLE VII ASSIGNMENT, SUBLEASING AND AMENDMENT SECTION 7.1. Assignment by the Board ................................................. 19 SECTION 7.2. Assignment and Subleasing by the City ........................... 19 SECTION 7.3. Sale of Enterprise............................................................. 19 SECTION 7.4. Amendment of Lease Agreement ...................................... 19 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES SECTION 8.1. Events of Default Defined ................................................. 21 SECTION 8.2. Remedies on Default......................................................... 21 SECTION 8.3. Appointment of Receiver ................................................... 22 SECTION 8.4. No Remedy Exclusive....................................................... 23 SECTION 8.5. Agreement to Pay Attorneys' Fees and Expenses............................................................................. 23 SECTION 8.6. No Additional Waiver Implied by One Waiver ................... 23 SECTION 8.7. Application of Proceeds.....................6.............................. 23 SECTION 8.8. Trustee and Certificate Owners to Exercise Rights.................................................................................. 23 ARTICLE IX u • pap PREPAYMENT OF LEASE PAYMENTS SECTION 9.1. Security Deposit ......... :...... ................................................ 24 SECTION 92. Optional Prepayment........................................................ 24 SECTION 9.3. Mandatory Prepayment From Net Proceeds of Insurance or Eminent Domain ............................................. 24 SECTION 9.4. Credit for Amounts on Deposit ......................................... 24 ARTICLE X MISCELLANEOUS SECTION10.1. Notices ................................................ ........................... . 26 SECTION 10.2. Binding Effect ........................... .............. .:............. 26 SECTION 10.3. Severability ......... .......... :................................................ 26 SECTION 10.4. Net -net -net Lease.......................................................... 26 SECTION 10.5. Further Assurances and Corrective Instruments......................................................................... 26 SECTION 10.6. Execution in Counterparts6 ............................................. 26 SECTION 10.7. Applicable Law.............................................6................. 27 SECTION 10.8. Board and City Representatives ...................................... 27 SECTION 10.9. Captions......................................................................... 27 o • LEASE AGREEMENT THIS LEASE AGREEMENT (this "Lease"), dated as of December 1, 1988, is by and between the CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD, a public body corporate and politic duly organized and existing under Ordinance No. 1059 (1986 Series) adopted by the City Council of the City of San Luis Obispo on April 15, 1986, and under the constitution and laws of the State of California (the "Board', and the CITY OF SAN LUIS OBISPO, a charter city and municipal corporation duly organized and existing under the constitution and laws of the State of California (the Ncitf ); WITNESSETH: WHEREAS, the City wishes to finance the acquisition and construction of improvements to the water treatment and distribution enterprise of the City (the "Enterprise"); and WHEREAS, the Board has been formed for the purpose of assisting the City in financing the acquisition, construction and improvement of property which is of benefit to the City; and WHEREAS, in order to provide funds for the acquisition and construction of said improvements to the Enterprise, the Board has proposed to acquire certain facilities constituting a portion of the Enterprise, as such facilities are described more fully in Exhibit A attached hereto (the "Facilities"), and to lease the Facilities to the City as provided herein; and WHEREAS, the Board will cause funds to be provided for the acquisition of the Facilities from the proceeds of certain Certificates of Participation executed and delivered in the aggregate principal amount of $5,000,000 under and pursuant to the Trust Agreement dated as of December 1, 1988, by and among the City, the Board and Security Pacific National Bank as trustee; and WHEREAS, the City and the Board wish to set forth the terms and conditions upon which the Facilities will be leased by the Board to the City, and to establish an obligation of the City to pay lease payments in consideration of the use and occupancy of the Facilities; and WHEREAS, the City is authorized to enter into this Lease pursuant to the provisions of Section 37350 of the Government Code of the State of California and pursuant to the municipal affairs power of the City as a charter city, and the Board is authorized to enter into this Lease pursuant to the provisions of the Ordinance pursuant to which the Board has been established; NOW, THEREFORE, for and in consideration of the premises and the material covenants hereinafter contained, the parties hereto hereby formally covenant, agree and bind themselves as follows: ARTICLE I DEFINMONS; EDITS SECTION 1.1. Definitions. Unless the context clearly otherwise requires or unless otherwise defined herein, the capitalized terms in this Lease shall have the respective meanings specified in the Trust Agreement. In addition, the following terms heretofore defined in this Lease and the following terms defined in this Section 1.1 shall, for all purposes of this Lease, have the respective meanings herein specified. "Acquisition Agreement" means the Acquisition Agreement dated as of December 1, 1988, by and between the City as seller and the Board as purchaser of the Facilities, together with any duly authorized and executed amendments thereto. "Acquisition Costs" means all costs of acquiring the Facilities on the Closing Date pursuant to the Acquisition Agreement. "Additional Payments" means the amounts payable by the City pursuant to Section 4.12. "Additional Revenues" means, for the purpose of determining compliance by the City with the requirements of Section 4.9(b) with respect to the issuance of any Parity Obligations, any or all of the following items: (a) An allowance for Net Revenues from any additions or improvements to or extensions of the Enterprise to be made with the proceeds of such Parity Obligations and also for Net Revenues from any such additions, improvements or extensions which have been made from moneys from any source but in any case which were not in service during all or any part of the most recently completed Fiscal Year for which audited financial statements are available in an amount equal to ninety percent (90%) of the estimated additional average annual Net Revenues to be derived from such additions, improvements and extensions for the first thirty-six (36) month period in which each addition, improvement or extension is respectively to be in operation, all as shown by the certificate or opinion of a qualified independent `accounting or consulting firm employed by the City. (b) An allowance for Net Revenues arising from any increase in the charges made for service from the Enterprise which has become effective prior to the incurring of such Parity Obligations but whichwere not in effect during all or any part of the most recently completed Fiscal Year for which audited financial statements are available, in an amount equal to the total amount by which the Net Revenuestwould have been increased if such increase in charges had been in effect during the whole of such Fiscal Year, all as shown by the certificate or opinion of a "qualified independent accounting or consulting firm employed by the City. 'Enterprise" means all facilities, properties and improvements at any time owned, controlled or operated by the City for the collection, treatment and supply of water to -2- residents of the City and adjacent areas, and any necessary lands, rights,eentitlements and other property useful in connection therewith, together with all extensions thereof and improvements thereto hereafter acquired, constructed or installed by the City. "Event of Default" means any of the events described in Section 8.1. "Facilities" means the facilities, improvements and other property described as more fully in Exhibit B attached hereto and by this reference incorporated herein, as such description may be amended by the City from time to time pursuant to and in accordance with Section 3.3. "Gross Revenues" means all, gross charges received for, and all other gross income and receipts derived by the City from, the ownership and operation of the Enterprise or otherwise arising from the Enterprise, including but not limited to connection charges and earnings on the investment of any funds held by the City; but excluding (a) the proceeds of any ad valorem property taxes levied for the purpose of paying general obligation bonds of the City relating to the Enterprise, and (b) the proceeds of any special assessments or special taxes levied upon real property within any improvement district served by the City levied for the purpose of paying special assessment bonds or special tax obligations of the City relating to the Enterprise. "Lease Payment Date" means, with respect to any Interest Payment Date, the twenty-fifth (25th) day of the month preceding such Interest Payment Date, constituting May 25 and November 25 of each Fiscal Year during the Term hereof commencing May 25, 1989. "Maximum Annual Debt Service" means, as of the date of any calculation and with respect to the Lease Payments or any Parity Obligations, as the case may be, the maximum sum obtained for the current or any future Fiscal Year during the Term of this Lease by totaling the following amounts for such Fiscal Year:. (a) the aggregate amount of the Lease Payments coming due and payable in such Fiscal Year pursuant hereto, except to the extent payable from any security deposit pursuant to Section 9.1; (b) the principal amount of all outstanding Parity Obligations, if any, coming due and payable by their terms in such Fiscal Year; and (c) the amount of interest which would be due during such Fiscal Year on the aggregate principal amount of all outstanding Parity Obligations, if any, which would be outstanding in such Fiscal Year if such Parity Obligations are retired as scheduled; provided, however, that in the event any such Parity Obligations bear interest at a variable rate, such interest shall be calculated at an assumed rate equal to the average rate of interest for each of the five previous whole calendar years as shown by the J. J. Kinney Index (or, if such index is not maintained for all or any portion of such period, any similar index of variable rate interest for tax-exempt obligations as may be selected by the City in its sole discretion). ism "Net Revenues" means, for any period, an amount equal to all of the Gross Revenues received during such period minus the amount required to pay all Operation and Maintenance Costs becoming payable during such period. "Operation and Maintenance Costs" means the reasonable and necessary costs and expenses paid by the City for maintaining and operating the Enterprise, including but not limited to (a) the reasonable expenses of management and repair and other costs and expenses necessary to maintain and preserve the Enterprise in good repair and working order and (b) the reasonable administrative costs of the City attributable to the operation and maintenance of the Enterprise;. but in all cases excluding (i) interest expense relating to subordinate obligations and unsecured obligations of the" City, (ii) depreciation, replacement and. obsolescence charges or reserves therefor, and (iii) amortization of intangibles or other bookkeeping entries of a similar nature. "Parity Obligations" means any leases, installment sale agreements, bonds, notes or other obligations of the City payable from and secured by a pledge of and lien upon any of the Net Revenues on a parity with the Lease Payments, entered into or issued pursuant to and in accordance with Section,&_9 'Rental Period" means each period during the Term of this Lease commencing on and including the day immediately following an Interest Payment Date and extending to and including the next succeeding.Interest Payment Date; except that the first Rental Period shall commence on the Closing Date and extend to and including the next succeeding Interest Payment Date. "Term of this Lease means the time during which this Lease is in effect, as provided in Section 4.3. "Trust Agreement" means the Trust Agreement, and dated as of December 1, 1988, by and among the Trustee, the Board and the City, together with any duly authorized and executed amendments thereto. "Water Enterprise Fund" means the existing fund by that name established and held by the City with respect to the Enterprise. -4- ARTICLE 11 COVENANTS, REPRESENTATIONS AND WARRANTIES SECTION 2.1. Covenants, Representations and Warranties of the City. The City makes the following covenants, representations and warranties to the Board as of the date of the execution and delivery of this Lease: (a) Due Organization and Existence. The City is a charter city and municipal corporation duly organized and validly existing under the constitution and laws of the State of California, has full legal right, power and authority to enter into this Lease, the Acquisition Agreement and the Trust Agreement and to carry out and consummate all transactions contemplated hereby and thereby, and by proper action the City has duly authorized the execution and delivery of this Lease, the Acquisition Agreement and the Trust Agreement. (b) Due Execution. The representatives of the City executing this Lease, the Acquisition Agreement and the Trust Agreement are fully authorized to execute the same. (c) Valid, Binding and Enforceable Obligations. This Lease, the Acquisition Agreement and the Trust Agreement have been duly authorized, executed and delivered by the City and constitute the legal, valid and binding agreements of the City enforceable against the City in accordance with their respective terms. (d) No Conflicts. The execution and delivery of this Lease, the Acquisition Agreement and the Assignment Agreement, the consummation of the transactions herein and therein contemplated and the fulfillment of or compliance with the terms and conditions hereof, do not and will not conflict with or constitute a violation or breach of or default (with due notice or the passage of time or both) under any applicable law or administrative rule or regulation, or any applicable court or administrative decree or order, or any indenture, mortgage, deed of trust, lease, contract or other agreement or instrument to which the City is a party or by which it or its properties are otherwise subject or bound, or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of the City, which conflict, violation, breach, default, lien, charge or encumbrance would have consequences that would materially and adversely affect the consummation tion of the transactions contemplated by this Lease, the Acquisition Agreement and the Assignment Agreement or the financial condition, assets, properties or operations of the City or its properties. (e) Consents and Approvals. No consent or approval of any trustee or holder of any indebtedness of the City or of the voters of the City, and no consent, permission, authorization herein or therein contemplated, except as have been obtained or made and as are in full force and effect. -5- M No Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court or federal, state, municipal or other governmental authority pending or, to the knowledge of the City after reasonable investigation, threatened against or affecting the City or the assets,. properties or operations of the City which, if determined adversely to the City or its interests, would have a material and adverse effect upon the consummation of the transactions contemplated by or the validity of this Lease, the Acquisition Agreement or the Trust Agreement, or upon the financial condition, assets, properties or operations of the City, and the City is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental authority, which default might have consequences that would materially and adversely affect the consummation of. the transactions contemplated by this Lease, the Acquisition Agreement or the Trust Agreement or the financial conditions, assets, properties or operations of the City or its properties. SECTION 22. Covenants, Representations and Warranties of the Board. The Board makes the following covenants, representations and warranties as the basis for its undertakings herein contained: (a) Due Organization and Existence. The Board is a public body corporate and politic duly organized and existing under Ordinance No. 1059 (1986 Series) adopted by the City Council of the City of San Luis Obispo on April 15, 1986, and under the constitution and laws of the State of California, has full legal right, power and authority to enter into this Lease, the Acquisition Agreement, the Trust Agreement and the Assignment Agreement and to carry out and consummate all transactions contemplated hereby and thereby, and by proper action the Board has duly authorized the execution and delivery of this Lease, the Acquisition Agreement, the Trust Agreement and the Assignment Agreement. (b) Due Execution. The representatives of the Board executing this Lease, the Acquisition Agreement, the Trust Agreement and the Assignment Agreement are fully authorized to execute the same. (c) Valid. Binding and Enforceable Obligations. This Lease, the Acquisition Agreement, the Trust Agreement and the Assignment Agreement have been duly authorized, executed and delivered by the Board and constitute the legal, valid and binding agreements of the Board with the Board, enforceable against the Board in accordance their respective terms. (d) No Conflicts. The execution and delivery of this Lease, the Acquisition Agreement, the Trust Agreement and the Assignment Agreement, the consummation of the transactions herein and therein contemplated and the fulfillment of or compliance with the terms and conditions hereof, do not and will not conflict with or constitute a violation or breach of or default (with due notice or the passage of time or both) under any applicable law or administrative rule or regulation, or any applicable court or administrative decree or order, or any indenture, mortgage, deed of trust, lease, contract or other agreement or instrument to which the Board is a party or by which it or its properties are otherwise subject or bound, or result in the creation or imposition of any prohibited lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of the Board, which conflict, violation, breach, default, lien, charge or encumbrance would have consequences that would materially and adversely affect the consummation of the transactions contemplated by this Lease, the Acquisition. Agreement and by the Trust Agreement or the financial condition, assets, properties or operations of the Board or its properties. (e) Consents and Approvals. No consent or approval of any trustee or holder of any indebtedness of the Board, and no consent, permission, authorization, order or license of, or filing or registration with, any governmental authority is necessary in connection with the execution and delivery of this Lease, the Acquisition Agreement, the Trust Agreement or the Assignment Agreement, or the consummation of any transaction herein or therein contemplated, except as have been obtained or made and as are in full force and effect. (f) No Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court or federal, state, municipal or other governmental authority pending or, .to the knowledge of the Board after reasonable investigation, threatened against or affecting the Board or the assets, properties or operations of the Board which, if determined adversely to the Board or its interests, would have a material and adverse effect upon the consummation of the transactions contemplated by or the validity of this Lease, the Acquisition Agreement, the Trust Agreement or the Assignment Agreement, or upon the financial condition, assets, properties or operations of the Board, and the Board is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental authority, which default might have consequences that would materially and adversely affect the consummation of the transactions contemplated by this Lease, the Acquisition Agreement, the Trust Agreement or the Assignment Agreement or the financial conditions, assets, properties or operations of the Board or its properties. -7- ARTICLE III DEPOSIT OF MONEYS; ACQUISITION OF THE FACILITIES SECTION 3.1. Deposit of Moneys. On the Closing Date, the Board shall cause the proceeds of sale of the Certificates to be deposited with the Trustee. Pursuant to Section 4.01 of the Trust Agreement, the initial amount of the Reserve Requirement shall be deposited in the Reserve FundAlhe amount of .accrued interest reuresented by the Certificates to the Closing Date shall be deposited in the Certificate Fund, and the remaining balance of said amount shall be deposited in the Acquisition Fund. SECTION 3.2. Acquisition of the Facilities. The Board agrees on the Closing Date to acquire the Facilities and to pay the full amount of the Acquisition Costs from amounts deposited in the Acquisition Fund, pursuant to and in accordance with the provisions of the Acquisition Agreement. The Board shall finance direct payment of the Acquisition Costs from amounts on deposit in the Acquisition Fund pursuant to Section 4.02 of the Trust Agreement. SECTION 3.3. Substitution of Facilities. The City shall have, and is hereby granted, the option at any time and from time to time during the Term of this Lease, to substitute other land, facilities, improvements or other property constituting any part of the Enterprise (the "Substitute Facilities") for any Facilities or portion thereof (the "Former Facilities"), provided that the City shall satisfy all of the following requirements which are hereby declared to be conditions precedent to such substitution: (a) No Event of Default shall have occurred and be continuing; (b) The value of such Substitute Facilities shall not be less than the value of such Former Facilities on or about the time of such substitution, as shown in the report or opinion of a qualified independent appraisal or consulting firm selected by the City; (c) The City shall file with the Board and the Trustee an amended Exhibit B to this Lease which adds thereto a description of such Substitute Facilities and deletes therefrom the description of such Former Facilities; (d) The City shall certify in writing to the Board and the Trustee that such Substitute Facilities serve the municipal purposes of the City and constitute property which the City is permitted to lease under the laws of the State of California; and (e) The Substitute Facilities shall not cause the City to violate any of its covenants, representations and warranties made herein and in the Trust Agreement. Upon the satisfaction of all such conditions precedent, the Term of this Lease shall thereupon end as to the Former Facilities and shall thereupon commence as to the Substitute Facilities. W2 ARTICLE IV AGREEMENT TO LEASE; TERMINATION OF THIS LEASE; LEASE PAYMENTS SECTION 4.1. Lease. The Board hereby leases the Facilities to the City, and .the City hereby leases the Facilities from the Board, upon the terms and conditions set forth in this Lease. SECTION 4.2. Term of Agreement. The Term of this Lease shall commence on December 1, 1988, and shall end on June 1, 2008, unless such term is extended as hereinafter provided. If on June 1, 2008, the Trust Agreement shall not be discharged by its terms, then the Term of this Lease shall be extended until the Trust Agreement shall be discharged by its terms, but not beyond June 1, 2018. If prior to June 1, 2008, the Trust Agreement shall be discharged by its terms, the Term of this Lease shall the eupon end. SECTION 4.3. Possession. The City shall take possession of the Facilities hereunder on the Closing Date. SECTION 4.4. Lease Payments. (a) Obligation to Pay. nThe City agrees to pay to the Board, its successors and assigns, but solely from the Net Revenues and other funds pledged hereunder, the Lease Payments (denominated into components of principal and interest) for the Facilities in the respective amounts specified in Exhibit A, to be due and payable on the Interest Payment Dates following each of the respective Lease Payment Dates specified in Exhibit A, and to be deposited by the City with the Trustee on each of the Lease Payment Dates specified in Exhibit A. Any amount held in the Certificate Fund on any Lease Payment Date (other than amounts resulting from the prepayment of the Lease Payments in part but not in whole pursuant to Article IX and other than amounts required for payment of past due principal or interest represented by any Certificates not presented for payment) shall be credited towards the Lease Payment then required to be paid hereunder•, and no Lease Payment need be deposited with the Trustee on any Lease Payment Date if the amounts then held in the Certificate Fund are at least equal to the Lease Payment then required 'to be deposited with the Trustee. The Lease Payments payable in any Rental Period shall be for the use of the Facilities for such Rental Period. The Lease Payments shall be payable from the sources specified in Section 4.5. (b) Effect of Prepayment. In the event that the City prepays all remaining Lease Payments in full pursuant to Article IX, the City's obligations under this Lease shall thereupon cease and terminate, including but not limited to the City's obligation to pay Lease Payments therefor under this Section 4.4; subject, however, to the provisions of Section 9.1 in the case of prepayment by application of a security deposit. In the event that the City prepays the Lease Payments in part but not in whole pursuant to Section 9.2 or Section 9.3, the principal component of each succeeding Lease Payment shall be reduced as provided in such Sections, and the interest component of each remaining Lease Payment shall be reduced by the aggregate corresponding amount of interest which would otherwise be payable with respect to the Certificates thereby prepaid pursuant to Section 3.01 of the Trust Agreement. (c) Rate on Overdue Payments. In the event the City should fail to make any of the payments required in this Section 4.4, the payment in default shall continue as an obligation of the City until the amount in default shall have been fully paid, and the City agrees to pay the same with interest thereon, from the date of default to the date of payment at the net effective rate of interest then represented by the Outstanding Certificates. (d) Fair Rental Value. The Lease Payments for the Facilities during each Rental Period shall constitute the total rental for the Facilities for each Rental Period, and shall be paid by the City in each Rental Period for and in consideration of the right of the use and occupancy of, and the continued quiet use and enjoyment of the Facilities during each Rental Period. The parties hereto have agreed and determined that the total Lease Payments for the Facilities represent the fair rental value of the Facilities. In making such determination, consideration has been given to the value of the Facilities as set forth in the appraisal of Brown & Caldwell, dated November _, 1988, other obligations of the parties under this Lease, the uses and purposes which may be served by the Facilities and the benefits therefrom which will accrue to the City and the general public. (e) Assignment. The City understands and agrees that all Lease Payments have been assigned by the Board to the Trustee in trust, pursuant to the Assignment Agreement, for the benefit of the Owners of the Certificates, and the City hereby assents to such assignment. The Board hereby directs the City, and the City hereby agrees to pay to the Trustee at the Trust Office of the Trustee, all payments payable by the City pursuant to this Section 4.4 and all amounts payable by the City pursuant to Article DL SECTION 4.5. Fledge and Application of Net Revenues.,\ (a) Pledge of Net Revenues. All of the Net Revenues and all moneys on deposit in any of the funds and accounts established under the Trust Agreement (other than the Rebate Fund) are hereby irrevocably pledged to the punctual payment of the Lease Payments and except as otherwise provided herein the Net Revenues and such other funds shall not be used for any other purpose so long as any of the Lease Payments remain unpaid. Such pledge shall constitute a first lien on the Net Revenues and such other moneys for the payment of the Lease Payments in accordance with the terms hereof. (b) Deposit of Net Revenues Into Water Enterprise Fund; Transfers to Make Lease Payments. All of the Gross Revenues shall be deposited by the City immediately upon receipt in the Water Enterprise Fund which has heretofore been established by the City and which shall continue to be held and maintained by the City at all times during the Term hereof. The City covenants and agrees that all Net Revenues will be held by the City in the Water Enterprise Fund in trust for the benefit of the Trustee (as assignee of the rights of the Board hereunder) and the Certificate Owners, and for the benefit of the owners of any Parity Obligations. On or before each Lease Payment Date during the Term of this Lease, the City shall withdraw from the Water Enterprise Fund and transfer to the Trustee, for deposit in the Certificate Fund, the full amount then required to be deposited in payment of the Lease Payments pursuant to Section 4.4(a). In addition, the City shall withdraw from the Water Enterprise Fund such amounts at such times as shall be .required to: (i) pay all Operation and Maintenance Costs as they come due and IKIII payable, (ii) pay to the Trustee the amount of any deficiency in the Reserve Fund, the notice of which deficiency shall have been given by the Trustee to the City; and (iii) pay the principal of and interest on any Parity Obligations and otherwise comply with the. provisions of the instruments authorizing the issuance of any Parity Obligations. (c) Other Uses of Net Revenues Permitted. The City shall manage, conserve and apply the Net Revenues on deposit in the Water Enterprise Fund in such a manner that all deposits required to be made pursuant to the preceding paragraph will be made at the times and in the amounts so required. Subject to the foregoing sentence, so long as no Event of Default shall have occurred and be continuing hereunder, the City may use and apply moneys in the Water Enterprise Fund for (i) the payment of Additional Payments, (ii) the payment of any subordinate obligations or any unsecured obligations, (iii) the acquisition and construction of extensions and betterments to the Enterprise; (iv) .the prepayment of any obligations of the City relating to the Enterprise, or (iv) any. other lawful purposes of the City. I"' (d) Budget and Appropriation of Lease Payments. During the term of this Lease, the City shall adopt and make all necessary budgets and appropriations of the Lease Payments from theANet Revenues, and shall furnish to the Trustee a certificate of the City Representative stating that the Lease Payments have been included in the final budget of the City for the current Fiscal Year. Such certificate for any Fiscal Year shall be filed with the Trustee not later than September 30 in such Fiscal Year. In the event any Lease Payment requires the adoption by the City of any supplemental budget or appropriation, the City shall promptly adopt the same. The covenants on the part of the City contained in this subsections shall be deemed to be and shall be construed to 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 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 this subsection.(d). SECTION 4.6. Special Obligation of the City; Obligations Absolute. The City's obligation to pay the Lease Payments and the Additional Payments shall be a special obligation of the City limited solely to the Net Revenues. Under no circumstances shall the City be required to advance moneys derived from any source of income other than the Net Revenues and other sources specifically identified herein for the payment of the Lease Payments and the Additional Payments, nor shall any other funds or property of the City be liable for the payment of the Lease Payments and the Additional Payments. The obligations of the City to make the Lease Payments and the Additional Payments from the Net Revenues and to perform and observe the other agreements contained herein shall be absolute and unconditional and shall not be subject to any defense or any right of setoff, counterclaim or recoupment arising out of any breach of the City, the Board or the Trustee of any obligation to the City or otherwise with respect to the Enterprise, whether hereunder or otherwise, or out of indebtedness or liability at any time owing to the City by the Board or the Trustee. Until such time as all of the Lease Payments and all of the Additional Payments shall have been fully paid or prepaid, the City (a) will not suspend or discontinue payment of any Lease Payments or Additional Payments, (b) will perform and observe all other agreements contained in this Lease, and (c) will not terminate the Term of this Lease for any cause, including, without limiting -11- the generality of the foregoing, the occurrence of any acts or circumstances that may constitute failure of consideration, eviction or constructive eviction, destruction of or damage to the Enterprise, sale of the Enterprise, the talang by eminent domain of title to or temporary use of any component of the Enterprise, commercial frustration of purpose, any change in the tag or other laws of the United States of America or the State of California or any political subdivision of either thereof or any failure of the Board or the Trustee to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with the Trust Agreement or this Lease. Nothing contained in this Section 4.6 shall be construed to release the Board or the Trustee from the performance of any of the agreements on. its part herein contained, and in the event the Board or the Trustee shall fail to perform any such agreements on its part, the City may institute such action against the Board or the Trustee as the City may deem necessary to compel performance so long as such action does not abrogate the obligations of the City contained in the preceding paragraph. The City may, however, at the City's own cost and expense and in the City's own name or in the name of the Board prosecute or defend any action or proceeding or take any other action involving third persons which the City deems reasonably necessary in order to secure or protect the City's rights hereunder, and in such event the Board hereby agrees to cooperate fully with the City and to take such action necessary to effect the substitution of the City for the Board in such action or proceeding if the City shall so request. _ SECTION 4.7. Rates and Charges. The City shall fig, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the Enterprise during each Fiscal Year which (together with existing unencumbered fund balances which are lawfully available to the City for payment of any of the following amounts during such Fiscal Year) are at least sufficient, after making allowances for contingencies and error in the estimates, to pay the following amounts in the following order. (a) all Operation and Maintenance Costs estimated by the City to become due and payable in such Fiscal Year, (b) The Lease Payments and the principal of and interest on any Parity Obligations as they become due and payable during such Fiscal Year, without preference or priority; (c) All payments coming due and payable during such Fiscal Year and required for compliance with this Lease and the instruments authorizing the issuance of any Parity Obligations; and (d) All payments required to meet any other obligations of the City which are charges, liens, encumbrances upon or payable from the Gross Revenues or the Net Revenues during such Fiscal Year. In addition, the City shall fix, prescribe, revise and collect rates, fees and charges for the services and facilities furnished by the Enterprise during each Fiscal Year which are sufficient to yield Net Revenues which are at least equalAto one hundred ten percent (110%) of the sum of (i) the amount of the Lease Payments coming due and payable during such Fiscal Year, plus (ii) the principal of and interest on all outstanding Parity Obligations coming due and payable during such Fiscal Year.A -12- SECTION 4.8. Superior and Subordinate Obligations. The City shall not issue or incur any additional bonds or other obligations during the Term of this Lease having any priority in payment of principal or interest out of the Gross Revenues or the Net Revenues over the Lease Payments. Nothing herein is intended or shall be construed to limit or affect the ability of the City to issue or incur obligations which are either unsecured or which are secured by an interest in the Net Revenues which is junior and subordinate to the pledge of and lien upon the Net Revenues established hereunder. SECTION 4.9. Issuance of Parity Obligations. Except for obligations incurred to prepay„Ledeem or discharge Lease Payments or Parity Obligations, the City shall not issue or incur any Parity Obligations during the Term hereof unless: (a) No Event of Default shall have occurred and be continuing; (b) The Net Revenues (excluding connection charges), calculated in accordance with sound accounting principles, as shown by the books of the City for the most recent completed Fiscal Year for which audited financial statements are available, or for any more recent consecutive twelve (12) month period selected by the City, in either case verified by a certificate or opinion of an independent certified public accountant employed by the City, plus, at the option of the City, any or all of the Additional Revenues, at least equal one hundred twenty-five percent (125%) . of the amount of Maximum Annual Debt Service with respect to the Lease Payments and all Parity Obligations then outstanding (including the Parity Obligations then proposed to be issued); and (c) Upon the issuance of such Parity Obligations a reserve fund shall be established for such Parity Obligations in an amount at least equal to the lesser of (A) Maximum Annual Debt Service on such Parity Obligations, or (B) the maximum amount then permitted under the Tax Code. SECTION 4.10. Quiet Enjoyment. During the Term of this Lease,. the Board shall provide the City with quiet use and enjoyment of the Facilities, and the.City shall during such Term peaceably and quietly have and hold and enjoy the Facilities, without suit, trouble or hindrance from the Board, except as expressly set forth in this Lease. The Board will, at the request of the City and at the City's cost, join in any legal action in which the City asserts its right to such possession and enjoyment to the extent the Board may lawfully do so. Notwithstanding the foregoing, the Board shall have the right to inspect the Facilities as provided in Section 6.2. SECTION 4.11. Title. During the Term of this Lease, the Board shall hold title to the Facilities and to any and all additions which comprise fixtures, repairs, replacements or modifications to any of the Facilities, except for those fixtures, repairs, replacements or modifications which are added to the Facilities by the City at its own expense and which may be removed without damaging the Facilities and except for any items added to the Facilities by the City pursuant to'Section.5 8. If the City prepays the Lease Payments in full pursuant to Sections„9.2 or, 9 3 or posts the security deposit permitted by Section 9.1, or pays all Lease' Payments during -13- the Term of this Lease as the same become due and payable, all right, title and interest of the Board in and to the Facilities shall be transferred to and vested in the City. The Board agrees to take any and all steps and execute and record any and all documents reasonably required by the City to consummate any such transfer of title. SECTION 4.12. Additional Payments. In addition to the Lease Payments, the City shall pay when due all costs and expenses incurred by the Board to comply with the provisions of the Trust Agreement, including without limitation all Costs of Issuance (to the extent not paid from amounts on deposit in the Acquisition Fund), annual compensation due to the Trustee and all of its reasonable costs payable as a result of. the performance of and compliance with its duties under the Trust Agreement, and all costs and expenses of auditors, engineers and accountants. -14- ARTICLE V COVENANTS REGARDING ENTERPRISE SECTION 5.1. Maintenance, Utilities, Taxes and Assessments. Throughout the Term of this Lease, as part of the consideration for the rental of the Facilities, all improvement, repair and maintenance of the Facilities shall be the responsibility of the City, and the City shall arrange for the payment of all costs of maintaining the Facilities in good working order, and the cost of the repair and replacement of the .Facilities resulting from ordinary wear and tear or want of care on the part of the City. In exchange for the Lease Payments herein provided, the Board agrees to provide only the Facilities, as hereinbefore more specifically set forth. The City waives the benefits of subsections 1 and 2 of Section 1932, Section 1933(4) and Sections 1941 and 1942 of the California Civil Code, but such waiver shall not limit any of the rights of the City under the terms of this Lease. The City shall also pay or cause to be paid all taxes and assessments of any type or nature, if any, charged to the Board or the City affecting the Facilities or the respective interests or estates therein; provided that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the City shall be obligated to pay only such installments as are required to be paid during the Term of this Lease as and when the same become due. The City may, at the City's expense and in its name, in good faith contest any such taxes, assessments, utility and other charges and, in the event of any such contest, may permit the taxes, assessments or other charges so contested to remain unpaid during the period of such contest and any appeal therefrom. r SECTION 5.2. Modification of Facilities. The City shall, at its own expense, have the right to remodel the Facilities or to make additions, modifications and improvements to the Facilities. All additions, modifications and improvements to the Facilities shall thereafter comprise part of the Facilities and be subject to the provisions of this Lease. Such additions, modifications and improvements shall not in any way damage the Facilities or cause them to be used for purposes other than those authorized under the provisions of state and federal law; and the Facilities, upon completion of any additions, modifications and improvements made thereto pursuant to this Section, shall be of a value which is not substantially less than the value of the Facilities immediately prior to the making of such additions, modifications and improvements. The City will not permit any mechanic's or other lien to be established or remain against any Facilities for labor or materials furnished in connection with any remodeling, additions, modifications, improvements, repairs, renewals or replacements made by the City pursuant to this Section; provided that if any such lien is established and the City shall first notify or cause to be notified the Board of the City's intention to do so, the City may in good faith contest any lien filed or established against any Facilities, and in such event may permit. the items so contested to remain undischarged and unsatisfied during the period of such contest and any appeal therefrom and shall provide the Board with full security against any loss or forfeiture which might arise from the nonpayment of any such item, in form satisfactory to the Board. The Board will cooperate fully in any such contest, upon the request and at the expense of the City. -15- SECTION 5.3. Public Liability and Property Damage Insurance. The City shall maintain or cause to be maintained, throughout the Term of this Lease, but only if and to the extent available at reasonable cost from reputable insurers, a standard comprehensive general insurance policy or policies in protection of the Board, the City, and their respective members, officers, agents and employees. Said policy or policies shall provide for indemnification of said parties against direct or contingent loss or liability for damages for bodily and personal injury, death or property damage occasioned by reason of the operation of the Enterprise. Said policy or policies shall provide coverage in the minimum liability limits of $1,000,000 for personal injury or death of each person and $3,000,000 for personal ,injury or deaths of two or more persons in each accident or event (subject to a deductible of not to exceed $100,000), and in a minimum amount of $150,000 (subject to a deductible of not to exceed $50,000) for damage to property resulting from each accident or event. Such public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks, subject to&reasonable deductible,. Such liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the City, and may be maintained in whole or in part in the form of self-insurance by the City, subject to the provisions of SectionL5.5, or in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. The proceeds of such liability insurance shall be applied toward extinguishment or satisfaction of the liability with respect to whit such proceeds shall have been paid. SECTION 5.4. Casualty Insurance. The City shall procure and maintain, or cause to be procured and maintained, throughout the Term of this Lease, but only in the event and to the extent available from reputable insurers at reasonable cost, casualty insurance against loss or damage to any improvements constituting any part of the Enterprise, covering such hazards as are customarily covered with respect to works and property of like character. Such insuranceNnay be subject to deductible clauses which are customary for works and property of a like character. Such insurance may be maintained as part of or in conjunction with any other casualty insurance carried by the City and may be maintained in whole or in part in the form of self-insurance by the City, subject to the provisions of Section, 5.5, or in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. All amounts collected from insurance against accident to or destruction of any portion of the Facilities shall be used to repair or rebuild such damaged or destroyed portion of the Facilities, and to the extent not so applied, shall be paid to the Trustee to be applied to prepay the Lease Payments on the next available prepayment date pursuant to Section 9.3. f\ SECTION 5.5. Insurance Net Proceeds; Form of Policies. The City shall pay or cause to be paid when due the premiums for all insurance policies required by this Lease.NThe Trustee shall not be responsible for the sufficiency of any insurance herein required and shall be fully protected in accepting payment on account of such insurance or any adjustment, compromise or settlement of any loss. n In the event that any insurance required pursuant to Sections 5.3 or 5.4 shall be provided in the form of self- insurance, the City shall file with the Trustee annually, within ninety (90) days following the close of each Fiscal Year, a statement of the risk manager of the City or of an independent insurance advisor engaged by the City identifying the extent of such self. - insurance and stating the determination that the City maintains sufficient reserves with respect thereto. In the event that any such insurance shall be provided in the form of -16- self insurance by the City, the City shall not be obligated to make any payment with respect to any insured event except from Net Revenues or from such reserves. SECTION 5.6. Eminent Domain. Any amounts received as awards as a result of the taking of all or any part of the Enterprise by the lawful exercise of eminent domain, at the election of the City (evidenced by a written certificate of the City Representative filed with the Trustee and the Board) shall either (a) be used for the acquisition or construction of improvements and extension of the Enterprise, or (b) be paid to the Trustee for deposit into the Certificate Fund to be used to prepay the Lease Payments on the next available prepayment date pursuant to Section 9.3. SECTION 5.7. Records and Accounts. The City shall keep proper books of record and accounts of the Enterprise, separate from all other records and accounts, in which complete and correct entries shall be made of all transactions relating to the Enterprise. Said books shall, upon prior request, be subject to the reasonable inspection of the Owners of not less than ten percent (10%) of the Outstanding Certificates, or their representatives authorized in writing. The City shall cause the books and accounts of the Enterprise to be audited annually by an independent certified public accountant or firm of certified public accountants, not more than one hundred eighty (180) days after the close of each Fiscal Year, and shall make a copy of such report available for inspection by the Certificate Owners at the office of the City and at the Trust Office of the Trustee. The City shall cause to be published annually, not more than one hundred eighty (180) days after the close of each Fiscal Year, a summary statement showing the amount of Gross Revenues, the disbursements from Gross Revenues and from other funds of the City in reasonable detail. The City shall furnish a copy of the statement to the Trustee and, upon reasonable written request, to any Certificate Owner. SECTION 5.8. Installation of City's Equipment. The City may at any time and from time to time, in its sole discretion and at its own expense, install or permit to be installed other items of equipment or other personal property in or upon the Facilities. All such items shall remain the sole property of the City, in which neither the Board nor the Trustee shall have any interest, and may be modified or removed by the City at any time provided that the City shall repair and restore any and all damage to any Facilities resulting from the installation, modification or removal of any such items. Nothing in this Lease shall prevent the City from purchasing or leasing items to be installed pursuant to this Section under a lease or conditional sale agreement, or subject to a vendor's lien or security agreement, as security for the unpaid portion of the purchase price thereof, provided that no such lien or security interest shall attach to any part of the Facilities. SECTION 5.9. Liens. The City shall not, directly or indirectly, create, incur, assume or suffer to exist any mortgage, pledge, lien, charge, encumbrance or claim on or with respect to any Facilities, other than as herein contemplated. Except as expressly provided in this Article, the City shall promptly, at its own expense, take such action as may be necessary to duly discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim, for which it is responsible, if the same shall arise at any time. The City shall reimburse the Board for any expense incurred by it in order to discharge or remove any such mortgage, pledge, lien, charge, encumbrance or claim. -17- ARTICLE VI DISCIAMER, OF WARRANTIES; ACCESS SECTION 6.1. Disclaimer of Warranties. The Board and the Trustee make no warranty or representation, either express or implied, as to the value, design, condition, merchantability or fitness for any particular purpose or fitness for the use contemplated by the City of the Facilities, or any other representation or warranty with respect to the Facilities. In no event shall the Board be liable for incidental, indirect, special or consequential damages in connection with or arising out of this Lease or the Trust Agreement for the existence, furnishing, functioning or City's use of the Facilities. SECTION 6.2. Access to the Facilities. The City agrees that the Board and any Board Representative, and the Board's successors or assigns, shall have the right at all reasonable times to enter upon and to eYAmine and inspect the Facilities. The City further agrees that the Board, any Board Representative and the Board's successors or assigns shall have such rights of access to the Facilities as may be reasonably necessary to. cause the proper maintenance of the Facilities in the event of failure by the City to perform its obligations hereunder. SECTION 6.3. Release and Indemnification Covenants. The City shall and hereby agrees to indemnify and save the Board and the Trustee and their respective officers, agents, successors and assigns harmless from and against all claims, losses and damages, including legal fees and expenses, arising out of (a) the use, maintenance, condition or management of, or from any work or thing done on the Facilities by the City, (b) any breach or default on the part of the City in the performance of any of its obligations under this Lease, (c) any negligence or willful misconduct of the City or of any of its agents, contractors, servants, employees or licensees with respect to the Facilities, (d) any act or negligence of any sublessee of the City with respect to the Facilities, or (e) the acquisition of the Facilities or the authorization of payment of the Acquisition Costs. No indemnification is made under this Section or elsewhere in this Lease for willful misconduct, negligence, or breach of duty under this Lease by the Board or the Trustee, or their respective officers, agents, employees, successors or assigns. -18- A ARTICLE VII • ASSIGNMENT, SUBLEASING AND AMENDMENT SECTION 7.1. Assignment by the Board. The Board's rights under this Lease, including the right to receive and enforce payment of the Lease Payments to be made by the City under this Lease have been assigned to the Trustee pursuant to the Assignment Agreement, to which assignment the City hereby consents. SECTION 72. Assignment and Subleasing by the City. This Lease may not be assigned by the City. The City may further sublease the Facilities or portion thereof, but only with the written consent of the Board and subject to all of the following conditions: (a) This Lease and the obligation of the City to make Lease Payments hereunder shall remain obligations of the City. (b) The City shall, within thirty (30) days after the delivery thereof, furnish or cause to be furnished to the Board and the Trustee a true and complete copy of such sublease. (c) No such sublease by the City shall cause the Facilities to be used for a purpose other than as may be authorized under the provisions of the laws of the State of California. (d) The City shall furnish the Board and the Trustee with a written opinion of Bond Counsel, stating that such sublease does not cause the interest components of the Lease Payments to become subject to federal or State Qf California personal income taxes. SECTION 7.3. Sale of Enterprise. Except as provided herein, the City covenants that the Enterprise shall not be encumbered, sold, leased, pledged, any charge placed thereon, or otherwise dispose of, as a whole or substantially as a whole. Neither the Net Revenues nor any other funds pledged or otherwise made available to secure payment of the Lease Payments shall be mortgaged, encumbered, sold, leased, pledged, any charge placed thereon, or disposed or used except as authorized by the terms of this Lease. The City shall not enter into any agreement which impairs the operation of the Enterprise or any part of it necessary to secure adequate Net Revenues to pay the Lease Payments, or which otherwise would impair the rights of the Certificate Owners with respect to the Net Revenues. If any substantial part of the Enterprise shall be sold, the payment therefor shall either (a) be used for the acquisition or construction of improvements, extensions or replacements of facilities constituting part of the Enterprise, or (b) be paid to the Trustee for deposit into the Certificate Fund to be used to prepay the Lease Payments on the nest available prepayment date pursuant to Section 9.2. SECTION 7.4. Amendment of Lease Agreement. Without the prior written consent of the Trustee, the City will not alter, modify or cancel, or agree or consent to alter, modify or cancel this Lease, excepting only such alteration or modification as may be permitted by Article IX of the Trust Agreement; provided, however, that the City and the Board shall have the right to modify or amend this Lease without the consent of the -19- M • Trustee or any of the Certificate Owners, but only if such amendment or modification does not cause interest represented by the Certificates to be includable in gross income for federal income tax purposes and only if such amendment or modification is for any one or more of the following purposes - (a) to add to the covenants and agreements of the City contained in this Lease, other covenants and agreements thereafter to be observed, or to limit or surrender any rights or power herein reserved to or conferred upon the City, or (b) to make such provisions for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective provision contained herein, or in any other respect whatsoever as the Board and the City may deem necessary or desirable, provided under any circumstances that such modifications or amendments shall not, in the opinion of Bond Counsel, materially adversely affect the interests of the Owners of the Certificates; or (c) to amend any provision thereof relating to the Tax Code, to any extent whatsoever but only if and to the extent such amendment will not adversely affect the exclusion from gross income of interest represented by any of the Certificates under the Tax Code, in the opinion of Bond Counsel. -20- ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES SECTION 8.1. Events of Default Defined. The following shall be Events of Default under this Lease: (a) Failure by the City to pay any Lease Payment when due and payable hereunder. (b) Failure by the City to pay any amounts (other than Lease Payments) when due and payable hereunder, and the continuation of such failure for a period of ten (10) days. (c) Failure by the City to observe and perform any covenant, condition or agreement on its part to be observed or performed, other than as referred to in the preceding clauses (a) or (b), for a period of sixty (60) days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Agency or the Trustee; provided, however, that if in the reasonable opinion of the City the failure stated in the notice can be corrected, but not within such 60 -day period, such failure shall not constitute an Event of Default hereunder if the City shall commence to cure such failure within such sixty (60) day period and thereafter diligently and in good faith cure such failure in a reasonable period of time. (d) Commencement.by the City of a voluntary case under Title 11 of the United States Code or any substitute or successor statute. SECTION 82. Remedies on Default. Whenever any Event of Default shall have happened and be continuing, the Board may exercise any or all remedies available pursuant to law or granted pursuant to this Lease.NEach and every covenant hereof to be kept and performed by the City is expressly made a condition and upon the breach thereof the Board may exercise any and all rights of entry and re-entry upon the Facilities, and also, at its option, with or without such entry, may terminate this Lease; provided, that no such termination shall be effected either by operation of law or acts of the parties hereto, except only in the manner herein expressly provided. If any Event of Default and upon any entry or re-entry by the Board, the City shall, as herein expressly provided, continue to remain liable for the payment of the Lease Payments and/or damages for breach of this Lease and the performance of all conditions herein contained and, in any event such rent and/or damages shall be payable to the Board at the time and in the manner as herein provided, to wit: (a) In the event the Board terminates this. Lease in the manner hereinafter provided for in subparagraph (b) hereof, the City agrees to and shall remain liable for the payment of all Lease Payments and the performance of all conditions herein contained and shall reimburse the Board for any deficiency arising out of the re-leasing of the Facilities, or, in the event the Board is unable to re -lease the Facilities, then for the full amount of all Lease Payments to the end of the Term of this Lease, but said Lease Payments and/or deficiency shall be payable only at the same time and in the same -21- manner as hereinabove provided for the payment of Lease Payments hereunder, notwithstanding such entry or re-entry by the Board or any suit in unlawful detainer, or otherwise, brought by the Board for the purpose of effecting such re-entry or obtaining possession of the Facilities or the exercise of any other remedy by the Board. The City hereby irrevocably appoints the Board as the agent and attorney-in-fact of the City to enter upon and re -lease the Facilities upon the occurrence of an Event of Default and to remove all personal property whatsoever situated upon the Facilities to place such property in storage or other suitable place in the County of San Luis Obispo for the account of and at the expense of the City, and the City hereby exempts and agrees to save harmless the Board from any costs, loss or damage whatsoever arising or occasioned by any such entry upon and re-leasing of the Facilities and the removal and storage of such property by the Board or its duly authorized agents in accordance with the provisions herein contained. The City hereby waives any and all claims for damages caused or which may be caused by the. Board in re-entering and taking possession of the Facilities as herein provided and all claims for damages that may result from the destruction of or injury to the Facilities and all claims for damages to or loss of any property belonging to the City that may be in or upon the Facilities. The City agrees that the terms of this Lease constitute fall and sufficient notice of the right of the Board to re- lease the Facilities in the event of such re-entry without effecting a surrender of this Lease, and further agrees that no acts of the Board in effecting such re-leasing shall constitute•a surrender or termination of this Lease irrespective of the term for which such re-leasing is made or the terms and conditions of such re-leasing, or otherwise, but that, on the contrary, in the event of such Event of Default by the City the right to terminate this Lease shall vest in the Board to be effected in the sole and exclusive manner hereinafter provided for in subparagraph (b) hereof. The City further waives the right to any rental obtained by the Board in excess of the Lease Payments and hereby conveys and releases such excess to the Board as additional rental hereunder. (b) In an Event of Default, with the written consent of the Board may terminate this Lease and re -lease all or any portion of the Facilities; provided that any such termination shall not operate to terminate the rights and remedies granted to the Board pursuant to this Article VIII. In the event of the termination of this Lease by the Board and in the manner hereinafter provided on account of an Event of Default by the City (and notwithstanding any re-entry upon the Facilities by the Board in any manner whatsoever or the re-leasing of the Facilities), the City nevertheless agrees to pay to the Board all costs, loss or damages howsoever arising or occurring payable at the same time and in the same manner as is herein provided in the case of payment of Lease Payments. Any surplus received by the Board from such re-leasing shall be credited towards the Lease Payments next coming due and payable. Neither notice to pay rent or to deliver up possession of the premises given pursuant to law nor any proceeding in unlawful detainer taken by the Board shall of itself operate to terminate this Lease, and no termination of this Lease on account of an Event of Default by the City shall be or become effective by operation of law, or otherwise, unless and until the Board shall have given written notice to the City of the election on the part of the Board to terminate this Lease. The City covenants and agrees that no surrender of the Facilities or of the remainder of the Term hereof or any termination of this Lease shall be valid in any manner or for any purpose whatsoever unless stated or accepted by the Board by such written notice. SECTION 8.& Appointment of Receiver. Upon the occurrence of an Event of Default hereunder, and upon the filing of a suit or other commencement of judicial -22- proceedings to enforce the rights of the Trustee or of the Certificate Owners hereunder, the Trustee shall be entitled, as a matter of right, for the equal and proportionate benefit of the Owners of all the Outstanding Certificates, to the appointment of a receiver or receivers of the Net Revenues and other moneys pledged hereunder, pending such proceedings, with such powers as the court making such appointment shall confer. SECTION 8.4. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Board is intended to be exclusive and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Lease or now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Board.to exercise any remedy reserved to it in this Article it shall not be necessary to give any notice, other than such notice as may be required in this Article or by law. SECTION 8.5. Agreement to Pay Attorneys' Fees and Expenses. In the event either party to this Lease should default under any of the provisions hereof and the nondefaulting party should employ, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Board to exercise any remedy reserved to it in this Article it shall not be necessary to give any notice, other than attorneys or incur other expenses for the collection of moneys or the enforcement or performance or observance of any obligation or agreement on the part of the defaulting party herein contained, the defaulting party agrees that it will on demand therefor pay to the nondefaulting party the reasonable fees of such attorneys and such other expenses so incurred by the nondefaulting party. SECTION M. No Additional Waiver Implied by One Waiver. In the event any agreement contained in this Lease should be breached by either party and thereafter waived by the other party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. SECTION 8.7. Application of Proceeds. All net proceeds received from the re- lease of the Facilities under this Article VIII, and all other amounts derived by the Board or the Trustee as a result of an Event of Default hereunder, shall be transferred to the Trustee promptly upon receipt thereof and shall be deposited by the Trustee in the Certificate Fund to be applied to the Lease Payments in order of Lease Payment Date. SECTION 8.8. Trustee and Certificate Owners to Exercise Rights. Such rights and remedies as are given to the Board under this Article VIII have been assigned by the Board to the Trustee under the Assignment Agreement, to which assignment the City hereby consents. Such rights and remedies shall be exercised by the Trustee and the Owners of the Certificates as provided in the Trust Agreement. -23- ARTICLE IX PREPAYMENT OF LEASE PAYMENTS SECTION 9.1. Security Deposit. Notwithstanding any other provision of this Lease, the City may on any date secure the payment of Lease Payments in whole or in part by irrevocably depositing with the Trustee or any other fiduciary an amount of cash which, together with amounts on deposit in the Certificate Fund, the Insurance and Condemnation Fund and the Reserve Fund, is either (a) sufficient to pay all such Lease Payments, including the principal and interest components thereof, in accordance with the Lease Payment schedule set forth in Exhibit A, or (b) invested in whole or in part in Federal Securities in such amount as will, in the opinion of an independent certified public accountant, together with interest to accrue thereon and together with any cash which is so deposited, be fully sufficient to pay all such Lease Payments when due pursuant to Section 4.4(a) or when due on any optional prepayment date pursuant to Section 9.2, as the City shall instruct at the time of said deposit. In the event of a security deposit pursuant to this Section with respect to all of the Lease Payments, all obligations of the City under this Lease, and all security provided by this Lease for said obligations, shall cease and terminate, excepting only the obligation of the City to make, or cause to be made, all of such Lease Payments from such security deposit, and title to the Facilities shall vest in the City on the date of said deposit automatically and without further action by the City or the Board. Said security deposit shall be deemed to be and shall constitute a special fund for the payment of Lease Payments in accordance with the provisions of this Lease. SECTION 9.2. Optional Prepayment. The City may exercise its option to exercise its option to prepay the principal components of the Lease Payments in whole, or in Dart►amone Lease Pavmant 'natac in enr}i in+&a l ,,,,,14:,.1. ..r @c nnn ,._ �ti_ n_.— —___ aesienate in written notice to the Trustee on any date on or after June 1,1997, by Paying a prepayment price equal to the aggregate principal components of the Lease Payments to be prepaid, together with the interest component of the Lease Payment required to be paid on or accrued through such date j� Such prepayment price shall be deposited by the Trustee in the Certificate Fund to be applied to the prepayment of Certificates pursuant to Section 3.01(a) of the Trust Agreement. The City shall give the Trustee notice of its intention to exercise its option not less than forty-five (45) days in advance of the date of exercise. SECTION 9.3. Mandatory Prepayment From Net Proceeds of Insurance or Eminent Domain. The City shall be obligated to prepay the Lease Payments in whole, or in part among Lease Payment Dates on a pro rata basis in any integral multiple of $5,000, on any date from and to the extent of any Net Proceeds of insurance award or condemnation award with respect to the Enterprise theretofore deposited in the Certificate Fund for such purpose pursuant to Sections 5.4 or, 5.6. The City and the Board hereby agree that such Net Proceeds, to the extent remaining after payment of any delinquent Lease Payments, shall be credited towards the City's obligations under this Section 9.3. SECTION 9.4. Credit for Amounts on Deposit. In the event of prepayment of the principal components of the Lease Payments in full under this Article M such that the Trust Agreement shall be discharged by its terms as a result of such prepayment, all -24- N L_I amounts then on deposit in the Certificate Fund, the Acquisition Fund or the Reserve Fund shall be credited towards the amounts then required to be so prepaid. -25- ARTICLE X MISCELLANEOUS SECTION 10.1. Notices. All notices, certificates or other communications hereunder shall be sufficiently given and shall be deemed to have been received 48 hours after deposit in the United States mail in registered or certified form with postage fully prepaid: If to the City: Director of Finance City of San Luis Obispo . 990 Palm Street San Luis Obispo, California 93401 If to the Board: Chief Financial Officer City of San Luis Obispo Capital. Improvement Board 990 Palm Street San Luis Obispo, California 93401 If to the Trustee: Security Pacific National Bank 333 South Beaudry Avenue, 24th Floor Los Angeles, California 90017 Attention: Corporate Services Division W24- 30 SECTION 102. Binding Effect. This Lease shall inure to the benefit of and shall be binding upon the Board and the City and their respective successors and assigns. SECTION 10.3. Severability. In the event any provision of this Lease shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. SECTION 10.4. Net—net—net Lease.. This Lease shall be deemed and construed to be a "net -net -net lease" and the City hereby agrees that the Lease Payments shall be an absolute net return to the Board, free and clear of any expenses, charges or set -offs whatsoever. SECTION 10.5. Further Assurances and Corrective Instruments. The Board and the City agree that they will, from time to time, execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such supplements hereto and such further instruments as may reasonably be required for correcting any inadequate or incorrect description of the Facilities hereby leased or intended so to be or for carrying out the expressed intention of this Lease. SECTION 10.6. Execution in Counterparts. This Lease may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. -26- M0J SECTION 10.7. Applicable Law. This Lease shall be governed by and construed in accordance with the laws of the State of California. SECTION 10.8. Board and City Representatives. Whenever under the provisions of this Lease the approval of the Board or the City is required, or the Board or the City is required to take some action at the request of the other, such approval or such request shall be given for the Board by a Board Representative and for the City by a City Representative, and any party hereto shall be authorized to rely upon any such approval or request. SECTION 10.9. Captions. The captions or headings in this Lease are for convenience only and in no way define, limit or describe the scope or intent of any provisions or Section of this Lease. -27- X E IN WITNESS WHEREOF, the, Board and the City have caused this Lease to be executed in their respective names by their duly authorized officers, all as of the date first above written. (S E A L) Attest: By: Secretary Attest: By: City Clerk CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD, as lessor By Executive Director CITY OF SAN LUIS OBISPO, as lessee By City Administrative Officer —28— Lease Payment Date o EDIT A SCHEDULE OF LEASE PAYMENTS Principal Component May 25, 1989 $ November 25, 1989 May 25, 1990 November 25, 1990 May 25, 1991 November 25, 1991 May 25, 1992 November 25, 1992 May 25, 1993 November 25, 1993 May 25, 1994 November 25, 1994 May 25, 1995 November 25, 1995 May 25, 1996 November 25, 1996 May 25, 1997 November 25, 1997 May 25, 1998 November 25, 1998 May 25, 1999 November 25, 1999 May 25, 2000 November 25, 2000 May 25, 2001 November 25, 2001 May 25, 2002 November 25, 2002 May 25, 2003 November 25, 2003 May 25, 2004 November 25, 2004 May 25, 2005 November 25, 2005 May 25, 2006 November 25, 2006 May 25, 2007 November 25, 2007 May 25, 2008 -29- Interest Component $ $ Lease Payment E 0 DESCRIPTION OF FACII.ITIES -30- 28026-10 dHHW:CFA:dth November 10, 1088 F8182 O • MARKED TO SHOW CHANGES OFFICIAL NOTICE OF SALE $5,000,000 CERTIFICATES OF PARTICIPATION Evidencing the Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the CITY OF SAN LUIS OBISPO NOTICE IS HEREBY GIVEN that sealed proposals will be received by a representative of the of the City of San Luis Obispo at the office of Jones Hall Hill & White, A Professional Law Corporation, Four Embarcadero Center, Suite 1950, San Francisco, California 94111, on TUESDAY, DECEMBER 13, 1988 at 10:00 a.m. (California Time) for the purchase of $5,000,000 principal amount of Certificates of Participation (the "Certificates") evidencing the direct, undivided fractional interests of the owners thereof in lease payments (the "Lease Payments') to be made by the City of San Luis Obispo (the "City") as the rental for certain property pursuant to a Lease Agreement dated as of December 1, 1988, (the "Lease Agreement') by and between the City and the City of San Luis Obispo Capital Improvement Board, a public body corporate and politic duly organized and existing under Ordinance No. 1059 (1986 Series) adopted by the City Council of the City on April 15, 1986 (the "Board"). The Certificates will be executed and delivered under the provisions of a Trust Agreement dated as of December 1, 1988, (the "Trust Agreement') among the City, the Board and Security Pacific National Bank as trustee (the "Trustee"). The Certificates are more particularly described in the proposed form of the Trust Agreement and the Lease Agreement on file with the City Clerk of the City (which is incorporated herein by reference) and copies thereof will be furnished to any interested bidder upon request. ISSUE; BOOK ENTRY SYSTEM: The Certificates will be issued in fully registered form in denominations of $5,000 or authorized integral multiples thereof, to be dated initially as of December 1, 1988. The Certificates will be issued initmll under the book -entry system of The Depository Trust Company of New York, New York ("DTC"), and the ownership of the Certificates will be registered to the nominee of DTC. Bidders are referred to the Official Statement for further details. i MATURITIES: The Certificates will mature on June 1 in each of the years, and in the amounts, as follows: Year Principal Year Principal June 1 Amount June 1 Amount 1989 $120,000 1995 $ 180,000 1990 130,000 1996 190,000 1991 140,000 1997 205,000 1992 145,000 1998 220,000 1993 155,000 2003 1,370,000 1994 165,000 2008 1,980,000 OPTIONAL PREPAYMENT: Certificates maturing on or before June 1, 1997, are not subject to prepayment before their respective stated maturities. Certificates maturing on or after June 1, 1998, are subject to prepayment before their respective stated maturities in whole, or in partA!Lnong maturities in such amounts as the City shall designate andby lot within a maturity, from optional prepayments of the Lease Payments made by the City from any source of available funds, on any date on or after June 1, 1997, at a prepayment price equal to 100% of the principal amount to be prepaid, together with accrued interest represented thereby to the date fined for prepayment. r. SINKING FUND PREPAYMENT: The Certificates maturing on June 1, 2003, and the Certificates maturing on June 1. 2008 (collectively, the "Term Certificates") are also subject to prepayment in whole, or in part by lot, on any June 1 on or after June 1, 1999, from regular scheduled principal components of the Lease Payments required to paid by the City with respect to such dates pursuant to the Lease Agreement, at a prepayment price equal to 100% the principal amount to be prepaid, together with accrued interest represented thereby to the date fixed for prepayment, as follows: $1,370,000 Term Certificates Maturing. June 1, 2003 Sinking Fund. Prepayment Date Principal Amount (June 1) to be Prepaid 1999 $235,000 2000 255,000 2001 270,000 2002 295,000 2003 (Maturity) 315,000 -2- $1,980,000 Term Certificates Maturing June 1, 2008 Sinldng Fund Prepayment Date Principal. Amount (June 1) to be Prepaid 2004 $340,000 2005 365,000 2006 395,000 2007 425,000 2008 (Maturity) 455,000 PREPAYMENT FROM NET PROCEEDS OF INSURANCE AND CONDEMNATION. The Certificates are subject to mandatory prepayment on any date, in whole, or in part among maturities on a pro rata basis and by lot within a maturity, from the proceeds of insurance or eminent domain proceedings credited towards the prepayment of the Lease Payments by the City pursuant to the Lease Agreement, at a prepayment price equal to 100% the principal amount to be prepaid, together with accrued interest represented thereby to the date fixed for prepayment. PAYMENT: Both principal and interest represented by the Certificates are payable in lawful money of the United States of America, upon presentation and surrender at the corporate trust office of the Trustee in Los Ange es, ornia, in the case of principal and by check or draft of the Trustee mailed to the registered owner of each Certificate (being DTC through its nominee, so long as the Certificates are subiect to PURPOSE: The proceeds of the Certificates are to be applied to finance the acquisition by the Board from the City of certain facilities (the "Facilities') constituting a part of the water enterprise of the City (the "Enterprise") pursuant to an Acquisition Agreement dated as of December 1, 1988. The Facilities will be leased by the Board to the City pursuant to the Lease Agreement. The City will use the proceeds of sale of the Facilities to finance additional improvements to the Enterprise. SECURITY: The Certificates evidence a direct, undivided fractional interest in the Lease Payments. The Lease Payments are payable solely from and are secured by a fust lien on and pledge of the Net Revenues (as such term is defined in the Lease Agreement) of the Enterprise,nas more fully set forth in the Lease Agreement. Bidders are referred to the Lease Agreement and the Official Statement for further details. TAX—EXEMPT STATUS: In the opinion of Jones Hall Hill & White, A Professional Law Corporation, special counsel to the City, interest represented by the Certificates is not includable in gross income for federal income tag purpose, and is not an item of tax preference for purposes of the federal individual and corporate alternative minimum taxes. The Lease Agreement is a "qualified tax-exempt obligation" within the meaning of Section 265 of the Internal Revenue Code of 1986. In the event that prior to the delivery of the Certificates. (a) the interest on other obligations of the same type and character is declared to be includable in gross income (either at the time of such declaration or at any future date) under any federal income tax laws, either by the terms -3- of such laws or by ruling of a federal income tag authority or official which is followed by the Internal Revenue Service, or by decision of any federal court, or (b) any federal income tag law is enacted which will have a substantial adverse effect upon the owners of the Certificates as such, the successful bidder may; at its option, prior to the tender of the Certificates, be relieved of its obligation under the contract to purchase the Certificates, and in such case the deposit accompanying its bid will be returned. LEGAL OPINION: The legal opinion of Jones Hall Hill & White, A Professional Law Corporation, San Francisco, California, approving the validity of the Certificates, the Trust Agreement and the Lease Agreement, will be furnished to the successful bidder without cost. A copy of the .legal opinion, certified by the official in whose office the original is filed, will be printed on each Certificate without charge to the successful bidder. TERMS OF SALE FORM OF BID; MAXIMUM DISCOUNT: All bids must be for not less than all of the Certificates and for not less than ninety-eight percent (98%) of the par value thereof and accrued interest thereon to the delivery date. The amount of any discount specified in any bid may not exceed two percent (2%) of the aggregate principal amount of the Certificates. Each bid, together with bidder's check, must be enclosed in a sealed envelope addressed to the City with the envelope and bid clearly marked "Proposal for Purchase of of the City of San Luis Obispo 1988 Certificates of Participation". Each bid must be in accordance with the terms and conditions set forth in this notice, and all of the terms and conditions of this notice will be deemed to be incorporated into each of the bids. Bids may be mailed or delivered to the City, in care of Jones Hall Hill & White, at the address mentioned above, but must be received by the date and time of sale set forth above. IN'T'EREST RATE: Bidders must specify the rate or rates of interest to be represented by the Certificates.n Interest represented by the Certificates is payable on June 1, 1989, and thereafter semiannually on June 1 and December 1 in each year. Bidders will be permitted to bid different rates of interest; but (a) each interest rate specified in any bid must be in a multiple of one -twentieth or one-eighth of one percent; (b) no Certificate may represent more than one rate of interest; (c) interest represented by each Certificate will accrue from December 1, 1988, to its stated maturity date at the interest rate specified in the bid, payable semiannually as set forth above; (d) all Certificates maturing at any one time will represent the same rate of interest; (e)Athe rate of interestAM sented by Certificates maturing in any one year must be greater than or equal to the rate of interest borne by the Certificates maturing in the immediately preceding year; and (f)jyny premium must be paid as part of the purchase price, and no bid will be accepted which contemplates the waiver of any interest or other concession by the bidder as a substitute for payment in full of the purchase price. BEST BID: The best bid will be determined by deducting the amount of the premium bid (if any) from, and adding the amount of the discount bid (if any) to, the total amount of interest which would be required to be paid on the Certificates from December 1, 1988, to their respective maturity dates, or in the case of the Term Certificates to their respective sinking account prepayment dates set forth above, at the respective interest -4- t rates specified in the bid, on the basis of the lowest net interest cost determined thereby. The purchaser must pay accrued interest, computed on a 30—day month, 360—day year basis, from December 1, 1988, to the date of delivery. RIGHT OF REJECTION: The City reserves the right, in its sole discretion, (a) to determine whether any bid or bidder is responsible, (b) to reject any and all bids with or without cause, and (c) to waive any irregularity or informality in any bid, without regard to the degree of materiality thereof. ACCEPTANCE OF BID: On behalf of the City and pursuant to prior authorization from the City Council, the Director of Finance of the City will accept a bid for the Certificates in writing or will reject all bids not.later than twenty—four (24) hours after the expiration of the time herein prescribed for the receipt of bids, unless such time of award is waived by the successful bidder. Notice of the acceptance of any bid will be given promptly to the successful bidder. DELIVERY AND PAYMENT: Delivery of the Certificates will be made to the successful bidder on a date (not later than Decemberti0, 1988) to be determined by the City, at such place as the bidder may request at least four (4) days prior to delivery. The Certificates will be printed with either a steel—engraved or lithographed border, at the option of the City; and the cost of printing the Certificates will be borne by the City. Payment of the purchase price for the Certificates must be made by Federal Reserve funds check which is immediately available to the Trustee. Any expense in providing immediately available funds will be borne by the purchaser. RIGHT OF CANCELLATION: The successful bidder has the right, at its option, to cancel the contract of purchase if the Trustee fails to execute and deliver the Certificates within 60 days from the date of sale thereof, and in such event the successful bidder will be entitled to the return of the good faith check accompanying its bid. GOOD FAITH CHECK: A certified or cashier's check drawn on a bank or trust company having an office in Los Angeles, California, or in San Francisco, California, in the amount of $100,000, ayable to the order of the City, must accompany each proposal as a guaranty the bidder, if successful, will accept and pay for the Certificates in accordance with the terms of its bid. The check accompanying any accepted proposal will be retained by the City pending delivery of the Certificates and will be surrendered to the purchaser against payment in full of the purchase price of the Certificates. If the successful bidder fails to complete its purchase on the terms stated in its proposal or repudiates its obligation to make such purchase, the check will be cashed and the amount thereof retained by the City. The check accompanying each unaccepted proposal will be made available for recovery by each unsuccessful bidder at its expense. No interest will be paid upon the deposit made by any bidder. STATEMENT OF NET INTEREST RATE: Each bidder is requested, but not required, to state in its bid the total net interest cost and the percentage net interest rate represented by the bid, which will be informative only and not binding on either the bidder or the City. CALIFORNIA DEBT ADVISORY COMMISSION: The City has duly notified the California Debt Advisory City of the proposed sale of the Certificates. Payment of all M-2 0 • L fees to the California Debt Advisory City in connection with the sale and issuance of the Certificates are the sole responsibility of the successful bidder, and not of the City or the Board. NO LITIGATION: There is no litigation pending concerning the validity of the Certificates, the corporate existence of the City or the Board or the entitlement of the officers thereof to their respective offices, and the successful bidder will be furnished a no—litigation certificate certifying to the foregoing as of and at the time of delivery of the Certificates. CUSIP NUMBERS: It is anticipated that CUSIP numbers will be printed on the Certificates, but neither the failure to print such numbers on any Certificates nor any error with respect thereto will constitute cause .for a failure or refusal by the purchaser thereof to accept delivery of and pay for the Certificates in accordance with the terms hereof. All charges for the assignment of said numbers will be borne by the purchaser. OFFICIAL STATEMENT: The City and the Board have approved an Official Statement relating to the Certificates, and will makea reasonable number of copies, not to exceed 250, available to the successful bidder, provided that the purchaser may, at its cost, receive any amount of the copies of the -Official Statement in.egces"s of 250 copies. A copy of the preliminary Official Statement and any other information concerning the proposed financing. will be furnished upon request to the financial consultants of the City, Evensen Dodge, Inc., 650 Town Center Drive, Costa Mesa, California 92626, telephone: (714) 755-8016. Dated: November 15, 1988 CITY OF SAN LUIS OBISPO By /s/ William C. Statler Director of Finance of the City of San Luis Obispo Q3 NEW ISSUE Rating: Requested from Moody's Investors Service, Inc. (See "Rating" herein) In the •opinion of Jones Hall Hill & White, A Professional Law Corporation, San Francisco, California, Special Counsel, subject, however to certain qualifications described herein, under existing law, the portion of lease payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal individual and corporate alternative minimum taxes, although it is included in adjusted net book income and current earnings in computing the alternative minimum tax imposed on certain corporations and the Lease Agreement is a "qualified tax-exempt obligation" within the meaning of Section 265 of the Internal Revenue Code of 1986. In the further opinion of Special Counsel, such interest is exempt from California personal income taxes. See "TAS ESEMPTION19 herein. OFFICIAL STATEMENT $5,000,000 CERTIFICATES OF PARTICIPATION Representing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the CITY OF SAN LUIS OBISPO Dated: December 1, 1988 Principal Due: June 1, 1989-2008 Interest represented by the Certificates is payable on June 1 and December 1 of each year commencing June 1, 1989. The Certificates will be delivered as fully registered Certificates without coupons, and, when delivered, will be registered in the name of Cede & Co., as nominee of the Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository of the Certificates. Individual purchases may be made in book -entry form only, in the principal amount of $5,000 or integral multiples thereof for each maturity. Purchasers will not receive certificates representing their interest in the Certificates purchased. Principal and interest will be paid to DTC, which will in turn remit such principal and interest to its participants for subsequent dispersal to the beneficial owners of the Certificates as described herein. The Certificates will mature on June 1 in the years and amounts as set forth below. $1,650,000 Serial Certificates Year Amount Year Amount 1989 $120,000 1994 $165,000 1990 130,000 1995 1801000 1991 140,000 1996 190,000 1992 145,000 1997 205,000 1993 155,000 1998 220,000 $11,370,000 Term Certificates Due June 1, 2003 $1,980,000 Term Certificates Due June 1, 2008 as The Certificates are subject to prepayment as described herein. Bids must be for not less than $4,900,000 and accrued interest represented by the Certificates, and must be accompanied by a good faith check in the amount of $100,000, payable to the City of San Luis Obispo. The Certificates are being delivered to finance the acquisition of certain existing water system capital facilities (the "Facilities") pursuant to a an Acquisition Agreement dated as of December 1, 1988 by and between the City as seller and the City of San Luis Obispo Capital Improvement Board (the "Board") as purchaser. The Facilities will be leased pursuant to a Lease Agreement (the "Lease Agreement"), dated December 1, 1988, by and between the City of San Luis Obispo as lessee and the Board as lessor. See "The Facilities" herein.. The Certificates represent direct undivided fractional interests of the owners in lease payments to be made by the City under the Lease Agreement (the "Lease Payments"). The City has covenanted under the Lease Agreement that it will take such action as may be necessary to include the Lease Payments due under the Lease Agreement in its annual budgets, and to make the necessary annual appropriations there- fore. Neither the Certificates nor the obligation of the City to make Lease Payments constitutes an obligation of the City or Board 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 Board has no taxing power. Neither the Certificates nor the obligation of the City to make Lease Payments under the Lease Agreement constitute a debt of the City, the County of San Luis Obispo, the State of California or any of its political subdivisions within the meaning of any constitutional or statutory debt limitation or restriction. The Certificates are offered, subject to approval of validity and tax exemption, by Jones Hall Hill & White, A Professional Law Corporation, San Francisco, California, Special Counsel. Delivery of the Certificates in San Francisco, California is expected to be on or about December 29, 1988. The Lease Agreement has been designated as a "Qualified Tax -Exempt Obligation" pursuant to Section 265(b)(3) of the Internal Revenue Code of 1986. BIDS RECEIVED: 10:00 A.M., Pacific Time, Tuesday, December 13, 1988 at the offices of Jones Hall 'Hill & White, A Professional Law Corporation, Four Embarcadero Center, Suite 1950, San Francisco, California 94111. AWARD: In writing within 24 hours of receipt of bids by the City Director of Finance on behalf of the City and pursuant to prior authorization from the City Council. The date of this Preliminary Official Statement is November 23, 1988. CA21.88A1/2 This Official Statement does not constitute an offer to sell the Certificates in any state or other jurisdiction to any person to whom it is unlawful to make such offer in such state or jurisdiction. No dealer, salesman, or any person has been authorized to give any information or to make any representation other than those contained herein in connection with the offering of the Certificates, and if , given or made, such information or representation must not be relied upon. The information set forth herein has been furnished by the Board and the City and other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the Board or the City or anyone acting on its behalf. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale of the Certificates made hereunder shall, under the circumstances, except as stated herein, create any implication that there has been no change in the affairs of the Board or the City since the date hereof. The Certificates have not been registered under the Securities Act of 1933, in reliance upon exemptions contained in the Securities Act. TABLE OF CONTENTS ii CA21.88A1/3 CITY OF SAN LUIS OBISPO CAPITAL IMPROVEMENT BOARD CITY OF SAN LUIS OBISPO, CALIFORNIA Governing Body of the Board and the City Council Expiration of Term Ron Dunin Mayor and President November, 1989 Penny Rappa Vice Mayor and Vice President November, 1989 Peg Pinard Member November, 1991 Jerry Reiss Member November, 1991 Allen K. Settle Member November, 1989 City Officials John Dunn Administrative Officer Toby A. Ross Assistant Administrative Officer Roger T. Picquet City Attorney William C. Statler Director of Finance Pam Voges City Clerk William Hetlund Director of Utilities Special Counsel Jones Hall Hill & White, A Professional Law Corporation San Francisco, California Trustee Security Pacific National Bank Los Angeles, California Financial Advisor Evensen Dodge, Inc. Costa Mesa, California San Francisco, California iii CA21.88A1/4 s E OFFICIAL STATEMENT $5,000,000 CERTIFICATES OF PARTICIPATION .Representing Direct, Undivided Fractional Interests of the Owners Thereof in Lease Payments to be Made by the CITY OF SAN LUIS OBISPO INTRODUCTION The purpose of this Official Statement is to provide certain information concerning the $5,000,000 Certificates of Participation (the "Certificates") representing the direct, individual fractional interests of the owners thereof in lease payments to be made by the City of San Luis Obispo (the "City") pursuant to a Lease Agreement dated as of December 1, 1988 (the "Lease Agreement") between the City as lessee and the City of San Luis Obispo Capital Improvement Board (the "Board") as lessor. The Board is a public body corporate and politic created by the City pursuant to its municipal affairs powers as a charter city as exercised pursuant to Ordinance No. 1059 (1986 Series) adopted. by the City Council of the City on April 15, 1986. The Certificates are being delivered pursuant to a Trust Agreement, dated December 1, 1988 (the "Trust Agreement"), by and between the Board and Security Pacific National Bank as trustee (the "Trustee"). The proceeds of the Certificates will be used to finance the acquisi- tion by the Board of certain existing facilities (the "Facilities") consisting of a part of the City's water system (the "Enterprise") pursuant to an Acquisition Agreement dated as .of December 1, 1988, by and between the. City, as seller and the Board, as purchaser (the "Acquisition Agreement"). Pursuant to an Assignment Agreement, dated as of December 1, 1988 (the "Assignment Agreement"), the Board has assigned to the Trustee, for the benefit of the owners of the Certificates, certain rights of the Board under the Lease Agreement including its right to (i) to receive and collect the Lease Payments, (ii) to receive and collect proceeds of condemnation of, and insurance of the Facilities, and (iii) to enforce payment of amounts due under the Lease Agreement upon default -by the City. The Certificates evidence a direct, undivided fractional interest in the Lease Payments. The Lease Payments are payable from and are secured by a first lien on and pledge of the Net Revenues (as defined in the Lease Agreement) of the Enterprise, `and from amounts budgeted and appropriated by the City from its general fund, subject to termination under certain circumstances. See "Summary of Legal Documents - Lease Agreement." Neither the Certificates nor the obligation of the City to make Lease Payments constitute an obligation of the City or the Board for which the City or the Board is obligated to levy or pledge any form of taxation or for which the City or Board has levied or pledged any form of taxation. The Board has no taxing power. Neither the Certificates 1 CA21.88A1/5 M • nor the obligation of the City to make Lease Payments constitutes a debt of the City, County of San Luis Obispo, the State of California, or any of its political subdivisions, and does not constitute an indebtedness within the meaning of any constitutional or statutory debt. limitation or restriction. For certain information pertaining to the Enterprise and its financial operations, please see "The Enterprise." General information regarding the City is presented in Appendix A. Also within Appendix A is a discussion of certain provisions of the California Constitution and their impact on the City. See "Limitation on Tax Revenues and Tax Collection Procedures." Audited general purpose financial statements of the City for the fiscal year ended June 30, 1987 are presented in Appendix B. Brief descriptions of the Certificates, the Board, and the Facilities are included in this Official Statement, together with summaries of the Acquisition Agreement, Assignment Agreement, Lease Agreement and Trust Agreement. Such descriptions do not purport to be comprehensive or definitive. All references herein are qualified in their entirety by reference to the actual documents. THE CERTIFICATES GENERAL PROVISIONS The Certificates will be delivered in the aggregate principal amount of $5,000,000, and will be originally dated December 1, 1988. Interest on the Certificates will be payable on June 1, 1989, and semiannually thereafter on December 1 and June 1 of each year. The Certificates will mature June 1 in the years and amounts as set forth below. $1,650,000 Serial Certificates Year Amount Year Amount 1989 $120,000 1994 $165,000 1990 130,000 1995 180,000 1991 140,000 1996 190,000 1992 145,000 1997 205,000 1993 155,000 1998 220,000 $1070,000 Term Certificates due June 1, 2003 $1;980,000 Term Certificates due June 1, 2008 The Certificates will be executed and delivered in fully registered form without coupons and, when originally delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository of. the Certificates. Individual purchases may be made in book -entry form only, in the principal amount of $5,000 or integral multiples thereof for each maturity. Purchasers will not receive certificates repre- senting their interest in the Certificates purchased. Principal and interest represented by the Certificates will be paid to DTC, which will in turn remit such principal and interest to its participants for subsequent dispersal to the beneficial owners of the Certificates as described herein. 2 CA21.88A1/6 PREPAYMENT FEATURES Optional Prepayment of Certificates. The Board may elect on June 1, 1997 and on any date thereafter, to prepay Certificates due on or after June 1, 1998. Prepayment may be in whole or in part of the Certifi- cates subject to prepayment. If only part of the Certificates are called for prepayment, the specific Certificates to be prepaid will be selected by the City at its sole discretion.' All prepayments shall be at a price of par and accrued interest. Sinking Account Prepayment. The outstanding Term Certificates maturing on June 1, 2003 and June 1, 2008, shall also be subject to mandatory call and prepayment (or purchase in lieu of prepayment as provided in the Lease Agreement) in part by lot commencing on June 1, 1997 from the principal components of the regular scheduled Lease Payments, at a prepayment price equal to the principal amount thereof to be prepaid together with accrued interest thereon to the prepayment date, without premium. The principal amount of Term Certificates to be called for prepayment on each such date is by the Trustee by lot as follows: $1,370,000 Term Certificate Maturing June 1, 2003 Sinking Account Redemption Date (June 1) 1999 2000 2001 2002 2003 Principal Amount to be Redeemed or Purchased $235,000 255,000 270,000 295,000 315,000 (maturity) $1,980,000 Term Certificate Maturing June 1, 2008 Sinking Account Redemption Date (June 1) 2004 2005 2006 2007 2008 Principal Amount to be Redeemed or Purchased $340,000 365,000 395,000 425,000 455,000 (maturity) SECURITY FOR THE CERTIFICATES The Certificates represent direct, undivided fractional interests in the Lease Payments. The Lease Payments are payable from and are secured by a first lien and pledge of the Net Revenues, as defined in the Lease Agreement, of the Enterprise. During the term of the Lease Agreement, the City has covenanted to set rates and charges for the Enterprise during each fiscal year at levels sufficient to yield Net Revenues which are at least equal to 110% of the sum of any Lease Payments coming due and payable during such fiscal year, plus the principal of and interest on any outstanding parity obligations due and payable during such fiscal year. 3 CA21.88A1/7 0 0 In the event Net Revenues are insufficient in any fiscal year to enable the City to pay the Lease Payments coming due in such fiscal year in full, the portion of the Lease Payments not paid from Net Revenues shall be payable from any source of available general funds of the City. In that event, the City shall take whatever action may be necessary to include that portion of the Lease Payments in its budget ,, for the fiscal year and make the necessary annual appropriations. The City's general fund obligation terminates on the Net Revenue Achievement Date, defined in the Lease Agreement as the first day of the fiscal year immediately following three consecutive fiscal years during which Net Revenues at least equaled 110% of maximum annual debt service with respect to the Lease Payments and all parity obligations then outstanding. Pursuant to the Trust Agreement, there is to be on deposit in the Reserve Fund an amount equal to the maximum annual debt service requirement. Such money is to be held in trust as a reserve for the payment when due of principal and interest represented by the Certificates in the event amounts, in the Certificate Fund are insufficient therefor. BOOK -ENTRY ONLY SYSTEM The Depository Trust Company ("DTC") , New York, New York, will act as securities depository for the Certificates. The Certificates will be issued as one fully registered Certificates for each maturity as set forth on the cover page hereof, each in the aggregate principal amount of such maturity, in the name of Cede & Co., as nominee and registered owner for DTC. DTC is a limited -purpose trust company organized under the laws of the State of New York, 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, as amended. DTC was created to hold securities of its participants (the "Participants") and to facilitate the clearance and settlement of securities transactions among Participants in such securities through electronic book -entry changes in accounts of the Participants, thereby eliminating the need of physical movement of securities certificates. Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations, some of whom (and/or their representatives) own DTC. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Ownership interest in the Certificates may be purchased by or through Participants. Such Participants and the persons for whom they acquire interest in the Certificates as nominees will not receive certificated Certificates, but each such Participant will receive a credit balance in the records of DTC in the amount of such Participant's interest in the Certificates, which will be confirmed in accordance with DTC's standard procedures. When reference is made herein to any consent from or direction by the Certificate holders or Beneficial Owners, such reference shall only relate to those permitted to act (by statute, regulation or otherwise) on behalf of Beneficial Owners for such purposes. For the purposes of this Official Statement, the term "Beneficial Owner" shall hereinafter be defined to include the person for which the Participant acquires an interest in the Certificates. 4 CA21.88A1/8 Q 0 The Board, as long as a book -entry -only. method is used for the Certificates, will send any notice of redemption or other bondholder notices only to DTC. Each such person for which a Participant has an interest in the Certificates, as nominee, may desire to make arrangements with such Participant to have all notices of redemption or other communications of the Board to DTC, which may affect such persons, to be forwarded in writing by such Participant and to have notification made of all .interest payments. Any failure of DTC to advise any Participant, or of any Participant to notify the Beneficial Owner, of any such notice and its content or effect will not affect the validity or sufficiency of the proceedings .relating to the redemption of the Certificates called for redemption or of any other action premised on such notice. NEITHER THE CITY NOR THE BOARD WILL HAVE A RESPONSIBILITY OR OBLIGATION TO SUCH PARTICIPANTS OR THE PERSONS FOR WHICH THEY ACT AS NOMINEES WITH RESPECT TO PROVIDING NOTICE TO SUCH PARTICIPANTS OR THE PERSONS FOR WHICH THEY ACT AS NOMINEES. DTC will receive payments from the Trustee, to be remitted by DTC to the Parti- cipants for subsequent disbursement to the Beneficial Owners. The ownership interest of each Beneficial Owner in the Certificates will be recorded on the records of the Participants whose ownership interests will be recorded on a computerized book -entry system operated by DTC. Transfer or crediting of the applicable principal, interest or redemption premium payments to Participants is the responsibility of DTC, and to Beneficial Owners on their nominees the responsibility of the Participants. THE CITY AND THE BOARD CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC, DTC PARTICIPANTS OR OTHERS WILL DISTRIBUTE TO BENEFICIAL OWNERS PAYMENTS REPRESENTED BY THE CERTIFICATES PAID TO DTC OR ITS NOMINEE AS THE REGISTERED OWNER OF THE CERTIFICATES, OR THAT THEY WILL DO SO ON A TIMELY BASIS, OR THAT DTC WILL SERVICE AND ACT IN THE MANNER DESCRIBED IN THIS OFFICIAL STATEMENT. Beneficial Owners will receive written confirmations of their purchases detailing the terms of the Certificates acquired. Transfers of ownership interests in the Certificates will be accomplished by book entries made by DTC and the Participants who act on behalf of the Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interest in the Certificates, except as specifically provided in the Ordinance. Interest and principal will be paid by the Trustee to DTC, then paid by DTC to the Participants and thereafter paid by the Participants to the Beneficial Owners when due. DISCONTINUANCE OF DTC SERVICES AND THE ISSUANCE OF REPLACEMENT BONDS DTC may determine to discontinue providing its services with respect to the Certificates at any time by giving notice to the City and discharg- ing its responsibilities with respect thereto under applicable law. Under such circumstances, certificates ("Replacement Certificates") are required.to be delivered as described in the Trust Agreement unless a successor securities depository is selected. The Beneficial Owner, upon registration of certifications held in the Beneficial Owner's name, will become the registered owner of the Replacement Certificates. Interest represented by the Replacement Certificates, when due and payable, will be paid by check or draft mailed by the Trustee to the registered owners as they appear on the books of the Registrar on the close of business on the Record Date (as hereinafter defined). F, CA21.88A1/9 The City may determine that continuation of the system of book -entry transfers through DTC (or a successor securities depository) is not in the best interests of the Beneficial Owners. In such event, Replace- ment Certificates will be delivered. No transfer or exchange of any Replacement Certificate shall be required to be made (i) after the Record Date with respect to any interest payment due on the next succeeding interest payment date, (ii) after the Record Date with respect to any redemption of such Replacement Certificates. "Record Date" means the 15th day of the month next preceding such interest payment date or the 15th day next preceding a date of mailing notice of redemption, whether or not a regular business day of the Bond Registrar. The City shall not be required to register the transfer of or exchange any Replacement Certificate selected. for redemption in whole or in part, except the unprepaid portion of the Replacement Certificate being prepaid in part. For every transfer and exchange of the Replacement Certificates, the Trustee may charge the Beneficial Owner a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. THE BOARD The City of San Luis Obispo Capital Improvement Board was formed pursuant to Ordinance No. 1059 (1986 Series) adopted by the City Council of the City of San Luis Obispo on April 15, 1986 (the "Ordinance"), for the purpose of implementing the construction, acquisition, maintenance and improvement of public facilities and improvements within the City and the performance of all undertakings incidental or advantageous thereto. Among the powers expressly granted to the Board is the power to borrow money to provide funds for the construction, acquisition, maintenance or improvement of public facilities authorized by the Ordinance and to issue in its name revenue bonds to evidence the indebtedness created by such borrowing. The Ordinance further provides that the bonds of each issue of the Board shall constitute special obligations, and evidence a special indebtedness of the Board, which shall be a charge upon and payable, both as to principal and interest and as to any premiums payable upon the redemption of bonds, solely from such revenues and funds as are specified therein and in the proceedings for their issuance and shall not constitute obligations nor evidence any indebtedness of the City. The Certificates are the second issuance of bonds or of any indebtedness by the Board. The members of the City Council of the City also sit as the board of directors of the Board. THE FACILITIES Proceeds of the Certificates will be used to finance the costs of acquisition of certain existing .water facilities of the Enterprise. The City will deposit the proceeds of such sale in its general fund to be expended for improvement projects of the Enterprise. The facilities to be sold consist of water distribution pipelines.` Three major types of projects will be financed with the proceeds: source of supply projects, distribution system projects, and water treatment plant projects. Brief descriptions of the improvements are presented below. 6 CA21.88A1/10 Source of Supply Projects: An approximate total of $575,000 will be expended to drill new groundwater and golf course wells and provide financing for the design work for the Salinas Reservoir expansion. Distribution System Projects: An estimated $1,720,000 will be used to finance water main reconstruction and upgrades throughout the City. An additional $330,000 will be used for pump and valve improvements. ' Water Treatment Plant Projects: Several smaller scale improvement projects at the City's water treatment plant have been consolidated into one large project in order to minimize costs and disruption of operations. The primary purpose of the improvements is to ensure that water will be treated to required standards and to achieve operational efficiency. Total estimated cost of the improvements is $1,739,300. A summary of estimated project costs is presented below. Source of Supply: Groundwater wells $ 250,000 Salinas Reservoir design work 250,000 Golf course wells 75,000 Subtotal - Source of Supply $ 575,000 Distribution System: Water main reconstruction and upgrades $11720,000 Pump and valve improvements 330,000 Subtotal - Distribution System $21050,000 Water Treatment Plant $1,739,300 Subtotal - Water Treatment Plant $1,739,300 Total Estimated Costs - All Projects $4,364,300 Use of Proceeds The proceeds to be received from the sale of the Certificates (net of accrued interest) will be applied as follows: Acquisition Fund $4,304,200 Debt Service Reserve Fund (max. annual) 495,800 Underwriter's Discount 100,000 Estimated Costs of Issuance 100,000 Total Issue $5,000,000 7 CA21.88A1/11 THE ENTERPRISE Existing Water Sources G The City of San Luis Obispo's water supply is derived from two lakes behind dams, one located 20,miles from the City and the other located 25 miles away. These two reservoirs store creek runoff from rainfall on lands surrounding the lakes. Each reservoir can provide a certain maximum amount of water each year without being drawn down to an unacceptably low level, considering the period of lowest recorded rainfall. This amount of water represents the safe annual yield, with yield measured in acre-feet per year. For the City's reservoirs, safe annual yield is based on the driest six-year period experienced in the last 115 years. The Salinas Dam (Santa Margarita reservoir) can store about 23,300 acre-feet of water and has a safe annual yield of 4,800 acre-feet per year. The City is entitled to all the water stored in this reservoir. Water may only be stored, however, after enough has been released to maintain certain water levels downstream along the Salinas River. The California Water Resources Control Board sets rules which govern flow and storage. The reservoir is owned by the U.S. Army Corp of Engineers and operated by the San Luis Obispo County Flood Control and Water Conservation District, which is governed by the County Board of Supervisors. The Whale Rock reservoir can store about 40,660 acre-feet of water and has a safe annual yield of approximately 4,400 acre-feet per year. The City is entitled to 2,057 acre-feet per year. California Polytechnic Institute ("Cal Poly") is entitled to 823 acre-feet of water per year from Whale Rock for uses other than irrigation. Cal Poly is a City water customer, even though the campus is not located within the City limits. Whale Rock reservoir is owned jointly by the City and the State of California, which uses its allocation for Cal Poly and the Men's Colony prison. The Whale Rock Commission sets operating policies. The commission is comprised of representatives of the City, Cal Poly, Men's Colony and the State Department of Water Resources. City staff operate the dam. Treatment, Storage and Distribution The existing reservoirs generally provide good quality water, though it. must be treated to meet health and aesthetic standards. The City's Stenner Canyon Water Treatment Plant purifies the water to meet these drinking water standards. Various compounds are added to help remove sediment and kill bacteria. The water also flows through carbon filters to remove additional impurities. The Stenner Canyontreatment facility has treatment and pumping capacity of 33.8 acre-feet per day. The average daily usage is 21.97 acre-feet, excluding treatment of water for California Polytechnic Institute. As of June 30, 1988, the City had 11,695 water customers. 8 CA21.88A1/12 O 6 From the treatment plant, water is pumped to storage tanks located on hillsides throughout the City. From these tanks, it flows through a system of approximately 180 miles of watermains to customers and to fire hydrants. The existing system of pumps, mains and tanks determine water pressure and delivery rates which can be provided to various areas of the City. The pressures and rates in turn determine how far up the hillsides and how far out new development can be served while still meeting City standards for customer service and fire protection. Water Rates and Charges According to the resolution passed by the City Council on June 6, 1988 amending water service rates, the primary goals of the City's water utility are to provide quality water service to its citizens and to function as a self-sufficient enterprise. The water should meet all health standards, be free of bad taste and odors, provide adequate fire protection and assure reliably and continuity of service to users. In order to accomplish these goals, the City water utility operations shall be efficiently managed and based on a sound economic foundation. This requires following prudent business practices and setting equitable service rates resulting in revenues sufficient to cover expenses. The water service rates shall be based on a cost of service approach while encouraging water conservation. A comprehensive analysis of the City's water rate structure was performed in 1981. At that time it was recommended that minimum (readiness to serve) charges be increased by 20% and that commodity charges be increased by 30%. No action on water rates was taken by the City Council at that time. Water rates were reviewed again in January, 1986, at which time an across-the-board increase of 7.7% was approved. Presented on the following page various categories of service The new rates were effective August 1, 1988. The City bills Bi -Monthly Minimum Charge: Meter Size 5/8n 3/4" 1" 1 1/4" 1 1/2" 2" 3" 4" 611 8" 10" CA21.88A1/13 is a summary of rates and charges for adopted by the Council in June, 1988. with billings prepared on or after on a bi-monthly basis. Inside Cit Previous Current $ 5.40 $ 7.40 8.10 11.10 13.50 18.50 21.60 29.60 32.50 44.54 54.00 .74.00 97.00 132.89 172.00 235.70 260.00 356.30 410.00 561.85 520.00 712.59 9 as commoaity Charge Per Hundred Cubic Feet of Water (CCF) Per Dwelling Unit for Accounts ClascifivA DZ94Ai,M zz-i ..3__, _ .._�____ I _ Ca 11 Other Users: Previous Current 0 to 10 (CCF) $0.70 $0.75 4 In excess thereof 0.70 1.50 The estimated annual debt service requirement associated with a $5,000,000 issuance of the Certificates was incorporated in the rate increase approved in June. Major Users of the Enterprise Financial Operations of the Enterprise A five-year audited history of revenues, expenses and changes in retained earnings of the Water Fund, together with preliminary and unaudited results for the fiscal year ended June 30, 1988 is presented on the following page. 10 CA21.88A1/14 N • Total Nonoperating Revenues (Expenses) S TABLE 1 143,138 S 129,834 S 239,484 S (10.679) $ City of San Luis Obispo Water Fund Statement of Revenues, Expenses Operating Transfers $ 97,298 and Changes in Retained Earnings 177,862 S 428,808 S 265,077 8 90,213 Year Ended June 30 (125,000) (67,338) 2,570 Net Income $ (27,702) 5 526,077 1988 180,432 1983 1984 1985 265,077 1986 90,213 1987 (Unaudited) Operating Revenues primarily Water Sales Beginning of Year 9,138,364 9,110,662 $9,636,739 9,817,171 and Services $2,133,896 82,337,885 $2,477,192 S 2,652,231 8 3,034,953 5 3,319,675 Total Operating Revenues $2,133,896 $2,357,885 $2,477,192 $ 2,652,231 $ 3,034,953 S 3,319,675 Operating Expense: $9,817,171 810,245,979 $10,511,056 510,601,269 Operations and Maintenance $1,829,364 $1,573,782 82,069,229 S 2,079,907 S 2,354,611 8 2,721,226 Depreciation 252,349 223,826 249,935 273,000 294,586 309,237 Amortization 100,000 110,000 110,000 110,000 110,000 110,000 Total Operating Expenses $2,181,713 $1,907,608 $2,429,164 $ 2,462,907 8 2,759,197 8 3,140,463 Operating Income (Loss) $ (47,817) S 450,277 S 48.028 5 189,324 S 275,756 8 179,212 Nonoperating Revenues: Interest Revenue 8 215,950 S 146,688 $ 216,149 S 309,764 $ 234,067 S 87,465 Interest Expense (70,835) (106,624) (194,482) (195,310) (244,746) (176,464) Other 103,074 108,167 125,030 Total Nonoperating Revenues (Expenses) S 145,115 $ 143,138 S 129,834 S 239,484 S (10.679) $ (88,999) Income (Loss) Before Operating Transfers $ 97,298 S 593,415 $ 177,862 S 428,808 S 265,077 8 90,213 Operating Transfers In (Out) (125,000) (67,338) 2,570 Net Income $ (27,702) 5 526,077 $ 180,432 $ 428,808 $ 265,077 $ 90,213 Retained Earnings at Beginning of Year 9,138,364 9,110,662 $9,636,739 9,817,171 10,245,979 10,511,056 Retained Earnings at End of Year $9,110,662 59,636,739 $9,817,171 810,245,979 $10,511,056 510,601,269 Source: City of San Luis Obispo Comprehensive Annual Financial Reports. SUMMARY OF PRINCIPAL DOCUMENTS Following are brief summaries of the provisions of the principal documents. These summaries are not intended to be definitive. Reference is made to the actual documents for the complete terms thereof. ACQUISITION AGREEMENT Pursuant to the Acquisition Agreement between the City and the Board; the Board purchases from the City the Facilities. The purchase price of the Facilities will be paid from proceeds of the Certificates and such purchase will be completed immediately prior to the recording of the Lease Agreement. 11 CA21.88A1/15 a N Lease of Facilities LEASE AGREEMENT The Board agrees to lease the Facilities to the City pursuant to the Lease Agreement. The term of the Lease Agreement begins on December 1, as 1988, and ends only after all of the Certificates have been paid or provision made therefor. Lease Payments The City has agreed to pay the Lease Payments to the Board for the Facilities during the terms of the Lease Agreement. The City has agreed to pledge Net Revenues of the Enterprise to payment of the Lease Payments, constituting a first lien on the Net Revenues. The City has covenanted to set rates and charges of the Enterprise to generate sufficient funds in each fiscal year to meet the operations and maintenance costs of the Enterprise; the Lease Payments; and any payments required to meet other obligations of the City payable from Gross or Net Revenues during the fiscal year. In the event that Net Revenues are insufficient in any fiscal year to pay the Lease Payments, the portion of the Lease Payments not paid from Net Revenues shall be payable from any source of available general funds of the City. Under these circumstances, the City shall take all actions necessary to include such portion of the Lease Payments in its annual budget for the fiscal year and make the necessary annual appropriation. The general fund obligation of the City shall terminate at the Net Revenue Achievement Date, the first day of the fiscal year immediately following three consecutive fiscal years during each of which the amount of Net Revenues equaled at least 110% of maximum annual debt service with respect to the Lease Payments. After this point, the City's obligation to pay the Lease Payments shall be a special obligation limited solely to the Net Revenues of the Enterprise and other funds pledged under the Lease Agreement. In addition to the Lease Payments, the City shall pay when due all costs and expenses incurred by the Board to comply with the provisions of the Trust Agreement, including costs of issuance, annual compensation due to the Trustee and costs and expenses of auditors, engineers and accountants. Maintenance. Utilities. Taxes and Modifications The City, at its own expense, has agreed to maintain or cause to be maintained the Facilities in good repair; the Board has no responsibility for such repair. The City has the power to make additions, modifications and improvements to the Facilities which do not damage or reduce their value substantially less than that which existed prior to such modifications or improvements. Any such additions, modifications or improvements that constitute fixtures will automatically become subject to the Lease Agreement. The City must pay or cause to be paid all utility charges with respect to the Facilities, as well as any taxes and assessments, if.any, which it or the Board is legally obligated to pay. 12 CA21.88A1/16 Insurance The Lease Agreement requires the City to maintain or cause to be maintained the following insurance against the risk of physical damage to the Facilities and other risks for the protection of Certificate owners, the Board and the Trustee: 4 (i) Public Liability and Property Damage Insurance Coverage shall be equal to the minimum liability of $1,000,000 for personal injury or death of each person and $3,000,000 for personal injury or deaths of two or more persons in each accident or event (subject to a deductible of not to exceed $100,000), and in a minimum amount of $150,000 (subject to deductible of not to exceed $50,000) for damage to property resulting from each accident or event. Such Public liability and property damage insurance may, however, be in the form of a single limit policy in the amount of $3,000,000 covering all such risks, subject to a deductible of not to exceed $100,000. Liability insurance may be maintained as part of or in conjunction with any other liability insurance coverage carried by the City, and may be maintained in whole or in part in the form of self-insurance by the City, subject to the provisions of the Lease Agreement, or in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. (ii) Casualty Insurance The City shall procure and maintain, or cause to be procured and maintained, throughout the term of the Lease Agreement, but only in the event and to the extent available from reputable insurers at reasonable cost, casualty insurance against loss or damage to any improvements constituting any part of the Enterprise, covering such hazards as are customarily covered with respect to works and property of like character. Such insurance shall be in a loss recoverable amount at least equal to the aggregate principal amount of the Outstanding Certificates, and may be subject to deductible clauses which are customary for works and property of a like character. Such insurance may be maintained as part of or in conjunction with any other casualty insurance carried by the City and may be maintained in whole or in part in the form of self-insurance by the City, subject to the provisions of the Lease Agreement, or in the form of the participation by the City in a joint powers agency or other program providing pooled insurance. All amounts collected from insurance against accident to or destruction of any portion of the Facilities shall be used to repair or rebuild such damaged or destroyed portion of the Facilities, and to the extent not so applied, shall be paid to the Trustee to be applied to prepay the Lease Payments on the next available prepayment date pursuant to the Lease Agreement. 13 CA21.88A1/17 • Eminent Domain Any amounts received as awards as a result of the taking of all or any part of the Enterprise by the lawful exercise of eminent domain, at the election of the City (evidenced by a written certificate of the City Representative filed with the Trustee and the Board) shall either ., (a) be used for the acquisition or construction of improvements and extension of the Enterprise, or (b) be paid to the Trustee for deposit into the Certificate Fund to be used to prepay the Lease Payments on the next available prepayment date pursuant to the Lease Agreement. Limitations on Superior and Subordinate Obligations The City shall not issue or incur any additional bonds or other obligations during the term of this Lease having any priority in payment of principal or interest out of the Gross Revenues or the Net Revenues over the Lease Payments. Nothing herein is intended or shall be construed to limit or affect the ability of the City to issue or incur obligations which are either unsecured or which are secured by an interest .in the Net Revenues which is junior and subordinate to the pledge of and client upon the Net Revenues established hereunder. Issuance of Parity Obligations Except for obligations incurred to prepay all or a portion of the Lease Payments or to post a security deposit for the payment of all of a portion of the Lease Payments, the City shall not issue or incur any Parity Obligations during the Term hereof unless: a. No event of default shall have occurred and be continuing; b. The Net Revenues (excluding connection charges), calculated in accordance with sound accounting principles, as shown by the books of the City for the most recent completed Fiscal Year, or for any more recent consecutive twelve (12) month period selected by the City; in either case verified by a certificate or opinion of an independent certified public accountant employed by the City, plus, at the option of the City, any or all of .the Additional Revenues, at least equal one hundred twenty-five percent (125%) of the amount of Maximum Annual Debt Service with respect to the Lease Payments and all Parity Obligations then outstanding (including the Parity Obligations then proposed to be issued); and C. Upon the issuance of such Parity Obligations a reserve fund shall be established for such Parity Obligations in an amount at least equal to the lesser of (A) Maximum Annual Debt Service on such Parity Obligations, or (B) the maximum amount then permitted under the Tax Code. 14 CA21.88A1/18 Option to Prepay The City has the option to prepay the Lease Payments in whole or in part in inverse order on any date on or after June 1, 1997. Such prepayment price shall be deposited by the Trustee in the Certificate Fund to be applied to the prepayment of the Certificates pursuant to as the Trust Agreement. Assignment; Subleases - The Board has assigned certain of its rights under the Lease Agreement to the Trustee pursuant to the Assignment Agreement. The City may not assign any of its rights in or obligations under the Lease Agreement. The City may sublease all or a portion of the portion of any of the Projects only under the conditions contained in the Lease Agreement, including the conditions that the City provide to the Board and the Trustee an opinion of bond counsel stating that such sublease does not cause the interest on the Bonds to become subject to federal or State of California personal income taxes. Events of Default The following shall be events of default under this Lease: a. Failure by the City to pay any Lease Payment when due and payable hereunder. b. Failure by the City to pay any amounts (other than Lease Payments) when due and payable hereunder, and the continuation of such failure for a period of ten (10) days. C. Failure by the City to observe and perform any covenant, condition or agreement on its part to be observed or performed, other than as referred to in the preceding clauses (a) or (b), for a period of sixty (60) days after written notice specifying such failure and requesting that it be remedied has been given to the City by the Agency or the trustee; provided, however, that if in the reasonable opinion of the City the failure stated in the notice can be corrected, but not within such 60 -day period, such failure shall not constitute an Event of Default hereunder if the City shall commence to cure such failure within 60 days and thereafter diligently and in good faith cure such failure in a reasonable period of time. d. Commencement by the City of a voluntary case under Title 11 of the United States Code or any substitute or successor statute. Upon the occurrence and continuance of any event of default, the Board may at its option elect to terminate the Lease Agreement or, with or without such termination, re-enter, take possession of the Facilities and re -let the Facilities. When the Board does not elect to terminate the Lease Agreement, the City remains liable to pay all Lease Payments as they come due and payable. When the Board elects to terminate the Lease Agreement, the City is liable for damages resulting from such event of default. Any amounts collected by the Board from the 15 CA21.88A1/19 Q reletting of the Facilities shall be credited towards the City's unpaid Lease Payments. Any net proceeds of re-leasing or other disposition of the Facilities are required to be deposited in the Lease Payment Fund and applied to the payment of principal and interest on the Certificates in order of payment date. Pursuant to the Assignment Agreement, the Board assigns all of its rights with respect to remedies in an event of default to the Trustee, so that, all such remedies shall be exercised by the Trustee and the Bond owners as provided in the Trust Agreement. TRUST AGREEMENT Trustee The Trustee is appointed pursuant to the Trust Agreement and is authorized to prepare, execute and deliver the Certificates and to act as a depository of amounts held thereunder. The Trustee is required to make deposits into and withdrawals from funds, and invest amounts held under the Trust Agreement in accordance with the City's instructions. Funds The Trust Agreement creates the Acquisition Fund, Reserve Fund, Certificate Fund and Insurance and Condemnation Fund to be held in trust by the Trustee. Acquisition Fund. The balance of the proceeds from the sale of the Certificates after certain deposits are made to the Certificate Fund and the Reserve Fund will be deposited in the Acquisition Fund and disbursed by the Trustee, upon written order of the Board, to pay the acquisition costs of the Facilities and to pay costs of issuance. Any amounts remaining on deposit in the Acquisition Fund three months following the closing date shall be withdrawn by the Trustee and transferred to the Certificate Fund. Reserve Fund. The Reserve Fund will be funded out of proceeds of the sale of the Certificates in an amount equal to the maximum annual debt service on the Certificates. If on any interest payment date there are insufficient moneys in the Certificate Fund to pay principal and interest then due, the Trustee shall transfer as much of the Reserve Fund as necessary to make such payments. Any amounts transferred will be replenished upon receipt of Net Revenues in excess of the amount needed for principal and interest payments on the Certificates. Certificate Fund. There shall be deposited in the Certificate Fund, when received by the Trustee, all Lease Payments and prepayments and accrued interest on the Certificates. All amounts held in the Certificate Fund shall be used and withdrawn by the Trustee solely for the purpose of paying the principal and interest represented by the Certificates as they become due and payable. Any surplus remaining in the Certificate Fund after prepayment and payment of all Certificates and payment of any applicable fees and expenses to the Trustee, shall be withdrawn by the Trustee and remitted to the City. 16 CA21.88A1/20 Investment of Funds The Trustee is required to invest and reinvest all funds held under the Trust Agreement in investments permitted by the Trust Agreement, including (a) Federal Securities; (b) any of the following obligations or indebtedness issued or guaranteed by,any of the following federal • agencies and entities: (i) senior debt obligations of the Federal Home Loan Bank System; (ii) participation certificates of the Federal Home Loan Mortgage Corporation; (iii) mortgage-backed securities or senior debt obligations of the Federal National Mortgage Association; or (iv) senior debt obligations of the Student Loan Marketing Association; (c) interest-bearing demand or time deposits (including certificates of deposit) in federal or state chartered savings and loan associations or in national or State banks (including the. Trustee) provided that either: (i) the obligations of such association or bank or the obligations of the :holding company of such association or bank have a rating of "A" or better from Moody's or Standard & Poor's; or (ii) such deposits are fully insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation; (d) obligations issued by any corporation organized and operating within the United States of America having assets in excess of $50010001000, which obligations have a rating of "A" or better from Moody's or Standard & Poor's; (e) commercial paper which has a rating or backed by a letter of credit or credit line of credit which has a rating; (f) money market funds either (i) the policy of which is to invest solely in Permitted Investments, or (ii) which have a rating of "A" or better from Moody's or Standard & Poor's; (g) bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as bankers acceptances, which are eligible for purchase by the Federal Reserve System and the obligations of which commercial bank or the obligations of the holding company of which has a rating of "A" or better from Moody's or Standard & Poor's; (h) obligations the interest on which is exempt from federal income taxation under. Section 103 of the Tax Code, and which have a rating of "A" or better from Moody's and Standard & Poor's; and (i) investment agreements which are the obligations of or which are secured or guaranteed by the obligations of a financial institution whose long-term obligations have a rating of "A" or better from Moody's or Standard & Poor's. Remedies on Default If an event of default by the Board under the Trust Agreement should occur, the Trustee may, and at the written direction of the owners of a majority of the aggregate principal amount of the Certificates then outstanding, exercise any and all remedies available pursuant to law or granted pursuant to the Lease Agreement. There will be no right, however, to accelerate the maturities of the Certificates or otherwise declare any Lease Payment not then in default to be due and payable. Amendment The Trust Agreement and the rights and obligations of the owners of the Certificates and the Lease Agreement and the rights and obligations of the respective parties thereto, may be modified or amended at any time by a supplemental agreement, without the consent of any such owners, but only to the extent permitted by law and only (a) to add to the covenants and agreements of any party, other covenants to be observed, or to surrender any right or power herein or therein reserved to the Board or the City, (b) to cure, correct or supplement any ambiguous or 17 CA21.88A1/21 defective provision contained herein or therein, (c) in regard to questions arising hereunder or thereunder, as the parties hereto or thereto may deem necessary or desirable and which shall not, in the opinion of Bond Counsel, materially adversely affect the interests of the owners of the Certificates, (d) to modify the description of the Facilities to conform to the requirements of title insurance or otherwise to add or delete property descriptions to reflect accurately the description of the property intended to be included therein, or (e) if and to the extent permitted in the opinion of Bond Counsel filed with the Trustee, the City and the Board, to delete or modify any of the provisions hereof or thereof relating to the exemption from federal income taxation of interest represented by the Certificates. Any such supplemental agreement shall become effective upon execution and delivery by the parties hereto or thereto as the case may be. Defeasance Upon payment of all outstanding Certificates, either at or before maturity, or upon the deposit of money or federal securities (as required by the Trust Agreement) with the Trustee sufficient with other available funds to retire the Certificates at or before maturity, the Trust Agreement will be terminated, except for the obligation of the Trustee to make payments on the Certificates. ASSIGNMENT AGREEMENT Pursuant to the Assignment Agreement, the Board transfers, assigns and sets over to the Trustee, for the benefit of the owners of the Certificates, all of the Board's rights under the Lease Agreement (subject to certain exceptions), including the right of the Board to receive and collect amounts payable under the Lease Agreement, its right to receive and collect proceeds of condemnation of and insurance awards and the right to exercise rights and remedies of the Board in the Lease Agreement to enforce payments of amounts thereunder. The Trustee accepts such assignment for the purpose of securing such payments due to, and the rights of,, the owners of the Certificates, subject to the provisions of the Trust Agreement. FINANCIAL ADVISOR Evensen Dodge, Inc., Costa Mesa, California, has acted as Financial Advisor to the Corporation and the City in connection with the issuance of the Certificates. Requests for information concerning the Board and the City should be addressed to Evensen Dodge, Inc., 650 Town Center Drive, Suite 1900, Costa Mesa, CA 92626 (714) 755-8016. 18 CA21.88A1/22 LEGAL MATTERS Legal matters incident to the authorization and issuance of the Certificates are subject to the opinion of Jones Hall Hill and White, A Professional Law Corporation, San Francisco, California, Special Counsel, as to validity and tax exemption. The opinion will be substantially in the form set forth in Appendix C attached hereto. Bond Counsel has not been requested to, and has not undertaken to, verify the accuracy of the information contained in this Official Statement and expresses no opinion with respect thereto. TAX EXEMPTION In the opinion of Jones Hall Hill & White, A Professional Law Corporation, San Francisco, California, Special Counsel, subject, however, to the qualifications set forth below, under existing law, the portion of the Lease Payments designated as and comprising interest and received by the owners of the Certificates is excluded from gross income for federal income tax purposes, such interest is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations, provided, however, that, for the purpose of computing the alternative minimum tax imposed on such corporations (as defined for federal income tax purposes), such interest is taken into account in determining adjusted net book income (adjusted current earnings for taxable years beginning after December 31, 1989) and the Lease Agreement is a "qualified tax-exempt obligation" within the meaning of Section 265 of the Internal Revenue. Code of 1986 (the "Code") such that, in the case of a financial Institution, a deduction for federal income tax purposes is allowed for 80 percent of that portion of such financial institutions' interest expense allocable to interest payable with respect to the Certificates. The opinions set forth in the preceding sentences are subject to the condition that the City comply with all requirements of the Code that must be satisfied subsequent to the delivery of the Lease Agreement in order that such interest be, or continue to be', excluded from gross income for federal income tax purposes. The City has covenanted to comply with each such requirement. Failure to comply with certain of such requirements may cause the. inclusion of such interest in gross income for federal income tax purposes to be retroactive to the date of delivery of the Lease Agreement. Special Counsel expresses no opinion regarding other federal tax consequences arising with respect to the Lease Agreement and the Certificates. Prospective purchasers of the Certificates should be aware that (i) with respect to insurance companies subject to the tax imposed by Section 831 of the Code, for taxable years beginning after December 31, 1986, Section 832 (b) (5) (B) (1) reduces the deduction for loss reserves by 15 percent of the sum of certain items, including interest payable with respect to the Certificates, (ii) for taxable years beginning after December 31, 1986 and before January 1, 1992, interest payable with respect to the Certificates earned by some corporations could be subject to the environmental tax imposed by Section 59A of the Code, (iii) for taxable years beginning after December 31, 1986, interest payable with respect to the Certificates earned by certain foreign corporations doing business in the United States could be subject to a branch profits tax imposed by Section 884 of the Code, (iv) passive 19 CA21.88A1/23 investment income, including interest payable with respect to the Certificates, may be subject to federal income taxation under Section 1375 of the Code for subchapter S corporations that have subchapter C earnings and profits at the close of the taxable year if greater than 25% of the gross receipts of such subchapter S corporation is passive investment income and (v) Section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take into account, in determining gross income, receipts or accruals of interest payable with respect to the Certificates. In the further opinion of Special Counsel, such interest is exempt from California personal income taxes. BANK QUALIFIED TAX-EXEMPT OBLIGATIONS The Lease Agreement has been designated as a "bank -qualified tax-exempt obligation" pursuant to Section 265(b)(3) of the Internal Revenue Code of 1986. RATING A rating review has been requested for the Certificates from Moody's Investors Service, Inc. This rating will reflect only the view of the rating agency, and does not constitute a recommendation to buy, sell or hold securities. Explanations of the significance of the rating may be obtained from the rating agency. The rating is subject to revision or withdrawal at any time by the rating agency, and there is no assurance that the rating will continue for any period of time or that it will be revised or withdrawn. Any revision or withdrawal of the rating could have an adverse effect on the market price of the Certificates. LITIGATION There is no litigation now pending or, to the knowledge of Board officials, threatened which questions the validity of the Certificates or of any proceedings of the Board taken with respect to the delivery or sale thereof. CERTIFICATION On the date of delivery of the Certificates, the Board President will furnish a written certification to the effect that this Official Statement, to the best of his knowledge and belief as of the date of sale and the date of delivery, is true and correct in all material respects and does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made herein, in light of the circumstances under which they were made, not misleading. 20 CA21.88A1/24 • MISCELLANEOUS Any statements made in this Official. Statement involving matters of opinion or of estimated, whether or not so expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimated will be realized. AUTHORIZATION The execution and delivery of this Official Statement by its Chief Financial Officer have been duly authorized by the Board BY /s/ William C. Statler Chief Financial Officer 21 CA21.88A1/25 n R APPENDIX A • General Information Concerning the City 22 CA21.88A1/26 GENERAL INFORMATION CONCERNING THE CITY Although the Certificates do not constitute a general obligation debt of the City, the following is presented for informational purposes. The City of San. Luis Obispo is a Charter City, incorporated February 19, 1856 and chartered May 1, 1876 under the laws of the State of California. Located on the central coast of California approximately 175 miles northwest of Los Angeles, the City is the county seat of San Luis Obispo County. With a January 1, 1988 estimated population of 39,850, the City is the largest city in the county. The City is governed under a "Council -Mayor -Administrative Officer" form of municipal government. The elected officers of the City are the Mayor and four Council members. Each elected officer shares equal voting power., The Mayor serves a two-year term. Council members serve four-year staggered terms. The City Administration Officer, City Attorney, City Clerk, City Treasurer and all advisory boards, committees and commissions are appointed by the City Council. The City Administrative Officer is responsible for the day-to-day operations of the City staff, implementing the policies of the City Council. San Luis Obispo is a full-service city. Services provided include: public safety (police and fire); public utilities (water, wastewater, waste collection and disposal); transportation (street maintenance, parking, flood control, municipal transit); leisure, cultural and social services (parks, recreation, golf course, library, community promotion, human relations); and community development (public improvements, planning and zoning, business promotion). CITY PROPERTY VALUES, TAX RATES AND -PROPERTY TAX COLLECTIONS TABLE A-1 City of San Luis Obispo Trend of Assessed and Estimated Actual Value of Taxable Property 23 CA21.88A1/27 _ Gross Assessed Valuation (1) Year Ended Secured Unsecured Estimated June 30 Total Valuation Total Valuation Utility Total Actual Value 1982 S 674,198,789 842,290,865 $43,575,130 S 760,064,784 8 760,064,784 1983 783,223,138 54,592,077 46,228,190 884,043,405 884,043,405 1984 857,236,452 57,158,947 49,961,260 964,356,659 964,356,659 1985 933,064,061 69,050,162 53,753,180 1,055,867,403 1,055,867,403 1986 1;004,275,125 64,811,299 64,146;830 1,133,233,254 1,133,233,254 1987 1,202,072,027 81,766,693 66,459,690 1,350,298,410 1,350,298,410 1988 1,355,182,574 94,891,297 65,930,350 1,516,004,221 1,516,004,221 (1) For comparison purposes, gross assessed valuations include homeowner's and other exemptions. Although these exemptions reduce property tax collections, the revenue Loss is reimbursed by the State of California. As such, gross assessed valuation is the revenue base used in establishing property tax related revenues. Source: San Luis Obispo County Auditor -Controller. 23 CA21.88A1/27 TABLE A-2 City of San Luis Obispo Secured Property Tax Levies and Collections Year Ended Current Collections June 30 Total Levy Amount Percent 1982 $11421,144 $1,3461370 94.9% 1983 1,651,863 11554,635 94.1% 1984 11805,369 11719,593 95.2% 1985 1,962,421 1,886,049 96.1% 1986 21138,689 21069,902 96.8% 1987 2,5411905 2,439,169 96.0% 1988 2,826,498 21723,234 96.3% TABLE A-3 City of San Luis Obispo Total Property Tax Rates Per $100 of Assessed Value Year Ended June 30 1983 1984 1985 1986 1987 1988 1.130 1.021 1.021 1.021 1.015 1.014 Source: City of San Luis Obispo LIMITATIONS ON TAX REVENUES AND TAX COLLECTION PROCEDURES PROPERTY TAX RATE LIMITATIONS --ARTICLE XIII A In 1978, California voters approved an amendment (commonly known as both Proposition 13 and the Jarvis -Gann Initiative) to the California Constitution which imposes certain limitations on taxes that may be levied against real property. This amendment, which adds Article XIIIA to the California Constitution, among other things, defines full cash value to mean "the county assessor's valuation of real property as shown on the fiscal year 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 period." This full cash value may be increased at a rate not to exceed 2% per year to account for inflation. The amendment further limits the amount of any ad valorem tax on real property to it of the full cash value, except that additional taxes may be levied to pay debt service on indebtedness approved by the voters prior to July 1, 1978, and on any bonded indebtedness for the acquisition or improvement of real property which is approved after July 1, 1978, by two-thirds of the voters voting on such indebtedness. 24 CA21.88A1/28 a PROPERTY TAX COLLECTION PROCEDURES In California, property which is subject to ad valorem taxes is classified as "secured" or "unsecured." The secured classification includes property on which any property tax levied by a county becomes a lien on that property. A tax levied on unsecured property does not as become a lien against the taxes unsecured property, but may become a lien on certain other property owned by the taxpayer. Every tax which becomes a lien on secured property has priority over all other liens, arising pursuant to State law, on the secured property, regardless of the time of the creation of other liens. The valuation of property is determined as of March 1 each year, and installments of taxes levied upon secured property become delinquent on the following December 10 and April 10. Taxes on unsecured property are due March 1 and become delinquent August 31. Secured and unsecured property are entered separately on the assessment roll maintained by the county assessor. The method of collecting delinquent taxes is substantially different for the two classifications of property. The exclusive means of enforcing the payment of delinquent taxes with respect to property on the secured roll is the sale of the property securing the taxes to the State for the amount of taxes that is delinquent. The taxing authority has three ways of collecting unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the county clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; and (3) seizure and sale of personal property, improvements or possessory interests belonging or taxable to the assessee. Commencing in 1982, a 10% penalty is added to delinquent taxes which have been levied with respect to property on the secured roll. In addition, property on the secured roll on which taxes are delinquent is sold to the State on or about June 30 of the fiscal year. Such property may thereafter be redeemed by payment of the delinquent taxes and a delinquency penalty, plus a redemption penalty of 1 1/2% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the property is deeded to the State and then is subject to sale by the county tax collector. A l0% penalty also applies to delinquent taxes on property on the unsecured roll, and further, an additional penalty of 1 1/2% per month accrues with respect to such taxes beginning on the varying dates related to the tax billing date. SUPPLEMENTAL ASSESSMENTS Legislation enacted in 1983, SB 813 (Statutes of 1983, Chapter 498), provides for the supplemental assignment and taxation of property as of the occurrence of a change of ownership or completion of new construction. Previously, statutes enabled the assessment of such changes only as of the next March 1 tax lien date following the change and thus delayed the realization of increased property taxes from the new assessments for up to 14 months. As enacted, Chapter 498 provides increased revenue to redevelopment agencies to the extent that supplemental assessments of new construction or changes of ownership occur within the boundaries of redevelopment projects subsequent to the March 1 lien date. 25 CA21.88A1/29 Q Collection of taxes based on supplemental assessments occurs throughout the year. Taxes due are prorated according to the amount of time remaining in the tax year, with the exception of tax bills dated March 1 through May 31, which are calculated on the basis of the remainder of the current fiscal year and the full 12 months of the next fiscal year. a BUSINESS INVENTORY EXEMPTION Pursuant to legislation adopted in 1979 (Statues of 1979, Chapter 1150), business inventories were exempted from taxation in fiscal year 1980-81 and each fiscal year thereafter. Under Chapter 1150, the State paid, as a subvention to certain local agencies, an amount equal to 100% of taxes that would otherwise be due (excluding taxes to pay for voter -approved indebtedness) on business inventories. This law further provided a formula for reimbursement by the State to cities, counties, special districts and school districts for the amount of tax revenues lost be reason of such exemption, as adjusted for percentage changes in the population and the cost of living. SUPPLEMENTAL REVENUES/SPECIAL SUBVENTIONS Legislation adopted in 1984 (Senate Bill 794 and Assembly Bill 1849) has replaced business inventory subventions with a financing plan for local governments. In Section 1 of Senate Bill 794 (Section 16110, et seq. of the California Government Code, which became operative along with counterpart legislation, Assembly Bill 1849, on July 1, 1984), the purpose and intent of the legislation was stated as follows: The Legislature finds and declares that some local agencies lack sufficient revenues to meet their obligations to the landowners and residents they serve. It is the intent of the Legislature in enacting this act to provide local agencies with reliable, stable, and very predictable revenues to finance these obligations. APPROPRIATION LIMITATION --ARTICLE XIII B On November 6, 1979, California voters approved Proposition 4, known as the Gann Initiative, which added Article XIII B to the California Constitution. The principal effect of Article XIII B is to limit the annual appropriations of the State and its political subdivisions to the level of appropriations for the prior fiscal year,'as adjusted for changes in the cost of living, population and services rendered by the government entity. PROPOSITION 62 On November 4, 1986, an initiative statute (known as Proposition 62) was approved by the voters of the State which (i) requires that any tax for general government purposes imposed on local governmental entities such as the City be approved by resolution or ordinance adopted by a two-thirds vote of the governmental entity's legislative body and by a majority vote of the electorate of the governmental entity, (ii) requires that any special tax (defined as taxes levied for other than general government purposes) imposed by a local governmental entity approved by a two-thirds vote of the voters within that jurisdiction, 26 CA21.88A1/30 (iii) restricts the use of revenues from a special tax to the purposes or for the service for which the special tax was imposed, (iv) prohibits the imposition of ad valorem taxes on real property by local government entities except as permitted by Article XIIIA, (v) prohibits the imposition of transaction taxes and sales taxes on the sale of real property by local governmental entities, and (vi) requires that any tax imposed by a local governmental entity on or after August 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. TABLE A-4 City of San Luis Obispo Statement of Direct and Overlapping Debt Direct and Overlapping Bonded Debt San Luis Obispo County Certificates of Participation Cuesta Community College District San Luis Obispo Coastal Unified School District Certificates of Participation City of San Luis Obispo City of San Luis Obispo Lease Revenue Bonds and Certificates of Participation City of San Luis Obispo 1915 Act Bonds Total Gross Direct and Overlapping Bonded Debt Less: Self -Supporting Issues: General Obligation (water) Lease Revenue (parking) 1915 Act Total Net Direct and Overlapping Bonded Debt Debt Outstanding as % Applicable of June 1, 1988 12.729% $ 1,709,356 12.690% 381,334 23.380% 2,338,000 100.000% 1,816,000 100.000% 18,745,000(1) 100.000% 21,000 825,010,690 (1) Includes $5,000,000 certificates of participation to be sold. Source: City of San Luis Obispo Comprehensive Annual Financial Report. Lease Obligations (1,816,000) (8,904,425) (21,000) 814,269,265 The City has entered into noncancelable long-term leases with outside parties for financing the construction of the Public Works Corporation Yard and the purchase of an IBM computer system. The lease arrange- ments transfer ownership of the facilities and equipment to the City at the end of the term of the lease. Accordingly, the City has recorded the Corporation Yard and the computer equipment lease obligation and corresponding assets in the General Long -Term Debt and Fixed Asset group of accounts, respectively. The computer equipment lease debt service is funded directly out of the General Fund. 27 CA21.88A1/31 Future minimum lease payments under these capital leases are as follows: Fiscal Year 1988-89 1989-90 Total Minimum Lease Payments Less: Amount Representing Interest Present Value of Future Minimum Lease Payments General Fund Corporation IBM Yard Computer Total $586,540 $34,366 $620,906 - 34,366 34,366 $586,540 $68,732 $655,272 52,253 Population 8,913 61,166 34,500 - 1980 $534,287 (0,9%) $59r819 $594,106 0,9% ECONOMY The economic base of the City consists principally of governmental services, higher education, the tourist industry and public utilities. Government and public utilities are the largest employers in the City and county. TABLE A-5 City of an Luis Obispo Population Growth Year Population Percentage Change 1979 34,500 - 1980 34,184 (0,9%) 1981 34,509 0,9% 1982 35,545 3.0% 1983 35,740 0,2% 1984 36,420 2,0% 1985 37,151 2.0% 1986 38,205 2,8% 1987 38,307 0.2% 1988 39,850 4.0% Source: California Department of Finance and U.S. Census. Source: City of San Luis Obispo 28 CA21.88A1/32 Total Single -Family Permits Issued 158 270 167 197 129 97 45 TABLE A-6 City of San Luis Obispo Building Permit Data Year Ended Total Permits Total Permit June 30 Issued Valuation 1988 657 $41,768,000 1987 833 54,014,530 1986 741 65,383,233 1985 694 30,915,815 1984 275 24,339,357 1983 418 18,115,703 1982 330 71172,099 Source: City of San Luis Obispo 28 CA21.88A1/32 Total Single -Family Permits Issued 158 270 167 197 129 97 45 EO MANUFACTURING: TRW Cryolab Zistech Corporation Trusco Tank TABLE A-7 Major Employers NON -MANUFACTURING: County of San Luis Obispo* Cal Poly State University* California Men's Colony* Pacific Gas & Electric (Diablo Canyon)* San Luis Coastal Unified School District Sierra Vista Regional Medical Center Pacific Gas & Electric (General Construction) French Hospital City of San Luis Obispo American Eagle Airlines* San Luis Obispo General Hospital Pacific Gas & Electric (Transmission and Distribution) Madonna Inn Guests Community College* Mervyn's Pacific Bell Telegram -Tribune Embassy Suites Hotel Estimated Number of Employees 283 80 58 50 2,400 2,000 1,475 1,041 670 606 350 340 302 300 300 267 240 232 221 213 210 165 • Principal Product/Service Electronics Assembly Cryogenic Values, Piping Systems Electronics Welded Steel Storage Tanks County Government University State Prison Power Plant School District Hospital Utilities Construction Hospital City Government Airlines Hospital Utilities Lodging Community College Department Store Telephone Company Newspaper Lodging Although outside of the City limits, these companies or agencies are located immediately adjacent to the City's boundaries, and are major sources of employment for the San Luis Obispo community. In the case of the County of San Luis Obispo, which is seated in the City, the total above represents County -wide employment, of which 1,800 are estimated to work in the City. Source: San Luis Obispo Chamber of Commerce (1) As of August, 1988. Source: State of California Employment Development Department. 29 CA21.88A1/33 4 TABLE A-8 County of San Luis Obispo Average Annual Labor Force, Employment, Unemployment and Unemployment Rate 1984 1985 1986 1987 1988(1) Employed 73,850 77,750 81,300 85,800 89,550 Unemployed 41450 41600 41400 3,950 3,950 Labor Force 78,300 82,350 85,700 89,750 93,500 Unemployment Rate 5.7% 5.6% 5.1% 4.4% 4.2% (1) As of August, 1988. Source: State of California Employment Development Department. 29 CA21.88A1/33 4 K TABLE A-9 County of San Luis Obispo Estimated Number of Wage and Salary Workers by Industry - Annual Averages (Amounts in Thousands) Agricultural Mining. Construction Manufacturing Transportation, Utilities and Communications Wholesale Trade Retail Trade Finance, Insurance and Real -Estate Services Government Total All Industries 1983 1984 1985 1986 1987 1.9 2.0 2.0 1.7 1.8 .3 .4 .3 .3 .2 6.3 6.5 5.0 4.7 5.0 3.6 4.1 4.7 4.8 4.9 3.1 3.1 3.3 3.5 3.8 1.5 1.5 1.5 1.5 1.5 12.5 14.6 16.5 17.5 18.6 2.1 2.6 2.9 3.2 3.2 11.4 12.0 12.9 13.5 14.7 12.0 12.3 13.1 13.8 14.3 54.7 59.1 62.2 64.5 68.0 Source: State of California Employment Development Department. Retail Sales and Effective Buying Income Sales and Marketing Management's annual "Survey of Buying Power" reported retail sales results and effective buying income ("EBI") within the County of San Luis Obispo as follows: TABLE A-10 County of San Luis Obispo EBI and Retail Sales Data 30 CA21.88A1/34 • Total EBI Median Household Total Retail Retail Sales ($000) EBI Sales ($000) Per Household 1987 $2,607,691 $24,217(1) $1,125,149 $14,863(2) 1986 2,360,440 22,996 11064,423 14,682 1985 21212,179 22,362(3) 11005,084 14,277 1984 21069,202 24,462 957,539 13,699 1983 11816,793 22,239 884,221 13,100 (1) State median household EBI in 1987: $30,537. (2) State retail sales per household in 1987: $18,234. (3) Sales and Marketing Management changed its methods of calculating effective buying income in 1985. This adjustment resulted in generally lower figures being recorded in 1985 compared to previous years. 30 CA21.88A1/34 • N • The median age of residents in San Luis Obispo County was estimated to be 32.5 years in 1987. Table A-13 presents the County's 1987 EBI by percentage of households in EBI groups in comparison with the State. $ 21,800 54,902 TABLE A-11 Drug Stores 71243 7,557 County of San Luis Obispo 65,140 10,620 Food Stores Package Liquor Stores 18,253 41927 1987 EBI Income Groups 20,771 22,300 Eating/Drinking Places $101000- $201000- $35,000- $50,000 4F252 50,803 $19,999 $34F999 $49,999 and Over San Luis Obispo California County 24.5% 25.4% 16.8$ 16.5% 22,870 96,784 18.9% 23.7% 17.7$ 25.8$ TABLE A-14 City of San Lu12 Obispo Taxable Sales 1984-1987.($000 Source: California State Board of Equalization. FINANCIAL OPERATIONS OF THE CITY The City uses the modified accrual basis of accounting for its governmental, expendable trust and agency funds whereby revenues are recorded when available and measurable, and expenditures are recorded when services or goods are received. The proprietary fund types utilize the accrual basis of accounting. The City has received the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association of the United States and Canada for the fiscal year ended June 30, 1987, as well as for the four previous fiscal years. 31 CA21.88A1/35 4 1984 1985 1986 1987 Apparel Stores General Merchandise Stores $ 18,975 44,538 $ 20,665 49,526 $ 21,800 54,902 $ 22,639 Drug Stores 71243 7,557 10,372 65,140 10,620 Food Stores Package Liquor Stores 18,253 41927 19,782 20,771 22,300 Eating/Drinking Places 43,234 41474 44,823 41503 46,354 4F252 50,803 Home Furnishings/Appliances Building Materials/Farm 12,914 14,202 14,866 17,419 Implements Auto Dealers/Auto Supplies 19,862 84,932 22,870 96,784 23,133 110,837 26,552 Service Stations 33,719 34,541 28,078 107,987 27,883 Other Retail Stores 40,402 36,254 38,394 47,649 Total Retail Outlets All Other Outlets $328,999 $351,478 $374,010 $403,244 541,215 52,473 66,128 78,735 Total All Outlets $383,214 $403,951 $440,138 $481,979 Source: California State Board of Equalization. FINANCIAL OPERATIONS OF THE CITY The City uses the modified accrual basis of accounting for its governmental, expendable trust and agency funds whereby revenues are recorded when available and measurable, and expenditures are recorded when services or goods are received. The proprietary fund types utilize the accrual basis of accounting. The City has received the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association of the United States and Canada for the fiscal year ended June 30, 1987, as well as for the four previous fiscal years. 31 CA21.88A1/35 4 Table A-15 summarizes the statements of revenues, expenditures and changes in fund balance for the City's general fund for the past three fiscal years. Preliminary unaudited operating results for the fiscal year ended June 30, 1988 are also presented. The financial information presented for fiscal years ended June 30, 1985-87 was extracted from the audited annual financial statements of the City. The City's general purpose audited annual financial statement for the fiscal year ended June 30, 1987 is included as Appendix S of this Official Statement. The reader should be aware that the complete financial statements may contain additional data relating to the information presented here which may interpret, explain or modify it. Source: City of San Luis Obispo Comprehensive Annual Financial Statements. 32 CA21.88A1/36 4 TABLE A-13 City of San Luis Obispo Statement of Revenues, Expenditures and Changes in Fund Balance - General Fund Fiscal Year Ended June 30 Revenues: 1985 1986 1987 1988 (Unaudited) Taxes Licenses and Permits $ 8,793,957 280,261 S 9,279,690 361,284 $ 9,739,287 $11,297,531 Fines and Forfeitures 420,250 496,261 316,302 457,360 245,977 Investment Revenue Subventions and Grants 708,742 1,272,982 474,731 1,526,850 605,243 420,660 750,366 Charges for Services 450,427 437,173 1,459,765 417,179 1,529,081 Other 201,209 110,248 19.591 569,624 118.267 Total Revenues 512,127,828 $12,686,237 $13,014,727 $14,931,506 Expenditures: Current: General Government Public Safety S 1,982,108 S 1,898,202 S 1,941,438 S 2,281,189 Public Works 6,265,200 1,721,485 6,921,3.87 2,241,390 7,272 489 6,929,385 Cultural and Social Services 254,179 267,943 2,267,935 385,884 3,419,182 Other Debt Service: 92,044 39,141 71,047 422,584 .0. Principal Interest 367,859 21 073 182.764 403,776 23,651 25,975 10,715 8.391 Total Expenditures 510,900,948 811,954,603 511,973,159 $13,086,706 Excess of Revenues Over (Under) Expenditures S 1,226,880 S 731,634 S 1,041,568 $ 1,844,800 Other Financing Sources (Uses): Operating Transfers In Operating Transfers Out $ 765,092 (1,000,157) $ 201,247 S 1,385,458 S 209,682 Proceeds of Capital Lease (980,000) (1,655,540) (1,338,377) Financing 186,003 -0- -0- 0. Total Other Financing Sources (Uses) S (49,062) S (778,753) S_ (270.082) 8(1.128,695) Excess of Revenues and Other Financing Sources Over (Under) Expenditures and Other Financing Uses $ 1,177,818 , , 177 818 S (47,119) S 771,486 S 716,105 Fund Balance at Beginning of Year S 1,855,061 S 3;032,879 S 2,985760 S 3,757,246 Fund Balance at End of Year S 3.032,879 S 2,985,760 S 3,757,246 S 4,473,351 Source: City of San Luis Obispo Comprehensive Annual Financial Statements. 32 CA21.88A1/36 4 The Budgetary Process In January, 1983, the City Council approved the use of a two-year financial planning and budgeting process. The purpose of the two-year plan is to emphasize long-range planning and effective fiscal management. The plan presents program budgets based on significant and measurable objectives. The City's two-year planning documents have received national recognition as outstanding and innovative management techniques from the Government Finance Officers Association of the United States and Canada. The 1985-1987 Financial Plan received unanimous recognition as an especially notable policy document - one of only two such awards out of 200 documents reviewed. Basic tenets of the budgetary policy of the City, briefly stated, include: maintenance of basic services at current levels with adequate funding; maintenance of reserves at levels which will protect the City from future uncertainties; estimation of revenues at realistic levels; arrangement of program costs to reflect the true picture of the cost of operations; and compliance of the recommended budget with the provisions of the State Constitution, City Charter, municipal code and sound fiscal policy. Table A-16 sets forth comparative revenue detail by source and comparative expenditure detail program of actual, estimated, budgeted and projected budgets for fiscal years 1985-86 through 1988-89. 33 CA21.88A1/37 a • TABLE A-14 City of San Luis Obispo Summary of Revenues, Expenditures, and Changes in Fund Balance - All Funds Combined REVENUES: Tax Revenues Licenses and Permits Fines and Forfeitures Investment and Property Revenues Subventions and Grants Service Charges Trust and Agency Revenues Other Revenues Total Revenues OPERATING PROGRAMS: Public Safety Public Utilities Transportation Leisure, Cultural, and Community Development General Government Total Operating Programs Social Services CAPITAL PROJECTS: 1987-89 Financial Plan Projects Carry -Over and Supplemental Projects Total Capital Projects Total Expenditures OTHER FINANCING SOURCES (USES) FUND BALANCE, BEGINNING OF YEAR FUND BALANCE, Designated Undesignated END OF YEAR: TOTAL FUND BALANCE 34 CA21.88A1/38 1987-88 Estimated $13,267,100 230,600 474,000 1,857,400 4,901,200 6,145,700 575,400 904,900 28,356,300 $ 71075,300 4,864,700 2,298,800 2,777,700 1,996,700 2,520,800 21,5_ 34,000 $11,895,500 8,1— 24t 00 20, 0- 1` 0 41,533,800 $ (488,700) $29,426,400 $ 8,151,500 7,588,700 $15,740,200 1988-89 Budget $141066,200 190,600 515,000 1,613,900 3,397,500 8,204,500 577,600 96f000 28,661,300 $ 7,479,400 5,373,800 2,482,000 3,028,600 2,290,900 2,566,100 23,220,800 $ 71090,500 1,947,300 9,037,800 32,258,600 $ 31076,800 $15,740,200 $ 81393,300 __6L826 400 $15,219,700 Retirement Plans for City Employees The City participates in the State of California Public Employees' Retirement System (PERS) which covers substantially all of the City's employees. Two valuations have been established for the City: one for all safety employees and a separate program for all other qualifying employees. PERS is considered a contributory plan deriving funds from employee contributions as well as from employer contributions and earnings from investments. It is the City's policy to fund current retirement costs as accrued. The total pension expense for the fiscal year ended June 30, 1987 was $1,041,991, which includes amortization of past service cost to the year 2000. The accumulated plan benefits and plan net assets for the City's PERS is presented below as of the most recent valuation date, June 30, 1986. Actuarial present value of accumulated plan benefits Net assets available for benefits Unfunded liability: Employees Employers Total Actuarial Assets 35 CA21.88A1/39 Safety $19,843,687 $ 91941,989 2,557,643 7,344,055 $19,843,687 All Others $18,003,478 $ 91814,642 4,042,532 4,146,304 $18,003,478 0 APPENDIX B • General Purpose Audited Annual Financial Statements for the Fiscal Year Ended June 30, 1987 36 CA21.88A1/40 • Y U L 5ca G co la- u d 9 0ms m s i cagidm aoi r e b s m M W m M d J J M Y Y yX� q J U m O b q d m q •Gr m O d u C C L Y C Y O 0 J c S..Gi t _ ram M o. m m o v 0 0 u Y w u m L C t 7 d V C m 0 q a C C 0 0 Y O Y M 0 G..Yi 9 •Y• 0++ C 0 C A • d Y C i • M +• I J W J r m 0 Mm u A O d Y W E u u q r .» C C C d O J m 0 q 0 p q d m r Y w a m u L d e m Al Y Y WJ Y C 7 '^I m 0 M O u m Y m O M W O.a Y C 7 u U q J d 0 C G u 0 r O 7 C ++ C m 01 w 0 • O d L d 0 Y fi a d u Y m f0 'q 9 u Y J L ••• 0 u 0 0 C u 0 d e a J b e u J d a J a 0 c 0 d q 0 d U m 0 L O C ) m C a m o d m 7 0 d m Y m o s d mr a y Y y C C W 0 d d u L s 0 0 M 0 0 E 07 0 C u F C Y C u u V d g m d a u 0 M O C Y a 0 G M an d d 0 Y 0 •Tq O q YmE� C Y u 0 y 0 qFq .M+ 0 0 0 0 Y W eu0 W mu .+ ca rtr ao and O Y c 0 0 0 7 0 G X r W 0 s O M L •.� C 0 r g C O Y mWJa. u0 O.m mdM o. 0 0 u Y Y O C g q m 0 Y d r M a 7 Y deo a e J m r e e o ou o. fi 0 0 •.• M 0 u O. 0 d q O. 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O y ]• p • _ 4VV�do y Tutw CO �- �qe n ° $ol r� c • � `" s4 _ a a it `•_ Vpp � v5 ag: m' �c uv T cm OSO 'I •� aV^ 044]0 PI etCD4 St tl0✓y • e T " � v 7� Y'• VVu �Y 9 •VO9• V4 "r Oji ° C�<•O ar Tw0V0✓ °C ° uY L•S C D 9 _ �`i� GYr _ p� Y60 YQc m _Cu 4 — •OI _ T-O- a`4c a Y _ ✓ > T �. O y ]• p • _ 4VV�do y Tutw CO �- �qe �uw.. ••w3 �.u. <�o \/ /3 1� � I . � } { 0 ! \/ /3 1� � m u pI 1 1 nOI MI Y Y 6 u• Y. O ° e• O MO��O—p —VVUJVZ66 C i O I • a � _ Yow °o ei eon c. o°\ �y Oi m° L_.e Y•' S 9: .. o e8 « . as p -p - C Asa V V C Y p 9 + O gnu _ 0a p0 Ow • yO OO EC 9Y y�A°• ° �g•g9 uI L t] aF _uV'T ¢Yw J0 • • y°y� O�VB=U i V Oi•Y — �•_ C 10 8° u• Y Y ° 'pp. UVY U° VOe M• GWM 1�p�.�)°•u� C YipVw CC u pI 1 1 nOI MI Y Y 6 u• Y. O ° e• O MO��O—p —VVUJVZ66 C i O I • APPENDIX C Form of Legal Opinion 37 CA21.88A1/41 M CA21.88A1/42 APPENDIX D Official Notice of Sale 38 i Members of the Board of City of San Luis Obispo Capital Improvement Board San Luis Obispo, California. Members of the Board: It Sale Date: December 13, 1988 For all or none of the principal amount of $5,000,000 Certificates of Participation, Series 1988, legally issued and as described in the Official Notice of Sale, we will pay the Board $ (not less than $4,900,000) plus accrued interest on the total principal Of $5,000,000 to date of delivery, provided the Certificates bear the following interest rates: Serial Certificates Year Amount Interest Rate Year Amount Interest Rate 1989 $120,000 % 1994 $165,000 $ 1990 1991 130,000 % 1995 180,000 $ 1992 140,000 145,000 % % 1996 1900000 $ 1993 155,000 % 1997 1998 205,000 220,000 $ $ Term Certificates $1,370,000 Term Certificates Due June 1, 2003 $ $1,980,000 Term Certificates Due June 1, 2008 $ The Certificates mature above, and interest is on June 1 in each of the years as indicated thereafter payable June on December 1 and June 1 of 1, 1989, and each semiannually year. This bid the Official is made for prompt acceptance Notice and subject to the conditions of of Sale. We enclose, herewith, check in the amount of $100,000. our good faith NOT PART OF THE BID Explanatory Note: According to our computation, this bid involves the following: Net Interest Cost Net Interest Rate I hereby acknowledge receipt for the above-described good faith check. CA21.88A1/43 Respectfully submitted, Syndicate Manager By (A list of the firms associated with us in this bid is on the reverse side of this proposal.) The foregoing offer is hereby accepted by and on behalf of City of San Luis Obispo Capital Improvement Board, San Luis Obispo, California, this 13th day of December, 1988. City of San Luis Obispo Capital Improvement Board San Luis Obispo, California City of San Luis Obispo Capital Improvement Board 39 San Luis Obispo, California