$109,875,000 ORANGE COUNTY SANITATION DISTRICT REVENUE REFUNDING CERTIFICATE ANTICIPATION NOTES SERIES 2016B

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1 NEW ISSUE BOOK-ENTRY-ONLY RATINGS: S&P: AAA Fitch: AAA/F1+ (See RATINGS herein.) In the opinion of Norton Rose Fulbright US LLP, Los Angeles, California, Special Counsel, under existing statutes, regulations, rulings and court decisions, and assuming compliance with the tax covenants described herein, the interest component of the Installment Payment, and the allocable portion thereof distributable in respect of any Note, is excluded pursuant to section 103(a) of the Internal Revenue Code of 1986 from the gross income of the owners thereof for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax. It is also the opinion of Special Counsel that under existing law the interest component of the Installment Payment, and the allocable portion thereof distributable in respect of any Note is exempt from personal income taxes of the State of California. See, however, TAX MATTERS herein. $109,875,000 ORANGE COUNTY SANITATION DISTRICT REVENUE REFUNDING CERTIFICATE ANTICIPATION NOTES SERIES 2016B Dated: Date of Delivery Interest Rate: 2.000% Price: % Yield: 0.840% Maturity Date: December 15, 2018 CUSIP No P FF7 The $109,875,000 Orange County Sanitation District Revenue Refunding Certificate Anticipation Notes, Series 2016B (the Notes ) evidence direct, fractional undivided interests of the Owners thereof in an installment payment (the Installment Payment ), and the interest thereon, to be made by the Orange County Sanitation District (the District ) pursuant to the Installment Purchase Agreement, dated as of October 1, 2016 (the Installment Purchase Agreement ), by and between the District and the Orange County Sanitation District Financing Corporation (the Corporation ). Pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000 (the Master Agreement ), by and between the District and the Corporation, the District has established conditions and terms upon which obligations, such as the Installment Payment and the interest thereon, will be incurred and secured. The Installment Payment under the Installment Purchase Agreement is payable from (i) Net Revenues (as more fully described in the Master Agreement, the Net Revenues ), as provided in the Installment Purchase Agreement, consisting primarily of all income and revenue received by the District from the operation or ownership of the Wastewater System of the District (the Wastewater System ) remaining after payment of Maintenance and Operation Costs, and (ii) other lawfully available funds of the District, as further described in SECURITY AND SOURCES OF PAYMENT FOR THE NOTES herein. The Notes will mature on December 15, 2018 (the Maturity Date ). The District expects the principal of the Notes to be paid from proceeds of the sale, on or prior to the Maturity Date, of a future series of certificates of participation, notes or other obligations of the District. The sale and delivery of a future series of certificates of participation, notes or other obligations of the District will depend on market conditions, certain approvals by the District and the Corporation and other factors. See SECURITY AND SOURCES OF PAYMENT FOR THE NOTES herein. The Notes are subject to prepayment prior to their maturity. See THE NOTES Prepayment Provisions herein. The proceeds of the Notes, together with other amounts, will be used to (i) prepay all of the Orange County Sanitation District Revenue Refunding Certificate Anticipation Notes, Series 2014B, currently outstanding in the aggregate principal amount of $120,850,000, and (ii) pay the costs incurred in connection with the execution and delivery of the Notes. See PLAN OF FINANCE herein. Interest evidenced by the Notes will accrue from the date of their initial delivery and will be payable on each June 15 and December 15, commencing December 15, 2016, through and including the Maturity Date. See THE NOTES herein. The Notes initially will be delivered only in book-entry form and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the Notes. Individual purchases of the Notes will be made in book-entry form only. Purchasers of Notes will not receive physical certificates representing their ownership interests in the Notes purchased. The Notes will be delivered in denominations of $5,000 and any integral multiple thereof. Payments of principal and interest evidenced by the Notes are payable directly to DTC by U.S. Bank National Association, as trustee (the Trustee ). Upon receipt of payments of such principal and interest, DTC will in turn distribute such payments to the beneficial owners of the Notes. See APPENDIX E BOOK-ENTRY SYSTEM herein. THE OBLIGATION OF THE DISTRICT TO PAY THE INSTALLMENT PAYMENT, AND THE INTEREST THEREON, AND OTHER PAYMENTS REQUIRED TO BE MADE BY IT UNDER THE INSTALLMENT PURCHASE AGREEMENT IS A SPECIAL OBLIGATION OF THE DISTRICT PAYABLE, IN THE MANNER PROVIDED IN THE INSTALLMENT PURCHASE AGREEMENT, FROM NET REVENUES AND OTHER LAWFULLY AVAILABLE FUNDS OF THE DISTRICT, AS PROVIDED IN THE INSTALLMENT PURCHASE AGREEMENT, AND DOES NOT CONSTITUTE A DEBT OF THE DISTRICT OR OF THE STATE OF CALIFORNIA, OR OF ANY POLITICAL SUBDIVISION THEREOF, IN CONTRAVENTION OF ANY CONSTITUTIONAL OR STATUTORY DEBT LIMITATION OR RESTRICTION. NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA, OR ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE INSTALLMENT PAYMENT, OR THE INTEREST THEREON, OR OTHER PAYMENTS REQUIRED TO BE MADE UNDER THE INSTALLMENT PURCHASE AGREEMENT. SEE SECURITY AND SOURCES OF PAYMENT FOR THE NOTES HEREIN. This cover page contains information intended for quick reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to making an informed investment decision. The Notes are offered when, as and if executed and delivered subject to the approval of Norton Rose Fulbright US LLP, Los Angeles, California, Special Counsel and Disclosure Counsel to the District, and certain other conditions. Certain legal matters will be passed upon for the District and the Corporation by Woodruff, Spradlin & Smart, a Professional Corporation, Costa Mesa, California. Public Resources Advisory Group, Los Angeles, California, has served as financial advisor to the District in connection with the execution and delivery of the Notes. It is anticipated that the Notes in definitive form will be available for delivery through the book-entry facilities of DTC on or about November 1, Dated: October 20, 2016

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3 ORANGE COUNTY SANITATION DISTRICT Board of Directors John Nielsen (Chair) Tustin Greg Sebourn (Vice Chair) Fullerton Lucille Kring Anaheim Glenn Parker Brea Fred Smith Buena Park Mariellen Yarc Cypress Steve Nagel Fountain Valley Steve Jones Garden Grove Jim Katapodis Huntington Beach Steven Choi Irvine Tom Beamish La Habra Peter Kim La Palma Richard Murphy Los Alamitos Keith Curry Newport Beach Teresa Smith Orange Chad Wanke Placentia Sal Tinajero Santa Ana Ellery Deaton Seal Beach David Shawver Stanton Greg Mills Villa Park James M. Ferryman Costa Mesa Sanitary District John Withers Irvine Ranch Water District Joy Neugebauer Midway City Sanitary District Robert Kiley Yorba Linda Water District Michelle Steel Member of the Orange County Board of Supervisors Executive Management of the District James Herberg, General Manager Robert P. Ghirelli, D.Env., Assistant General Manager Lorenzo Tyner, Director of Finance and Administrative Services Ed Torres, Director of Operations and Maintenance James Colston, Director of Environmental Services Robert Thompson, Director of Engineering Celia Chandler, Director of Human Resources Special Services Special Counsel and Disclosure Counsel Norton Rose Fulbright US LLP Los Angeles, California District General Counsel Bradley R. Hogin Woodruff, Spradlin & Smart, a Professional Corporation Costa Mesa, California Financial Advisor Public Resources Advisory Group Los Angeles, California Trustee U.S. Bank National Association Los Angeles, California

4 No dealer, salesman or any other person has been authorized by the Orange County Sanitation District (the District ) or Merrill Lynch, Pierce, Fenner & Smith Incorporated (the Initial Purchaser ) to give any information or to make any representations, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by the District or the Initial Purchaser. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Notes by any person in any jurisdiction in which it is unlawful for such person to make such an offer, solicitation or sale. The information set forth herein has been provided by the District and other sources that are believed by the District to be reliable. No dealer, broker, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Official Statement. If given or made, such other information or representations must not be relied upon as having been authorized by the District, the Corporation or the Initial Purchaser in connection with any reoffering. This Official Statement is not to be construed as a contract with the purchasers of the Notes. Statements contained in this Official Statement which involve estimates, projections, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. The information and expressions of opinion herein are subject to change without notice and neither delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or the Corporation since the date hereof. This Official Statement is submitted with respect to the sale of the Notes referred to herein and may not be reproduced or used, in whole or in part, for any other purpose, unless authorized in writing by the District. All summaries of the documents and laws are made subject to the provisions thereof and do not purport to be complete statements of any or all such provisions. Preparation of this Official Statement and its distribution have been duly authorized and approved by the District and the Corporation. In connection with the offering of the Notes, the Initial Purchaser in connection with any reoffering may over-allot or effect transactions which stabilize or maintain the market price of the Notes at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The Initial Purchaser in connection with any reoffering may offer and sell the Notes to certain dealers, institutional investors and others at prices lower than the public offering prices stated on the cover page hereof and such public offering prices may be changed from time to time by the Initial Purchaser. Certain statements included or incorporated by reference in this Official Statement constitute forwardlooking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. CUSIP is a registered trademark of the American Bankers Association. CUSIP data on the cover hereof and herein is provided by CUSIP Global Services, managed by Standard & Poor s Financial Services LLC on behalf of The American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. The District, the Financial Advisor and the Initial Purchaser are not responsible for the selection or correctness of the CUSIP numbers set forth on the cover hereof or herein.

5 TABLE OF CONTENTS Page INTRODUCTION... 1 General... 1 The District... 2 Security and Sources of Payment for the Notes... 2 Continuing Disclosure... 3 Miscellaneous... 3 PLAN OF FINANCE... 4 ESTIMATED SOURCES AND USES OF FUNDS... 4 THE NOTES... 5 General... 5 Prepayment Provisions... 5 SECURITY AND SOURCES OF PAYMENT FOR THE NOTES... 6 Sale Proceeds of Future Obligations... 6 Installment Payment... 7 Available Funds of the District... 8 Net Revenues... 8 Rate Stabilization Account... 9 Allocation of Revenues... 9 Rate Covenant Limitations on Issuance of Additional Obligations Insurance Allocation of Installment Payment THE DISTRICT Background Organization and Administration Services Service Area Employees Retirement Plan Other Post-Employment Benefits Risk Management Existing Facilities Permits, Licenses and Other Regulations District Planning and Capital Improvement Program Groundwater Replenishment System Preferred Level of Treatment Biosolids Management Urban Runoff Integrated Emergency Response Program Five-Year Strategic Planning DISTRICT REVENUES Sewer Service Charges Additional Revenues Wastewater Treatment History i

6 TABLE OF CONTENTS (continued) Page Customers Assessed Valuation Tax Levies and Delinquencies Budgetary Process Reserves Summary of Operating Data Forecasted Operating Data Management s Discussion and Analysis of Operating Data Investment of District Funds FINANCIAL OBLIGATIONS Existing Indebtedness Anticipated Financings Direct and Overlapping Bonded Debt THE CORPORATION LIMITATIONS ON TAXES AND REVENUES Article XIIIA of the California Constitution Legislation Implementing Article XIIIA Article XIIIB of the California Constitution Proposition 1A and Proposition Article XIIIC and Article XIIID of the California Constitution Other Initiative Measures LEGAL MATTERS FINANCIAL ADVISOR ABSENCE OF LITIGATION FINANCIAL STATEMENTS TAX MATTERS CONTINUING DISCLOSURE RATINGS PURCHASE AND REOFFERING MISCELLANEOUS APPENDIX A APPENDIX B COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, A-1 THE COUNTY OF ORANGE ECONOMIC AND DEMOGRAPHIC INFORMATION... B-1 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS... C-1 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT... D-1 APPENDIX E BOOK-ENTRY SYSTEM... E-1 APPENDIX F FORM OF APPROVING OPINION OF SPECIAL COUNSEL... F-1 ii

7 OFFICIAL STATEMENT $109,875,000 ORANGE COUNTY SANITATION DISTRICT REVENUE REFUNDING CERTIFICATE ANTICIPATION NOTES SERIES 2016B INTRODUCTION This introduction contains only a brief summary of certain of the terms of the Notes being offered and a brief description of the Official Statement. All statements contained in this introduction are qualified in their entirety by reference to the entire Official Statement. References to, and summaries of, provisions of the Constitution and laws of the State of California (the State ) and any documents referred to herein do not purport to be complete and such references are qualified in their entirety by reference to the complete provisions. All capitalized terms used in this Official Statement and not otherwise defined herein have the meanings set forth in the Trust Agreement, the Installment Purchase Agreement and the Master Agreement (each, as hereinafter defined). See APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Definitions herein. General This Official Statement, including the cover page and all appendices hereto, provides certain information concerning the sale and delivery of $109,875,000 aggregate principal amount of the Orange County Sanitation District Revenue Refunding Certificate Anticipation Notes, Series 2016B (the Notes ), which are certificates of participation evidencing direct, fractional undivided interests in an installment payment (the Installment Payment ) and the interest thereon, to be made by the Orange County Sanitation District (the District ) pursuant to the Installment Purchase Agreement, dated as of October 1, 2016 (the Installment Purchase Agreement ), by and between the District and the Orange County Sanitation District Financing Corporation (the Corporation ). Unless the context clearly indicates to the contrary, a reference herein to either of the Installment Purchase Agreement or the Notes is intended to refer to the corresponding interest in the Installment Purchase Agreement. Pursuant to the Master Agreement for District Obligations, dated as of August 1, 2000 (the Master Agreement ), by and between the District and the Corporation, the District has established and declared the conditions and terms upon which obligations such as the Installment Purchase Agreement, and the Installment Payment and the interest thereon, will be incurred and secured. The Installment Payment under the Installment Purchase Agreement is payable from (i) Net Revenues (as defined hereinafter) as provided in the Installment Purchase Agreement, consisting primarily of all income and revenue received by the District from the operation or ownership of the Wastewater System of the District (the Wastewater System ) remaining after payment of Maintenance and Operation Costs, and (ii) other lawfully available funds of the District, as further described in SECURITY AND SOURCES OF PAYMENT FOR THE NOTES herein. The Notes are to be executed and delivered pursuant to a Trust Agreement, dated as of October 1, 2016 (the Trust Agreement ), by and among the District, the Corporation and U.S. Bank National Association, as trustee (the Trustee ). Proceeds from the sale of the Notes will be used to (i) prepay all of the Orange County Sanitation District Revenue Refunding Certificate Anticipation Notes, Series 2014B, currently outstanding in the aggregate principal amount of $120,850,000 (the Prior Notes ), and (ii) pay the costs incurred in connection with the execution and delivery of the Notes. See PLAN OF FINANCE herein. The Notes are subject to prepayment prior to their maturity. See THE NOTES Prepayment Provisions herein.

8 The Notes will be executed and delivered in the form of fully registered certificates, dated as of the date of initial delivery thereof and will mature on December 15, 2018 (the Maturity Date ). Interest evidenced by the Notes will be payable on each June 15 and December 15, commencing December 15, 2016, through and including the Maturity Date (each, an Interest Payment Date ). See THE NOTES herein. The Notes initially will be delivered only in book-entry form and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the Notes. The Notes will be delivered in denominations of $5,000 and any integral multiple thereof. So long as the Notes are in the DTC book-entry system, the interest and principal due with respect to the Notes will be payable by the Trustee, or its agent, to DTC or its nominee. DTC, in turn, will make payments pursuant to its procedures as described under APPENDIX E BOOK ENTRY SYSTEM herein. The District The District is a public agency responsible for regional wastewater collection, treatment and disposal. The District is the sixth largest wastewater discharger in the United States. The District provides service to an area with a population of approximately 2.6 million people in the northern and central portion of the County of Orange (the County ), in a service area of approximately 479 square miles, treating an average of 183 million gallons per day ( mg/d ) of wastewater in Fiscal Year See THE DISTRICT, DISTRICT REVENUES and FINANCIAL OBLIGATIONS herein. Security and Sources of Payment for the Notes The Notes, which are certificates of participation, evidence direct, fractional undivided interests in the Installment Payment, and the interest thereon, paid by the District pursuant to the Installment Purchase Agreement. The obligation of the District to pay the Installment Payment and the interest thereon and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided under the Installment Purchase Agreement, from Net Revenues, and other lawfully available funds of the District, as provided in the Installment Purchase Agreement. Net Revenues generally consist of all income and revenue received by the District from the operation or ownership of the Wastewater System remaining after payment of Maintenance and Operation Costs, all as further provided in the Master Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. The District expects the principal of the Notes to be paid from proceeds of the sale, on or prior to the Maturity Date, of a future series of certificates of participation, notes or other obligations of the District. The sale and delivery of a future series of certificates of participation, notes or other obligations of the District will depend on market conditions, certain approvals by the District and the Corporation and other factors. See SECURITY AND SOURCES OF PAYMENT FOR THE NOTES Sale Proceeds of Future Obligations. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. The District currently has Outstanding Senior Obligations payable from Net Revenues on a parity with the Installment Payment under the Installment Purchase Agreement. See FINANCIAL OBLIGATIONS Existing Indebtedness and THE DISTRICT herein and APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement attached hereto. The District has no Subordinate Obligations currently outstanding. Pursuant to the Master Agreement, the District will, to the extent permitted by law, fix, prescribe and collect fees and charges for the services and facilities of the Wastewater System which will be at least 2

9 sufficient to yield during each Fiscal Year (a) Net Revenues equal to 125% of Debt Service on Senior Obligations for such Fiscal Year and (b) Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but shall not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. See SECURITY AND SOURCE OF PAYMENT FOR THE NOTES Rate Covenant herein. The obligation of the District to pay the Installment Payment and the interest thereon, and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided in the Installment Purchase Agreement, from Net Revenues and other lawfully available funds of the District, as provided for in the Installment Purchase Agreement, and does not constitute a debt of the District or of the State, or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and credit nor the taxing power of the District or the State or any political subdivision thereof, is pledged to the payment of the Installment Payment, or the interest thereon, or other payments required to be made under the Installment Purchase Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. See SECURITY AND SOURCES OF PAYMENT FOR THE NOTES herein. Continuing Disclosure The District has covenanted for the benefit of holders and beneficial owners of the Notes (a) to provide certain financial information and operating data (the Annual Report ) relating to the District and the property in the District not later than eight months after the end of the District s Fiscal Year (which currently would be March 1), commencing with the report for the Fiscal Year, and (b) to provide notices of the occurrence of certain enumerated events. The specific nature of the information to be contained in the Annual Report or the notices of enumerated events is set forth in the Continuing Disclosure Agreement. See CONTINUING DISCLOSURE herein and APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT. Miscellaneous The descriptions herein of the Trust Agreement, the Master Agreement, the Installment Purchase Agreement, the Continuing Disclosure Agreement and any other agreements relating to the Notes are qualified in their entirety by reference to such documents. Copies of the Trust Agreement, the Master Agreement and the Installment Purchase Agreement are on file and available for inspection at the corporate trust office of U.S. Bank National Association, Los Angeles, California, Attention: Corporate Trust. 3

10 PLAN OF FINANCE A portion of the net proceeds from the sale of the Notes, together with other available moneys, will be used to prepay on November 1, 2016 the installment payment (the Funded Installment Payment ) to be made by the District in connection with the Prior Notes. Under the terms of the Trust Agreement, dated as of October 1, 2014 (the Prior Trust Agreement ), pursuant to which the Prior Notes were executed and delivered, the payment of the Prior Notes will be effected by depositing a portion of the proceeds of the Notes into the Installment Payment Fund established under the Prior Trust Agreement (the Payment Fund ). Such moneys will be in an amount sufficient to provide for the payment of the interest on the Funded Installment Payment through and including November 1, 2016 and to provide for the payment of the principal represented by the Funded Installment Payment. In accordance with the Prior Trust Agreement, the Funded Installment Payment will be applied to the payment of interest with respect to the outstanding Prior Notes and to the payment of the principal of the outstanding Prior Notes on the maturity date thereof. The amounts deposited in the Payment Fund will be held in trust solely for the Prior Notes and will not be available to pay the principal and interest evidenced by the Notes or any obligations other than the Prior Notes. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds and other amounts in connection with the delivery of the Notes are presented below. Sources Principal Amount of Notes $109,875, Premium 2,619, District Contribution 10,909, Total Sources $123,403, Uses Payment of Prior Notes $123,079, Costs of Issuance (1) 324, Total Uses $123,403, (1) Costs of Issuance include, among other things, the Initial Purchaser s discount, fees of rating agencies, Special Counsel and Disclosure Counsel fees and expenses and the initial fees of the Trustee. 4

11 THE NOTES General The Notes will be prepared in the form of fully registered certificates in Authorized Denominations of $5,000 and any integral multiple thereof. The Notes will be dated the date of initial delivery thereof and will mature on December 15, 2018 (the Maturity Date ). Interest evidenced by the Notes will accrue from their date of initial delivery and will be payable semiannually on each June 15 and December 15, commencing December 15, 2016, through and including the Maturity Date (each, an Interest Payment Date ). Each Note shall evidence interest from the Interest Payment Date next preceding its date of execution to which interest has been paid in full, unless such date of execution shall be after a Record Date and on or prior to the following Interest Payment Date, in which case such Note shall evidence interest from such Interest Payment Date, or unless such date of execution shall be on or prior to December 1, 2016, in which case such Note shall represent interest from its date of initial delivery. Notwithstanding, the foregoing, if, as shown by the records of the Trustee, interest evidenced by the Notes shall be in default, each Note shall evidence interest from the last Interest Payment Date to which such interest has been paid in full or duly provided for. Interest evidenced by the Notes shall be computed on the basis of a 360-day year consisting of twelve 30-day months. See APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Trust Agreement. The Notes initially will be delivered only in book-entry form and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the Notes. Individual purchases of the Notes will be made in book-entry form only. Purchasers of Notes will not receive physical certificates representing their ownership interests in the Notes purchased. Payments of principal and interest evidenced by the Notes are payable directly to DTC by U.S. Bank National Association, as trustee. Upon receipt of payments of such principal and interest, DTC will in turn distribute such payments to the beneficial owners of the Notes. So long as the Notes are held in the DTC book-entry system, the interest and principal due with respect to the Notes will be payable by the Trustee, or its agent, to DTC or its nominee. DTC, in turn, will make payments pursuant to its procedures as described under APPENDIX E BOOK-ENTRY SYSTEM herein. Prepayment Provisions Optional Prepayment. The Notes are subject to optional prepayment prior to the Maturity Date, on any date on or after November 29, 2018, in whole or in part, in Authorized Denominations, from and to the extent of prepayment of the Installment Payment paid pursuant to the Installment Purchase Agreement or from any other source of available funds, any such prepayment to be at a price equal to the principal evidenced by the Notes to be prepaid, plus accrued interest evidenced thereby to the date fixed for prepayment, without premium. Selection of Notes for Prepayment. Whenever less than all the Outstanding Notes are to be prepaid on any one date in accordance with the Trust Agreement, the Trustee shall select the Notes to be prepaid as directed in a Written Request of the District, or at the discretion of the District by lot in any manner that the Trustee deems fair and appropriate, which decision shall be final and binding upon the District and the Owners. The Trustee shall promptly notify the District in writing of the Notes so selected for prepayment on such date. For purposes of such selection, any Note may be prepaid in part in Authorized Denominations. Notice of Prepayment. When prepayment of Notes is authorized pursuant to the Trust Agreement, the Trustee shall give notice, at the expense of the District, of the prepayment of the Notes. The notice of prepayment shall specify (a) the Notes or designated portions thereof (in the case of prepayment of the Notes in part but not in whole) which are to be prepaid, (b) the date of prepayment, (c) the place or places where the prepayment will be made, including the name and address of any paying 5

12 agent, (d) the prepayment price and (e) the CUSIP numbers assigned to the Notes to be prepaid. Such notice of prepayment shall further state that on the specified date there shall become due and payable upon each Note or portion thereof being prepaid the prepayment price and that from and after such date interest evidenced thereby shall cease to accrue and be payable. With respect to any notice of optional prepayment of Notes, unless at the time such notice is given the Notes to be prepaid shall be deemed to have been paid within the meaning of the Trust Agreement, such notice shall state that such prepayment is conditional upon receipt by the Trustee, on or prior to the date fixed for such prepayment, of moneys sufficient to pay for the prepayment price of the Notes to be prepaid, and that if such moneys shall not have been so received said notice shall be of no force and effect and the District shall not be required to prepay such Notes. In the event a notice of prepayment of Notes contains such a condition and such moneys are not so received, the prepayment of Notes as described in the conditional notice of prepayment shall not be made and the Trustee shall, within a reasonable time after the date on which such prepayment was to occur, give notice to the persons and in the manner in which the notice of prepayment was given, that such moneys were not so received and that there shall be no prepayment of Notes pursuant to such notice of prepayment. The Trustee shall, at least 20 but not more than 60 days prior to any prepayment date, give notice of prepayment to the respective Owners of Notes designated for prepayment by first-class mail, postage prepaid, at their addresses appearing on the registration books maintained by the Trustee as of the close of business on the day before such notice of prepayment is given. The actual receipt by the Owner of any notice of such prepayment shall not be a condition precedent to prepayment, and neither failure to receive such notice nor any defect therein shall affect the validity of the proceedings for the prepayment of such Notes or the cessation of interest evidenced thereby on the date fixed for prepayment. Effect of Prepayment. If notice of prepayment has been duly given as aforesaid and moneys for the payment of the prepayment price of the Notes to be prepaid are held by the Trustee, then on the prepayment date designated in such notice, the Notes so called for prepayment shall become payable at the prepayment price specified in such notice; and from and after the date so designated, interest evidenced by the Notes so called for prepayment shall cease to accrue, such Notes shall cease to be entitled to any benefit or security hereunder and the Owners of such Notes shall have no rights in respect thereof except to receive payment of the prepayment price thereof. The Trustee shall, upon surrender for payment of any of the Notes to be prepaid, pay such Notes at the prepayment price thereof, and such moneys shall be pledged to such payment. SECURITY AND SOURCES OF PAYMENT FOR THE NOTES Sale Proceeds of Future Obligations The District expects the principal of the Notes to be paid from proceeds of the sale, on or prior to the Maturity Date, of a future series of certificates of participation, notes or other obligations of the District, that will amortize over a term of approximately 19 years (the Future Obligations ). The issuance of the Future Obligations will require future authorizations by the governing boards of the District and the Corporation, as well as the preparation of suitable legal and disclosure documents for the issue. The District is currently unaware of any material impediment to obtaining such authorizations and documents. In addition, the issuance and sale of the Future Obligations will be contingent on the District s ability to access the municipal capital markets, which will depend on the District s creditworthiness and market conditions during the weeks immediately preceding the Maturity Date. The District is unable to predict such matters with certainty and therefore cannot guarantee that the Future Obligations will be successfully issued and sold. 6

13 Installment Payment The Notes evidence direct, fractional undivided interests in the Installment Payment, and the interest thereon, paid by the District pursuant to the Installment Purchase Agreement. The obligation of the District to pay the Installment Payment and the interest thereon and other payments required to be made by it under the Installment Purchase Agreement is a special obligation of the District payable, in the manner provided under the Installment Purchase Agreement, from Net Revenues and other lawfully available funds of the District, as provided in the Installment Purchase Agreement. Net Revenues generally consist of all income and revenue received by the District from the operation or ownership of the Wastewater System remaining after payment of Maintenance and Operation Costs, all as further provided in the Master Agreement. See DISTRICT REVENUES herein. Pursuant to the Master Agreement, the District has established and declared the conditions and terms upon which obligations such as the Installment Purchase Agreement, and the Installment Payment and the interest thereon payable under the Installment Purchase Agreement, will be incurred and secured. The obligation of the District to make the Installment Payment, and payments of interest thereon, and other payments required to be made by it under the Installment Purchase Agreement, from Net Revenues, and other lawfully available funds of the District, is absolute and unconditional, and until such time as the Installment Payment, payments of interest thereon, and such other payments shall have been paid in full (or provision for the payment thereof shall have been made pursuant to the Installment Purchase Agreement), the District has covenanted that it will not discontinue or suspend the Installment Payment when due, whether or not the Project or any part thereof is operating or operable or has been completed, or its use is suspended, interfered with, reduced or curtailed or terminated in whole or in part, and such Installment Payment, payments of interest thereon, and other payments shall not be subject to reduction whether offset or otherwise and shall not be conditional upon the performance or nonperformance by any party of any agreement or any cause whatsoever. The District s obligation to make the Installment Payment from Net Revenues is on a parity with the District s obligation to make payments with respect to its Outstanding Senior Obligations. See Net Revenues below. Pursuant to the Trust Agreement, the Corporation has assigned to the Trustee for the benefit of the Owners of the Notes substantially all of its rights, title and interest in and to the Installment Purchase Agreement, including its right to receive the Installment Payment and the interest thereon. The District has certain Existing Senior Obligations Outstanding payable from Net Revenues on a parity with the Installment Payment under the Installment Purchase Agreement. The term Existing Senior Obligations as used in this Official Statement refers to the Installment Purchase Agreements relating to the District s currently Outstanding Senior Obligations, as set forth on Table 16 under the caption FINANCIAL OBLIGATIONS Existing Indebtedness herein. The term Senior Obligations as used in this Official Statement refers to the Existing Senior Obligations and to any additional Senior Obligations, such as the Installment Purchase Agreement, that may be made payable on a parity basis to the Installment Payment as provided in the Master Agreement. Senior Obligations, together with any Subordinate Obligations payable on a subordinate basis to the Installment Payments incurred as provided in the Master Agreement, are referred to collectively as the Obligations. The District has no Subordinate Obligations currently outstanding. See FINANCIAL OBLIGATIONS Existing Indebtedness herein and APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement attached hereto. The obligation of the District to pay the Installment Payment, and the interest thereon, and other payments required to be made by it under the Installment Purchase Agreement and Master Agreement, is a special obligation of the District payable, in the manner provided in the Installment Purchase Agreement, from Net Revenues and other lawfully available funds of the District, as provided for in the Installment Purchase Agreement, and does not constitute a debt of the District, the State or of any political subdivision thereof, in contravention of any constitutional or statutory debt limitation or restriction. Neither the faith and credit nor the taxing power of the District, the State or any political subdivision thereof, is pledged to the payment of the Installment Payment, or the interest thereon, or other 7

14 payments required to be made under the Installment Purchase Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. See SECURITY AND SOURCES OF PAYMENT FOR THE NOTES herein. Available Funds of the District As Senior Obligations under the Master Agreement, the Installment Payments are payable from and secured by a pledge of Net Revenues. Should Net Revenues prove insufficient, the Installment Purchase Agreement further provides that the Installment Payments are payable from any other lawfully available funds of the District. The primary lawfully available funds of the District are its reserve funds, other than trustee-held amounts required to be in any Obligation Reserve Fund securing certain of the District s Senior Obligations, as described in the Master Agreement. At June 30, 2016, the District s Debt Service Required Reserves totaled $112 million, of which $25 million were trustee-held amounts in Obligation Reserve Funds as required under the Master Agreement. See APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement attached hereto. District reserve funds are maintained in accordance with the District s reserve policy. See DISTRICT REVENUES Reserves. Available reserves at June 30, 2016 were approximately $569 million (consisting of $545 million in cash and investments and $24 million due from the Orange County Flood Control District). See DISTRICT REVENUES Reserves, Summary of Operating Data and Projected Operating Data. Net Revenues The District is obligated to make the Installment Payment from, among other things, Net Revenues as provided in the Master Agreement, which consist of Revenues remaining after payment of costs paid by the District for maintaining and operating the Wastewater System ( Maintenance and Operation Costs ). Revenues are defined in the Master Agreement to mean, for any period, all income and revenue received by the District during such period from the operation or ownership of the Wastewater System, determined in accordance with generally accepted accounting principles, including all fees and charges received during such period for the services of the Wastewater System, investment income received during such period (but only to the extent that such investment income is generally available to pay costs with respect to the Wastewater System, including Maintenance and Operation Costs), Net Proceeds of business interruption insurance received during such period, ad valorem taxes received during such period, payments under the Agreement Acquiring Ownership Interests, Assigning Rights and Establishing Obligations, entered into on February 13, 1986, and amendment No. 1 thereto dated December 10, 1986 (the IRWD Agreement ), by and between predecessor County Sanitation District No. 14 of Orange County and the Irvine Ranch Water District (the IRWD ) received during such period and all other money received during such period howsoever derived by the District from the operation or ownership of the Wastewater System or arising from the Wastewater System (including any standby or availability charges), but excluding (a) Capital Facilities Capacity Charges, (b) payments received under Financial Contracts, and (c) refundable deposits made to establish credit and advances or contributions in aid of construction (which, for purposes of the Master Agreement, shall not include payments under the IRWD Agreement); provided, however, that (i) Revenues shall be increased by the amounts, if any, transferred during such period from the Rate Stabilization Account to the Revenue Account and shall be decreased by the amounts, if any, transferred during such period from the Revenue Account to the Rate Stabilization Account, and (ii) Revenues shall include Capital Facilities Capacity Charges collected during such period to the extent that such Capital Facilities Capacity Charges could be properly expended on a Capital Facilities Capacity Charge Eligible Project for which the proceeds of Senior Obligations were used or are available to be used. Any Federal Subsidy payments received by the District will constitute Revenues as defined in the Master Agreement. See DISTRICT REVENUES Additional Revenues herein. 8

15 The District s obligation to make the Installment Payment from its Net Revenues is on a parity with the District s obligation to make payments with respect to its other outstanding obligations described as Senior Obligations and all Reimbursement Obligations with respect to Senior Obligations, as provided in the Master Agreement. The Installment Purchase Agreement constitutes a Senior Obligation and, as such, is subject to the provisions of the Master Agreement and is afforded all of the advantages, benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. Pursuant to the Master Agreement, the District pledges all Net Revenues to the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations, and the Net Revenues will not be used for any other purpose while any of the Senior Obligations or Reimbursement Obligations with respect to Senior Obligations remain unpaid; provided, however, that out of the Net Revenues there may be apportioned such sums for such purposes as are expressly permitted by the Master Agreement. This pledge constitutes a first lien on the Net Revenues for the payment of the Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. The term Senior Obligations, generally means all revenue bonds or notes (including bond anticipation notes and commercial paper) of the District authorized, issued, executed and delivered under and pursuant to applicable law, the Installment Purchase Agreement, and all other contracts (including financial contracts) or leases of the District authorized and executed by the District under and pursuant to applicable law, including, without limitation, installment, lease or other payments which are, in accordance with the provisions of the Master Agreement, payable from Net Revenues on a parity with the payments under the Master Agreement. The District may at any time incur Subordinate Obligations payable on a subordinate basis to the Installment Payment as provided in the Master Agreement; provided, however, that prior to incurring such Subordinate Obligations, the District shall have determined that the incurrence thereof will not materially adversely affect the District s ability to comply with the requirements of the Master Agreement. The District may at any time incur Reimbursement Obligations with respect to Subordinate Obligations. For a description of the District s Outstanding Senior Obligations and Subordinate Obligations, see FINANCIAL OBLIGATIONS Existing Indebtedness herein. There are currently no Subordinate Obligations or Reimbursement Obligations with respect to Subordinate Obligations outstanding. The District may, in connection with the incurrence of Subordinate Obligations, pledge Net Revenues to the payment of Subordinate Obligations and Reimbursement Obligations with respect to Subordinate Obligations; provided, however, that such pledge, and any lien created thereby, shall be junior and subordinate to the pledge of, and lien on, Net Revenues for the payment of Senior Obligations and Reimbursement Obligations with respect to Senior Obligations. Rate Stabilization Account To avoid fluctuations in its fees and charges of the Wastewater System, from time to time the District may deposit in the Rate Stabilization Account from Net Revenues such amounts as the District deems necessary or appropriate. From time to time, the District may also transfer moneys from the Rate Stabilization Account to the Revenue Account to be used by the District, first to pay all Maintenance and Operations Costs as and when the same shall be due and payable. In addition, any such amount transferred from the Rate Stabilization Account to the Revenue Account by the District is included as Revenues for any period, but such transferred amount is excluded from determining Operating Revenues for any period. Revenues will be decreased by the amounts, if any, transferred from the Revenue Account to the Rate Stabilization Account. There are presently no funds in the Rate Stabilization Account. Allocation of Revenues To carry out and effectuate the pledge of Net Revenues under the Master Agreement as described above, the District agrees and covenants that all Operating Revenues received by the District will be deposited when and as received in the Revenue Account. Additionally, amounts may, from time to time as the District deems necessary or appropriate, be transferred from the Rate Stabilization Account and 9

16 deposited in the Revenue Account, as described above under Rate Stabilization Account above. The District will pay from the Revenue Account all Maintenance and Operations Costs (including amounts reasonably required to be set aside in contingency reserves for Maintenance and Operations Costs, the payment of which is not immediately required) as and when the same shall be due and payable. After having paid, or having made provisions for the payment of, Maintenance and Operations Costs, the District shall set aside and deposit or transfer, as the case may be, from the Revenue Account such amounts at such times as provided in the Master Agreement in the following order of priority: (1) (2) (3) (4) (5) Senior Obligation Payment Account; Senior Obligation Reserve Funds (the Notes are not secured by any Reserve Fund); Subordinate Obligation Payment Account; Subordinate Obligation Reserve Funds; and Rate Stabilization Account. Amounts required or permitted to be deposited or transferred as described in items 2, 3, 4 and 5 above, shall not be so deposited or transferred unless the District shall have determined that there will be sufficient Net Revenues available to make the required deposits or transfers on the dates on which such deposits or transfers are required to be made as described above. So long as the District has determined that Net Revenues will be sufficient to make all of the deposits or transfers required to be made pursuant to items 1, 2, 3, 4 and 5 above, on the dates on which such deposits or transfers are required to be made, Net Revenues on deposit in the Revenue Account may from time to time be used for any purpose for which the District funds may be legally applied. For additional information, see APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement. Rate Covenant Pursuant to the Master Agreement, the District will, to the extent permitted by law, fix, prescribe and collect fees and charges for the services of the Wastewater System which will be at least sufficient to yield during each Fiscal Year (a) Net Revenues equal to 125% of Debt Service on Senior Obligations for such Fiscal Year and (b) Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but will not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. In addition, the District has covenanted in the Master Agreement to prepare and adopt an annual budget for the Wastewater System for each Fiscal Year. Such budget will set forth in reasonable detail the Revenues anticipated to be derived in such Fiscal Year and the expenditures anticipated to be paid or provided for therefrom in such Fiscal Year, including, without limitation, the amounts required to pay or provide for the payment of the Obligations during such Fiscal Year, the amounts required to pay or provide for the payment of Maintenance and Operations Costs during such Fiscal Year and the amounts required to pay or provide for the payment of all other claims or obligations required to be paid from Revenues in such Fiscal Year, and will show that Revenues and Net Revenues will be at least sufficient to satisfy the requirements of the Master Agreement. On or before September 1 of each Fiscal Year, the District will file with the Trustee a copy of the adopted budget for such Fiscal Year. See APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement for additional information. 10

17 The District has an established reserve policy with eight separate reserve fund categories. Over the next ten years, the year ending reserve total for each year is projected not to fall below $475 million as indicated in the District s ten-year cash flow forecast for fiscal years through At its election, the District may use unrestricted reserves to help satisfy the rate covenant described above. See DISTRICT REVENUES Reserves herein. Limitations on Issuance of Additional Obligations Senior Obligations. The District may at any time incur Senior Obligations in addition to the Existing Senior Obligations payable from Net Revenues as provided in the Master Agreement on a parity with all other Senior Obligations theretofore incurred but only subject to the following conditions under the Master Agreement: (1) (2) Upon the incurrence of such Senior Obligations, no Event of Default will be continuing under the Master Agreement; and Subject to the provisions of the Master Agreement, the District will have received either one of the following: (i) A Written Certificate of the District certifying that, for a 12 consecutive calendar month period during the 24 consecutive calendar month period ending in the calendar month prior to the incurrence of such Senior Obligations (which 12 consecutive calendar month period will be specified in such certificate or certificates): (A) (B) Net Revenues, as shown by the books of the District, will have amounted to at least 125% of Maximum Annual Debt Service on all Senior Obligations to be outstanding immediately after the incurrence of such Senior Obligations, and Net Operating Revenues, as shown by the books of the District, will have amounted to at least 100% of Maximum Annual Debt Service on all Obligations to be outstanding immediately after the incurrence of such Senior Obligations. For purposes of demonstrating compliance with the foregoing, Net Revenues and Net Operating Revenues may be adjusted for (x) any changes in fees and charges for the services of the Wastewater System which have been adopted and are in effect on the date such Senior Obligations are incurred, but which, during all or any part of such 12 consecutive calendar month period, were not in effect, (y) customers added to the Wastewater System subsequent to such 12 consecutive calendar month period but prior to the date such Senior Obligations are incurred, and (z) the estimated change in available Net Revenues and Net Operating Revenues which will result from the connection of existing residences or businesses to the Wastewater System within one year following completion of any project to be funded or any system to be acquired from the proceeds of such Senior Obligations; or (ii) A certificate or certificates from one or more Consultants which, when taken together, project that, for each of the two Fiscal Years next succeeding the incurrence of such Senior Obligations: 11

18 (A) (B) Net Revenues will amount to at least 125% of Maximum Annual Debt Service on all Senior Obligations to be outstanding immediately after the incurrence of such Senior Obligations, and Net Operating Revenues will amount to at least 100% of Maximum Annual Debt Service on all Obligations to be outstanding immediately after the incurrence of such Senior Obligations. For purposes of demonstrating compliance with the foregoing, Net Revenues and Net Operating Revenues may be adjusted for (x) any changes in fees and charges for the services of the Wastewater System which have been adopted and are in effect on the date such Senior Obligations are incurred or will go into effect prior to the end of such two Fiscal Year period, (y) customers expected to be added to the Wastewater System prior to the end of such two Fiscal Year period, and (z) the estimated change in available Net Revenues and Net Operating Revenues which will result from the connection of existing residences or businesses to the Wastewater System within one year following completion of any project to be funded or any system to be acquired from the proceeds of such Senior Obligations. For purposes of preparing the certificate or certificates described above, the Consultant may rely upon financial statements prepared by the District that have not been subject to audit by an independent certified public accountant if audited financial statements for the period are not available. See, also FINANCIAL OBLIGATIONS Existing Indebtedness herein. The District is not required to comply with the provisions described above in paragraph (2) if the Senior Obligations being incurred are Short-Term Obligations excluded from the calculation of Assumed Debt Service pursuant to clause (H) of the definition thereof. See APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Definitions herein. The determination of Net Revenues for use in the calculation described above is more fully described in APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement Senior Obligations attached hereto. The District is not required to comply with the provisions described in paragraph (2) above for such portion of Senior Obligations incurred for the purpose of providing funds to refund or refinance Senior Obligations if (i) upon such refunding or refinancing, debt service on such refunded or refinanced Obligations, or debt service on bonds, notes or other obligations of an entity other than the District, the debt service on which is payable from Obligation Payments for such Obligations (the Related Bonds ), will no longer be included in the calculation of Assumed Debt Service either because such Obligations, or the Related Bonds of such Obligations, will have been paid in full or because such debt service is disregarded pursuant to clause (L) of the definition of Assumed Debt Service, and (ii) Assumed Debt Service in each Fiscal Year for the portion of such Senior Obligations incurred for the purpose of providing funds to refund or refinance such Obligations is less than or equal to 105% of Assumed Debt Service in such Fiscal Year for such Obligations being refunded or refinanced (assuming for such purposes that debt service on such refunded or refinanced Obligations, or debt service on the Related Bonds of such Obligations, is not disregarded pursuant to clause (L) of the definition of Assumed Debt Service). See APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement attached hereto for additional information. The District may at any time incur Reimbursement Obligations with respect to Senior Obligations. Subordinate Obligations. The District may at any time incur Subordinate Obligations upon satisfaction of the conditions provided in the Master Agreement. See APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement herein for a description of such conditions. 12

19 Insurance The District will procure and maintain or cause to be procured and maintained casualty insurance on the Wastewater System with responsible insurers, or provide self-insurance (which may be provided in the form of risk-sharing pools), in such amounts and against such risks (including accident to or destruction of the Wastewater System) as are usually covered in connection with facilities similar to the Wastewater System. The District will procure and maintain such other insurance which it will deem advisable or necessary to protect its interests and the interests of the Corporation. See THE DISTRICT Risk Management and APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS Master Agreement herein. [Remainder of page intentionally left blank.] 13

20 Allocation of Installment Payment Set forth in Table 1 below is the estimated Installment Payment with respect to the Notes. Also set forth are the payments due on Other Senior Obligations, excluding the Prior Notes. The District ultimately expects the Notes to be paid with obligations that will amortize over a term of approximately 19 years, but there is no guarantee that such refinancing will occur. Table 1 Estimated Installment Payment and Outstanding Existing Senior Obligations of the District (As of November 1, 2016) Fiscal Year Ending June 30 Installment Payment Relating to Notes Other Senior Obligation Payments (1) Principal Interest Principal Interest Total $1,367,333 $ 11,625,000 $ 24,235,234 $ 37,227, ,197,500 32,415,000 47,452,869 82,065, $109,875,000 1,098,750 31,940,000 46,358, ,272, ,025,000 44,764,719 77,789, ,675,000 43,116,419 77,791, ,675,000 41,424,669 70,099, ,085,000 40,008,079 70,093, ,430,000 38,666,329 70,096, ,960,000 37,129,459 70,089, ,305,000 35,793,541 70,098, ,330,000 34,114,691 70,444, ,200,000 32,396,166 74,596, ,205,000 30,388,341 74,593, ,310,000 28,284,666 74,594, ,510,000 26,084,941 74,594, ,100,000 24,161,819 78,261, ,845,000 21,516,586 90,361, ,660,000 18,249,806 62,909, ,830,000 15,835,282 62,665, ,105,000 13,304,810 62,409, ,485,000 10,652,664 62,137, ,995,000 7,972,605 40,967, ,455,000 6,212,648 40,667, ,575,000 4,375,150 28,950, ,805,000 2,912,640 23,717, ,430,000 1,581,120 14,011, ,795, ,600 10,580, ,480, ,720 2,638,720 Total $109,875,000 $4,663,583 $971,250,000 $677,938,442 $1,763,727,025 (1) Excludes debt service on the Prior Notes. 14

21 THE DISTRICT Background The District is managed by the Board of Directors, whose members are appointed by 25 member cities and agencies which are serviced by the District. The District is a public agency responsible for construction and maintenance of a major portion of the wastewater collection, treatment and disposal facilities within its boundaries and is the sixth largest wastewater discharger in the United States. The District provides service to an area with a population of approximately 2.6 million people in the northern and central portion of the County by treating an average of 183 mg/d of wastewater in Fiscal Year The District serves approximately 81% of the County population in approximately 479 square miles, or approximately 60% of the County s area. Local sanitary districts, water districts and cities are responsible for local sewers in the District s service area. The District reuses more than 50% of the total wastewater flow that it receives. The service area which comprises the District was originally formed in 1954 pursuant to the County Sanitation District Act, as amended, Section 4700 et seq. of the Health and Safety Code of the State. The District s service area originally consisted of seven independent special districts in the County which were each responsible for matters relating to their individual districts. These special districts were jointly responsible for the treatment and disposal facilities which they each used. The seven independent districts were successors to the Joint Outfall Sewer Organization, which was formed in 1923 among the Cities of Anaheim, Santa Ana, Fullerton, and Orange, and the sanitary districts of Placentia, Buena Park, La Habra, and Garden Grove. The Joint Outfall Sewer Organization constructed a treatment plant and outfall in the early 1920s to serve its members. It was reorganized in 1947 and 1948 into seven county sanitation districts District Nos. 1, 2, 3, 5, 6, 7 and 11. These prior districts were formed based on engineers analyses of the gravity flows in the service area. District No. 13 was formed in 1985 and District No. 14 was added in These districts were co-participants in a Joint Agreement which provided for the joint construction, ownership, and operation of the prior districts joint facilities. In April 1998, at the request of the Board of Directors of the District (the Board of Directors ), the Board of Supervisors of the County of Orange (the County Board ) passed Resolution No approving the consolidation of the then existing nine special districts into a new, single sanitation district, to be known as the Orange County Sanitation District. This action was designed to simplify governance structures, reduce the size of the Board of Directors, ease administrative processes, streamline decisionmaking and consolidate accounting and auditing processes. The consolidation was effective on July 1, Pursuant to Resolution No and Government Code Section 57500, the prior districts transferred and assigned all of their powers, rights, duties, obligations, functions and properties to the District, and the District assumed all obligations of the prior districts which were several and not joint including, without limitation, their obligations to repay the then outstanding certificates of participation. The boundaries of the nine predecessor special districts were initially used by the District to delineate separate revenue areas (the Revenue Areas ) for budgeting and accounting purposes and in order to facilitate the imposition of fees and charges imposed by the District. See DISTRICT REVENUES Sewer Service Charges herein. 15

22 Organization and Administration The District is independent of and overlaps other political jurisdictions. There are many governmental entities, including the County, that operate within the District s jurisdiction. These entities are exclusively responsible for the administration of their own fiscal affairs, and the District is not entitled to operating surpluses of, or responsible for operating deficits of, any of the other entities. The 25-member Board of Directors is composed of representatives from 20 cities, four special districts and a member representing the County. Several board committees, made up of members of the Board of Directors, consider topics for action by the Board of Directors and make recommendations to the Board of Directors. The Chair and the Vice Chair of the Board of Directors are elected every year by a majority of the Board of Directors, and serve at the pleasure of a majority of the Board of Directors. The District has a general manager, outside general counsel, and administrative and operating staff, with offices located at Reclamation Plant No. 1 in Fountain Valley, California. The District currently employs an administrative and operating staff of approximately 600 under the direction of its General Manager, James Herberg. James Herberg, P.E. is the General Manager of the District and has served in this capacity since April During his 20 years with the District, he has held the positions of Assistant General Manager, Director of Engineering, and Director of Operations and Maintenance. Mr. Herberg has more than 27 years of experience in the water and wastewater industries, including six years at the Orange County Water District with whom the District has partnered on the Groundwater Replenishment System project. Robert P. Ghirelli, D.Env. is the Assistant General Manager of the District, and has served in that capacity since July Dr. Ghirelli previously served as Director of Technical Services for the District since his joining the District in Prior to joining the District, Dr. Ghirelli served for just over a year as managing principal of the Los Angeles office of a national environmental consulting firm, and served 20 years in supervisory positions with the State Water Resources Control Board and Regional Water Quality Control Boards, including 13 years serving as Executive Officer of the California Regional Water Quality Control Board, Los Angeles/Ventura Region. Lorenzo Tyner is the District s Director of Finance and Administrative Services. In September 2005, Mr. Tyner joined the District with more than 20 years of public finance and budgeting experience, most recently serving as the Los Angeles Unified School District Budget Director and Deputy Chief Financial Officer. Mr. Tyner previously worked in large government organizations including the City of Los Angeles and the Los Angeles County Metropolitan Transportation Authority and with private sector companies IBM Global Services and TRW Space and Defense. Ed Torres is the District s Director of Operations and Maintenance for the District. He has served the District since Prior to joining the District, Mr. Torres served in a professional capacity for the California State University System and TRW Electronics and Defense Sector. Mr. Torres has more than 25 years of public and private sector experience in protecting public health and the environment. 16

23 Robert Thompson, P.E. is the District s Director of Engineering. He has worked for the District since Mr. Thompson has served as manager in several departments with OCSD, including Information Technology, Operations and Maintenance, and Engineering. He has had a lead role in creating and maintaining engineering, programming, tagging and asset standards for the District. Celia Chandler is the District s Director of Human Resources. In October 2015, Ms. Chandler joined the District with more than 20 years of experience in all aspects of Human Resources in both public and private sector organizations, most recently serving as the Director of Academic Labor Relations for the California State University system. Ms. Chandler previously worked in large government organizations including the City of Corona, the City of Murrieta and the County of Riverside, and with private sector company Stone & Webster Engineering Services Company. James Colston, J.D. is the District s Director of Environmental Services. He has served in this position since May 2016 and he has worked for the District since 1989, serving as the Environmental Compliance & Regulatory Affairs Manager, Environmental Supervisor, Legal & Regulatory Affairs Liaison and in other prior positions. Mr. Colston has the lead role overseeing the District s Environmental Laboratory, Ocean Monitoring Program and Vessel, Pretreatment Program, and Environmental Compliance Program including Clean Water Act and Clean Air Act permits. Services The District owns and operates regional wastewater collection, treatment, and disposal facilities for the metropolitan area in the northern and central portion of the County. The District receives wastewater from the collection systems of the cities, sanitary districts and unincorporated areas of the County located within the District. See THE DISTRICT Service Areas herein. Generally, local agency systems collect wastewater from residential and industrial customers and convey the wastewater to District trunk sewer pipelines for conveyance to the District s wastewater treatment plants. The District s staff is responsible for operating and maintaining the District s infrastructure, although some work is performed by external contractors. Currently, the District has established supply contracts for all chemicals necessary to the operation and maintenance of the facilities of the District. The District has sufficient standby systems in the event of equipment failures or system outages. Service Area The map on the inside cover of this Official Statement shows the District s boundaries and selected cities located within the District. District boundaries were originally established in 1947 and 1948 based on drainage basins. As the existing cities have grown and new areas have incorporated, city limits have come to overlap District boundaries. The District currently serves an approximately 479 square-mile area including 23 of the County s 34 cities and various unincorporated areas of the County. The District serves a population of approximately 2.6 million residents. 17

24 Set forth in Table 2 below is the estimated populations of cities and unincorporated areas served by the District as of January 1, Table 2 Estimated Populations of Cities and Unincorporated Areas Served by the Orange County Sanitation District As of January 1, 2016 City Population Anaheim 358,136 Brea 43,710 Buena Park 83,347 Costa Mesa 114,603 Cypress 49,743 Fountain Valley 56,714 Fullerton 142,457 Garden Grove 177,303 Huntington Beach 195,212 Irvine 258,386 La Habra 62,064 La Palma 16,057 Los Alamitos 11,738 Newport Beach 84,270 Orange 141,420 Placentia 52,263 Santa Ana 342,930 Seal Beach 25,078 Stanton 39,751 Tustin 82,717 Villa Park 5,948 Westminster 94,073 Yorba Linda 67,637 Cities Subtotal (1) 2,505,557 Unincorporated Areas (estimated) (2) 72,822 Total 2,578,379 (1) Demographic Research Unit, State of California Department of Finance. (2) Center for Demographic Research, California State University, Fullerton. Employees As of July 19, 2016, the District had a total of 567 employees. The majority of District employees are represented by recognized employee organizations, which include the following: the Orange County Employees Association ( OCEA ), representing administrative/clerical, technical services and engineering employees since 1979, the International Union of Operating Engineers Local 501 ( Local 501 ), representing operations and maintenance employees since October 1985, and the Supervisory and Professional Management Group ( SPMT ), representing employees within the Supervisor Group and Professional Group since The total number of represented employees as of July 19, 2016 was 533, and is broken down as follows: 103 employees represented by OCEA, 186 employees represented by Local 501, and 244 employees represented by the SPMT. In 2015, the District reached final agreement with all bargaining units on the most recent set of labor contracts. All labor contracts recently expired on June 30, The District is currently engaged in negotiations with all of 18

25 its employee organizations. Historically, the District has experienced positive and collaborative working relationships with each organization and has not endured any work stoppages since the early 1980s. Retirement Plan The District participates in the Orange County Employees Retirement System ( OCERS ), a cost-sharing multiple-employer defined benefit pension plan, which is governed and administered by a nine-member Board of Retirement. OCERS was established in 1945 under the provisions of the County Employees Retirement Law of 1937, and provides members with retirement, death, disability, and cost ofliving benefits. All full-time and part-time District employees participate in OCERS. Contributions are based on an OCERS actuarial-determined rate structure and age at time of employment; contributions are deducted on a pre-tax basis. Most employees do not pay into Social Security with the exception of 1.45% of gross income, which is paid into the Medicare portion of Social Security. The amount of the retirement allowance is based upon the member s age at retirement, the member s final compensation as defined in Section of the Retirement Law of 1937, the total years of service under OCERS, and the employee s classification as a Plan B, G, H or U member. Plan U applies to all full-time and part-time employees hired on or after January 1, Plan B applies to supervisor and professional employees hired on or after October 1, 2010, Local 501 employees hired on or after July 1, 2011 and OCEA employees hired on or after August 1, Plan G applies to employees hired before September 21, Plan H applies to employees hired on or after September 21, 1979 and prior to the eligibility dates for Plan B or Plan U. Plan G and H provide 2.5% of final compensation per year of service at age 55. Plan B provides 1.667% of final compensation per year of service at age 57.5, and Plan U provides 2% at 62. Final compensation is the highest consecutive 12 months of compensation for Plan G members and the highest consecutive 36 months of compensation divided by three for Plan B, H, and U members. Benefits fully vest under the OCERS retirement plan upon reaching five years of service. Employees who retire at or after age 50 with ten or more years of service are eligible to receive an annual retirement allowance, but at a reduced benefit for those employees retiring prior to age 62 for Plan U members, 57.5 for Plan B members, or prior to age 55 for Plan G and H members. OCERS also provides death and disability benefits. As a condition of participation under the provisions of the County Employees Retirement Law of 1937, members are required to contribute a percentage of their annual compensation to OCERS. The District contributes a portion of the employee s contribution to OCERS for members of Plans G and H based on a percentage of the covered employee s base salary. Members of Plans U and B do not receive any contributions toward employee contribution to OCERS. As of the December 31, 2015 valuation, OCERS had an aggregate Unfunded Actuarial Accrued Liability ( UAAL ) of $4.8 billion, and a funded ratio of 71.72%. 19

26 Set forth in Table 3 below is a current comparison of the District s required contributions to OCERS for Fiscal Years through and projected required contributions for Fiscal Year Table 3 Orange County Sanitation District District Required Contributions to OCERS for Fiscal Years through and Projected Required Contributions for Fiscal Year Fiscal Year Rate (1) Contributions District Required % $15,767, ,363, ,920, ,201, ,222, (2) ,290,080 (1) Required contribution as a percent of covered payroll. Includes amortization of Unfunded Actuarial Accrued Liability. Combined rate for all Plans. (2) Projected. Source: Orange County Sanitation District. For Fiscal Years through , the District s required contribution was equal to the contribution that the District actually made, except for Fiscal Years and In Fiscal Year , the District contributed an additional $125 million to OCERS to pay against UAAL liability totaling $194 million as of July 1, On September 3, 2015, the District again made an additional UAAL contribution to OCERS in the amount of $50 million. As of December 31, 2015, the date of the most recent actuarial valuation completed by OCERS, the District s past UAAL was approximately $5.3 million. However, for the OCERS year ended December 31, 2015, OCERS experienced a total net deferred investment loss of $680 million. The District s share of this loss totaled $31.6 million. Therefore, the District s total UAAL as of December 31, 2015 was $36.9 million. For the Fiscal Year ended June 30, 2016, total payroll costs of District employees covered by OCERS was $59,789,927. The District s retirement program includes Additional Retiree Benefit Account ( ARBA ) benefits. ARBA benefits provide a monthly payment to retirees towards the premium costs of health insurance for the retiree and eligible dependents. The retiree is not required to use this amount for health insurance premium or to remain on the OCERS medical plan. Benefits vest upon retirement. The District pays 100% of the cost for the ARBA plan and utilizes a pay-as-you-go method for funding the plan. The District paid $565,380 in ARBA benefits during Fiscal Year As of August 1, 2011, ARBA benefits are no longer available to new OCEA Group employees of the District. For more information regarding OCERS and the District s retirement plan as of June 30, 2015, see Note 5 and 6 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for the Year Ended June 30, 2015 set forth in Appendix A. The Comprehensive Annual Financial Reports of the Orange County Employees Retirement System are available on the OCERS website at The information on such website is not incorporated herein by such reference or otherwise. The District cannot predict whether the OCERS investment portfolio will experience additional losses in the future; however, any future losses could result in material increases in the District s required contributions. 20

27 Other Post-Employment Benefits In June 2004, Governmental Accounting Standards Board ( GASB ) issued Statement No. 45, which requires state and local governmental employers to fund the actuarially determined annual required contribution ( ARC ) for its post-employment benefits other than pension benefits (known as other postemployment benefits or OPEB ) or record the entire amount of the unfunded liability of its OPEB in its financial statements. OPEB includes healthcare and life insurance expenses and related liabilities, and an annual required contribution to fund such liabilities. The District adopted Statement No. 45 for the fiscal year beginning July 1, 2007, as required of a GASB Phase l Agency. According to the District s actuary, Demsey Filliger Associates (the Actuary ), the unfunded OPEB liability as of July 1, 2015 was approximately $9.4 million. The ARC was determined to be $755,078 for Fiscal Year and $559,620 for each of Fiscal Years and , the period covered by the last actuarial valuation. Calculation of the ARC is based on the present value of benefits accruing in the current year, a 30-year amortization of the unfunded OPEB liability and an assumed rate of return on investments in the retiree fund of 3.75% per annum. The District does not believe that its OPEB liability will have a material impact on its operational results. Risk Management As of the date hereof, the District has in force basic all risk property and casualty insurance, including theft, fire, flood, terrorism and boiler and machinery losses at its plants and pump stations. The District is self-insured for portions of workers compensation, property damage and general liability. The self-insurance portion of workers compensation is $1,000,000 per person per occurrence with outside excess insurance coverage to the statutory limit. The self-insured portion for property damage covering fire and other disasters is $250,000 per occurrence with outside excess insurance coverage to $1 billion. The self-insured portion for property damage covering flood is $100,000 per occurrence with outside excess insurance coverage to $300 million. The District also maintains outside comprehensive boiler and machinery insurance, including business interruption insurance, with a $100 million limit with deductibles ranging from $25,000 to $350,000. The District is self-insured for general liability coverage up to $500,000 per occurrence, with excess general liability coverage up to $40 million. In addition, the District has limited earthquake insurance partially covering several key structures; beyond that, the District relies on a combination of self-insurance and District reserves for all property damage from the perils of seismic activity as well as the expectation that some disaster relief funds may be available from the Federal Emergency Management Agency ( FEMA ) to address any resulting damage. See DISTRICT REVENUES Reserves and Integrated Emergency Response Program. There is no assurance that, in the event of a significant seismic event, a combination of self-insurance, District reserves or FEMA assistance would be available or sufficient for the repair or replacement of the affected property. During the past five fiscal years there have been no settlements in excess of covered amounts. Claims against the District are primarily processed by outside claim administrators or the District s General Counsel. The District believes that there are no unrecorded claims as of June 30, 2016 that would materially affect the financial position of the District. For more information regarding the District s insurance coverage as of June 30, 2015, see Note 1 to the Comprehensive Annual Financial Report of the Orange County Sanitation District for the Year Ended June 30, 2015 set forth in Appendix A. Existing Facilities The Wastewater System presently consists of two wastewater treatment plants, an influent metering and diversion structure, 15 off-plant pump stations, various interplant pipelines and connections, and the ocean outfall facilities. The District s Wastewater System includes approximately 396 miles of 21

28 sewers within 11 trunk sewer systems, two treatment plants, two discharge outfalls and two emergency weir outlets. The existing treatment plants have a rated primary treatment capacity of 376 mg/d, including standby capacity. Treatment Plant No. 1 ( Plant No. 1 ) is located in the City of Fountain Valley, about four miles from the coast, adjacent to the Santa Ana River. Secondary treatment capabilities are provided by a trickling filter plant and two conventional air activated sludge plants. Up to 130 mg/d of secondary treated effluent is conveyed to a plant owned by the Orange County Water District (the OCWD ) for tertiary treatment prior to reclamation and groundwater recharge. See Groundwater Replenishment System below. Treatment Plant No. 2 ( Plant No. 2 ) is located in the City of Huntington Beach, 1,500 feet from the ocean, at the mouth of the Santa Ana River. Secondary treatment capabilities are provided by a Pure Oxygen Activated Sludge plant and a Solids Contact Trickling Filter plant. The District employs several phases in the treatment of wastewater. The first phase, preliminary treatment, removes debris such as eggshells, sand and other non-biodegradable items. See also Preferred Level of Treatment and Biosolids Management below. In the next phase, primary treatment, wastewater is pumped to large settling basins. The liquids are separated from the remaining solids which settle or float as the wastewater passes through large settling basins called clarifiers. The settled solids are sent to solids treatment facilities. All of the wastewater received by the District is sent to secondary treatment for further processing. During secondary treatment, the wastewater is treated with naturally occurring bacteria to remove most of the remaining dissolved and suspended microscopic organic solids. The treated wastewater from both plants is mixed together at Plant No. 2, where it is then pumped through the ocean outfall pipe that extends five miles offshore. Set forth in Table 4 below are the treatment plants approximate treatment capacities. Table 4 Wastewater System Treatment Capacities (mg/d) As of June 30, Actual Flows Primary Treatment Capacity Secondary Treatment Capacity Plant No Plant No Aggregate Treatment Source: Orange County Sanitation District. The District also has the capability to divert a portion of the influent flow from Plant No. 1 to Plant No. 2 through interplant connections. A portion of the flow destined for Plant No. 2 can also be diverted to Plant No. 1. Another interplant facility allows gas generated during solids treatment to be transported between Plant No. 1 and Plant No. 2 and allows digester gas (which is used as fuel for many of the facilities engines) from one plant to be used at the other to balance the supply and demand, which results in efficient gas utilization. Permits, Licenses and Other Regulations The District is subject to laws, rules and permits issued by federal, state, regional and local regulatory bodies. The Wastewater System is subject to regulations imposed by the 1972 Clean Water 22

29 Act, as amended (the Clean Water Act ), the California Environmental Quality Act of 1970, as amended ( CEQA ) and the Federal Clean Air Act. The regulatory requirements are primarily administered by the United States Environmental Protection Agency (the EPA ), the California Air Resources Board, the Santa Ana Regional Water Quality Control Board ( RWQCB ), and the South Coast Air Quality Management District ( AQMD ). Regulations of these agencies deal primarily with the quality of effluent which may be discharged from the treatment plants and air quality emissions. The Clean Water Act directs the EPA to monitor and to regulate the discharge of pollution into navigable waterways and to enforce the requirements that all wastewater treatment plants in the nation provide full secondary treatment for sewage. In 1977, Congress amended the Clean Water Act to allow waivers of secondary treatment standards for certain ocean dischargers, if they can demonstrate to the satisfaction of the EPA that significant adverse environmental impacts would not occur. The District currently has all applicable permits and licenses necessary to operate its facilities. The District has discharged treated wastewater into the Pacific Ocean under a permit issued by the EPA and the RWQCB. The discharge permit included a waiver under the Section 301(h) provisions of the Clean Water Act, allowing for less than full secondary treatment based on an ocean discharge of sufficient depth, distance and dilution. The permit was initially issued in 1985 and was the first modified Section 301(h) permit issued to a major wastewater treatment facility. The permit was re-issued on May 6, 1998 and expired on June 8, On July 17, 2002, the Board of Directors adopted Resolution No. OCSD 02-14, Establishing the Policy for Level of Treatment of Wastewater Discharged into the Ocean. This resolution established the District s policy to treat all wastewater discharges into the ocean to secondary treatment standards, thereby providing for continued public safety, marine ecosystem protection, and water reclamation opportunities. To implement this policy, District staff was directed to immediately proceed with the planning, design, and implementation of treatment methods that will allow the District to meet Clean Water Act secondary treatment standards with the expressed purposes of eliminating the need for the permit waiver received under Section 301(h). The District completed these improvements on time by December 2012 at a total capital improvement cost of $537.8 million. Following the determination by the Board of Directors in July 2002 to implement full secondary standards, staff prepared the Secondary Treatment National Pollutant Discharge Elimination System ( NPDES ) Permit Application that was required to be submitted to the regional office of the EPA and the RWQCB in December The NPDES permit was approved by the EPA and became effective on October 31, 2004, and is subject to renewal every five years. The District s current NPDES permit became effective on July 20, 2012 and will expire on July 19, Federal regulations require permittees to apply for a new application at least 180 days prior to the current permit expiration date. District staff has begun the process of preparing a permit application in advance of the 2017 permit expiration date. The District is also subject to the requirements of the Federal Clean Air Act which mandates attainment with national ambient air quality standards for criteria pollutants (ozone, particulate matter, carbon monoxide, lead, nitrogen dioxide, and sulfur dioxide). Criteria air pollutants cause adverse effects on human health and environment. AQMD is the local air pollution control agency charged with implementing the Federal Clean Air Act. In addition to criteria pollutants, AQMD also implements numerous federal and State requirements related to the toxic air pollutants which can cause cancer or other severe localized health effects. For example, the State s Air Toxic Hot Spots Act requires facilities to conduct health risk assessments and notify the neighboring communities if the health risk exceeds the regulatory thresholds. Pursuant to AQMD s requirements, the District must obtain permits before sewage treatment improvement projects can be constructed and operated. Such permits are project-specific and may contain conditions that govern design criteria, operating parameters, and emissions standards. Most of the District s treatment facilities are enclosed in order to capture and treat emissions to meet regulatory 23

30 emissions standards and to minimize odor impact to the neighboring communities. The District s treatment plants are also subject to the requirements of Title V of the Federal Clean Air Act amendments. The Title V permit is a single air quality permit for a facility that consolidates and replaces all of the air permits for individual pieces of equipment previously issued by the local air quality district. The permit contains all of the applicable local, state, and federal requirements, including periodic self-certification of compliance and mandatory self-reporting of permit deviation. All Title V permit-related reporting and documents submitted to the AQMD must be signed by the highest District official in this case, the General Manager. The Title V program also demands facilities to organize and conduct extensive training of the staff involved, including the field operation and maintenance staff. Another Title V important feature is a possibility of the public active participation and intervention in the cases of potential emission limits and monitoring violations. The District Title V permits did not receive any negative public responses or comments during the required public review period. The District received initial Title V permits for the treatment plants in January Title V permits are issued for a five-year period. Title V permits for both plants were issued on April 16, They will expire on April 16, District Planning and Capital Improvement Program In November 2007, the Board of Directors adopted a new comprehensive strategic plan to consider the District s service levels and operational needs for the next five years. The Strategic Plan has subsequently been updated annually to continue looking at a five-year horizon (each, a Five-Year Strategic Plan ). See THE DISTRICT Five-Year Strategic Planning. In December 2009, the Board of Directors adopted a Facilities Master Plan (the Master Plan ). The Master Plan updated the planning processes set forth in the 1989 Master Plan, the 1999 Strategic Plan and the 2002 Interim Strategic Plan Update. The Master Plan also incorporates and implements the levels of services defined by the Board of Directors that are included in the 2007 Five-Year Strategic Plan. The result is a plan that integrates research, facilities planning, water conservation and reclamation, sludge reuse, other wastewater programs and financial planning into a single unified approach. Key components of the Master Plan include updated flow projections and collection system hydraulic modeling. The District expects to satisfy required sewer capacity and rehabilitation improvements for the Wastewater System through its Capital Improvement Program ( CIP ). The District annually reviews and validates its CIP. The CIP was developed to satisfy anticipated regulatory requirements, increased population, anticipated rehabilitations and replacements, additional treatment requirements, conservation, energy and other resource savings considerations, odor control improvements, and air quality protection needs. Through Fiscal Year , the current CIP is scheduled to accomplish: Major rehabilitation of existing headworks, primary treatment, outfall pumping, solids handling facilities, and central generation at both treatment plants; Relocation of District headquarters complex, including the relocation of the front entrance at Plant No. 1; Upgrade of the Supervisory Control and Data Acquisition ( SCADA ) system and network at Plant No. 2, replacement of the process control systems, uninterruptible power supply ( UPS ) system, and electrical power distribution system at both treatment plants; Replacement or rehabilitation of seven of the District s outlying pumping stations, abandonment of one pump station, and nine trunk sewer improvement projects; Reduction of fence line odor to levels that minimize odor complaints; and 24

31 Safety improvements at both treatment plants. The 2016 CIP validation effort resulted in revisions to the CIP. The CIP currently consists of 81 individual capital projects through Fiscal Year , with remaining outlays of approximately $2.1 billion. Over the next five years, the District contemplates average annual capital outlays of $197 million based on the 2016 CIP validation effort, without taking into account CIP savings and deferrals. Set forth in Table 5 below is a summary of total estimated capital costs over the next ten years. Project Table 5 Capital Improvement Program Estimated Capital Costs Fiscal Years through Cost Collection System Capacity $ 162,400,000 Collection System Repair, Rehabilitation, Replacement 408,600,000 Treatment Plant Capacity 46,300,000 Additional Secondary Treatment 40,200,000 Improved Treatment 135,500,000 Treatment Plant Repair, Rehabilitation, Replacement 1,083,900,000 Support Facilities 240,000,000 Total Validated Capital Improvement Program $2,116,900,000 Source: CIP Validation, Orange County Sanitation District. Of this ten year $2.1 billion CIP program, $190.3 million of CIP outlays is budgeted in Fiscal Year Also budgeted in a separate contra line item are anticipated offsetting CIP savings and deferrals of $19.0 million, thereby reducing the net budgeted outlays to $171.3 million. There are currently 30 projects in the construction phase with proposed capital outlay spending in Fiscal Year The two most significant projects in the construction phase are the Sludge Dewatering and Odor Control Project at Plant No. 2 and the Newhope-Placentia Trunk Replacement Project with projected Fiscal Year outlays of $23.5 million and $20.9 million, respectively. Groundwater Replenishment System The District has taken a multi-jurisdictional approach to planning for capital facilities because many of the methods for reducing or managing flows involve other jurisdictions. One such project is the Groundwater Replenishment System (the GWRS ). In March 2001, the District entered into an agreement with the OCWD to design and construct Phase I of the GWRS. The capital cost of this Phase was shared equally (50% shares) by each agency. The GWRS is a joint effort by the two agencies to provide reclaimed water for replenishment of the Orange County Groundwater Basin and to augment the seawater intrusion barrier. Phase I of the GWRS became operational in January of In 2015, the GWRS produced approximately 92,300 acre-feet. The Phase II expansion broke ground in January 2012 to add approximately 31,000 acre-feet per year and was completed in June 2015, resulting in purifying 100% of the treated wastewater from the District s Fountain Valley-based Plant No. 1. Phase II expansion was funded solely by the OCWD. In April 2015, the District and the OCWD approved a $2 million joint study to explore the Phase III expansion which would increase flows to GWRS by an additional 30 MGD. The Phase III expansion would require additional infrastructure and treatment that would likely be funded by the OCWD, and no capital funding is anticipated from the District for such expansion. Preferred Level of Treatment In July 2002, the Board of Directors approved a change from the existing level of treatment, a blend of 50% advanced primary and 50% secondary treated wastewater, to full secondary treatment 25

32 standards. The District completed all of the necessary expansion projects to support full secondary treatment by December On July 20, 2012, the District received a new NPDES permit, which reflects the full secondary treatment requirements. The new NPDES permit will expire on July 19, See THE DISTRICT Permits, Licenses and Other Regulations. Biosolids Management Through the treatment of wastewater, the District recovers and treats nutrient-rich, organic matter (solids) to produce biosolids. Consistent with EPA s regulations and the regulations in place at the enduse sites, the District s biosolids are recycled through composting, fertilizing non-food farm fields (land application), and disposed in a landfill for methane gas recovery. The District s goal is to ensure our biosolids management strategies align with existing market conditions and continue a sustainable, reliable and economical biosolids management program that provides environmentally-sound practices and meets federal, State and local regulatory requirements. The District s biosolids averaged about 775 tons per day ( tpd ) in Fiscal Year , with an annual average cost per ton of $62.13 for management at offsite locations, as described in the following table. Costs have remained stable with in part due to diesel prices remaining low. The biosolids management costs totaled about $17.6 million last fiscal year, which was 101% of the $17.4 million budgeted. Costs and biosolids production in Fiscal Year are anticipated to remain stable with a budget of $17.4 million. The District s biosolids tonnage will begin trending down in Fiscal Year as new solids facilities complete construction. This will also reduce biosolids management costs. Plant No. 1 thickening and dewatering centrifuge facility is currently under construction, and by early 2018 it is anticipated to create drier solids which will reduce hauling costs. Irvine Ranch Water District is constructing solids processing facilities, and the agency will stop sending solids to the District during Plant No. 2 centrifuges will begin operating during Biosolids Management Contracts Contractor Location Product Contract (Minimum tons per day and term) Current tons per day managed (approximate) Average cost per ton (June 2016) Synagro Kern County, CA Compost 250 tpd Expires 12/27/ tpd $75.25 Synagro La Paz County, AZ Compost 0 tpd Expires 12/27/16 70 tpd $60.98 Tule Ranch Yuma County, AZ Land application Orange County Waste & Recycling Inland Empire Regional Composting Facility Orange County, CA Rancho Cucamonga, CA Local Landfill Compost 0 tpd 10 years plus one five-year renewal; first renewal 1/1/18 0 tpd 8 years plus one 10-year renewal; first renewal 6/30/18 0 tpd 1 year plus up to three renewals; first renewal 7/31/ tpd $ tpd Facility: $41.19 Hauling: $8.96 Total: $ tpd Facility: $56.00 Hauling: $14.99 Total: $70.99 The District s contractors provide back-up biosolids management capacity in California and Arizona that include compost, land application, lime stabilization before land application and landfill. Together, these options have the additional available capacity to manage more than ten times the District s daily biosolids production to ensure sustainable, consistent and reliable operations. On June 16, 2016, OCSD posted a request for qualification (RFQ) for composting (including hauling) services. OCSD expects to award two separate contracts before Synagro s current composting contract expires on December 27, The new contractors will begin hauling December 27,

33 The District has started work on a Biosolids Master Plan, which includes evaluating onsite and offsite management options in order to make recommendations for the Capital Improvement Plan and potentially longer-term management options for the future. The final Plan is anticipated to be complete in spring of In 2003, the District was certified by the National Biosolids Partnership for its biosolids program. The District s biosolids program has continued to develop under this certification over the last decade. In late 2015, the District started transitioning its biosolids management system to an internal standard, as outside certification is not required for the District s biosolids program. The District s internal standard is intended to maintain sound practices while allowing the District to streamline areas to increase efficiency and redirect staff resources. Urban Runoff Recognizing that County beaches were being affected by pollution carried by urban runoff, the Board of Directors adopted a number of resolutions agreeing to accept dry weather urban runoff into the sewer system. In June 2002, Assembly Bill 1892 amended the District s charter to formally allow the diversion and management of dry weather urban runoff flows. Resolution No , adopted March 28, 2001, declared that the District will initially waive fees and charges associated with authorized discharges of dry weather urban runoff to the sewer system until the total volume of all runoff discharges exceeds four million gallons per day ( mg/d ) calculated on a monthly average. For the first 12 years of the Urban Runoff Program, the average monthly flow averages remained less than the four mg/d threshold, thus avoiding user fee costs being assessed to the diversion permittees. In 2012, the District received a number of diversion proposals to deal with bacteria and selenium loading to the upper Newport Bay. The discharge from the additional proposed diversions combined with the existing diversion flows would eventually exceed the four mg/d fee threshold. On June 12, 2013, the Board of Directors adopted Resolution No expanding the waiver of fees or charges on the treatment of dry weather urban runoff from four mg/d to ten mg/d. According to the Board of Directors, the change was necessary not only to protect the County s coastal resources, but also to provide an economic benefit to the local economy by helping to keep the County s beaches open. The Dry Weather Urban Runoff Program is administered by the District s Resource Protection Division (formerly known as the Environmental Compliance Division), which issues a discharge permit for each of the diversion structures. The permit functions as a control mechanism that specifically prohibits storm runoff and authorizes discharge only during periods of dry weather. The permit also establishes specific discharge limits, constituent monitoring, and flow metering requirements. The District conducts quarterly sampling and analysis of the urban runoff discharges to ensure discharge limit compliance with the various regulated constituents. There are currently 20 active urban runoff diversion structures; three owned and operated by the County of Orange, 11 owned and operated by the City of Huntington Beach, two owned and operated by the City of Newport Beach, three owned and operated by the IRWD, and one owned and operated by PH Finance (present owner of the Pelican Point Resort). In 2015, the Big Canyon Diversion was added to OCSD s urban runoff program. To further remediate elevated selenium concentrations entering into the waters of the Upper Newport Bay, the City of Newport Beach is evaluating a second diversion in the lower Big Canyon wetlands area. Also in the proposal stage are three City of Santa Ana diversions: the Delhi, Santa Fe, and Lane flood control channels. The Peters Canyon Diversion went on-line in September This diversion is projected to add an additional 1.8 mg/d of flow, possibly doubling the average monthly flow tally. The District continues to work with the Orange County Public Works Department (OC Watersheds) to prioritize existing and proposed diversion projects to ensure that the District s limited capacity is effectively utilized to improve coastal water quality. 27

34 Integrated Emergency Response Program In recognition of the potential damage which could occur in the event of a major earthquake, flood, or other disaster, the District implemented an Integrated Emergency Response Program (the IERP ) in The IERP is a two-volume plan which contains policies, plans and procedures preparing for, and responding to, emergencies. The District also analyzed disaster preparedness issues and policies within the Master Plan, and within a 1994 report titled Fault Rupture Hazard Investigation Wastewater Treatment Plant No. 2 (the 1994 Report ). The disaster preparedness plan included in the Master Plan reviewed two possible major earthquake scenarios: an 8.3 Richter magnitude ( M ) earthquake on the southern San Andreas fault system and an M 7.0 earthquake on the Newport-Inglewood fault zone, which includes Plant No. 2. An M 8.3 earthquake on the southern San Andreas fault, while on the whole more destructive than the M 7.0 Newport-Inglewood fault, may result in less damage to the District s service area due to the distance of the fault from most of the service area. However, the Master Plan stated that damage from such a major earthquake on the San Andreas fault would be extensive. Also, the Master Plan indicated that an M 7.0 earthquake on the Newport-Inglewood fault within five miles of the District s sewerage facilities could cause major destruction to those facilities. The disaster preparedness plan in the Master Plan indicated that it would not be economically feasible to upgrade all of the existing sanitary sewerage facilities to survive an earthquake of this magnitude along the Newport-Inglewood fault. The IERP outlines the policies and employee actions to be taken before, during and after an earthquake, earthquake response guidelines and damage assessment procedures. The Master Plan analyzed the vulnerability of the sanitary sewerage facilities and operations of the District and planned a risk reduction program wherein the vulnerability of many of the District s sanitary sewerage facilities to an earthquake could be reduced by recommended retrofit construction measures. The Master Plan also recommended that designs of existing major structures which were constructed prior to development of current seismic design standards be reviewed and the structures strengthened, if necessary. Since the Master Plan and the 1994 Report, the District has completed retrofitting where deemed appropriate. Pursuant to the Master Plan, all recent and future projects have been, and will be, designed to the same high earthquake code standards as set for other essential services, such as hospitals and fire stations. Many of the older buildings analyzed in the Master Plan have been replaced by structures built after The Army Corps of Engineers All-River Plan has mitigated any future flooding of the Santa Ana River system and potential threats to the District s Wastewater System. Also, both Plant No. 1 and Plant No. 2 are built to federal standards. The IERP takes into account the damage potential posed by coastal flooding, tsunamis (large ocean waves generated by seismic activity) and windstorms. No assurance can be given that any such events would not have a material adverse impact on the Wastewater System. The District s High Flow Emergency Response Plan is included as a section in the IERP. This plan is based on a color code system from blue to yellow to orange to red and then purple that identifies specific actions to be taken by staff in response to expected and actual increasing flow coming into the District s treatment plants and collection sewers. The District believes that wastewater collection, treatment and disposal systems typically undertaken in anticipation of normal wet weather should be able to withstand, for example, an expected/average El Nino event without significant disruption. While no assurances can be given, the District believes that the likelihood of a system failure is low due to the operational readiness of all of its equipment and the District s high level of equipment redundancy. 28

35 The Strategic Plan and IERP makes recommendations regarding fire protection of the Wastewater System. Most of the structures at Plant No. 1 and Plant No. 2 are constructed of fire-resistant materials. The IERP describes the procedures needed to respond to a possible disaster. For more information regarding emergency response policies, the disaster preparedness plan described in the IERP can be reviewed at the District s office. Five-Year Strategic Planning The District maintains a Strategic Plan to address service levels and operational needs over a fiveyear horizon. The Strategic Plan envisions an organizational culture that adheres to the District s core values and makes efficient and effective use of all available resources. The District is committed to focusing efforts on customer service, protecting public health and the environment, fiscal responsibility, communications, partnering with others, and creating the best possible workforce. Eight strategic goals were identified through planning workshops, individual interviews with members of the Board of Directors, and employee and management focus groups. The following eight strategic goals were adopted in 2013: 1. Odor Control Completion of the Odor Control Master Plan. 2. Future Biosolids Management Options Study biosolids management options including third party contracts and onsite capital facilities. 3. Energy Efficiency Continue to research new energy efficiency and energy conversion technologies. 4. Disinfection of Ocean Discharge Develop an implementation plan that includes the technical, financial and societal factors associated with cessation of disinfection of the ocean discharge. 5. Local Sewer Transfers Complete the transfer of 174 miles of local sewers serving parts of the City of Tustin and unincorporated areas north of the City of Tustin and local sewer transfers in the City of Santa Ana. 6. Legislative Advocacy and Public Outreach Develop a unified legislative advocacy and public outreach program. 7. Future Water Recycling Determine partnerships, needs, strategies, benefits and costs associated with recycling of Plant No. 2 effluent water. 8. Workforce Planning and Workforce Development This initiative is ongoing and part of a comprehensive workforce planning and development effort to ensure that the District has the right people with the right skills and abilities, in the right place, at the right time. The five-year Strategic Plan is updated annually. The most recent update to the Strategic Plan was in December Two years into the five-year Plan, two of the strategic goals have been completed and strides have been made towards accomplishing the remaining six. The completed strategic goals are: (a) Disinfection of Ocean Discharge Develop an implementation plan that includes the technical, financial and societal factors associated with cessation of disinfection of the ocean discharge. (b) Legislative Advocacy and Public Outreach Develop a unified legislative advocacy and public outreach program. 29

36 DISTRICT REVENUES Sewer Service Charges General. The District has the power to establish fees and charges for services of the Wastewater System. Such fees and charges are established by the District s Board of Directors and are not subject to review or approval by any other agencies. In Fiscal Year , a Rate Advisory Committee (the RAC ) was established comprised of representatives from industrial, commercial and residential users. The goal of the RAC was to examine the then current rate structure and, if needed, develop recommendations for change. The RAC analyzed the District s rate structure to determine whether its then current sewer service user fees (now known as Sewer Service Charges ) were equitable among residential and industrial customers. This review resulted in a proposal to expand the number of non-residential user categories from one to 23 and to provide for gradual rate increases in seven of the nine Revenue Areas. The Sewer Service Charges for those categories were based on the average flow and strength of wastewater discharged for each property type and remain currently in use. The Board of Directors establishes the annual sanitary sewer service charges by ordinance. The sanitary sewer service charge ordinances are adopted by a two-thirds vote of the Board of Directors as required under law after conducting a noticed public hearing in compliance with Proposition 218. See LIMITATIONS ON TAXES AND REVENUES Article XIIIC and Article XIIID of the California Constitution. The District collects Sewer Service Charges from property owners through the semi-annual property tax bill distributed by the County throughout the District, except in Revenue Area No. 14. Pursuant to the IRWD Agreement, the District receives quarterly fee payments from the IRWD which directly collects fees from customers through a monthly billing procedure in Revenue Area No. 14. The District currently participates in the County s Teeter Plan under which the District receives annually 100% of the secured property tax levies to which it otherwise is entitled, regardless of whether the County has actually collected the levies. The District has covenanted in the Master Agreement to fix, prescribe and collect fees and charges to satisfy certain coverage requirements as further described under SECURITY AND SOURCES OF PAYMENT FOR THE NOTES Rate Covenant herein. Residential and Commercial Sewer Service Charges. In December 2012, the Board of Directors authorized a Proposition 218 notice on proposed rate increases for each year over the next five years. Pursuant to the adoption of Ordinance No. OCSD-41 on March 27, 2013, the District established residential Sewer Service Charges, except within Revenue Area No. 14, based on the cost of services and facilities provided to each customer of the District. The noticed public hearing held in connection with the adoption of this ordinance considered an increase in the single family residential rate, the underlying rate for all of the District s sewer service charges, of 4.8% for Fiscal Year and thereafter by an average annual increase of 2.4% for each Fiscal Year through Fiscal Year These increases were approved by the Board through the adoption of Ordinance No. OCSD-41. Following the first two years of this rate plan, however, District staff recommended and the Board of Directors approved a reduction of the rate increase for the last three years of the plan, lowering the average of these increases from 2.4% to 1.6%. Set forth in Table 6 below is a comparison of the Sewer Service Charge rate for single family residences ( SFRs ) for the fiscal years shown. 30

37 Table 6 Annual Sewer Service Charges Single Family Residence Rate Fiscal Years through Fiscal Year Sewer Service Charge Percentage Change $ % Source: Orange County Sanitation District. Set forth in in the following Table 7 are the total average annual Sewer Service Charges for SFRs within the District, together with comparable total average annual charges for wastewater service within the jurisdictions of certain other cities and districts within the State as of July 1, The District s approved SFR rate of $327 for Fiscal Year remains below the average annual sewer rate of $475 according to a Fiscal Year survey of 482 agencies encompassing all 58 counties in California conducted by the State Water Resources Control Board. 31

38 Table 7 Comparison of Total Sewer Service Charges For Single-Family Residences As of July 1, 2016 Entity Average Dry Weather Flow (mg/d) (3) Annual Sewer Service Charge (1) Treatment Level (2)(3) Collection Responsibility (3) Property Tax Income (3) City of San Diego 168 $573 2 Yes No City of Los Angeles Yes No Sacramento No Yes East Bay MUD No Yes Orange County Sanitation District No Yes Los Angeles County No Yes (1) Source: Information obtained from respective entities listed. (2) Treatment Level Categories: 1 Primary treatment. 2 Advanced primary or primary with some secondary treatment. 3 Secondary treatment. 4 Advanced secondary or secondary with some tertiary treatment. 5 Tertiary treatment. (3) Source: Wastewater User Charge Survey Report by the California State Water Resources Control Board. Industrial Sewer Service Charges. The District charges industrial Sewer Service Charges to customers discharging high-strength or high-volume wastes into the sewer systems. Customers subject to industrial Sewer Service Charges are billed directly by the District. The fee charged to each customer is based on the customer s sewage volume, the concentration of suspended solids and biochemical oxygen demand. Total industrial Sewer Service Charges in Fiscal Year were approximately $12.6 million. Industrial Sewer Service Charges are applied to both operating and capital funds. Summary. The Sewer Service Charge increases described above are necessary to meet the District s cash flow needs arising from the addition of disinfection treatment and other operating requirements. As projected through Fiscal Year , the cash flow needs of the CIP total approximately $2.4 billion. This total represents the $2.1 billion for projects identified within the CIP Validation Study, as summarized in Table 5 above, less $112 million for CIP savings and deferrals plus $371 million for replacement, refurbishment and rehabilitation of existing infrastructure that have been identified within the District s Asset Management Program as future capital outlays but have not yet been developed into specific proposed projects and included within the CIP Program. Over the next five years the District contemplates average annual net capital outlays of $186 million. Additional Revenues The District has several sources of additional revenue, including property taxes, Capital Facilities Capacity Charges, capacity rights, permit and inspection fees and interest earnings. Property Taxes. The District receives approximately 2.5% of the one percent County ad valorem property tax levy, based on the allocation procedure under State law. Property tax revenues were $67.9 million in Fiscal Year , $77.3 million in Fiscal Year , $72.8 million in Fiscal Year , $77.6 million in Fiscal Year and $82.0 million in Fiscal Year The District currently estimates that its property tax receipts will increase by approximately 5.0% each year from Fiscal Year through Fiscal Year The apportionment of the ad valorem tax is pursuant to the 32

39 Revenue Program adopted in April 1979 to comply with regulations of the Environmental Protection Agency, the State Water Resources Control Board and Board of Directors policy. Capital Facilities Capacity Charges. Capital Facilities Capacity Charges (commonly referred to as connection fees) are one-time fees with two components, paid at the time property is developed and connected to the Wastewater System. The fees are imposed by the District pursuant to Section 5471 of the California Health and Safety Code and are levied to pay a portion of the District s capital costs and for access to capacity in the Wastewater System. The District currently has Capital Facilities Capacity Charges of $3,710 per residential unit (three-bedroom); however, under the current industrial use ordinance, additional Capital Facilities Capacity Charges can be imposed on industrial users who place larger than average demand on the Wastewater System. Member cities and sanitary districts collect Capital Facilities Capacity Charges for the District when building permits are issued. Capital Facilities Capacity Charges are reviewed annually to reflect the changes in the value of the Wastewater System to which a new customer is connecting. On December 15, 1999, the Board of Directors approved District Ordinance No. OCSD (the 1999 Ordinance ) which established a comprehensive Capital Facilities Capacity Charge. The 1999 Ordinance, effective as of January 1, 2000, renamed connection fees as Capital Facilities Capacity Charges and provided a more equitable schedule of fees among industrial, commercial and residential users. Pursuant to the 1999 Ordinance, Capital Facilities Capacity Charges were revised for high demand industrial users in five incremental increases from 1999 through For a summary of historical and projected revenues derived from Capital Facilities Capacity Charges, see Table 14 and Table 15 below. Pursuant to an agreement with the IRWD, the IRWD is not required to pay Capital Facilities Capacity Charges and, in exchange, the IRWD provides funding to the District for the construction costs of certain wastewater collection, transmission, treatment and disposal facilities to be used by the IRWD and is obligated to make certain payments to the District for certain services arising from the Wastewater System (including any standby or availability charges). Sale of Capacity. The District has entered into agreements with the Santa Ana Watershed Project Authority ( SAWPA ) whereby wastewater from Upper Santa Ana River Basin dischargers can be transported through the District s Santa Ana River Interceptor to the District s wastewater treatment facilities. This program was developed in the early 1970s. The agreements establish control mechanisms regarding the quality of wastes deposited into the Wastewater System. At the present time, SAWPA has purchased and paid for 30 mg/d of maximum regulated flow capacity rights in the District s Santa Ana River Interceptor and 17 mg/d of monthly average flow capacity in the District s wastewater treatment plants. Projected revenues from SAWPA range from $3.3 million to $3.8 million over the next five years. Additional treatment plant capacity can be purchased in increments at the District s current replacement cost. Federal Subsidy Payments. In connection with the District s Revenue Obligations, Series 2010A (the 2010A Revenue Obligations ) and the District s Revenue Obligations, Series 2010C (the 2010C Revenue Obligations ), issued as Build America Bonds, the District is scheduled to receive certain federal subsidy payments of approximately $5.1 million annually through 2031 and lesser amounts thereafter until Subsidy payments with respect to the 2010A Revenue Obligations and the 2010C Revenue Obligations constitute Revenues as defined in the Master Agreement. In its financial reports, the District accounts for subsidy payments received in connection with the 2010A Revenue Obligations and the 2010C Revenue Obligations as a reduction in interest expense with respect to such obligations. For the 2010A Revenue Obligations and the 2010C Revenue Obligations to be and remain Build America Bonds, the District must comply with certain covenants and establish certain facts and expectations with respect to the 2010A Revenue Obligations and the 2010C Revenue Obligations, the use and investment of proceeds thereof and the use of property financed thereby. Thus, it is possible that the District may not receive the federal subsidy payments due to the District s noncompliance. The federal subsidy payments 33

40 are also subject to offset against amounts that may, for unrelated reasons, be owed by the District to any agency of the United States of America. On March 1, 2013, the federal government announced the implementation of certain automatic spending cuts known as the sequester (the Sequester ). As a result of the Sequester, federal subsidy payments for the 2010A Revenue Obligations were reduced by 8.7% (or $67,872; second half of the year only), 7.2% (or $112,339), 7.3% (or $114,882), and 6.8% (or $106,098) for the federal fiscal years ended September 30, 2013, 2014, 2015, and 2016, respectively; and federal subsidy payments for the 2010C Revenue Obligations were reduced by 8.7% (or $152,807; second half of the year only) by 7.4% (or $261,616), 7.3% (or $256,435), and 6.8% (or $238,881) for the federal fiscal years ended September 30, 2013, 2014, 2015, and 2016, respectively. The federal government has publicized that the federal subsidy payments for the federal fiscal year ended September 30, 2017 will be 6.9%. The District is obligated to make all payments with respect to the 2010A Revenue Obligations and the 2010C Revenue Obligations from Revenues as defined in the Master Agreement, regardless of whether it receives the full amount of federal subsidy payments. The District cannot predict whether future reductions in federal subsidy payments will occur due to the Sequester. However, the District does not believe that any reduction in federal subsidy payments will have a material adverse effect on the District s ability to pay the 2010A Revenue Obligations or the 2010C Revenue Obligations. Wastewater Treatment History The wastewater flows for Fiscal Year through Fiscal Year were 201 mg/d, 200 mg/d, 198 mg/d, 190 mg/d and 183/mg/d, respectively. The highest flow rate experienced was during El Niño storm periods. Peak flows of 500 mg/d were recorded in December 1997 and February There were no sewer failures or overflows during these events. See THE DISTRICT Integrated Emergency Response Program. Customers The historical number of customers served by the District for the Fiscal Years through and the projected number of customers served by the District for the Fiscal Years through , identified in Equivalent Dwelling Units ( EDUs ), are set forth in Table 8 and Table 9 below. As discussed below, sewer service charges are based on the expected amount of wastewater flow for a single family dwelling. This base amount is considered the equivalent dwelling unit. Set forth in Table 8 below are the EDUs that equate to total Sewer Service Charge levies, while the EDUs set forth in Table 9 equate to total sewer service charge collections. Table 8 Historical and Projected Equivalent Dwelling Units Fiscal Years through Fiscal Year Historical EDUs (1) Fiscal Year Projected EDUs , , , , , , , , , ,300 Source: Orange County Sanitation District. (1) With respect to such Fiscal Years, presentation in the Statistical Section of the District s Comprehensive Annual Financial Report set forth in Appendix A includes EDUs that equate to total Sewer Service Charge collections rather than levies. 34

41 Set forth in Table 9 below are the number of residential and commercial customers and industrial customers and the approximate percentages of Sewer Service Charge revenues derived from the combined residential and commercial use and industrial use for the last five fiscal years. Table 9 Number of Accounts and Revenues by Customer Class for the Fiscal Years through ($ in Millions) Fiscal Year Number of Equivalent Single- Family Dwellings Residential/Commercial Total Revenue Percentage of Sewer Service Charge Revenues Number of Customer Accounts Industrial Total Revenue Percentage of Sewer Service Charge Revenues ,709 $ % 516 $ 9.5 4% , , , , Source: Orange County Sanitation District. Set forth in Table 10 below are the ten largest principal sewer service customers of the District for the Fiscal Year ended June 30, Table 10 Largest Principal Sewer Service Customers of the District for the Fiscal Year Ended June 30, 2015 User Sewer Service Charges House Foods America Corp. $1,055,843 Kimberly-Clark Worldwide, Inc. 1,047,510 Stremicks Heritage Foods, LLC 811,061 MCP Foods, Inc. 738,346 Pulmuone Wildwood, Inc. 571,057 Jazz Semiconductor 521,890 Ameripec Inc. 517,583 Nor-Cal Beverage Co. Inc. (NCB) 461,589 Alta Dena Certified Dairy, LLC 457,496 Nor-Cal Beverage Co. Inc. (Main) 387,579 Total $6,569,954 Source: Orange County Sanitation District. 35

42 Assessed Valuation The assessed valuation of property in the County is established by the County Assessor, except for public utility property which is assessed by the State Board of Equalization. Due to changes in assessment required under State Constitution Article XIIIA, the County assessment roll no longer purports to be proportional to market value. See LIMITATIONS ON TAXES AND REVENUES herein. Generally, property can be reappraised upward to market value only upon a change in ownership or completion of new construction. The assessed value of property that has not incurred a change of ownership or new construction must be adjusted annually to reflect inflation at a rate not to exceed 2% per year based on the State consumer price index. In the event of declining property value caused by substantial damage, destruction, economic or other factors, the assessed value must be reduced temporarily to reflect market value. For the definition of full cash value and more information on property tax limitations and adjustments, see LIMITATIONS ON TAXES AND REVENUES herein. The County Assessor determines and enrolls a value for each parcel of taxable real property in the County every year. The value review may result in a reduction in value. Taxpayers in the County also may appeal the determination of the County Assessor with respect to the assessed value of their property. Set forth in Table 11 below is a five-year history of assessed valuations in the District for the fiscal years shown. Table 11 Assessed Valuations of Property in the District Fiscal Years through ($ in Billions) Fiscal Year Value Percent Change $ % Source: County of Orange Auditor-Controller. Tax Levies and Delinquencies Property taxes are based on assessed valuation which is determined as described under DISTRICT REVENUES Assessed Valuation herein. In accordance with the California Revenue and Taxation Code, the County tax collector collects secured tax levies for each Fiscal Year. Property taxes on the secured roll are due in two installments, on November 1 and February 1. The District currently participates in the County s Teeter Plan under which the District receives annually 100% of the secured property tax levies and Sewer Service Charges to which it otherwise is entitled, regardless of whether the County has actually collected the levies. This alternative method provides for funding each taxing entity included in the Teeter Plan with its total secured property taxes during the year the taxes are levied, including any amount uncollected at fiscal year-end. Under this plan, the District s general fund receives the full amount of secured property taxes levied each year on its behalf and, for so long as such plan remains in effect, the participating entities, such as the District, no longer experience delinquent taxes. The County s general fund is the designated recipient of future collections of penalties and interest on all delinquent taxes collected on behalf of participants in this alternative method of apportionment. 36

43 Set forth in Table 12 below is a five-year history of the District s ad valorem total property tax and Sewer Service Charge levies. Table 12 Total Property Tax and Sewer Service Charge Levies in the District for Fiscal Years through (In Thousands) Fiscal Year Total Property Tax and Sewer Service Charge Levy Source: County of Orange Auditor-Controller. Budgetary Process $340, , , , ,711 The District s operating fund budget relies on revenues from Sewer Service Charges and property taxes, both of which are collected on the property tax bill, as previously described under the captions Sewer Service Charges and Additional Revenues. The District receives tax revenues from the County in eight allocations, with the largest receipts in December and April. The District operates on a Fiscal Year beginning each July 1. The operating fund budgets include funds to cover the dry period of each tax year, i.e., the period from the beginning of the Fiscal Year until the first taxes are received. The dry-period requirement is budgeted at one-half of the annual operating fund budgeted expenditures. The District uses the accrual method of accounting in its budgets. The District has conformed to its budgets for the last five fiscal years and is conforming to its budget for the current fiscal year. The District s annual budget preparation process begins in January of each year and concludes in June upon its adoption. The General Manager reviews the final operating budgets and then distributes them to the Directors and District Committees for consideration. The Board of Directors then adopts the proposed annual budgets, with any revisions, in June of each year. Budgetary control is exercised at the individual Department level and administrative policies provide guidelines on budget transfers and the authorization necessary to implement transfers. A budget adjustment is a transfer which does not change the total appropriated amount and does not require Board of Directors action. Approval may be granted by the General Manager or the Department Head in certain circumstances. Department Heads have the discretion to reapportion funds between certain line items within a division but may not exceed total appropriated amounts for each department. They may also transfer staff across divisional lines. The General Manager and Board of Directors must approve additional capital outlay items. A budget amendment is an adjustment to the total appropriated amount which was not included in the original budget. These supplemental appropriations require formal action by the Board of Directors. Prior year reserves or fund balances may be appropriated to fund items not previously included in the adopted budget. Reserves or fund balances exceeding minimum amounts required by fiscal policies may be appropriated if it is determined to be in the best interest of the District. Directors may also appropriate reserves in case of emergencies or unusual circumstances. 37

44 Reserves The District has an established reserve policy with eight separate categories for its reserve funds. Collectively, these individual reserve requirements total over $475 million for each year of the current ten-year cash flow forecast. Set forth in Table 13 below are the actual reserves at June 30, 2013, June 30, 2014 and June 30, 2015, and unaudited reserves at June 30, 2016 for each fund. Table 13 Cash and Investment Reserves June 30, 2013 through 2015 and Unaudited at June 30, 2016 (In Millions) 2013 (June 30) 2014 (June 30) 2015 (June 30) Unaudited 2016 (June 30) Cash Flow Requirements Reserve: Operating Expenses $ 76 $ 76 $ 76 $ 71 Certificates of Participation Payments Operating Contingencies Reserve Capital Improvement Program Reserve Catastrophe and Self Insurance Capital Replacement and Refurbishment Debt Service Required Reserves (1) Rate Stabilization Reserve Total $652 $714 $588 $569 (1) Debt Service Required Reserves constitute all amounts designated for reserves within the District s investment management program, together with certain funds held directly by bond trustees. As of June 30, 2016, of the total Debt Service Required Reserves of $112 million, $25 million was held by bond trustees to meet specific covenants in the District s bond documents. Source: Orange County Sanitation District. The District s reserves consist of the following components: The Cash Flow Requirements Reserve was established to fund operation, maintenance and certificates of participation debt service expenses for the first half of the fiscal year, prior to the receipt of the first installment of the property tax allocation and sewer service user fees which are collected as a separate line item on the property tax bill. The level of this reserve is established as the sum of an amount equal to six months operations and maintenance expense and the total of certificates of participation debt service expenses due in the subsequent fiscal year. The Operating Contingencies Reserve was established to provide for non-recurring expenditures that were not anticipated when the annual budget and Sewer Service Charges were adopted. The level of this reserve is equal to 10% of the District s annual operating budget. The Capital Improvement Program Reserve was established to fund annual increments of the Capital Improvement Program with a target level at one-half of the average annual Capital Improvement Program through the year Levels higher and lower than the target can be expected while the long-term financing and capital improvement programs are being finalized. 38

45 The Catastrophic Loss, or Self-Insurance Reserve is established for property damage including fire, flood and earthquake, general liability and workers compensation. The level of reserve in this fund is maintained at a level to fund the District s non-reimbursed costs which are estimated to be $57 million. The Capital Replacement and Refurbishment Reserve was established to provide 30% of the funding to replace or refurbish the current collection, treatment and disposal facilities. The current replacement value of these facilities is estimated to be approximately $6.2 billion. The initial reserve level for this fund was established at $50 million and is augmented by interest earnings and a portion of the annual Sewer Service Charges. Debt Service Required Reserves include trustee-held amounts in any Obligation Reserve Fund and additional amounts held by the District for the payment of debt service in accordance with the District s reserve policy. The District s current policy is to maintain reserves (including trusteeheld reserves) for debt service in the amount of 10% of the principal amount of the District s outstanding debt obligations. The Rate Stabilization Reserve accumulates all available funds which exceed the targets for all other reserves. The Rate Stabilization Reserve is a separate fund from the Rate Stabilization Account established under the Trust Agreement. There is currently no established target for this reserve and, because the reserves of all other funds have not been exceeded, the reserve level for this reserve fund has been zero for Fiscal Years through In Fiscal Year , Financial Management staff and the Board of Directors concluded that given the nature of the likely events that may cause a withdrawal from the District s reserves and the degree of overlap among reserve categories, the total amount reserved need not equal the sum of each separate reserve category. As a result, the District adjusted the application of its reserve policy, leading to a reduction of $40 million of the accumulated total, or approximately 8%. Reserve levels are calculated in accordance with the District s reserve policy. Summary of Operating Data Set forth in Table 14 below is a summary of historical audited operating results for the District for Fiscal Years through Fiscal Year and unaudited operating results for the District for the Fiscal Year The information presented in the summary should be read in conjunction with the financial statements and notes. See APPENDIX A COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR THE YEAR ENDED JUNE 30,

46 Table 14 Summary of District Historical Revenues and Expenses and Other Financial Information For Fiscal Years through and Unaudited for Fiscal Year ($ in Millions) Audited Unaudited Revenues: Residential & Commercial Sewer Service Charges (1) Regional $232.2 $258.6 $267.8 $260.5 $278.0 Local Industrial Sewer Service Charges IRWD Assessments SAWPA Assessments Ad Valorem Taxes Interest Earnings 15.7 (3.6) Other Revenues Total Revenues $352.6 $383.7 $395.5 $397.1 $423.7 Operations and Maintenance Expenses (2) (3) Net Revenues $180.3 $233.9 $249.1 $247.9 $270.2 Debt Service $ 65.4 $ 77.6 $ 92.8 $ 81.5 $ 75.7 UAAL Payment (4) $125.0 $50.0 Coverage Ratios 2.76x 3.01x 2.68x 3.04x 3.57x CIP Outlay $101.7 $ 97.6 $ 87.5 $182.6 $151.0 Ending Reserves $608.0 $651.8 $713.7 $588.0 $568.8 (1) Net of rebates, if any, to commercial users. (2) Excludes depreciation and amortization expenses. (3) Includes a one-time write-down of $34.2 million for costs of feasibility studies to properly conform to generally accepted accounting principles. These costs were previously capitalized and were being amortized over a fiveyear period. (4) As of July 1, 2014, the District had an unfunded actuarial accrued pension liability in its defined pension benefit plan administered by the Orange County Employees Retirement System of $194 million. In Fiscal Year and Fiscal Year , the District paid down $125 million and $50 million of this liability, respectively. Source: Orange County Sanitation District. 40

47 Forecasted Operating Data Set forth in Table 15 below are forecasted operating results for the District for Fiscal Years through These projections assume the number of projects and scheduled build out set forth in the 2016 CIP Validation Study, and reflects the Board-approved annual rate increases of 1.55% and 1.22% for Fiscal Year , and Fiscal Year , respectively. Principal outlay components of these projections are derived from the 2016 CIP Validation Study, which identified 81 individual capital projects with a 10-year projected outlay of $2.1 billion. Much of the construction is scheduled during the next five years, with average annual capital outlays of $197.0 million. The District s net CIP cash flow budget for Fiscal Year is $171.3 million, which factors in savings and deferrals. This CIP budget finances joint works treatment and disposal system improvement projects, and collection system improvement projects. The preparation of such projections was based upon certain assumptions and certain forecasts with respect to conditions that may occur in the future. While the District believes that these assumptions and forecasts are reasonable for the purposes of the projected selected operating data, it makes no representation that they will in fact occur. To the extent that actual future conditions differ from those assumed herein, the data will vary. [Remainder of page intentionally left blank.] 41

48 Table 15 Summary of District Forecasted Revenues and Expenses and Other Financial Information for Fiscal Years through ($ in Millions) (2) Revenues: Residential & Commercial Sewer Service Charges $ $ $ $ $ Industrial Sewer Service Charges IRWD Assessments SAWPA Assessments Ad Valorem Taxes Interest Earnings Other Revenues Total Revenues Build America Bonds Federal Subsidy Operations and Maintenance Expenses (146.4) (149.9) (155.8) (162.1) (168.6) Net Revenues (1) $ $ $ $ $ Debt Service $ 86.7 $ 83.1 $ 81.6 $ 81.0 $ 81.0 Build America Bonds Federal Subsidy Gross Debt Service $ 91.4 $ 87.8 $ 86.3 $ 85.7 $ 85.7 Coverage Ratios (1) 3.00x 3.18x 3.30x 3.42x 3.51x CIP Outlays $ $ $ $ $ Replacement, Refurbishment & Rehabilitation (3) $ - $ 0.3 $ 5.2 $ 10.1 $ 17.7 Debt Proceeds $ - $ - $ - $ - $ - Ending Reserves $ $ $ $ $ (1) Calculated in accordance with the Master Agreement and the Installment Purchase Agreement. (2) Assumptions: a) Annual growth in equivalent dwelling units is projected to average 0.3% over the next five years. b) The Residential, Commercial, and Industrial Sewer Service Charge forecasts are based on the total projected equivalent dwelling units, Board approved rate increases for Fiscal Years and averaging 1.4% per year, and projected rate increases of approximately 2.0 percent per year over the next three years. c) Revenue Area No. 14 Fees are derived based on the projected contribution of sewage flows to the District from the Irvine Ranch Water District. d) Ad Valorem Taxes are projected with annual increases of 5%. e) Interest earnings are projected to average 2.0% of annual cash balances. f) Operating and Maintenance Expenses are forecasted with a base increase of 4.0% per year beginning with Fiscal Years with adjustments for known periodic outlays that do not occur annually. g) Annual CIP Outlays are based on the cash flow projections developed from the CIP Validation Study, with adjustments for CIP savings and deferrals. (3) Replacement, Refurbishment & Rehabilitation are known future capital outlays that have been identified within the District s Asset Management Program but have not yet been developed into specific proposed projects and included within the CIP Program. Source: Orange County Sanitation District. 42

49 Management s Discussion and Analysis of Operating Data The District s Fiscal Year total operating, capital improvement, debt service, and other financing requirements budget is $475.2 million, a 1.2% increase over the prior fiscal year budget of $469.7 million. Included in this overall increase for Fiscal Year is a $65 million planned reduction in long-term liabilities. Of this amount, approximately $35 million in reserves for the rehabilitation and replacement of 174 linear miles of local sewer lines located in the City of Tustin is being transferred to the East Orange County Water District along with the responsibility of maintaining, repairing, and replacing these assets as the District is divesting itself of providing local sewer services and focusing on its core mission of providing regional trunk line sewer services. The remaining $25 million in long-term liability reductions is being applied to the District s UAAL. Excluding these planned liability reductions, the total approved cash flow budget for Fiscal Year totals $410 million, versus the Fiscal Year total of $420 million, or a 2% decrease over the prior year. This overall decrease consists of a decrease in capital outlay of $3.7 million or 2.1%, a decrease in debt service requirements of $5.1 million or 5.6%, and an increase in operating expenses of $0.5 million or 0.3%. The Fiscal Year approved budget to operate, maintain and manage the District s sewage collection, treatment and disposal system is $152.4 million, an increase of 0.3%. Personnel costs have decreased by $5.5 million, or 5.8%, due primarily to the projected savings of $5.89 million, or 34.5% in employee retirement premiums due to the pay down of the District s UAAL of $125 million in Fiscal Year and another $50 million in Fiscal Year As a result of these pay downs, the District s employer premium retirement contribution rate decreased 36.9% in Fiscal Year These retirement savings were partially offset by increased salaries of $0.5 million attributable to provisions of the existing bargaining unit agreements. As of June 30, 2016, there were 52 vacant positions, or 8.3% of the total budgeted staffing level of full-time equivalent positions. Repairs and maintenance costs were approved to increase of $1.9 million or 15.4%. This increase is mostly attributable to increases in basic repairs and maintenance costs, including the scheduling of one digester cleaning and one central generation engine overhaul totaling approximately $1.3 million each. 20%. Electrical power increased $1.0 million, or 15.9% due to anticipated unit cost rate increases of Contractual Services and professional services were budgeted to increase of $0.9 million, or 3.7%; and $0.7 million, or 19.7% respectively to support the new Civil Assets Maintenance Program for asset assessment, industrial cleanings and coatings, as well as specialized heating, ventilation and air conditioning ( HVAC ) support services. In preparation of the Fiscal Year biennium budget, District staff developed a Capital Improvement Program to deliver the levels of service included in the District s five-year rolling Strategic Plan. These levels of service and associated capital projects are included in the Strategic Plan, last updated in December In addition, District staff validated the active CIP projects currently being executed to ensure that the scope of work on the active projects remains appropriate, and that the cost estimates have been accurately updated. The Fiscal Year CIP cash flow budget was approved at $190.3 million. After factoring in CIP savings and deferrals, this CIP budget was reduced by $19.0 million to $171.3 million. The 2016 validated CIP includes 81 individual capital projects with 10-year outlays totaling approximately $2.1 billion. The completion of the CIP Validation Study in 2013 reaffirmed the need for rate increases in future years. Based on the results of the CIP Validation Study and the Strategic Plan, the Board of Directors adopted Ordinance No. OCSD-41, increasing the sanitary sewer service charges by approximately 4.8% in Fiscal Year , and by an average of 2.4% over the following four years. These rate increases were approved by a vote of two-thirds of the members of the Board of Directors and are not subject to reaffirmation in any of the future fiscal years covered by this five-year period. 43

50 Following the first two years of this rate plan, however, District staff recommended and the Board of Directors approved a reduction of the rate increase for the last three years of the plan, lowering the average of these increases from 2.4% to 1.6%. This action resulted in the single family residence user rate, the basis for all sewer user fee rates, increasing from $322 in Fiscal Year to $327 in Fiscal Year See DISTRICT REVENUES Sewer Service Charges. Investment of District Funds State statutes authorize the District to invest in obligations of the United States Government, state and local governmental agencies, negotiable certificates of deposits, banker s acceptances, commercial paper, reverse repurchase agreements and a variety of other investment instruments which are allowable under California Government Code Section et seq. All District funds, except for Obligation Reserve Funds controlled by a bank trustee pursuant to the provisions of Existing Senior Obligations, are managed by an external money manager, Chandler Asset Management. BNY Mellon Trust serves as the District s independent custodian bank for its investment program. Callan Associates serves as the District s independent advisor. As of June 30, 2016, the District s externally managed fund consisted of a short-term investment portfolio of $139.4 million with an average maturity of 48 days, and a long-term investment portfolio of $332.7 million with average maturities of 2.9 years. Investments consist of United States government securities, corporate bonds and commercial paper. The District s portfolio contains no structured investment vehicles ( SIVs ) or reverse repurchase agreements. Deposits in banks are maintained in financial institutions which provide deposit protection on the bank balance from the Federal Deposit Insurance Corporation. The California Government Code requires State banks and savings and loans to secure local government deposits by pledging government securities equal to 110% of the deposits or by pledging first trust deed mortgage notes equal to 150% of the deposits. The District s Investment Policy requires that the District invest public funds in a manner which ensures the safety and preservation of capital while meeting reasonable anticipated operating expenditure needs, achieving a reasonable rate of return and conforming to all state and local statutes governing the investment of public funds. The primary objectives, in order, of the District s investment activities are safety, liquidity and return on investment. Existing Indebtedness FINANCIAL OBLIGATIONS Currently, the District has Senior Obligations Outstanding payable on a parity with the Notes. The table below describes the District s outstanding parity certificates of participation as of October 1, The payment obligations in connection with each series of these certificates of participation constitute Senior Obligations, subject to the provisions of the Master Agreement and shall be afforded all of the benefits, interests and security afforded Senior Obligations pursuant to the Master Agreement. The District has no general obligation bonds or subordinate bonds outstanding. 44

51 Table 16 Outstanding Senior Obligations As of November 1, 2016 Original Principal Amount Issue Date Outstanding Balance Final Maturity 2007A Certificates $ 95,180,000 05/22/07 $ 91,885,000 02/01/ B Certificates 300,000,000 12/20/07 7,110,000 02/01/ A Certificates 200,000,000 05/07/09 13,405,000 02/01/ A Certificates 80,000,000 05/18/10 80,000,000 02/01/ C Revenue Obligations 157,000,000 11/29/10 157,000,000 02/01/ A Revenue Obligations 147,595,000 10/03/11 96,330,000 02/01/ A Revenue Obligations 100,645,000 03/22/12 100,645,000 02/01/ B Revenue Obligations 66,395,000 08/16/12 66,395,000 02/01/ A Revenue Obligations 85,090,000 08/07/14 85,090,000 02/01/ A Revenue Obligations 127,510,000 02/12/15 127,510,000 02/01/ A Revenue Obligations 145,880,000 03/30/16 145,880,000 02/01/ B Notes 109,875,000 11/01/16 109,875,000 12/15/18 Total Senior Obligations $1,615,170,000 $1,081,125,000 (1) Excluding the Prior Notes. See PLAN OF FINANCE. In connection with the execution and delivery of the above-referenced outstanding certificates of participation, the District entered into certain installment purchase agreements, or equivalent documents, providing for the payment of installment payments or similar payments. Anticipated Financings From time to time the District may incur other obligations to finance portions of the CIP. Over the next five years, however, the District does not expect to issue any additional debt, other than refunding debt. The District expects to refund outstanding obligations from time to time. See SECURITY AND SOURCES OF PAYMENT FOR THE NOTES Sale Proceeds of Future Obligations. Direct and Overlapping Bonded Debt The aggregate direct and overlapping bonded debt of the District as of June 30, 2015 is set forth on page 64 of Appendix A. THE CORPORATION The Corporation was organized on June 19, 2000 as a nonprofit public benefit corporation pursuant to the Nonprofit Public Corporation law of the State. The Corporation s purpose is to render assistance to the District in its acquisition of equipment, real property and improvements on behalf of the District. Under its articles of incorporation, the Corporation has all powers conferred upon nonprofit public benefit corporations by the laws of the State, provided that it will not engage in any activity other than that which is necessary or convenient for, or incidental to the purposes for which it was formed. The Corporation is a separate legal entity from the District. It is governed by a twenty-five member Board of Directors. The Corporation has no employees. All staff work is performed by employees of the District. The members of the Corporation s Board of Directors are the Board of Directors of the District. 45

52 The District s Director of Finance and Administrative Services and other District employees are available to provide staff support to the Corporation. The Corporation has not entered into any material financing arrangements other than those referred to in this Official Statement. Further information concerning the Corporation may be obtained from the Orange County Sanitation District office at Ellis Avenue, Fountain Valley, California, Article XIIIA of the California Constitution LIMITATIONS ON TAXES AND REVENUES On June 6, 1978, California voters approved Proposition 13 ( Proposition 13 ), which added Article XIIIA to the State Constitution ( Article XIIIA ). Article XIIIA, as amended, limits the amount of any ad valorem tax on real property to one percent of the full cash value thereof, except that additional ad valorem taxes may be levied to pay debt service on (i) indebtedness approved by the voters prior to July 1, 1978, (ii) (as a result of an amendment to Article XIIIA approved by State voters on June 3, 1986) on bonded indebtedness for the acquisition or improvement of real property which has been approved on or after July 1, 1978 by two-third of the voters on such indebtedness, and (iii) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district, but only if certain accountability measures are included in the proposition. Article XIIIA defines full cash value to mean the county assessor s valuation of real property as shown on the tax bill under full cash value, or thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year or to reflect a reduction in the consumer price index or comparable data for the area under the taxing jurisdiction, or reduced in the event of declining property values caused by substantial damage, destruction, or other factors. Legislation enacted by the State Legislature to implement Article XIIIA provides that notwithstanding any other law, local agencies may not levy any ad valorem property tax except to pay debt service on indebtedness approved by the voters as described above. Legislation Implementing Article XIIIA Legislation has been enacted and amended a number of times since 1978 to implement Article XIIIA. Under current law, local agencies are no longer permitted to levy directly any property tax (except to pay voter-approved indebtedness). The one percent property tax is automatically levied by the County and distributed according to a formula among taxing agencies. The formula apportions the tax roughly in proportion to the relative shares of taxes levied prior to Increases of assessed valuation resulting from reappraisals of property due to new construction, change in ownership or from the 2% annual adjustment are allocated among the various jurisdictions in the taxing area based upon their respective situs. Any such allocation made to a local agency continues as part of its allocation in future years. Beginning in the fiscal year, assessors in the State no longer record property values on tax rolls at the assessed value of 25% of market value which was expressed as $4 per $100 assessed value. All taxable property is now shown at full market value on the tax rolls. Consequently, the tax rate is expressed as $1 per $100 of taxable value. All taxable property value included in this Official Statement is shown at 100% of market value (unless noted differently) and all tax rates reflect the $1 per $100 of taxable value. 46

53 Article XIIIB of the California Constitution An initiative to amend the State Constitution entitled Limitation of Government Appropriations was approved on September 6, 1979, thereby adding Article XIIIB to the State Constitution ( Article XIIIB ). Under Article XIIIB, the State and each local governmental entity has an annual appropriations limit and is not permitted to spend certain moneys that are called appropriations subject to limitation (consisting of tax revenues, state subventions and certain other funds) in an amount higher than the appropriations limit. Article XIIIB does not affect the appropriations of moneys that are excluded from the definition of appropriations subject to limitation, including debt service on indebtedness existing or authorized as of January 1, 1979, or bonded indebtedness subsequently approved by the voters. In general terms, the appropriations limit is to be based on certain expenditures, and is to be adjusted annually to reflect changes in consumer prices, populations, and services provided by these entities. Among other provisions of Article XIIIB, if these entities revenues in any year exceed the amounts permitted to be spent, the excess would have to be returned by revising tax rates or fee schedules over the subsequent two years. Appropriations subject to limitation are authorizations to spend proceeds of taxes, which consist of tax revenues, state subventions and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed the cost reasonably borne by such entity in providing the regulation, product or service, but proceeds of taxes excludes tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on appropriations of funds which are not proceeds of taxes, such as reasonable user charges or fees, and certain other nontax funds. Not included in the Article XIIIB limit are appropriations for the debt service costs of bonds existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government and appropriations for qualified capital outlay projects. The appropriations limit may also be exceeded in certain cases of emergency. The appropriations limit for the District in each year is based on the District s limit for the prior year, adjusted annually for changes in the cost of living and changes in population, and adjusted, where applicable, for transfer of financial responsibility of providing services to or from another unit of government. The change in the cost of living is, at the District s option, either (1) the percentage change in State per capita personal income, or (2) the percentage change in the local assessment roll on nonresidential property. Either test is likely to be greater than the change in the cost of living index, which was used prior to Proposition 111. Change in population is to be measured either within the jurisdiction of the District or the County as a whole. As amended by Proposition 111, the appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate proceeds of taxes received by a District over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by reductions in tax rates or fee schedules over the subsequent two years. As originally enacted in 1979, the District s appropriations limit was based on authorizations to expend proceeds of taxes and was adjusted annually to reflect changes in cost of living and population (using different definitions, which were modified by Proposition 111). Starting with Fiscal Year , the District s appropriations limit was recalculated by taking the actual Fiscal Year limit, and applying the annual adjustments as if Proposition 111 had been in effect. The District does not anticipate that any such appropriations limitations will impair its ability to make Installment Payments as required by the Installment Purchase Agreement. Proposition 1A and Proposition 22 Proposition 1A ( Proposition 1A ), proposed by the Legislature in connection with the Budget Act and approved by the voters in November 2004, restricts State authority to reduce major local 47

54 tax revenues such as the tax shifts permitted to take place in Fiscal Years and Proposition 1A provides that the State may not reduce any local sales tax rate, limit existing local government authority to levy a sales tax rate or change the allocation of local sales tax revenues, subject to certain exceptions. Proposition 1A generally prohibits the State from shifting to schools or community colleges any share of property tax revenues allocated to local governments for any fiscal year, as set forth under the laws in effect as of November 3, Any change in the allocation of property tax revenues among local governments within a county must be approved by two-thirds of both houses of the Legislature. Proposition 1A provides, however, that beginning in Fiscal Year , the State may shift to schools and community colleges up to 8% of local government property tax revenues, which amount must be repaid, with interest, within three years, if the Governor proclaims that the shift is needed due to a severe state financial hardship, the shift is approved by two-thirds of both houses and certain other conditions are met. Such a shift may not occur more than twice in any ten-year period. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A was generally superseded by the passage of a new initiative constitutional amendment at the November 2010 election, known as Proposition 22 ( Proposition 22 ). The effect of Proposition 22 is to prohibit the State, even during a period of severe fiscal hardship, from delaying the distribution of tax revenues for transportation, redevelopment, or local government projects and services. It prevents the State from redirecting redevelopment agency property tax increment to any other local government or from temporarily shifting property taxes from cities, counties and special districts to schools. This is intended to, among other things, stabilize local government revenue sources by restricting the State s control over local property taxes. Prior to the passage of Proposition 22, the State invoked Proposition 1A to divert $1.935 billion in local property tax revenues in fiscal year from cities, counties, and special districts to the State to offset State general fund spending for education and other programs. Approximately $5 million of the District s property tax revenues were diverted to the State as a result of this Proposition 1A suspension. The District participated in a Proposition 1A Securitization Program (the Program ) sponsored by the California Statewide Communities Development Authority. The Program allowed the District to exchange its anticipated State property tax receivable for an equal amount of cash. In addition, the State s adopted budget included a $1.7 billion diversion in local property tax revenues from local redevelopment agencies. Many California Redevelopment Association members are actively engaged in litigation to block such diversion and recoup certain payments already made under certain legislation passed in July 2009 that is beyond the reach of Proposition 22, known as ABX4 26. Proposition 1A also provides that if the State reduces the vehicle license fee ( VLF ) rate currently in effect, 0.65% of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition 1A requires the State to suspend State mandates affecting cities, counties and special districts, excepting mandates relating to employee rights, schools or community colleges, in any year that the State does not fully reimburse local governments for their costs to comply with such mandates. Article XIIIC and Article XIIID of the California Constitution Proposition 218, a State ballot initiative known as the Right to Vote on Taxes Act, was approved by the voters on November 5, The initiative added Articles XIIIC and XIIID to the California Constitution, creating additional requirements for the imposition by most local governments of general taxes, special taxes, assessments, fees, and charges. Proposition 218 became effective, pursuant to its terms, as of November 6, 1996, although compliance with some of its provisions was deferred until July 1, 1997, and certain of its provisions purport to apply to any tax imposed for general 48

55 governmental purposes (i.e., general taxes ) imposed, extended or increased on or after January 1, 1995 and prior to November 6, Article XIIID imposes substantive and procedural requirements on the imposition, extension or increase of any fee or charge subject to its provisions. A fee or charge subject to Article XIIID includes any levy, other than an ad valorem tax, special tax or assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership. Article XIIID prohibits, among other things, the imposition of any proposed fee or charge, and, possibly, the increase of any existing fee or charge, in the event written protests against the proposed fee or charge are presented at a required public hearing on the fee or charge by a majority of owners of the parcels upon which the fee or charge is to be imposed. Except for fees and charges for water, sewer and refuse collection services, the approval of a majority of the property owners subject to the fee or charge, or at the option of the agency, by a two-thirds vote of the electorate residing in the affected area, is required within 45 days following the public hearing on any such proposed new or increased fee or charge. The California Supreme Court decisions in Richmond v. Shasta Community Services District, 32 Cal.4th 409 (2004) ( Richmond ), and Bighorn- Desert View Water Agency v. Verjil, 39 Cal.4th 205 (2006) ( Bighorn ) have clarified some of the uncertainty surrounding the applicability of Section 6 of Article XIIID to service fees and charges. In Richmond, the Shasta Community Services District charged a water connection fee, which included a capacity charge for capital improvements to the water system and a fire suppression charge. The Court held that both the capacity charge and the fire suppression charge were not subject to Article XIIID because a water connection fee is not a property-related fee or charge because it results from the property owner s voluntary decision to apply for the connection. In both Richmond and Bighorn, however, the Court stated that a fee for ongoing water service through an existing connection is imposed as an incident of property ownership within the meaning of Article XIIID, rejecting, in Bighorn, the water agency s argument that consumption-based water charges are not imposed as an incident of property ownership but as a result of the voluntary decisions of customers as to how much water to use. Article XIIID also provides that standby charges are considered assessments and must follow the procedures required for assessments under Article XIIID and imposes several procedural requirements for the imposition of any assessment, which may include (1) various notice requirements, including the requirement to mail a ballot to owners of the affected property; (2) the substitution of a property owner ballot procedure for the traditional written protest procedure, and providing that majority protest exists when ballots (weighted according to proportional financial obligation) submitted in opposition exceed ballots in favor of the assessments; and (3) the requirement that the levying entity separate the general benefits from the special benefits conferred on a parcel of land. Article XIIID also precludes standby charges for services that are not immediately available to the parcel being charged. Article XIIID provides that all existing, new or increased assessments are to comply with its provisions beginning July 1, Existing assessments imposed on or before November 5, 1996, and imposed exclusively to finance the capital costs or maintenance and operations expenses for [among other things] water are exempted from some of the provisions of Article XIIID applicable to assessments. Article XIIIC extends the people s initiative power to reduce or repeal existing local taxes, assessments, fees and charges. This extension of the initiative power is not limited by the terms of Article XIIIC to fees, taxes, assessment fees and charges imposed after November 6, 1996 and absent other authority could result in retroactive reduction in any existing taxes, assessments, fees or charges. In Bighorn, the Court concluded that under Article XIIIC local voters by initiative may reduce a public agency s water rates and delivery charges. The Court noted, however, that it was not holding that the authorized initiative power is free of all limitations, stating that it was not determining whether the electorate s initiative power is subject to the public agency s statutory obligation to set water service charges at a level that will pay the operating expenses of the agency,... provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay 49

56 the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due. The District implemented a five-year plan beginning in Fiscal Year which included a rate increase of $7.50 per year, or 9.4%, for all ratepayers to $87.50 per year. In May 2003, the Board of Directors approved a 15% rate increase per year, for each year, over the then following five years, upon 2/3 vote of the Board of Directors after conducting a noticed public hearing in compliance with Article XIIID. The Board of Directors considered this increase necessary to provide needed capital improvements, to cover additional treatment and disinfection costs, and to minimize rate increases over an extended period of time. On July 2, 2003, the Board of Directors adopted Ordinance No. OCSD-20 increasing sanitary sewer service charges for all single family and multi-family residential units as well as most commercial and industrial properties. The Ordinance was adopted by a 2/3 vote of the Board of Directors as required under law after conducting a noticed public hearing in compliance with all laws. The Ordinance increases the amount of the annual charges by approximately 15% per year for each of the following five years, commencing with Fiscal Year , thereby raising the single family residence user rate from the then current $87.50 to $100.00, $115.00, $132.00, $152.00, and $ annually. The Ordinance discounted by 5% the annual increases which were the subject of the required protest hearings on the fee increase as described above. After the completion of the CIP Validation Study for Fiscal Year that increased its ten year CIP cash flow projects to $2.2 billion, or an average of $220 million per year, the Board of Directors adopted Ordinance No. OCSD-26 increasing the Fiscal Year single family residential rate 31%, from $115 to $151 for such year. In May 2006, the Board of Directors adopted Ordinance No. OCSD-30B increasing the Fiscal Year single family residential rate 9.8%, from $ to $ for such year, except those located in Revenue Area 14. These increases represented the increase permitted under the protest hearings on the fee increase which was held in In June 2007, the Board of Directors adopted Ordinance No. OCSD-32 increasing the Fiscal Year single family residential rate by 9.8%. In February 2008, after a noticed public hearing, the Board of Directors adopted Ordinance No. OCSD-35, which provides for annual increases in the single family residential rate of 10.4%, 10.0%, 10.4%, 9.4% and 10.1%, respectively, for Fiscal Years through On March 27, 2013, the Board of Directors adopted Ordinance No. OCSD-41 approving increases in its sanitary sewer service charges for all single family residences, multi-family residential units, and all non-residential properties. The Board of Directors increased the single family residential rate, which is the basis for all of the District s sewer service charges, by 4.8% for Fiscal Year and thereafter by an average of 2.4% annually for each Fiscal Year through Fiscal Year Pursuant to the Master Agreement, the District will, to the extent permitted by law, fix, prescribe and collect fees and charges for the services of the Wastewater System which will be at least sufficient to yield during each Fiscal Year (a) Net Revenues equal to 125% of Debt Service on Senior Obligations for such Fiscal Year, and (b) Net Operating Revenues equal to 100% of Debt Service on all Obligations for such Fiscal Year. The District may make adjustments from time to time in such fees and charges and may make such classification thereof as it deems necessary, but will not reduce the fees and charges then in effect unless the Revenues and Net Revenues from such reduced fees and charges will at all times be sufficient to meet the requirements of the Master Agreement. If service charges are determined to be subject to Article XIIID, and proposed increased service charges cannot be imposed as a result of a majority protest, such circumstances may adversely affect the ability of the District to generate revenues in the amounts required by the Master Agreement, and to make the Installment Payment as provided in the Installment Purchase Agreement. No assurance may be given that Articles XIIIC and XIIID will not have a material adverse impact on Net Revenues. Other Initiative Measures Articles XIIIA, XIIIB, XIIIC and XIIID were adopted pursuant to California s constitutional initiative process. From time to time other initiative measures could be adopted by California voters, placing additional limitations on the ability of the District to increase revenues. 50

57 LEGAL MATTERS The validity of the Notes and certain other legal matters are subject to the approving opinion of Norton Rose Fulbright US LLP, Los Angeles, California, Special Counsel to the District. A complete copy of the proposed form of Special Counsel opinion is attached as Appendix F hereto. Special Counsel, in its capacity as Special Counsel to the District, undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed on for the District and the Corporation by Woodruff, Spradlin & Smart, a Professional Corporation, Costa Mesa, California, and for the District by Norton Rose Fulbright US LLP, Disclosure Counsel to the District. FINANCIAL ADVISOR The District has retained Public Resources Advisory Group as an independent registered municipal advisor (the Financial Advisor ) in connection with the execution and delivery of the Notes. The Financial Advisor has not been engaged, nor have they undertaken, to audit, authenticate or otherwise verify the information set forth in the Official Statement, or any other related information available to the District, with respect to accuracy and completeness of disclosure of such information. The Financial Advisor has reviewed this Official Statement but makes no guaranty, warranty or other representation respecting accuracy and completeness of the information contained in this Official Statement. ABSENCE OF LITIGATION There is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body, pending or, to the best knowledge of the District, threatened against the District affecting the existence of the District or the titles of its directors or officers to their offices or seeking to restrain or to enjoin the sale or delivery of the Notes, the application of the proceeds thereof in accordance with the Trust Agreement, or in any way contesting or affecting the validity or enforceability of the Notes, the Trust Agreement, the Master Agreement, the Installment Purchase Agreement or any action of the District contemplated by any of said documents, or in any way contesting the completeness or accuracy of this Official Statement, or contesting the powers of the District or its authority with respect to the Notes or any action of the District contemplated by any of said documents, nor, to the knowledge of the District is there any basis therefor. There is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body pending or, to the best knowledge of the District, threatened against the District contesting or affecting the ability of the District to collect amounts from which the Installment Payment is payable, or which would have a material adverse effect on the District s ability to make the Installment Payment. FINANCIAL STATEMENTS The basic financial statements of the District included in Appendix A to this Official Statement have been audited by McGladrey LLP, independent certified public accountants. See APPENDIX A COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR THE YEAR ENDED JUNE 30, 2015 herein. The District has received the Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting for over 20 consecutive years. The audited financial statements, including the footnotes thereto, should be reviewed in their entirety. McGladrey LLP, the District s independent auditor, has not been engaged to perform, and has not performed, since the date of its report included in Appendix A, any procedures on the financial statements addressed in that report. McGladrey LLP also has not performed any procedures relating to this Official Statement. 51

58 TAX MATTERS The Internal Revenue Code of 1986 (the Code ) imposes certain requirements that must be met subsequent to the execution and delivery of the Notes for the interest component of the Installment Payment (the Interest Component ), and the allocable portion thereof distributable in respect of each Note (the Note Interest Distribution ), to be and remain excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof from the gross income of the owner thereof for federal income tax purposes. Noncompliance with such requirements could cause such amounts to be included in gross income for federal income tax purposes retroactive to the date of delivery of the Installment Purchase Agreement and the Notes. In the opinion of Norton Rose Fulbright US LLP, Los Angeles, California, Special Counsel, under existing statutes, regulations, rulings and court decisions, the Interest Component of the Installment Payment and the Note Interest Distributions in respect thereof are exempt from personal income taxes of the State of California and, assuming compliance with the covenants referred to herein, are excluded pursuant to section 103(a) of the Code from the gross income of the owners thereof for federal income tax purposes. In the further opinion of Special Counsel, under existing statutes, regulations, rulings and court decisions, the Notes are not specified private activity bonds within the meaning of section 57(a)(5) of the Code and, therefore, the Interest Component allocable to and the Note Interest Distributions in respect of a Note will not be treated as an item of tax preference for purposes of computing the alternative minimum tax imposed by section 55 of the Code. Receipt or accrual of an Interest Component or of a Note Interest Distribution owned by a corporation may affect the computation of the alternative minimum taxable income. A corporation s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code will be computed. The initial public offering price for the Notes is greater than the principal amount payable on the Notes at maturity. To the extent that a purchaser of a Note who treats the stated interest payable at maturity as qualified stated interest (as described above) acquires the Note at a price greater than the aggregate amount (other than such qualified stated interest) payable on such Note, such excess will constitute bond premium under the Code. Section 171 of the Code, and the Treasury Regulations promulgated thereunder, provide generally that bond premium on a non-callable tax-exempt obligation must be amortized over the remaining term of the obligation: the amount of premium so amortized will reduce the owner s basis in such Note for federal income tax purposes, but such amortized premium will not be deductible for federal income tax purposes. Consequently, an owner of a Note who purchased the Note with bond premium and held the Note until paid at maturity generally will not realize tax gain or loss on such Note. The rate and timing of the amortization of the bond premium and the corresponding basis reduction may result in an owner realizing a taxable gain when a Note owned by such owner is sold or disposed of for an amount equal to or in some circumstances even less than the original cost of the Note to the owner. Purchasers should consult their own tax advisors as to the computation and treatment of such amortizable bond premium, including, but not limited to, the calculation of gain or loss upon the sale, maturity or other disposition of a Note. Pursuant to the Trust Agreement and in the Tax Certificate Pertaining to Arbitrage and Other Matters under Sections 103 and of the Internal Revenue Code of 1986, to be delivered by the District and the Corporation in connection with the issuance of the Notes, the District and the Corporation will make representations relevant to the determination of, and will make certain covenants regarding or affecting, the exclusion of interest on the Notes from the gross income of the owners thereof for federal income tax purposes. In reaching its opinions described above, Special Counsel will assume the accuracy of such representations and the present and future compliance by the District and the Corporation with such covenants referred to herein. Further, except as stated above, Special Counsel will express no opinion as to any federal or state tax consequences of the receipt of interest on, or the ownership or disposition of, the Notes. 52

59 Special Counsel has not undertaken to advise in the future whether any events after the date of execution and delivery of the Installment Purchase Agreement and the Notes may affect the tax status of the Interest Component or the Note Interest Distributions. No assurance can be given that future legislation, if enacted into law, will not contain provisions that could directly or indirectly reduce the benefit of the exemption of such amounts from personal income taxation by the State of California or of the exclusion of the interest on the Notes from the gross income of the owners thereof for federal income tax purposes. Furthermore, Special Counsel will express no opinion as to any federal, state or local tax law consequences with respect to the Installment Purchase Agreement, the Notes, the Interest Component or Note Interest Distributions, if any action is taken with respect to the Installment Purchase Agreement, the Notes or the proceeds thereof, or the Trust Agreement predicated or permitted upon the advice or approval of other counsel. Special Counsel s opinion is not a guarantee of a result, but represents its legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the District and the Corporation described above. No ruling has been sought from the Internal Revenue Service (the Service ) with respect to the matters addressed in the opinion of Special Counsel, and Special Counsel s opinion is not binding on the Service. The Service has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Notes is commenced, under current procedures the Service is likely to treat the District as the taxpayer, and the owners would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the Interest Component and Note Interest Distributions accrued in respect of Notes, the District may have different or conflicting interest from the owners. Public awareness of any future audit of the Notes could adversely affect the value and liquidity of the Notes during the pendency of the audit, regardless of its ultimate outcome. Although Special Counsel is of the opinion that Interest Component and Note Interest Distributions in respect of a Note are exempt from California personal income tax and excluded from the gross income of the owners thereof for federal income tax purposes, an owner s federal, state or local tax liability may be otherwise affected by the ownership or disposition of the Notes. The nature and extent of these other tax consequences will depend upon the owner s other items of income or deduction. Without limiting the generality of the foregoing, prospective purchasers of the Notes should be aware that (i) section 265 of the Code denies a deduction for interest on indebtedness incurred or continued to purchase or carry the Notes and the Code contains additional limitations on interest deductions applicable to financial institutions that own tax-exempt obligations (such as the Notes), (ii) with respect to insurance companies subject to the tax imposed by section 831 of the Code, section 832(b)(5)(B)(i) reduces the deduction for loss reserves by 15% of the sum of certain items, including Interest Component and Note Interest Distributions in respect of the Notes, (iii) Interest Component and Note Interest Distributions accrued in respect of Notes owned 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 investment income, including Interest Component and Note Interest Distributions accrued in respect of Notes, 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, (v) section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take into account, in determining the taxability of such benefits, Interest Distributions and Note Interest Distributions accrued in respect of Notes owned by such recipients for federal income tax purposes, and (vi) under section 32(i) of the Code, receipt of investment income, including Interest Component and Note Interest Distributions accrued in respect of Notes, may disqualify the recipient thereof from obtaining the earned income credit. Special Counsel has expressed no opinion regarding any such other tax consequences. Existing law may change to reduce or eliminate the benefit to noteholders of the exclusion of interest on the Interest Component and Note Interest Distributions accrued in respect of the Notes from gross income for federal income tax purposes. Any proposed legislation or administrative action, whether or not taken, could also affect the value and marketability of the Notes. Prospective purchasers of the 53

60 Notes should consult with their own tax advisors with respect to any proposed or future changes in tax law. A copy of the form of opinion of Special Counsel to be delivered at the closing of the Notes is included in Appendix F. CONTINUING DISCLOSURE The District has covenanted for the benefit of holders and beneficial owners of the Notes (a) to provide certain financial information and operating data (the Annual Report ) relating to the District and the property in the District not later than eight months after the end of the District s Fiscal Year (which currently would be March 1), commencing with the report for the Fiscal Year, and (b) to provide notices of the occurrence of certain enumerated events. The Annual Report will be filed by the Trustee on behalf of the District, with the Municipal Securities Rulemaking Board. The notices of enumerated events will be filed by the Trustee on behalf of the District with the Municipal Securities Rulemaking Board. The specific nature of the information to be contained in the Annual Report or the notices of enumerated events is set forth in the Continuing Disclosure Agreement. See APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT. These covenants have been made in order to assist the Initial Purchaser in complying with S.E.C. Rule 15c2-12 (the Rule ). RATINGS The Notes will be assigned long-term ratings of AAA by S&P Global Ratings, a business unit of Standard & Poor s Financial Services LLC ( S&P ), and AAA by Fitch Ratings ( Fitch ). The Notes will be assigned a short-term rating by Fitch of F1+. S&P affirmed the long-term rating of AAA on the District s Existing Senior Obligations. Such ratings reflect only the views of the rating agencies, and do not constitute a recommendation to buy, sell or hold the Notes. Explanation of the significance of such ratings may be obtained only from the respective organizations at: S&P Global, 55 Water Street, New York, New York and Fitch Ratings, One State Street Plaza, New York, New York There is no assurance that any such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by the respective rating agencies, if in the judgment of any such rating agency circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Notes. PURCHASE AND REOFFERING Merrill Lynch, Pierce, Fenner & Smith Incorporated (the Initial Purchaser ) has purchased the Notes from the District at a competitive sale for a purchase price of $112,483, (representing the aggregate principal amount of the Notes, plus a premium of $2,619,420.00, less an underwriter s discount of $10,987.50). The public offering price may be changed from time to time by the Initial Purchaser. The Initial Purchaser may offer and sell Notes to certain dealers and others at prices lower than the offering price shown on the cover page hereof. 54

61 MISCELLANEOUS Included herein are brief summaries of certain documents and reports, which summaries do not purport to be complete or definitive, and reference is made to such documents and reports for full and complete statements of the contents thereof. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or Owners of any of the Notes. The execution and delivery of this Official Statement has been duly authorized by the District. ORANGE COUNTY SANITATION DISTRICT By: /s/ John Nielsen Chair of the Board of Directors 55

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63 APPENDIX A COMPREHENSIVE ANNUAL FINANCIAL REPORT OF THE ORANGE COUNTY SANITATION DISTRICT FOR FISCAL YEAR ENDED JUNE 30, 2015

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65 Orange County Sanitation District Comprehensive Annual Financial Report for the period ended June 30, 2015 Orange County, California

66 ORANGE COUNTY SANITATION DISTRICT ORANGE COUNTY, CALIFORNIA COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED JUNE 30, 2015 Prepared By: Administrative Services Department Financial Management Division Michael D. White, CPA Controller

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68 ORANGE COUNTY SANITATION DISTRICT Comprehensive Annual Financial Report Table of Contents For the Year Ended June 30, 2015 INTRODUCTORY SECTION: Letter of Transmittal... GFOA Certificate of Achievement... Board of Directors... Organization Chart... Map of Service Area... FINANCIAL SECTION: Independent Auditor s Report Management Discussion and Analysis Required Supplementary Information Basic Financial Statements: Statement of Net Position Statement of Revenues, Expenses, and Changes in Net Position Statement of Cash Flows Notes to Basic Financial Statements Required Supplementary Information: Proportionate Share of the Net Pension Liability OCERS Pension Plan Schedule of District Contributions OCERS Pension Plan Schedule of Funding Progress Additional Retiree Benefit Account Schedule of Funding Progress Other Postemployment Benefits Supplementary Information: Combining Area Schedule of Net Position Combining Area Schedule of Revenues, Expenses, and Changes in Net Position Combining Area Schedule of Cash Flows STATISTICAL SECTION: Net Position by Component Last Ten Fiscal Years Revenues and Gross Capital Contributions by Source Last Ten Fiscal Years Expenses by Type Last Ten Fiscal Years Change in Net Position Last Ten Fiscal Years Cash and Investment Reserve Balances Last Ten Fiscal Years Sewer Service Fees Last Nine Fiscal Years and Next Fiscal Year Number of Accounts and Revenues by Customer Class Last Ten Fiscal Years Principal Sewer Service Customers Current Fiscal Year and Nine Years Ago Ratio of Annual Debt Service to Total Expenses Last Ten Fiscal Years Debt Coverage Ratios Last Ten Fiscal Years Computation of Direct and Overlapping Debt Ratios of Outstanding Debt Last Ten Fiscal Years Comparison of the Volume of Wastewater Treated Last Ten Fiscal Years Authorized Full-time Equivalents by Function Last Ten Fiscal Years Biosolids Produced Last Ten Fiscal Years Capital Asset Statistics Last Ten Fiscal Years Demographic Statistics Last Ten Fiscal Years Estimated Population Served by Orange County Sanitation District Principal Orange County Employers Current Fiscal Year and Nine Years Ago Operating Indicators OTHER DATA & TRENDS: Cash and Investment Portfolio Property Tax Rates Direct and Overlapping Governments Last Ten Fiscal Years Assessed and Estimated Actual Value of Taxable Property Last Ten Fiscal Years Property Tax and User Fee Levies and Collections Last Ten Fiscal Years Property Value and Construction Last Ten Fiscal Years Insurance in Force Page i-viii ix x xi xii

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70 October 23, 2015 The Board of Directors of the Orange County Sanitation District, Orange County, California Submitted herewith is the Comprehensive Annual Financial Report of the Orange County Sanitation District, Orange County, California for the fiscal year ended June 30, This report includes the financial position and activity of individual revenue areas, as described within the Governmental Structure below, as of June 30, 2015 and was prepared by the Financial Management Division of the Sanitation District s Administrative Services Department. Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, including all disclosures, rests with the Sanitation District. To the best of our knowledge and belief, the enclosed data is accurate in all material respects and is reported in a manner designed to present fairly the financial position and results of operations of the Sanitation District. All disclosures necessary to enable the reader to gain an understanding of the agency s financial activities have been included. Included within the accompanying financial statements are all of the organizations, activities, and functions controlled by the Sanitation District s Board of Directors in accordance with the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting. For the purpose of this evaluation, control was determined by the Board s responsibility for: (1) adoption of the budget and user charges, (2) taxing authority, and (3) establishment of policies. The reporting entity and its services are described in further detail in Note 1 of the financial statements. An audit of the books, financial records and transactions of the Sanitation District is conducted annually by independent certified public accountants. The Sanitation District selected the accounting firm of McGladrey LLP to perform the audit for the year ended June 30, The auditors report on the Sanitation District s basic financial statements and supplementary information is located on page 1 within the financial section of this report. This report renders an unmodified opinion on the Sanitation District s basic financial statements for the year ended June 30, Management s discussion and analysis (MD&A) immediately follows the independent auditor s report and provides a narrative introduction, overview, and analysis of the basic financial statements. The MD&A complements this letter of transmittal and should be read in conjunction with it. GOVERNMENTAL STRUCTURE The Orange County Sanitation District encompasses the Northern section of Orange County. The Sanitation District provides wastewater treatment for an area of the County covering 479 square miles and serving a population of approximately 2.5 million, or 79 percent of the County s population. The Sanitation District was originally incorporated in 1954 as nine separate public corporations, or districts. In April of 1998, at the Sanitation District s request, the Board of Supervisors of the County of Orange passed Resolution No ordering the consolidation of these nine County Sanitation Districts into a new, single sanitation district, to be known as the Orange County Sanitation District, effective July 1, This action was recommended to the Board by the Local Agency Formation Commission in order to simplify governance structures, reduce the size of the Board, ease administrative processes, streamline decision-making and consolidate accounting and auditing processes. The boundaries of the nine previous districts had remained intact for the purpose of i

71 collecting sewer user fees at the previously established rate schedules, and were referred to as nine individual revenue areas through June 30, Effective July , all Revenue Areas, except Revenue Area 14, consolidated user fee rates and all enterprise fund accounting and budgeting activities and are now known as the Consolidated Revenue Area. The Sanitation District is managed by an administrative organization composed of directors appointed by the agencies or cities which are serviced by the Sanitation District. Each of the two remaining Revenue Areas, the Consolidated Revenue Area and Revenue Area 14, has its own budget and is responsible for the construction and maintenance of its own collection system. All Revenue Areas, except Revenue Area 14 and the portion of the Consolidated Revenue Area previously known as Revenue Area 13, receive their own share of the one-percent ad valorem property tax levy. In addition, all Revenue Areas except Revenue Area 14, collect user fees from property owners. Revenue Area 14 receives all of its revenues from service charges to the Irvine Ranch Water District. The purpose of the Sanitation District s wastewater management program is to protect the public s health, preserve the beneficial uses of the coastal waters, and maintain air quality. The objectives of operating the treatment plants are to process and dispose of the treated wastewater and the separated solids in accordance with Federal, state, and local laws including the Environmental Protection Agency. The Sanitation District sewerage system includes approximately 580 miles of sewers that convey wastewater generated within the Sanitation District s boundaries to the Sanitation District s two wastewater treatment plants, Reclamation Plant No. 1 located in the City of Fountain Valley, and Treatment Plant No. 2 located in the City of Huntington Beach. Plants No. 1 and No. 2 have secondary treatment capacities of 182 million gallons per day (mgd) and 150 mgd, respectively. Both plants are master-planned for a future primary and secondary treatment capacity of 235 mgd for a combined total of 470 mgd by the year After wastewater receives secondary treatment at Plant No. 1, it flows to the Groundwater Water Replenishment System (GWRS) at the Orange County Water District, located adjacent to the Sanitation District, where it undergoes a state-of-the-art purification process consisting of microfiltration, reverse osmosis, and ultraviolet light with hydrogen peroxide. The product water is near-distilled quality. Approximately 35 million gallons (132,500 cubic meters) per day of the GWRS water are pumped into injection wells to create a seawater intrusion barrier. Another 65 million gallons (246,000 cubic meters) are pumped daily to Orange County Water District's percolation basins in Anaheim where the GWRS water naturally filters through sand and gravel to the deep aquifers of the groundwater basin. Remaining outflows of treated wastewater from Plants 1 and 2 are combined and discharged to the ocean off the Huntington Beach coast through an outfall pipe that is 120 inches in diameter and approximately five miles long. The last mile of the outfall pipe is a diffuser that dilutes the wastewater with seawater in a ratio of 148 parts seawater to one part treated wastewater at an average depth of 185 feet. ECONOMIC CONDITIONS AND OUTLOOK In October 2015, the Center for Economic Analysis and Forecasting at the California State University Fullerton Mihaylo College of Business and Economics (CSUF) forecasts that the real U.S. gross domestic product will grow an average of 2.4 percent this year; less than originally anticipated due in part to the greater-than-expected slowdown in China causing a strengthening of the dollar and a worsening trade balance, weaker than expected sales, lower investments in the energy sector due to the slump in crude prices, and another year of weather setbacks; and then modestly increase to 2.6 percent in CSUF forecasts Orange County s unemployment rate to decline from an average rate of 5.5 percent in 2014 to 4.4 percent in 2015 and 4.3 percent in The county s economy is expected to add 40,100 payroll jobs in 2015, an increase of 2.7 percent, and 37,700 jobs in 2016, an increase of 2.5 percent. ii

72 Payroll employment rose by 36,000 during 2014 for a 2.5 percent increase, approximately the same amount as in According to CSUF, California s recovery has picked up momentum in the last eighteen months as job growth in the state is faster than for the nation as a whole. This above-average performance is largely attributable to the heated job market in the Silicon Valley, but employment growth in Southern California and Orange County has shown marked improvement over the past year. They forecast further growth in the coming years as local consumer and business sentiment surveys indicate continued optimism and improved household financial health. While the continued drought will negatively impact the economy, especially California agriculture sector, better performance in high-tech, housing,and exports is expected to keep the overall growth on a steady path during the forecast horizon. The housing market continues to mend in Southern California and construction has started to pick up. A large portion of the epic collapse in home values during the Great Recession has been recovered by the solid price increases posted during the last few years. The median price of a single-family home in Orange County has increased from $420,000 in January 2009 to $680,000 in September This is an increase of 62 percent and puts the median price at the same level it was almost ten years ago, in September It is however, still below the level reached in June 2007 when the median prices for the county peaked at $735,000. MAJOR INITIATIVES Following are the District s current major initiatives as outlined in the General Manager s work plan for FY : 1. Safety and Security Implement measures to reduce risk, protect our regional infrastructure and provide a secure and safe workplace for our employees. Implement Administrative Controls and address high priority items identified in the Safety Study by December 31, Complete a feasibility analysis about obtaining VPP certification from OSHA by December 31, Implement remaining high priority physical site security improvements as identified by recent surveys and reports regarding OCSD s facilities by June 30, Work with Department of Homeland Security to assess and implement recommended mitigations to reduce cyber security risk by June 30, Enhance security awareness training, proactive identification and protection of Personally Identifiable Information (PII) on our network and add additional layers of protection on OCSD servers and employee workstations by December 31, Succession Planning Review, modify, improve and enhance OCSD s workforce planning and workforce development strategic initiative to develop and implement tools to expand labor force capacity and staff skill levels. Employee Engagement Survey Conduct an agency wide employee engagement survey to assist in measuring the staff satisfaction levels. Use the results of the survey to develop an action plan by June 30, Classification and Compensation Study Complete all phases of the classification and compensation study by February 28, iii

73 Workforce Vulnerability Assessment Identify vulnerable positions based on retention, criticality, and difficulty to fill. Develop a workforce planning action plan for each position identified in the vulnerability analysis. Identify workforce needs for the upcoming budget process by December 31, Talent Readiness Assessments Identify key talent, as well as possible development efforts. Develop guidelines and forms for this tool by December 31, Conduct 2 assessments by June 30, Resource Recovery Move towards 100 percent water recycling and expand from treatment to resource recovery. Research Present findings and recommendations on Super Critical Water Oxidation and how to more efficiently clean digester gas to the Board of Directors June 30, Planning Studies Receive a draft Effluent Reuse report by June 30, Retain a consultant to conduct a new biosolids master plan by June 30, Reliability Move towards future sustainability and resiliency of operations by implementing best practices for managing infrastructure maintenance and replacement and timely adoption of operational and technology improvements. Civil Assets Management Plan (CAMP) Finalize the data management structure for collecting, storing and retrieving all civil asset related data; implement the operational housekeeping program to enhance the availability and reliability of our civil assets and develop a 5-year program implementation plan for prioritizing, resourcing and integrating civil assets into existing maintenance programs. Planned Maintenance Ensure that critical process units and equipment are ready to operate and are receiving preventive maintenance in advance of the rainy season (El Nino). Develop and apply planning and scheduling key performance indicator reports to measure success by June 30, Operational Resiliency Present the results of the business continuity plan to the Board of Directors identifying the most critical functions to keep OCSD operating in the event of a major event by December 31, Operational Optimization Evaluate and optimize operations at the OCSD to increase efficiency. Energy Efficiency Evaluate the energy savings opportunities identified by The Energy Network (TEN). Present findings and implementation recommendations to the Board of Directors by March Shared Services Continue to explore the six areas identified as potential opportunities where shared services can improve performance and reduce costs for OCSD rate payers by consolidating functions while also monitoring other opportunities regionally and statewide. Implement at least one shared service contract by June 30, Odor Control Master Plan Develop a recommendation on odor treatment technologies and levels of service goals for both plant facilities and complete Odor Control Master Plan by June 30, OCSD Headquarters Building - Advertise request for proposal to retain a consultant to design the replacement of the Headquarters Complex Project P1-128 by January 31, iv

74 Strategic Planning In November 2013, the Board of Directors approved the biennium update to the rolling five-year strategic plan. This is a comprehensive strategic plan to steer OCSD s efforts and engage the organization to envision service levels and operational needs for the next five years. This annual process begins with the General Manager s Office initiating the planning effort with the Executive Management Team, and then soliciting input and ideas from managers and supervisors. A draft of the updated five-year strategic plan is then presented to the Board of Directors during a workshop, where Board Members discuss and deliberate changes and additions to the plan. Driven by the Sanitation District s mission, vision and core values, the 2014 Strategic Plan update maintains an aggressive effort to meet the sanitation, health, and safety needs of the 2.5 million people being served in a cost effective manner, while protecting the environment where we live. Since the implementation of the first strategic plan in 2007, 38 strategic goals have been established and completed. Following are the strategic goals included in the 2014 Strategic Plan Biennium: 1. Providing Exceptional Customer Service a. Completion of the Odor Control Master Plan. 2. Protecting the Public Health a. Development of Future Biosolids Management Options. b. Research new energy efficiency and conversion technologies. 3. Managing and Protecting the Public s Funds a. Cessation of Disinfection of Ocean Discharge. b. Ownership transfer of local sewers. 4. Stakeholder Understanding and Support a. Communicating the District s mission and strategies with those we serve and other stakeholders. b. Partnering with others to benefit our customers, this region, and our industry. 5. Organizational Effectiveness a. Creating the best possible workforce in terms of safety, productivity, customer service, and training. This strategic plan continues to chart a focused roadmap of success for the future of the Orange County Sanitation District. It addresses critical issues and challenges, and communicates clear and concise future direction to Sanitation District staff. The next biennium update is scheduled for November SERVICE EFFORTS AND ACCOMPLISHMENTS In July 2014, the Sanitation District was awarded the Peak Performance Award from the National Association of Clean Water Agencies in recognition of its complete and consistent National Pollutant Discharge Elimination System permit compliance during calendar year In October 2014, the Sanitation District received the Ten Year Platinum award for continuous improvement and best management practices in biosolids management from the National Biosolids Partnership. In November 2014, the Sanitation District received the Safety Award from the Water Environment Association. v

75 In January 2015, the Sanitation District received the Wastewater Conveyance Project of the Year Award for the Santa Ana River Interceptor Relocation Project from the American Society of Engineers. In March 2015, the Sanitation District received the Safety Plant of the Year award from the California Water Environment Association. In May 2015, the Sanitation District received the 2015 American In-house Design Award from Graphic Design USA for its publication of OCSD s 60 th Anniversary Annual Report. In June 2015, the Sanitation District received the Leading Fleets No. 1 Mid-Size Fleet Award from Government Fleet Magazine. ACCOUNTING AND BUDGETARY CONTROLS The Sanitation District s accounting records are maintained on the accrual basis. In developing and evaluating the Sanitation District s accounting system, consideration is given to the adequacy of internal accounting controls. Internal accounting controls are designed to provide reasonable, but not absolute, assurance regarding: (1) the safeguarding of assets against loss from unauthorized use or disposition; and (2) the reliability of financial records for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the evaluation of costs and benefits requires estimates and judgments by management. We believe that the Sanitation District s internal accounting controls adequately safeguard assets and provide reasonable assurance of proper recording of financial transactions. Each year the Sanitation District s Board of Directors adopts an annual operating plan. A joint works budget is first prepared that identifies the specific capital projects and operating activities to be undertaken by the Sanitation District during the year. The budgetary level of control, the level at which expenses cannot exceed budget, is exercised at the individual district, or fund level. The Sanitation District has adopted a Uniform Purchasing Policy that identifies the agreed upon purchasing standards. ACCUMULATED FUNDS AND RESERVES POLICY The Board of Directors of the Orange County Sanitation District has established the following Accumulated Funds and Reserves Policy: Cash Flow Reserve: is established to fund operations, maintenance and certificates of participation expenses for the first half of the fiscal year, prior to the receipt of the first installment of the property tax allocation and the sewer service user fees which are collected as a separate line item on the property tax bill. The level of this reserve will be established as the sum of an amount equal to six months operations and maintenance expenses and the total of the annual debt (COP) service payments due in August each year. Operating Contingency Reserve: is established to provide for non-recurring expenditures that were not anticipated when the annual budget and sewer service fees were considered and adopted. The level of this reserve will be established at an amount equal to ten percent of the annual operating budget. Capital Improvement Reserve: is established to fund annual increments of the capital improvement program. The long-term target is for one half of the capital improvement program to be funded from borrowing and for one half to be funded from current revenues and reserves. With this program in mind, the target level of this reserve has been established at one half of the average annual capital improvement program through the year Levels higher and lower than the target can be expected while the long-term financing and capital improvement programs are being finalized. vi

76 Catastrophic Loss or Self-Insurance Reserves: are established for property damage including fire, flood and earthquake; for general liability; and for workers' compensation. These reserves are intended to work with purchased insurance policies, FEMA disaster reimbursements and State disaster reimbursements. Based on the current infrastructure replacement value of $6.2 billion, the reserve level has been set to fund the District's non-reimbursed costs, estimated to be $57 million. Capital Replacement/Renewal Reserve Policy: is established to provide thirty percent of the funding to replace or refurbish the current collection and treatment and disposal facilities at the end of their useful economic lives. The current replacement value of these facilities is estimated to be $3.09 billion for the collection facilities and $3.11 billion for the treatment and disposal facilities. The initial reserve level was established at $50 million, which will be augmented by interest earnings and a small portion of the annual sewer user fees in order to meet projected needs through the year Debt Service Reserves: Provisions of the various Certificate of Participation (COP) issues require debt service reserves to be under the control of the Trustee for that issue. These reserve funds are not available for the general needs of the District and must be maintained at specified levels. The level of required COP service reserves at June 30, 2015 was $33.0 million. In addition, the District s Debt Service Reserve policy requires total debt service reserves to be ten percent of the total outstanding COP debt, or $129 million at June 30, Accumulated funds exceeding the levels specified by District policy will be maintained in a rate stabilization fund. These funds will be applied to future years' needs in order to maintain rates or to moderate annual fluctuations. There is no established target for this reserve. As of June 30, 2015, the Sanitation District was in compliance with the Accumulated Funds and Reserves Policy with designated cash and investments totaling $557 million, and have been earmarked for the following specific purposes in accordance with the Sanitation District s reserve policy: Designated Cash and Investments Designated For Cash Flow Contingency Designated For Self-Insurance Designated For Capital Improvements Designated For Debt Service Requirements Total Designated Cash and Investments $178 million 57 million 193 million 129 million $ 557 million CERTIFICATE OF ACHIEVEMENT FOR EXCELLENCE IN FINANCIAL REPORTING The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Orange County Sanitation District for the Sanitation District s comprehensive annual financial report for the year ended June 30, This was the twentieth consecutive year that the Sanitation District has received this award. In order to be awarded a Certificate of Achievement, a governmental unit must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program requirements and we are submitting it to GFOA to determine its eligibility for another certificate. vii

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79 ORANGE COUNTY SANITATION DISTRICT Board of Directors As of June 30, 2015 Agency Active Director Alternate Director Cities: Anaheim Lucille Kring Jordan Brandman Brea Glenn Parker Cecilia Hupp Buena Park Fred Smith Steve Berry Cypress Mariellen Yarc Stacy Berry Fountain Valley Steve Nagel Michael Vo Fullerton Gregory Sebourn Doug Chaffee Garden Grove Steve Jones Kris Beard Huntington Beach Jim Katapodis Erik Peterson Irvine Steven Choi Lynn Schott La Habra Tom Beamish Rose Espinoza La Palma Peter Kim Michele Steggell Los Alamitos Richard Murphy Shelley Hasselbrink Newport Beach Keith Curry Scott Peotter Orange Teresa Smith Mark Murphy Placentia Chad Wanke Constance Underhill Santa Ana Sal Tinajero David Benavides Seal Beach Ellery Deaton Sandra Massa-Lavitt Stanton David Shawver Carol Warren Tustin John Nielsen Allan Bernstein Villa Park Greg Mills Robert Collacott Sanitary Water Districts: Costa Mesa Sanitary District James M. Ferryman Robert Ooten Midway City Sanitary District Tyler Diep Joy Neugebauer Irvine Ranch Water District John Withers Douglas Reinhart Yorba Linda Water District Robert Kiley Michael Beverage County Areas: Member of the Board of Supervisors Lisa Bartlett Michelle Steel x

80 ORANGE COUNTY SANITATION DISTRICT Organizational Chart As of June 30, 2015 xi

81 ORANGE COUNTY SANITATION DISTRICT Map of Service Area As of June 30, 2015 xii

82 18401 Von Karman, 5 th Floor Irvine, CA O F Independent Auditor s Report To the Board of Directors Orange County Sanitation District Fountain Valley, California Report on the Financial Statements We have audited the accompanying financial statements of the Orange County Sanitation District (the District) as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the District s basic financial statements, as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District as of June 30, 2015, and the changes in its financial position and its cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America. 1

83 Emphasis of Matter As discussed in Note 1 to the financial statements, the District implemented Governmental Accounting Standards Board (GASB) Statements Nos. 68 and 71, which impacted the accounting and reporting of net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, for the year ended June 30, Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that management s discussion and analysis, Proportionate Share of Net Pension Liability, Schedule of District Contributions, and Schedules of Funding Progress be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB, which considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that comprise the District s basic financial statements. The separate Combining Area financial statements, introductory section, statistical section, and other data and trends are presented for purposes of additional analysis and are not a required part of the basic financial statements. The Combining Area financial statements are the responsibility of management and were derived from, and relate directly to, the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Combining Area financial statements are fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. The introductory and statistical sections and other data and trends have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on them. Irvine, California October 23,

84 Management Discussion and Analysis June 30, 2015 This section of the financial statements of the Orange County Sanitation District (District) is management s narrative overview and analysis of the financial activities of the District for the fiscal year ended June 30, The information presented here is to be considered in conjunction with additional information provided within the letter of transmittal located in the Introductory Section of this report. Financial Highlights As of June 30, 2015, the District s assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources by $1,761.8 million (net position). Of this amount, $434.5 million represents unrestricted net position, which may be used to meet the District s ongoing obligations to citizens and creditors. Total net position decreased $60.5 million, or 3.3 percent over the prior year. Net Capital Assets, consisting of non-depreciable capital assets and depreciable capital assets net of accumulated depreciation, increased $85.0 million, or 3.5 percent over the prior year. Net investment in capital assets increased $122.7 million, or 10.2 percent. Unrestricted Net Assets decreased $183.1 million, or 29.7 percent from the prior year. Total outstanding bonded debt decreased by $71.0 million over the prior year to $1.162 billion. The FY beginning net position of $1,627.8 million has been restated from the FY ending net position of $1,822.3 million due to the implementation of GASB Statements No. 68 and No. 71, and the recognition of a net pension liability of $194.5 million as of June 30, Overview of the Basic Financial Statements The District operates as a utility enterprise and presents its financial statements using the economic resources measurement focus and the full accrual basis of accounting. As an enterprise fund, the District s basic financial statements are comprised of two components: financial statements and notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. In accordance with the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards, the District s financial statements include a Statement of Net Position; Statement of Revenues, Expenses and Changes in Net Position; and a Statement of Cash Flows. The Statement of Net Position includes all of the District s assets, deferred outflow of resources, liabilities, and deferred inflow of resources; and provides information about the nature and amounts of investments in resources (assets) and the obligations to District creditors (liabilities). It also provides the basis for computing the rate of return, evaluating the capital structure of the District, and assessing the liquidity and financial flexibility of the District. The Statement of Revenues, Expenses, and Changes in Net Position accounts for the current year s revenues and expenses. This statement measures the success of the District s operations over the past year and can be used to determine the District s creditworthiness. It also highlights the District s dependency on property tax revenues in supplementing user fees and other charges for recovering total cost. The final required financial statement, the Statement of Cash Flows, reports cash receipts, cash payments, and net changes in cash resulting from operations and investments of the reporting period. As indicated in Note 1 of the accompanying financial statements, the District implemented GASB Statement No. 68 Accounting and Financial Reporting for Pensions in its financial statements for the year ended June 30, 2015 that required the reporting of net pension liability of $194.5 million as of June 30, 2014 and the restatement of the District s net position from $1,822.3 million to $1,627.8 million on this date. 3

85 Net Position As previously noted, net position decreased $60.5 million, or 3.3 percent over the net position for FY , to $1,761.8 million in Fiscal Year (Dollars in thousands) Assets and deferred outflow of resources June 30, June 30, Increase (Decrease) Percentage Increase (Decrease) Assets Current and other assets $ 604,005 $ 755,807 $ (151,802) -20.1% Net Capital assets 2,504,980 2,420,005 84, % Total assets 3,108,985 3,175,812 (66,827) -2.1% Deferred outflow of resources 52,949 18,173 34, % Total Assets and deferred outflow of resources 3,161,934 3,193,985 (32,051) -1.0% Liabilities Current liabilities 105, ,987 (8,956) -7.9% Noncurrent liabilities 1,269,553 1,257,703 11, % Total liabilities 1,374,584 1,371,690 2, % Deferred inflow of resources 25,506-25,506 N/A Total Liabilities and deferred inflow of resources 1,400,090 1,371,690 28, % Net position: Net investment in capital assets 1,327,384 1,204, , % Unrestricted 434, ,589 (183,129) -29.7% Total net position $ 1,761,844 $ 1,822,295 $ (60,451) -3.3% Current and other assets decreased $151.8 million, or 20.1 percent, due primarily to net cash provided by operations of $19.3 million, proceeds from property taxes of $79.9 million, receipt of capital facilities capacity charges of $20.2 million, and other government repayments of $9.5 million offset by capital outlays of $156.7 million, interest expense of $54.9 million, bonded debt retirements of $40.1 million, and the current year reclassification of prepaid retirement under current assets as a deferred outflow of resources in accordance with GASB Statement No. 68. The amount recorded in the prior year as prepaid retirement was $20.1 million. 4

86 Net Capital assets increased $85.0 million, or 3.5 percent, due mostly to the ongoing capital improvement program construction in progress additions of $182.6 million less depreciation of $94.2 million. Included in total capital outlay additions is the Sludge Dewatering and Odor Control Project at Plant No. 1 with a total project budget of $172.0 million. This project constructs primary sludge thickening facilities to improve solids handling capacity, replace aging sludge dewatering facilities, reduce biosolids handling and disposal, and rehabilitate obsolete solids handling odor control equipment. In FY , the District incurred project costs of $58.8 million bringing the total cost-to-date to $107.4 million with completion scheduled in FY Another solids handling project underway is the Solids Thickening and Processing Upgrades at Plant No. 2. This project consists of the rehabilitation and upgrades to the four existing dissolved air flotation thickeners (DAFTs) to treat the current activated sludge plant solids as well as the additional solids that will be generated from the new secondary trickling filter/solids contractor process. In FY , $8.6 million of the total project budget of $48.3 million was incurred bringing the cost-to-date to $41.1 million with completion scheduled in FY One large collection system projects; Newport Force Main Rehabilitation, with total project budget of $55.6 million incurred outlays of $35.6 million in FY This project will rehabilitate approximately 28,000 feet of the Newport Force Main system located on Pacific Coast Highway in Newport Beach between the Bitter Point Pump Station and Dover Drive. The force main system consists of two parallel, interconnected pipelines, varying in size from 22 to 36 inches. More than half of the force main system will be rehabilitated rather than replaced to minimize impacts to the community, businesses, tourism, and the environment at a total project budget of $55.6 million with completion scheduled for FY See page 8 for the Schedule of Capital Assets and listing of other major capital additions for FY Deferred Outflow of Resources increased $34.8 million, or percent over the prior year primarily due to the implementation of GASB Statement No. 68 and reclassifying prepaid retirement of $20.1 million in the current year as a deferred outflow of resources. Deferred Inflow of Resources Also due to the implementation of GASB Statement No. 68, the District is now required to report its deferred inflows of net pension liability of $25.5 million on the face of the financial statements. This amount represents changes in the net pension liability not recognized as pension expense in the current reporting period. Net Investment in capital assets increased $122.7 million, or 10.2 percent over the prior year primarily as a result of the net increase in capital assets of $85.0 million coupled with the $37.7 million decrease in related debt. The net reduction in capital assets consists of the $87.5 million increase in construction in progress offset by capital asset depreciation for the year of $99.8 million. Unrestricted net position decreased $183.1 million, or 29.7 percent due to the overall decrease in net position of $60.5 million coupled with the increase in net investment in capital assets of $122.6 million. Changes in Net Position Net position decreased $60.5 million in FY , a 3.3 percent decrease over the prior year. 5

87 (Dollars in thousands) June 30, 2015 June 30, 2014 Increase (Decrease) Percentage Increase (Decrease) Revenues: Operating revenues Service Charges $ 301,549 $ 300,611 $ % Permit and inspection fees % Total operating revenues 302, , % Non-operating revenues Property taxes 79,835 74,944 4, % Investment and interest income 4,806 6,498 (1,692) -26.0% Contrib. from other government 8,555 11,278 (2,723) -24.1% Other 1,441 1, % Total non-operating revenues 94,637 94, % Total revenues 397, ,496 1, % Expenses: Operating expense other than depreciation and amortization 149, ,447 2, % Depreciation and amortization 94,186 99,805 (5,619) -5.6% Non-operating expense 37,280 41,767 (4,487) -10.7% Total expenses 280, ,019 (7,326) -2.5% Income before capital contributions 116, ,477 8, % Capital facilitites capacity charges 17,656 14,093 3, % Increase in net position 134, ,570 12, % Beginning net position (1) 1,627,793 1,700,725 (72,932) -4.3% Ending net position $ 1,761,844 $ 1,822,295 $ (60,451) -3.3% (1) The FY beginning net position of $1,627.8 million has been restated from the FY ending net position of $1,822.3 million due to the implementation of GASB Statements No. 68 and No. 71, and the recognition of a net pension liability of $194.5 million as of June 30, As previously stated, an enterprise fund is used to account for the operations of the District, which is financed and operated in a manner similar to private business enterprises. This allows the District to determine that the costs (expenses, including depreciation and amortization) of providing wastewater management services on a continuing basis are financed or recovered primarily through user charges. Sewer service user fees are evaluated annually based primarily on budget requirements for total operation and maintenance expenses and capital outlays for providing wastewater management services. Property tax revenues are dedicated for the payment of debt service. In FY , operating revenues increased $1.0 million, or 0.3 percent over the prior year that is reflective of a $7.6 million increase in service charges to IRWD that is mostly offset by the $6.6 million decrease in service charges made directly to property owners, from $290.8 million in FY to $284.1 million in FY The decrease from service charges made directly to property owners is primarily due to the increase in rebates provided to commercial property users of $9.4 million in FY , a 35.5 percent increase over the prior year. This decrease was somewhat offset by the 2.6 percent increase in the average sewer user fee rate over the prior year. 6

88 Interest User Fees Other Taxes Levied Sources of Revenue June 30, % 7% 1% 73% Functional Expenses June 30, % 9% 12% 34% 42% Collections Treatment & Disposal Depreciation & Amortization Interest Expense Other The $0.6 million, or 0.6 percent increase in non-operating revenues primarily consists of a $4.9 million, or 6.5 percent increase in property tax revenues that is mostly offset by a $1.7 million, or 26.0 percent decrease in investment and interest income and a $2.7 million, or 24.1 percent decrease in contributions from other governments. The increase in property tax revenue is primarily the result of the increase in total assessed valuation of over the prior year of 6.4 percent over the prior year. The decrease in investment and interest income is attributable to lower yields earned on investments and lower cash and investments balances. Yields earned on investments decreased from a 1.1 percent in FY to a 0.8 percent in FY while cash and investment balances decreased from $673 million at June 30, 2014 to $557 million at June 30, The decrease in contributions from other governments is reflective of the decrease in capital contributions from IRWD. Operating expense before depreciation and amortization increased $2.8 million or 1.9 percent over the prior year. The majority of this increase is attributable to the $1.3 million, or 5.4 percent increase in supplies, repairs and maintenance, as repairs and maintenance services and materials alone went up $1.5 million, or 17.6 percent over the prior year due to Plant No. 1 Headworks repairs and installation of carbon media in the trickling filters at Plant No. 2. Utilities totaling $7.2 million increased $0.9 million, or 13.6 percent over the prior year primarily due to increased electricity and natural gas rates. Feasibility studies to determine the necessity and preferred designs of future potential construction projects increased to $6.0 million, or 11.5 percent over the prior year. Operating salaries and benefits also increased by $0.5 million to $79.7 million, a 0.6 percent increase over the prior year. The operating salaries and benefits costs are part of the overall increase of $2.3 million in total salaries and benefits when including the salaries and benefits capitalized within the capital improvement program. Overall, total District salaries and benefits were $94.2 million, a 2.5 percent increase over the prior year total of $91.9 million. This increase is equally attributable to the $1.1 million, or 3.6 percent increase in benefits and the $1.2 million, or 1.9 percent increase in salaries and wages. Non-operating expense decreased $4.5 million, or 10.7 percent, and is primarily reflective of the decrease in interest expense of $6.3 million to $34.1 million, a 15.7 percent decrease from the prior year as the District continues to pay down on its long-term bonded debt. Conversely, the loss on disposal of assets increased to $3.1 million, or a $1.8 million increase over the prior year. Capital Facility Capacity Charges increased $3.6 million, or 25.3 percent over the prior year due to the rebound in the economy and the increase activity in construction as total the total nonresidential permit valuation in Orange County increased 26.5 percent in Calendar Year 2014 over the prior year. Capital Assets At June 30, 2015, the District had a net investment of $2.505 billion in capital assets. This represents a net increase (including additions and deletions) of $85.0 million or 3.5 percent over the prior year. 7

89 (Dollars in thousands) June 30, 2015 June 30, 2014 Increase (Decrease) Percentage Increase (Decrease) Land $ 15,960 $ 15,960 $ - 0.0% Construction in Progress 392, , , % Sewage collection facilities 442, ,824 (11,641) -2.6% Sewage treatment facilities 1,536,861 1,568,340 (31,479) -2.0% Effluent disposal facilities 37,726 39,314 (1,588) -4.0% Solids disposal facilities (10) -3.1% General and administrative facilities 78,820 82,659 (3,839) -4.6% Assets acquired in excess of book value 905 1,563 (658) -42.1% Capital assets, net $ 2,504,980 $ 2,420,005 $ 84, % Major capital asset additions for the current fiscal year included the following: $58.8 million Sludge Dewatering and Odor Control at Plant No. 1 $35.7 million Newport Force Main Condition Assessment $13.5 million Central Generation Emissions Control Project $ 8.6 million Solids Thickening and Processing Upgrades at Plant No. 2 $ 7.6 million Sludge Digester Rehabilitation at Plant No. 1 $ 6.9 million Sludge Dewatering and Odor Control at Plant No. 2 More detailed information about the District s capital assets is provided in Notes 1 and 3 of Notes to the Financial Statements. Debt Administration At June 30, 2015, the District had $1.162 billion outstanding in bonded debt, a net decrease of $71.0 million, or 5.8 percent over the prior year. This reduction consisted of the accumulation of principal payments made in accordance with the schedule of debt service payments and the refunding of 1) $246.9 million of Series 2007B Certificates of Participation (COP) with Series 2014A Wastewater Refunding Revenue Obligations in the amount of $85.1 million issued in August 2014 and Series 2015A Wastewater Refunding Obligations in the amount of $127.5 million issued in February 2015; and 2) the refunding of the one-year $129.6 million Series 2013A Revenue Refunding Certificate Anticipation Notes (CANs) with the two-year Series 2014B Revenue Refunding CANs issued in the amount of $120.9 million in October Both Standard and Poor s Corporation and Fitch Ratings reaffirmed their AAA rating of the Orange County District in the past fiscal year. The District s long-range financing plan is designed to maintain this high rating. Over the next five years, the District is projecting close to $900 million in future treatment plant and collection system capital improvements. In accordance with the District s long-term debt fiscal policy, the District will restrict long-term borrowing to capital improvements that cannot be financed from current revenue. However, no new debt issuances are being proposed over the next five years to assist with the funding of the system improvements scheduled over this time period. For more information on long-term debt activities, see Note 4 of the Notes to Basic Financial Statements. Economic Factors and Next Year s Budgets and Rates The unemployment rate within the County of Orange is currently 4.0 percent, a decrease from the rate of 5.4 percent a year ago. 8

90 Inflation for Orange County in 2014 increased 1.3 percent based on the actual percentage change in the consumer price index according to the June 2015 Economic and Business Review report prepared by Chapman University. The actual rate of return on investments decreased from the 1.1 percent earnings rate in FY to 0.8 percent for FY All of these factors were considered in preparing the District s biennium budget beginning July 1, The District s user fee schedule was increased by 1.9 percent for FY over the prior year. The annual fee applicable to the District s largest customer base and the underlying basis for all other user rates: the single-family residential fee, increased by $6, from $316 to $322. This rate increase was necessary to finance the District s cash flow needs as capital improvement outlays alone are projected to be $175.0 million in FY and are projected to total $2.2 billion over the next 10 years in order to rehabilitate and upgrade existing facilities and maintain full secondary treatment standards. Requests for Information The financial report is designed to provide a general overview of the District s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Financial Management Division, Orange County Sanitation District, Ellis Avenue, Fountain Valley, CA

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92 ORANGE COUNTY SANITATION DISTRICT BASIC FINANCIAL STATEMENTS 11

93 ORANGE COUNTY SANITATION DISTRICT Statement of Net Position June 30, Current assets: Cash and cash equivalents $ 58,334,350 Investments 465,586,079 Accounts receivable, net of allowance for uncollectibles $32,844 4,538,036 Accrued interest receivable 1,251,757 Connection fees receivable 618,742 Property tax receivable 1,121,558 Inventories 6,722,734 Prepaid expenses 1,217,084 Total current assets 539,390,340 Noncurrent assets: Restricted: Cash and cash equivalents 16,028,848 Investments 16,940,965 Accrued interest receivable 218,852 Unrestricted: Non-depreciable capital assets 408,168,784 Depreciable capital assets, net of accumulated depreciation 2,096,811,510 Prepaid insurance on outstanding debt payable 217,772 Due from other governmental agency 31,080,935 Net OPEB asset 116,600 Other noncurrent assets, net 10,344 Total noncurrent assets 2,569,594,610 Total assets 3,108,984,950 Deferred outflow of resources: Deferred charges on defeasances 30,355,758 Deferred outflows of net pension liability 22,592,946 Total deferred outflow of resources 52,948,704 Total assets and deferred outflow of resources 3,161,933,654 Current liabilities: Accounts payable 19,459,022 Accrued expenses 9,370,551 Retentions payable 4,238,495 Interest payable 20,059,050 Due to other governmental agency 2,869,329 Current portion of long-term obligations 49,034,185 Total current liabilities 105,030,632 Noncurrent liabilities: Noncurrent portion of long-term obligations 1,212,134,124 Net pension liability 57,418,760 Total noncurrent liabilities 1,269,552,884 Total liabilities 1,374,583,516 Deferred inflow of resources: Deferred inflows of net pension liability 25,505,684 Total liabilities and deferred inflow of resources 1,400,089,200 Net position: Net investment in capital assets 1,327,384,360 Unrestricted 434,460,094 Total net position $ 1,761,844,454 See Accompanying Notes to Basic Financial Statements. 12

94 ORANGE COUNTY SANITATION DISTRICT Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended June 30, Operating revenues: Service charges $ 301,548,331 Permit and inspection fees 902,264 Total operating revenues 302,450,595 Operating expenses other than depreciation and amortization: Salaries and benefits 79,657,181 Utilities 7,246,147 Supplies, repairs and maintenance 24,569,388 Contractual services 26,677,971 Directors' fees 156,083 Meetings and training 843,485 Feasibility studies 6,043,385 Other 4,033,010 Total operating expenses other than depreciation and amortization 149,226,650 Operating income before depreciation and amortization 153,223,945 Depreciation and amortization 94,185,539 Operating income 59,038,406 Non-operating revenues: Property taxes 79,834,734 Investment and interest income 4,806,307 Contributions from other government 8,554,977 Other 1,440,520 Total non-operating revenues 94,636,538 Non-operating expenses: Interest 34,111,685 Other 64,610 Loss on disposal of assets 3,103,861 Total non-operating expenses 37,280,156 Income before capital contributions 116,394,788 Capital Contributions; Capital facilities capacity charges 17,656,357 Change in net position 134,051,145 Total net position - beginning, as restated 1,627,793,309 Total net position - ending $ 1,761,844,454 See Accompanying Notes to Basic Financial Statements. 13

95 ORANGE COUNTY SANITATION DISTRICT Statement of Cash Flows For the Year Ended June 30, Cash flows from operating activities: Receipts from customers and users $ 279,501,222 Payments to employees (214,339,462) Payments to suppliers (45,837,714) Net cash provided by operations 19,324,046 Cash flows from noncapital financing activities: Proceeds from property taxes 79,919,489 Proceeds from various resources 1,362,236 Net cash provided by noncapital financing activities 81,281,725 Cash flows from capital and related financing activities: Capital facilities capacity charges 20,242,080 Additions to capital assets (156,673,564) Interest paid (54,850,314) Principal payments on debt obligation (27,875,000) Proceeds released to escrow account on defeased debts (376,545,000) Proceeds from debt issuances 365,566,949 Debt issuance costs (1,295,923) Net cash used in capital and related financing activities (231,430,772) Cash flows from investing activities: Proceeds from the sale of investments 7,084,150,575 Purchases of investments (7,140,273,092) SARI project payments 9,542,217 Interest received 8,110,687 Net cash used in investing activities (38,469,613) Net decrease in cash and cash equivalents (169,294,614) Cash and cash equivalents, beginning of year 243,657,812 Cash and cash equivalents, end of year $ 74,363,198 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 59,038,406 Adjustments to reconcile operating income to net cash provided by operations: Depreciation and amortization 94,185,539 Bad debt expense (Net recoveries) 3,392 (Increase)/decrease in operating assets: Accounts receivable 3,288,569 Inventories (1,722,873) Prepaid and other assets 19,603,792 Increase/(decrease) in operating liabilities: Accounts payable 2,274,913 Accrued expenses 2,074,890 Due to other governmental agency (26,237,942) Net pension liability (134,169,917) ARBA/OPEB/Catastrophe leave payable 251,161 Compensated absences 14,483 Other payable 65,188 Claims and judgments 654,445 Net cash provided by operations $ 19,324,046 Noncash Activities: Unrealized (loss) on the fair value of investments $ (3,009,747) Receivable from non-operating activities 2,592,167 Capital assets acquired through accounts payable 5,262,051 See Accompanying Notes to Basic Financial Statements. 14

96 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 (1) Summary of Significant Accounting Policies Reporting Entity The Orange County Sanitation District (OCSD) is a public agency which owns and operates certain wastewater facilities in order to provide regional wastewater collection, treatment, and disposal services to approximately 2.5 million people in the northern and central portion of the County of Orange, California. OCSD is managed by an administrative organization comprised of directors appointed by the agencies and cities which are serviced by OCSD. OCSD s service area was originally formed in 1954 pursuant to the County Sanitation District Act and consisted of seven independent special districts. Two additional districts were formed and additional service areas were added in 1985 and These special districts were jointly responsible for the treatment and disposal facilities which they each used. In April of 1998, the Board of Supervisors of Orange County passed Resolution approving the consolidation of the existing nine special districts into a new, single sanitation district. This action was taken in order to simplify the governance structures, reduce the size of OCSD s Board of Directors, ease administrative processes, streamline decision-making and consolidate accounting and auditing processes. Pursuant to the Resolution and Government Code Section 57500, the predecessor special districts transferred and assigned all of their powers, rights, duties, obligations, functions and properties to OCSD, including all assets, liabilities, and equity. Effective July 1, 1998, the organization became known as the Orange County Sanitation District. The boundaries of one of the previous districts, now known as Revenue Area No. 14, have been maintained separately because their use of OCSD s collection, treatment, and disposal system is funded by the Irvine Ranch Water District (IRWD). The boundaries of the other eight districts have been consolidated and are collectively referred to as the Consolidated Revenue Area. OCSD utilizes joint operating and capital outlay accounts to pay joint treatment, disposal, and construction costs. These joint costs are allocated to each revenue area based on gallons of sewage flow. The supplemental schedules and statements show internal segregations and are not intended to represent separate funds for presentation as major or non-major funds in the basic financial statements. The accompanying financial statements present OCSD and its blended component unit, the Orange County Sanitation District Financing Corporation. The Corporation is a legally separate entity although in substance it is considered to be part of OCSD s operations. OCSD is considered to be financially accountable for the Corporation which is governed by a board comprised entirely of OCSD s board members. There is no requirement for separate financial statements of the Corporation; consequently, separate financial statements for the Corporation are not prepared. The Corporation had no financial activity during the fiscal year ended June 30, 2015, other than principal and interest payments on outstanding certificates of participation/ revenue obligations and notes (see Note 4). OCSD is independent of and overlaps other formal political jurisdictions. There are many governmental entities, including the County of Orange, that operate within OCSD s jurisdiction; however, financial information for these entities is not included in the accompanying financial statements in accordance with the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards. Measurement Focus and Basis of Accounting OCSD operates as an enterprise activity. Enterprise funds account for operations that are financed and operated in a manner similar to private business enterprises, where the intent of the 15

97 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Board of Directors is that the costs (expenses, including depreciation and amortization) of providing services to the general public on a continuing basis be financed or recovered primarily through user charges. Basis of accounting refers to when revenues and expenses are recognized in the accounts and reported in the financial statements. Enterprise funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred, regardless of the timing of related cash flows. The accounting policies of OCSD conform to accounting principles generally accepted in the United States of America (GAAP) as applicable to governments. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles in the United States. Operating Plans Each year, OCSD staff prepares an annual operating plan which is adopted by the Board of Directors. The annual operating plan is used to serve as a basis for monitoring financial progress, estimating the levy and collection of taxes, and determining future service charge rates. During the year, these plans may be amended as circumstances or levels of operation dictate. Cash and Cash Equivalents Investments with original maturities of three months or less when purchased and money market funds and external investment pools that can be withdrawn on demand are considered to be cash equivalents. Investments All investments are stated at fair value (the value at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale). Changes in fair value that occur during the fiscal year are reported as part of investment and interest income. Investment and interest income includes interest earnings and realized and unrealized gains or losses in fair value. Investment and interest income are recorded as revenues and receivables when declared and realized gains or losses are recorded when the investment is sold. Accounts Receivable Accounts receivable is reported net of the allowance for uncollectible receivables. Uncollectible receivables were $32,844 at June 30, Unbilled sewer services through June 30, 2015 are recorded as revenue and receivables. Management determines the allowance for uncollectible receivables by evaluating individual accounts receivable at least one year past due and considering a customer s financial condition, credit history and current economic conditions. Accounts receivables are written off when deemed uncollectible. Recoveries of accounts receivables previously written off are recorded when received. Inventories Inventories, which is held for consumption and not resale, is stated at cost on a weighted-average basis, and then is expensed when used. 16

98 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Capital Assets Outlays for property, plant, equipment, and construction in progress are recorded in the revenue area which will use the asset. Such outlays may be for individual revenue area assets or for a revenue area s share of joint assets. Capital assets of property, plant, and equipment are defined as assets with an initial, individual cost of more than $5,000 and an estimated useful life of at least three years. Such assets are recorded at cost, except for assets acquired by contribution, which are recorded at fair market value at the time received. Cost includes labor; materials; outside services; vehicle and equipment usage; other ancillary costs consisting of direct charges such as engineering, purchasing, supervision, or fringe benefits. Interest costs, net of interest earnings, are capitalized on projects. During the fiscal year ended June 30, 2015, net interest costs of $9,506,501 were capitalized. Depreciation of plant and equipment is provided for over the estimated useful lives of the assets using the straight-line method in accordance with generally accepted accounting principles. OCSD also considers the guidelines of estimated useful lives as recommended in the State of California Controller s Uniform System of Accounts for Waste Disposal Districts, which range from 3 to 75 years. The following are estimated useful lives for major classes of depreciable assets: Sewage collection facilities 50 years, Sewage treatment facilities 40 years, Sewage disposal facilities 40 years, and General plant and administrative facilities 11.5 years. Amortization Amortization of the excess purchase price over the book value of assets acquired is provided using the straight-line method over an estimated useful life of 30 years. Premiums and discounts on certificate anticipation notes and wastewater refunding revenue obligations are amortized to interest expense over the respective terms of the installment obligations based on the effective interest method (Note 4). Restricted Assets Certain assets are classified as restricted because their use is limited by applicable debt covenants. Specifically, the assets are restricted for installment payments due on certificates of participation and revenue obligations or are maintained by a trustee as a reserve requirement for the certificates of participation and revenue obligations. When both restricted and unrestricted resources are available for use, it is OCSD s policy to use restricted resources first, then unrestricted resources as they are needed. Deferred Charges on Defeasances For advance refundings resulting in defeasance of debt, the difference between the reacquisition price and the net carrying amount of the old debt (i.e. deferred charges) is reported as a deferred outflow of resources and amortized to interest expense based on the effective interest method over the remaining life of the old debt or the life of the new debt, whichever is shorter. OCSD s deferred charges on the refunding debt at June 30, 2015 are $30,355,758. Net Position Net position represents the total of assets and deferred outflows of resources less liabilities and deferred inflows of resources, and is classified into two categories: Net Investment in Capital Assets This amount consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets and excludes unspent debt proceeds. Deferred 17

99 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 outflows of resources that are attributable to the acquisition, construction or improvement of those assets or related debt also should be included in this component of net position. Unrestricted This amount represents the residual of amounts not classified in the other category and represents the net equity available for OCSD. Compensated Absences OCSD s employees, other than operations and maintenance personnel, are granted vacation and sick leave in varying amounts with maximum accumulations of 200 hours and 560 hours for vacation and sick days earned but unused, respectively. Operations and maintenance personnel accrue between 80 and 250 personal leave hours per year depending on years of service. Personal leave can be accumulated up to a maximum of 440 hours. Vacation and sick leave benefits and personal days are recorded as an expense and liability when earned by eligible employees. The distribution between current and long-term portions of the liability is based on historical trends. Claims and Judgments OCSD records estimated losses when it is probable that a claim liability has been incurred and when the amount of the loss can be reasonably estimated. Claims payable includes an estimate for incurred but unreported claims. The distribution between current and long-term portions of the liability is based on historical trends. Pensions For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of OCSD s cost sharing multiple-employer plan with the Orange County Employee s Retirement System (OCERS) plans (Plans) and additions to/deductions from the Plans fiduciary net position have been determined on the same basis as they are reported by OCERS. Benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit term. Investments are reported at fair value. A deferred outflow of resources and deferred inflow of resources related to pensions result from changes in the components of the net pension liability and are applicable to a future reporting period. OCSD s deferred outflows of net pension liability, deferred inflows of net pension liability, and net pension liability at June 30, 2015 are $22,592,946, $25,505,684, and $57,418,760 respectively. Property Taxes The County is permitted by State law (Proposition 13) to levy taxes at one percent of full market value (at time of purchase) and can increase the assessed value no more than two percent per year. OCSD receives a share of this basic levy, proportionate to what was received in the 1976 to 1978 period. Property taxes are determined annually as of January 1 and attached as enforceable liens on real property as of July 1 and are payable in two installments which become delinquent after December 10 and April 10. The County bills and collects the property taxes and remits them to OCSD in installments during the year. Property tax revenues are recognized when levied for. The Board of Directors has designated property tax revenue to be used for the annual debt service requirements prior to being used as funding for current operations. 18

100 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Capital Facilities Capacity Charges Capital facilities capacity charges represent fees imposed at the time a structure is newly connected to OCSD s system, directly or indirectly, or an existing structure or category of use is increased. This charge is to pay for District facilities in existence at the time the charge is imposed or to pay for new facilities to be constructed that are of benefit to the property being charged. Operating and Non-operating Revenues and Expenses Operating revenues and expenses result from collecting, treating, and disposing of wastewater and inspection and permitting services. OCSD s operating revenues consist of charges to customers for the services provided. Operating expenses include the cost of providing these services, administrative expenses, and depreciation and amortization expenses. All revenues and expenses not meeting these definitions and which are not capital in nature are reported as non-operating revenues and expenses. Construction Commitments OCSD has active construction projects to add additional capacity, improve treatment, or replace/rehabilitate existing assets. At June 30, 2015, the outstanding commitments with contractors totaled $141,178,054. Self-Insurance Plans For the year ended June 30, 2015, OCSD was self-insured for portions of workers compensation, property damage, and general liability. The self-insurance portion of the workers compensation exposure is the $750,000 deductible per occurrence under the outside excess insurance coverage to statutory levels. The self-insurance portion of the property damage exposure covering fire and other perils is the $250,000 per occurrence deductible (for most perils) under the outside excess property insurance coverage to $1 billion. The self-insurance portion of the property damage exposure covering flood is the $100,000 per occurrence deductible with outside excess property insurance coverage to $300 million. OCSD is self-insured for virtually all property damage from the peril of earthquake. The self-insurance portion of the boiler & machinery exposure is the deductible ranging from $25,000 to $350,000 under the outside excess boiler & machinery insurance coverage to $100 million per occurrence combined limit. The self-insurance portion of the general liability exposure is the $500,000 per occurrence deductible under the outside excess liability coverage to $40 million per occurrence and aggregate. The self-insurance portion of the pollution liability exposure is the $100,000 per loss deductible under the outside pollution liability insurance coverage to $10 million. There were no significant changes in insurance coverage during the fiscal year ended June 30, During the past three fiscal years there have been no settlements in excess of covered amounts. Claims against OCSD are processed by outside insurance administrators. These claims are charged to claims expense based on estimated or known amounts which will ultimately be paid. Claims incurred but not yet reported have been considered in determining the accrual for loss contingencies. Workers compensation reserves are actuarially determined and general liability estimated loss accruals are estimated using past experience adjusted for current trends and any other factors that would modify past experience. The estimate of the claims liability also includes any amounts for incremental and nonincremental claim adjustment expenses. OCSD management believes that there are no unrecorded claims as of June 30, 2015 that would materially affect the financial position of OCSD. 19

101 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Deferred Compensation Plan OCSD offers its employees a deferred compensation plan established in accordance with Internal Revenue Code Section 457. The plan permits all employees of OCSD to defer a portion of their salary until future years. The amount deferred is not available to employees until termination, retirement, death or for unforeseeable emergency. The assets of the plan are held in trust for the exclusive benefit of the participants and their beneficiaries. Since the plan assets are administered by an outside party and are not subject to the claims of OCSD s general creditors, in accordance with GASB Statement 32, the plan s assets and liabilities are not included within OCSD s financial statements. Accounting Changes The accompanying financial statements reflect the implementation of GASB Statement No Accounting and Financial Reporting for Pensions, as amended by GASB Statement No Pension Transition for Contributions Made Subsequent to the Measurement Date. The retroactive effect of implementing this change in reporting pension expenses and obligations resulted in a restatement of the beginning net position as described further in Note 9. The effect on the previously issued financial statement as of June 30, 2014 resulted in an adjustment to ending net position from $1,822,294,724 to $1,627,793,309. (2) Cash and Investments Cash and investments as of June 30, 2015 are classified within the accompanying Statement of Net Position as follows: Statement of Net Position: Current, Unrestricted: Cash and cash equivalents $ 58,334,350 Investments 465,586,079 Subtotal - current, unrestricted 523,920,429 Restricted: Cash and cash equivalents 16,028,848 Investments 16,940,965 Subtotal - restricted 32,969,813 Total cash and cash equivalents and investments $ 556,890,242 Cash and investments consist of the following as of June 30, 2015: Cash on hand $ 3,000 Deposits with financial institutions 3,401,930 Managed portfolio - cash and investments 520,515,499 Subtotal - unrestricted cash and investments 523,920,429 Monies held by trustees: Cash and cash equivalents $ 16,028,848 Investment contracts 16,940,965 Subtotal - monies held by trustees 32,969,813 Grand total cash and investments $ 556,890,242 20

102 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Investments Authorized by the California Government Code and OCSD s Investment Policy The following table identifies the investment types that are authorized by the California Government Code and OCSD s investment policy. This table, and the subsequent tables on pages 20-23, also identifies certain provisions of either the California Government Code or OCSD s investment policy (whichever is more restrictive) that address interest rate risk, credit risk, and concentration of credit risk. Authorized Maximum by OCSD's Maximum Investment Investment Type - Authorized by Investment Maximum Percentage in a Single the California Government Code Policy? Maturity (1)(3) of Portfolio (1 ) Issuer (1 ) Local Agency Bonds Yes 5 years 10% (2) 10% (2) U.S. Treasury Obligations Yes 5 years No limit No limit California State Treasury Obligations Yes 5 years No limit No limit U.S. Agency Securities Yes 5 years No limit No limit Banker's Acceptances Yes 180 days 40% 30% Commercial Paper Yes 270 days 25% 10% Negotiable Certificates of Deposit Yes 5 years 30% 30% Repurchase Agreements Yes 1 year 20% (2) 20% (2) Reverse Repurchase Agreements Yes 90 days (2) 5% (2) 5% (2) Corporate Medium-Term Notes Yes 5 years 30% 30% Mutual Funds Yes N/A 20% 10% Money Market Mutual Funds Yes N/A 20% 20% Mortgage Pass-Through Securities/ CMO/Asset-Backed Securities Yes 5 years 20% 20% County Investment Pools Yes N/A 15% (2) 15% (2) Local Agency Investment Fund (LAIF) Yes N/A 15% (2) 15% (2) Supranational Obligations Yes 5 years 30% 30% Notes (1 ) Restrictions are in accordance with the California Government Code unless indicated otherwise. (2) The restriction is in accordance with OCSD's Investment Policy which is more restrictive than the California Government Code. (3) As allowed by California Government Code Section 53601, the Board of Directors has adopted a policy of no maximum maturity for investments purchased by OCSD's external money manager for the long-term investment portfolio. However, the duration of the long-term investment portfolio can never exceed 60 months. Investments purchased for the short-term portfolio are subject to the maturity restrictions noted in this table. 21

103 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Investments Authorized by Debt Agreements The investment of debt proceeds held by trustees is governed by provisions of the debt covenant agreements, rather than the general provisions of the California Government Code or OCSD s investment policy. The following table identifies the investment types that are authorized for investments held by OCSD s debt trustees. This table, and the subsequent tables on pages also identifies certain provisions of the debt covenant agreements that address interest rate risk, credit risk, and concentration of credit risk. Maximum Maximum Investment Type - Authorized by the Maximum Percentage Investment in a Debt Covenant Agreement Maturity of Portfolio Single Issuer State and Local Agency Bonds 5 years No limit No limit U.S. Treasury Obligations 5 years No limit No limit U.S. Agency Securities 5 years No limit No limit Banker's Acceptances 180 days 40% 30% Commercial Paper 270 days 40% 10% Negotiable Certificates of Deposit 5 years 30% 10% Repurchase Agreements 1 year No limit No limit Corporate Medium-Term Notes 5 years 30% 30% Mutual Funds N/A 20% 10% Money Market Mutual Funds N/A 20% 20% Local Agency Investment Fund (LAIF) N/A No limit No limit Guaranteed Investment Contracts N/A No limit No limit Disclosures Relating to Interest Rate Risk Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer an investment has before maturity, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that OCSD manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time, as necessary to provide the cash flow and liquidity needed for operations. OCSD monitors the interest rate risk inherent in its managed portfolio by measuring the modified duration of its portfolio. The duration of monies held for shorter term purposes is recommended by OCSD s Treasurer and is based on OCSD s cash flow requirements in meeting current operating and capital needs. The average duration of monies invested for shorter term purposes may never exceed 180 days. The duration of monies held for longer term purposes is recommended annually by OCSD s Treasurer and is based on OCSD s five-year cash flow forecast. The average duration may not exceed 120 percent nor be less than 80 percent of the recommended duration. The average duration of monies invested for longer term purposes may never exceed 60 months. There is no stated maximum maturity for the Money Market Mutual Funds. The money market mutual funds for Blackrock Institutional Fund and the US Bank Money Market Fund are daily liquid funds available on demand. 22

104 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Following is a table which summarizes OCSD s managed portfolio investments by purpose with the modified duration as of June 30, Modified Modified Duration Duration Investment Type Fair Value (in years) (in months) Short-Term Portfolio: U.S. Agency Securities * $ 22,519, U.S. Treasury Notes 24,510, Corporate Medium-Term Notes 11,671, Local Agency Investment Fund (LAIF) 49,930, Money Market Mutual Funds 3,096, Short-term portfolio subtotal $ 111,727, Long-Term Portfolio: U.S. Treasury Notes $ 152,485, U.S. Treasury Inflation-Protected Securities (TIPS) 13,372, U.S. Agency Securities 95,690, U.S. Govt. Backed Mortgage Pools (GNMA) * 314, Taxable Municipal Bonds 9,991, Corporate Medium-Term Notes 102,159, Money Market Mutual Funds 928, Mortgage Pass-Through Securities/CMO/Asset- Backed Securities * 33,845, Long-term portfolio subtotal $ 408,788, Total Portfolio $ 520,515,499 *Includes highly sensitive securities. OCSD monitors the interest rate risk inherent in its other investments using specific identification of the investments. Following is a table of these investments all held by trustees, as of June 30, Fair Value Maturities Cash equivalents held by fiscal agents: US Bank Cash $ 29 N/A Money Market Mutual Funds: Blackrock Institutional Funds 19, days Federated Government Obligations Fund 26, days US Bank Money Market Fund 64,712 N/A Local Agency Investment Fund (LAIF) 15,917, day average Investments held by fiscal agents: Guaranteed Investment Agreements: FSA Capital Management Services LLC A COP 9,518,000 January 29, 2030 Bayerische Landesbank Girozentrale A COP 7,422,965 August 1, 2016 Total Fair Value of Investments Held by Fiscal Agents $ 32,969,813 23

105 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations OCSD s investments (including investments held by trustees) include the following investments that are highly sensitive to interest rate fluctuations (to a greater degree than already indicated in the information provided above): Mortgage-backed securities: These securities are subject to early payment in a period of declining interest rates. The resulting reduction in expected total cash flows affects the fair value of these securities, making them highly sensitive to change in interest rates. At fiscal year end, the fair value of investments in mortgage-backed securities totaled $7,100,920 including $4,252,799 of mortgage pass-through securities, $2,533,948 of U.S. agency securities, and $314,173 of U.S. government backed mortgage pools. Disclosures Relating to Credit Risk Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The following table presents the minimum rating as required by the California Government Code, OCSD s investment policy, or debt agreements, and the actual rating as of year-end for each investment type. 24

106 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Investment Type and the Lowest Rating Reported at Year End Fair Value Investments with no legal minimum rating & no required disclosure: U.S. Treasury Obligations $ 190,368,531 U.S. Govt. Backed Mortgage Pools (GNMA) 314,173 Subtotal $ 190,682,704 Investments with no legal minimum rating: U.S. Agency Securities (other than GNMA): Rating of AA+ (Standard & Poor's) 118,209,845 Municipal Bonds: Rating of Aaa (Moody's) 1,367,808 Rating of Aa1 (Moody's) 1,497,902 Rating of Aa3 (Moody's) 5,854,813 Rating of A3 (Moody's) 1,271,116 Local Agency Investment Fund (LAIF): Not rated 65,848,392 Investments with fiscal agents - Guaranteed Investment Contracts: Rating of A3 (Moody's) 7,422,965 Rating of A2 (Moody's) 9,518,000 Subtotal 210,990,841 Investments with a legal minimum rating (or its equivalent) of A: Corporate Medium-Term Notes: Rating of Aaa (Moody's) 13,027,260 Rating of AA (Standard & Poor's) 3,982,880 Rating of P-1 (Moody's) 8,491,642 Rating of AA- (Standard & Poor's) 6,801,651 Rating of A1 (Moody's) 15,986,350 Rating of F1 (Fitch) 7,479,020 Rating of A (Fitch) 8,803,442 Rating of A2 (Moody's) 23,052,613 Rating of A3(Moody's)* 12,734,713 Rating of Baa1 (Moody's)* 8,556,724 Rating of BBB+ (Standard & Poor's)* 3,288,890 Rating of BBB (Fitch)* 1,344,915 Not rated 280,750 Money Market Mutual Funds: Rating of Aaa (Moody's) 3,980,366 Not rated 44,283 Invested with fiscal agents: Rating of Aaa-mf (Moody's) 46,135 Rating of P-1 (Moody's) 64,741 Subtotal 117,966,375 Investments with a legal minimum rating (or its equivalent) of AA: Mortgage Pass-Through Securities/CMO/Asset-Backed Securities: Rating of AAA (Standard & Poor's) 29,544,678 Rating of AA+ (Standard & Poor's) 4,054,611 Rating of A (Fitch)* 122,566 Rating of BBB (Fitch)* 123,537 Subtotal 33,845,392 Total $ 553,485,312 * Investment was in compliance with legal requirements at the time it was purchased. 25

107 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Concentration of Credit Risk Limitations on the amount that OCSD is allowed to invest in any one issuer have been identified previously in the section Investments Authorized by the California Government Code and OCSD s Investment Policy and in the section Investments Authorized by Debt Covenant Agreements. OCSD follows whichever guideline is the most restrictive. Custodial Credit Risk Custodial credit risk for deposits is the risk that in the event of the failure of a depository financial institution, a government will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The California Government Code and OCSD s investment policy contain legal requirements that limit the exposure to custodial credit risk for deposits as follows: a financial institution must secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law (unless so waived by the governmental unit). The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. Custodial credit risk for investments is the risk that in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, a government will not be able to recover the value of its investment or collateral securities that are in the possession of another party. The California Government Code and OCSD s investment policy do not contain legal or policy requirements that would limit the exposure to custodial credit risk for investments. As of June 30, 2015, in accordance with OCSD s investment policy, none of OCSD s investments were held with a counterparty. All of OCSD s investments were held with an independent third party custodian bank registered in the name of OCSD. OCSD uses Bank of New York (BNY) Mellon as a third party custody and safekeeping service for its investment securities. Investment in State Investment Pool OCSD is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section under the oversight of the Treasurer of the State of California. The fair value of OCSD s investment in this pool is reported in the accompanying financial statements at amounts based upon OCSD s pro-rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Included in LAIF s investment portfolio are mortgage-backed securities, other asset-backed securities, loans to certain state funds, securities with interest rates that vary according to changes in rates greater than a one-for-one basis, and structured notes. The amounts invested in LAIF are recorded as cash and cash equivalents at June 30,

108 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 (3) Capital Assets Capital asset activity for the year ended June 30, 2015 is as follows: Balance at Additions / Deletions / Balance at June 30, 2014 Transfers Transfers June 30, 2015 Capital assets not depreciated: Cost: Land $ 15,959,559 $ - $ - $ 15,959,559 Construction in progress 258,018, ,604,773 (48,414,487) 392,209,225 Total nondepreciable assets 273,978, ,604,773 (48,414,487) 408,168,784 Depreciable capital assets: Cost: Sewage collection facilities 753,136,534 6,878,386 (1,856,818) 758,158,102 Sewage treatment facilities 2,220,814,179 35,242,665 (279,230) 2,255,777,614 Effluent disposal facilities 97,014, ,014,820 Solids disposal facilities 3,463, ,463,236 General and administrative facilities 224,717,092 3,683,995 (455,617) 227,945,470 Excess purchase price over book value on acquired assets 19,979, ,979,000 Subtotal 3,319,124,861 45,805,046 (2,591,665) 3,362,338,242 Accumulated depreciation: Sewage collection facilities (299,312,573) (17,690,007) 1,027,810 (315,974,770) Sewage treatment facilities (652,473,888) (66,717,494) 273,917 (718,917,465) Effluent disposal facilities (57,700,939) (1,588,008) - (59,288,947) Solids disposal facilities (3,136,816) (9,718) - (3,146,534) General and administrative facilities (142,058,469) (7,522,603) 455,617 (149,125,455) Excess purchase price over book value on acquired assets (18,415,852) (657,709) - (19,073,561) Subtotal (1,173,098,537) (94,185,539) 1,757,344 (1,265,526,732) Net depreciable assets 2,146,026,324 (48,380,493) (834,321) 2,096,811,510 Net capital assets $ 2,420,004,822 $ 134,224,280 $ (49,248,808) $ 2,504,980,294 27

109 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 (4) Long-Term Liabilities The following is a summary of the changes in long-term liabilities for the year ended June 30, 2015: Balance, July 1 Additions Deletions Balance, June 30 Due within one year Long-term amount Arbitrage Payable $ 209,762 $ 65,186 $ - $ 274,948 $ - $ 274,948 Compensated Absences 7,351,775 6,877,809 (6,866,982) 7,362,602 6,751, ,730 Claims and Judgments 1,896,152 1,286,106 (631,661) 2,550, ,110 2,083,487 Certificates of Participation, Revenue Obligations & Notes 1,233,325, ,450,000 (404,420,000) 1,162,355,000 29,405,000 1,132,950,000 Unamortized Premium (Discount) 45,673,124 55,389,964 (22,277,731) 78,785,357 12,410,203 66,375,154 Net Pension Obligation - ARBA 9,263,773 1,076,672 (500,640) 9,839,805-9,839,805 Totals $ 1,297,719,586 $ 398,145,737 $ (434,697,014) $ 1,261,168,309 $ 49,034,185 $ 1,212,134,124 Arbitrage Payable The Tax Reform Act of 1986 (the Act) requires OCSD to calculate and remit rebatable arbitrage earnings to the Internal Revenue Service. Certain of OCSD s debt and interest earnings on the proceeds thereof are subject to the requirements of the Act. OCSD s liability at June 30, 2015 is $274,948. Compensated Absences OCSD s policies related to compensated absences are described in Note 1. OCSD s liability at June 30, 2015 is $7,362,602 with an estimated $6,751,872 to be paid or used within the next fiscal year. Claims and Judgments Payable OCSD is self-insured in a number of areas as described in Note 1. The following is a summary of the change in claims and judgments payable for the years ended June 30, 2015 and 2014: Claims and judgments payable at July 1 $ 1,896,152 $ 1,578,036 Claims incurred during the fiscal year 1,286, ,463 Payments on claims during the fiscal year (631,661) (671,347) Claims and judgments payable at June 30 2,550,597 1,896,152 Less: current portion (467,110) (423,590) Total long-term claims and judgments payable $ 2,083,487 $ 1,472,562 28

110 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Certificates of Participation/ Revenue Obligations and Notes OCSD issues certificates of participation, revenue obligations and notes in order to finance construction of the treatment facilities. Each issuance represents a direct and proportionate interest in the semi-annual interest payments. Installment payments for the issues are payable from any source of lawfully available funds of OCSD. Certificates of participation, revenue obligations, and notes at June 30, 2015 are summarized as follows: Amount 2007A refunding certificates of participation $ 92,140, B certificates of participation 13,885, B refunding certificates of participation 17,315, A certificates of participation 180,235, A wastewater revenue obligations 80,000, C wastewater revenue obligations 157,000, A wastewater refunding revenue obligations 121,290, A wastewater refunding revenue obligations 100,645, B wastewater refunding revenue obligations 66,395, A wastewater refunding revenue obligations 85,090, B revenue refunding certificate anticipation notes 120,850, A wastewater refunding revenue obligations 127,510,000 Total certificates of participation, revenue obligations, and notes $ 1,162,355,000 Outstanding Certificates of Participation / Revenue Obligations and Notes All of the outstanding debt of OCSD is senior lien debt with rate covenants that require a minimum coverage ratio of The minimum coverage ratio is the ratio of net annual revenues available for debt service requirements to total annual debt service requirements. As of June 30, 2015, the coverage ratio for senior lien debt was May 2007 Refunding Certificates of Participation, Series 2007A On May 22, 2007, OCSD completed the sale of $95,180,000 of refunding certificates of participation. The certificates were issued to refund $88,500,000 of the outstanding principal balance of the 2003 Series certificates of participation. The interest rate on the refunding certificates is fixed and will range from 4.00 percent to 4.5 percent. Annual principal payments are due on February 1, beginning February 1, 2008 through February 1, The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2015 reserve of $9,518,001 is held by Union Bank, the trustee, and meets the reserve requirement. December 2007 Certificates of Participation, Series 2007B On December 20, 2007, OCSD completed the sale of $300,000,000 of certificates of participation. The certificates were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The interest rate on the refunding certificates is fixed and will range from 4.00 percent to 5.25 percent. Annual principal payments are due on February 1, beginning February 1, 2008 through February 1,

111 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 On August 7, 2014, $93,930,000 of the outstanding principal balance of the 2007 Series B certificates was advance-refunded with the proceeds of the August 7, 2014 wastewater refunding revenue obligations Series 2014A (see below) in a transaction accounted for as an in-substance defeasance. These funds are held in an escrow account that is not reflected on OCSD s financial statements because it has been legally defeased. At June 30, 2015, this $93,930,000 represents the amount still outstanding on bonds considered defeased. On February 12, 2015, $152,990,000 of the outstanding principal balance of the 2007 Series B certificates was advance-refunded with the proceeds of the February 12, 2015 wastewater refunding revenue obligations Series 2015A (see below) in a transaction accounted for as an in-substance defeasance. These funds are held in an escrow account that is not reflected on OCSD s financial statements because it has been legally defeased. At June 30, 2015, this $127,500,000 represents the amount still outstanding on bonds considered defeased. The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2015 reserve of $7,491,808 is held by Union Bank, the trustee, and meets the reserve requirement. September 2008 Refunding Certificates of Participation, Series 2008B On September 11, 2008, OCSD completed the sale of $27,800,000 of refunding certificates of participation. The certificates were issued to refund the $26,900,000 outstanding principal balance of the 1993 Series certificates of participation. The interest rate on the refunding certificates is fixed and will range from 2.80 percent to 3.0 percent. Annual principal payments are due on August 1, beginning August 1, 2009 through August 1, The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2015 reserve of $2,781,783 is held by US Bank, the trustee, and meets the reserve requirement. May 2009 Certificates of Participation, Series 2009A On May 7, 2009, OCSD completed the sale of $200,000,000 of certificates of participation. The certificates were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The interest rate on the certificates is fixed and will range from 3.00 percent to 5.00 percent. Annual principal payments are due on February 1, beginning February 1, 2010 through February 1, The trust agreement for the certificates requires the establishment of a reserve which was funded from certificate proceeds. The June 30, 2015 reserve of $13,118,559 is held by US Bank, the trustee, and meets the reserve requirement. May 2010 Wastewater Revenue Obligations, Series 2010A On May 18, 2010, OCSD completed the sale of $80,000,000 of wastewater revenue obligations under the federally taxable Build America Bonds program. The obligations were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The stated interest rate on the obligations is fixed and will range from 5.56 percent to 5.58 percent, however, in accordance with their designation as Build America Bonds, OCSD expects to receive a cash subsidy from the United States Treasury equal to 35 percent of the interest payable with respect to these revenue obligations. The expected net interest rate on the obligations is fixed and will range 30

112 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 from percent to percent. Annual principal payments are due on February 1, beginning February 1, 2034 through February 1, The trust agreement for the revenue obligations does not require the establishment of a reserve. December 2010 Wastewater Revenue Obligations, Series 2010C On December 8, 2010, OCSD completed the sale of $157,000,000 of wastewater revenue obligations under the federally taxable Build America Bonds program. The obligations were issued to finance and to reimburse OCSD for the acquisition, construction, and installation of additional improvements made to the wastewater system. The stated interest rate on the obligations is fixed and will range from 6.35 percent to 6.40 percent, however, in accordance with their designation as Build America Bonds, OCSD expects to receive a cash subsidy from the United States Treasury equal to 35 percent of the interest payable with respect to these revenue obligations. The expected net interest rate on the obligations is fixed and will range from percent to 4.16 percent. Annual principal payments are due on February 1, beginning February 1, 2031 through February 1, The trust agreement for the revenue obligations does not require the establishment of a reserve. October 2011 Wastewater Refunding Revenue Obligations, Series 2011A On October 3, 2011, OCSD completed the sale of $147,595,000 of wastewater refunding revenue obligations. The obligations were issued to refund $89,800,000 of the outstanding principal balance of 2000 Series A and B refunding certificates of participation, and $83,320,000 of the outstanding principal balance of 2003 certificates of participation. The stated interest rate on the obligations is fixed and will range from 3 percent to 5 percent. Annual principal payments are due on August 1 and February 1, beginning August 1, 2012 through February 1, The trust agreement for the revenue obligations does not require the establishment of a reserve. March 2012 Wastewater Refunding Revenue Obligations, Series 2012A On March 22, 2012, OCSD completed the sale of $100,645,000 of wastewater refunding revenue obligations. The obligations were issued to refund the $108,180,000 outstanding principal balance of the 2003 certificates of participation. The stated interest rate on the obligations is fixed and will range from 3 percent to 4 percent. Annual principal payments are due on February 1, beginning February 1, 2031 through February 1, The trust agreement for the revenue obligations does not require the establishment of a reserve. August 2012 Wastewater Refunding Revenue Obligations, Series 2012B On August 16, 2012, OCSD completed the sale of $66,395,000 of wastewater refunding revenue obligations. The obligations were issued to refund the remaining $91,900,000 outstanding principal balance of the Series 2000A and 2000B refunding certificates of participation. The stated interest rate on the obligations is fixed and will range from 3 to 5 percent. Annual principal payments are due on February 1, beginning February 1, 2019 through February 1,

113 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 The trust agreement for the revenue obligations does not require the establishment of a reserve. August 2014 Wastewater Refunding Revenue Obligations, Series 2014A On August 7, 2014, OCSD completed the sale of $85,090,000 of wastewater refunding revenue obligations. The obligations were issued to refund $93,930,000 of the outstanding principal balance of 2007 Series B certificates of participation. The stated interest rate on the obligations is fixed at 5 percent. Annual principal payments are due on February 1, beginning February 1, 2018 through February 1, The aggregate difference in debt service between the refunding debt and the refunded debt is a positive amount of approximately $8.2 million. The total future payments for the new debt provide a net present value gain of approximately $8.4 million to refund the old debt. The trust agreement for the revenue obligations does not require the establishment of a reserve. October 2014 Revenue Refunding Certificate Anticipation Notes, Series 2014B On October 8, 2014, OCSD completed the sale of $120,850,000 of revenue refunding certificate anticipation notes. The notes were issued to refund the $129,625,000 outstanding principal balance of the 2013 Series A revenue refunding certificate anticipation notes. The interest rate on the notes is fixed at 4 percent. The notes will mature on November 15, OCSD expects the principal and interest on the notes to be paid from proceeds of the sale, prior to the maturity date, of a future series of certificates of participation, notes or other obligations. The aggregate difference in debt service between the refunding debt and the refunded debt is a negative amount of approximately $15,000. The total future payments for the new debt provide a net present value loss of approximately $545,000 to refund the old debt. The trust agreement for the certificates does not require the establishment of a reserve. February 2015 Wastewater Refunding Revenue Obligations, Series 2015A On February 12, 2015, OCSD completed the sale of $127,510,000 of wastewater refunding revenue obligations. The obligations were issued to refund $152,990,000 of the outstanding principal balance of 2007 Series B certificates of participation. The stated interest rate on the obligations is fixed at 5 percent. Annual principal payments are due on February 1, beginning February 1, 2028 through February 1, The aggregate difference in debt service between the refunding debt and the refunded debt is a positive amount of approximately $21.2 million. The total future payments for the new debt provide a net present value gain of approximately $25.4 million to refund the old debt. The trust agreement for the revenue obligations does not require the establishment of a reserve. 32

114 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Annual Amortization Requirements The annual requirements to amortize all debt related to certificates of participation, revenue obligations, and anticipation notes as of June 30, 2015, including the Revenue Refunding Certificate Anticipation Notes, Series 2014B that currently matures in November 2016, are as follows: Year Ending June 30, Principal Estimated Interest Total 2016 $ 29,405,000 $ 51,053,577 $ 80,458, ,425,000 47,462, ,887, ,415,000 43,516,863 75,931, ,940,000 42,422,696 74,362, ,535,000 40,828,380 74,363, ,775, ,176, ,951, ,115, ,507, ,622, ,635,000 86,881, ,516, ,600,000 31,788, ,388, ,510,000 3,534,752 49,044,752 Total $ 1,162,355,000 $ 666,172,832 $ 1,828,527,832 (5) Pension Benefits OCSD has two pension plans for retirees: a defined benefit pension plan maintained through and by the Orange County Employees Retirement System (OCERS) and the Additional Retiree Benefit Account (ARBA) administered directly by OCSD. Pension Plan (A) General Information about the Pension Plan Plan Description: All qualified permanent and probationary employees are eligible to participate in OCSD s Employee Pension Plan (Plan), which is a cost-sharing multiple employer defined benefit pension plan administered by the Orange County Employees Retirement System (OCERS). OCERS was established in 1945 under the provisions of the County Employees Retirement Law of 1937 (CERL). The Plan operates under the provisions of the California County Employees Retirement Law of 1937 (CERL), the California Public Employees Pension Reform Act of 2013 (PEPRA), and the regulations, procedures and policies adopted by OCERS Board of Retirement. The Plan s authority to establish and amend the benefit terms are set by the CERL and PEPRA and may be amended by the California state legislature. The Plan is a tax qualified plan under Section 401(a) of the Internal Revenue Code Benefits Provided: OCERS provides service retirement, disability, death and survivor benefits to plan members who may be public employees or beneficiaries. The CERL and PEPRA establish benefit terms. Benefits are based on years of credited service equal to one year of full time employment. Members of plans B, G and H with ten years of service credit are entitled to receive a retirement allowance beginning at age 50; members of plan U with 5 years of service are eligible to receive a retirement allowance at age 52. Members attaining age 70 are eligible to retire regardless of credited service. 33

115 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Benefits are determined by plan formula, age, years of service and final average salary as follows: Hire Date Prior to 9/21/79 Plan G Plan H Plan B Plan U After 9/21/79 Prof/Sup*: Before 10/1/10 OCEA*: Before 8/1/11 501*: Before 7/1/11 Prof/Sup: After 10/1/10 OCEA: After 8/1/11 501: After 7/1/11 All: Before 1/1/2013 On or after 1/1/2013 Final Average Compensation (FAS) Highest 12 months Highest 36 months Highest 36 months Highest 36 months Normal Retirement Age Age 55 Age 55 Age 57.5 Age 67 Service Requirement Eligibility Benefit percent per year of service for normal retirement age Benefit Adjustments FAS Limitation Age 70, any years Age 70, any years Age 70, any years Age 70, any years Age 50, 10 years Age 50, 10 years Age 50, 10 years Age 52, 5 years 2.5% per year of FAS for every year of service credit Reduced before age 55 Internal Revenue Code Section 401(a)(17) 2.5% per year of FAS for every year of service credit Reduced before age 55 Internal Revenue Code Section 401(a)(17) 1.667% per year of FAS for every year of service credit Reduced before age 57.5 Internal Revenue Code Section 401(a)(17) 2.5% per year of FAS for every year of service credit Reduced before age 67 Public Employees Pension Reform Act (PEPRA): 120% of Social Security wage base per year * Prof/Sup: Professional and Supervisor employee groups, bargaining unit SPMG. * OCEA: Administrative, Clerical, Engineering, and Technical Services employee groups, bargaining unit OCEA. * 501: Operations and Maintenance employee groups, bargaining unit International Union of Operating Engineers Local 501 A cost of living adjustment is provided to benefit recipients based on changes in the Consumer Price Index (CPI) up to a maximum of 3% per year. Any increase greater than 3% is banked and may be used in years when the CPI is less than 3%. The increase is established and approved annually by the Board of Retirement. The Plan also provides disability and death benefits to eligible members and their beneficiaries, respectively. For retirees the death benefit is determined by the retirement benefit option chosen. For all other members the beneficiary is entitled to benefits based on the member s years of service and whether or not the cause of death is service related. (B) Contributions: Participating employers and active members are required by statute to contribute a percentage of covered salary to the Plan. Section 20814(c) of the California Public Employees Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and be effective on the July 1 following notice of a change in rate. Funding contributions are determined annually on an actuarial basis as of December 31 by OCERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. Contributions to the Plan from OCSD were $17,201,569 for the year ended June 30, An additional $125,000,000 was contributed to pay down OCSD s Net Pension Liability. 34

116 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Contribution rates in effect for the fiscal year ended June 30, 2015 are as follows: Plan G Plan H Plan B Plan U Employer Contribution Rate, 7/1/14-12/31/ % 36.57% 34.87% 33.52% Employer Contribution Rate, 1/1/15-6/30/ % 22.56% 20.86% 19.51% Employee Contribution Rate, 7/1/14-6/30/15 (2) % (1) % (1) % % Paid by Employer for Employee 3.50% 3.50% 0.00% 0.00% (1) Net of employer paid portion of 3.5% (2) Employee rates are determined by the age of entry into the retirement system. (C) Pension Liabilities: As of June 30, 2015, OCSD reported net pension liability of $57,418,760 for its proportionate share of OCERS net pension liability. The net pension liability was measured as of December 31, 2014 and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. OCSD s proportion of the net pension liability was based on a projection of OCSD s long-term share of contributions to the pension plan relative to the projected contribution of all participating employers, actuarially determined. At December 31, 2014, OCSD s proportion of the net pension liability was 1.130%, which was a decrease of 2.702% from its proportion measured as of December 31, The change in OCSD s proportion of the net pension liability during the fiscal year ended June 30, 2015 was caused by the contributions and projections noted above and an additional contribution of $125,000,000 in November 2014 by OCSD to the plan. (D) Pension Expense and Deferred Outflows/Inflows of Resources Related to Pensions For the year ended June 30, 2015, OCSD recognized pension expense of $17,945,082 for its proportionate share of the pension expense. At June 30, 2015 OCSD reported its share of deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Difference between expected and actual experience $ - $ 14,245,757 Net difference between projected and actual investment earnings on pension plan investments 5,699,846 - Changes of Assumptions (1) - 10,994,683 Changes in proportion and differences between employer contributions and proportionate share of contributions - 265,244 Employer contributions paid to OCERS subsequent to the measurement date 16,893,100 - Total $ 22,592,946 $ 25,505,684 (1) The monetary effects of changes in actuarial assumptions and method totals $10,994,683. These changes include: adjustments to the mortality tables (a setback of 3 years), a change to the retirement assumptions for deferred vested members (age at retirement from 58 to 57, increase of 5% in reciprocity, and an increase in compensation increases), an increase of 5% in the rate of marriage for male members at retirement or pre-retirement death, an increase in the Consumer Price Index from 3.0% to 3.5%, although the maximum increase is 3%, and a slight increase in salaries for employees with greater than 15 years of service. Detail for these changes is available in the Segal Actuarial Valuation for December 31, 2014, Section 3. This report is available on the OCERS website at 35

117 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 The amount $16,893,100 reported as deferred outflows of resources related to pensions resulting from OCSD s contributions to OCERS subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended June 30, Other amounts reported as deferred outflows of resources and deferred inflows of resources related to OCERS pensions will be recognized in pension expense as follows: Year ended June 30 Amount 2016 $ (3,498,917) 2017 (3,498,917) 2018 (3,498,917) 2019 (3,498,916) 2020 (4,923,878) 2021 (886,293) Thereafter - (E) Actuarial Assumptions and Methods: The total pension liability in the December 31, 2014 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Investment rate of return 7.25% of net pension plan investment expenses, including inflation Inflation rate 3.00% Projected salary increases 4.25% to 13.5% Cost of living adjustment 3.0% of retirement income The mortality assumptions used in the total pension liability at December 31, 2014 were based on the RP-2000 Combined Healthy Mortality Table projected with the Society of Actuaries Scale BB to For healthy general members, no adjustments are made. For disabled general members the ages are set forward six years for males and three years for females. The basis for determining the mortality assumptions used were based on the results of the actuarial experience study for the period January 1, 2011 through December 31, Further details of the Experience Study can be found in the OCERS CAFR, available on their website at (F) Long-Term Expected Real Rate of Return The long-term expected rate of return on pension plan investments was determined using a building-block method in which expected future real rates of return (expected returns, net of inflation) are developed for each major asset class. These returns are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation and deducting expected investment expenses. The target allocation and projected arithmetic real rates of return for each major asset class, after deducting inflation, but before investment expenses, used in the derivation of the long-term expected investment rate of return assumption are summarized in the following table for the calendar year ended December 31, 2014: 36

118 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Weighted Average Long- Asset Class Target Allocation Term Expected Real Rate of Return (Arithmetic) Large Cap U.A. Equity 14.90% 5.92% Small/Mid Cap US Equity 2.73% 6.49% Developed International Equity 10.88% 6.90% Emerging International Equity 6.49% 8.34% Core Bonds 10.00% 0.73% Global Bonds 2.00% 0.30% Emerging Markets Debt 3.00% 4.00% Real Estate 10.00% 4.96% Diversified Credit (US Credit) 8.00% 4.97% Diversified Credit (Non-US Credit) 2.00% 6.76% Hedge Funds 7.00% 4.13% Global Tactical Asset Allocation 7.00% 4.22% Real Return 10.00% 5.86% Private Equity 6.00% 9.60% Total % (G) Discount Rate: The discount rate used to measure the total pension liability was 7.25% for the year ended December 31, The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that employer contributions will be made at rates equal to the actuarially determined contribution rates. For this purpose, only employer contributions that are intended to fund benefits for current plan members and their beneficiaries are included. Projected employer contributions that are intended to fund the service costs for future plan members and their beneficiaries, as well as projected contributions from future plan members, are not included. Based on those assumptions, the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments for current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability as of December 31, (H) Sensitivity of the Proportionate Share of Net Pension Liability to Changes in the Discount Rate: The following table represents OCSD s proportionate share of the net pension liability calculated using the discount rate of 7.25%, as well as what OCSD s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (6.25%) or 1 percentage point higher (8.25%) than the current rate: 1% Decrease Current Discount Rate 1% Increase Net Pension Liability (6.25%) (7.25%) (8.25%) December 31, 2014 $ 134,934,012 $ 57,418,760 $ (6,317,778) 37

119 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 (I) Pension Plan Fiduciary Net position: Detailed information about OCERS fiduciary net position is available in a separately issued OCERS comprehensive annual financial report. That report may be obtained from OCERS at 2223 Wellington Avenue, Santa Ana, California or at their web site ( Additional Retiree Benefit Account (ARBA) The OCSD ARBA plan is a single-employer defined benefit plan which was administered by OCERS until February 29, 2008, when OCSD began direct administration. This benefit was established by the OCSD Board of Directors on October 25, It provides a monthly payment to retirees towards the premium costs of health insurance for the retiree and eligible dependents. The retiree is not required to use this amount for health insurance premium or to remain on the OCSD medical plan. The plan is currently paying benefits to 237 retirees. The ARBA plan is not subject to the reporting requirements of GASB 68 and 71 because a trust has not been set up for the plan. The plan is a funded on a pay-as-you-go plan from general funds and is administered by OCSD. The stand-alone financial statements are not issued for the plan. Benefits: Employees who retire receive $10 per month for every year of service up to a maximum of 25 years, or $250 per month. This amount is independent of salary and is fixed at retirement. Because OCSD cannot ensure the use of the benefit for payment of eligible health insurance expenses, the benefit is taxable to the retiree. Survivor benefits are provided in the event that a retiree pre-deceases his/her spouse. For retirees hired prior to July 1, 1988, OCSD provides health insurance coverage for 2½ months per year of service (see Note 6 Other Postemployment Benefits). ARBA benefits begin immediately after this benefit ends. For those hired on or after July 1, 1988, ARBA benefits begin immediately upon retirement and continue for life. Employees hired into the OCEA bargaining group after August 1, 2011 are ineligible for this benefit. Funding: There are no employee contributions for this plan; OCSD covers 100% of the cost. An actuarial evaluation was performed as of July 1, 2013, using the Projected Unit Credit Cost method. This method represents the present value of benefits earned to date assuming that an employee earns benefits ratably over his/her career. An investment rate of return of 4.0% per year and an inflation rate of 2.5% were used; no salary adjustment was used due to the flat dollar nature of the benefit. The unfunded actuarial liability was amortized on a level dollar basis over an open period of 30 years. OCSD utilizes a pay-as-you-go method for funding the plan. Trend Information and Funding Progress: Trend information gives an indication of the progress made in accumulating sufficient assets to pay benefits when due. OCSD s trend information follows. Annual Pension Cost Fiscal Year Ended Annual Pension Cost (APC) Percentage of APC Contributed Net Pension Obligation 6/30/13 969, % 8,629,918 6/30/14 1,087, % 9,263,773 6/30/15 1,076, % 9,839,805 38

120 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 The annual pension cost and net pension obligation for the years ended June 30, 2013, 2014 and 2015 were as follows: For the Fiscal Year Ended June 30, 2013 June 30, 2014 June 30, 2015 Annual required contribution $ 1,090,849 $ 1,241,847 $ 1,241,847 Interest on net pension obligation 404, , ,551 Adjustment to annual required contribution (525,767) (499,069) (535,726) Annual pension cost 969,200 1,087,975 1,076,672 Contributions made (421,650) (454,120) (500,640) Increase in net pension obligation 547, , ,032 Net pension obligation, beginning of year 8,082,368 8,629,918 9,263,773 Net pension obligation, end of year $ 8,629,918 $ 9,263,773 $ 9,839,805 The net pension obligation is reported in the noncurrent portion of long-term obligations on the Statement of Net Position. (6) Other Postemployment Benefits OCSD offers medical insurance to active and retired employees, as well as their qualified dependents. This is a single-employer defined benefit plan administered by OCSD. All retirees may choose coverage in an OCSD medical plan, with retirees paying the full premium. However, for employees hired prior to July 1, 1988, medical benefits begin immediately at retirement with OCSD paying 2.5 months of premium for each year of continuous service toward the cost of coverage under OCSD medical plans. At the termination of this period the retiree may elect to continue coverage at his/her own expense. This plan was established and may be modified only by action of the OCSD Board of Directors. The stand-alone financial statements are not issued. As of the date of the latest actuarial valuation (7/1/13), there were 593 active employees, 58 retirees paying premiums, and 71 retirees whose premium is fully paid by OCSD. For the fiscal year ended June 30, 2015, premiums ranged between $183 and $3,487 per month, depending on the plan and number of dependents covered. Funding Policy: There are no employee contributions to this plan; OCSD covers 100% of the cost for qualifying employees as stated above. Retirees opting to remain with the plan after employment pay 100% of the premium cost, except for those for whom OCSD pays for a period (see above). An actuarial evaluation was performed as of July 1, 2013, using the Projected Unit Credit Cost method. This method represents the present value of benefits earned to date, assuming that an employee earns benefits ratably over his/her career. An investment rate of return of 4.0% per year was used. The rate of increase for healthcare premium was set at 8.0%. The unfunded actuarial liability was amortized on a level dollar basis over an open period of 30 years. OCSD utilizes a pay-as-you-go method for funding the plan. For fiscal year , OCSD contributed $1,072,644 and retirees contributed $576,984 to cover current year expenses. Annual OPEB Cost and Net OPEB Obligation / (Asset): The annual OPEB cost is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize the unfunded actuarial liabilities over 30 years. 39

121 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 The following OPEB cost and net OPEB obligation/(asset) was determined for the years ended June 30, 2013, 2014, and 2015: For the Fiscal Year Ended June 30, 2013 June 30, 2014 June 30, 2015 Annual required contribution $ 900,035 $ 755,078 $ 755,078 Interest on net OPEB obligation 39,260 23,356 8,185 Adjustment to annual required contribution (51,078) (33,767) (11,833) Annual OPEB cost 888, , ,430 Contributions made (1,089,516) (1,123,961) (1,072,644) Increase (decrease) in net OPEB obligation (201,299) (379,294) (321,214) Net OPEB obligation, beginning of year 785, , ,614 Net OPEB obligation/(asset), end of year $ 583,908 $ 204,614 $ (116,600) OCSD s annual OPEB cost contributed and the net OPEB obligation/(asset) for the years ended June 30, 2013, 2014, and 2015 are shown in the following table. Annual OPEB Cost Fiscal Year Ended Annual OPEB Cost Actual Contributions Percentage of OPEB Cost Contributed Net OPEB Obligation/(Asset) 6/30/13 888,217 1,089, % 583,908 6/30/14 744,667 1,123, % 204,614 6/30/15 751,430 1,072, % (116,600) The net OPEB asset is reported in the noncurrent portion of assets on the Statement of Net Position. Actuarial methods and assumptions: Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing the benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. The ARC for the current year was determined as part of the July 1, 2013 actuarial valuation using the Projected Unit Credit cost method. The actuarial assumptions include a 4.0% investment rate of return, an annual rate of inflation of 2.5%, and an annual healthcare cost trend rate of 8.0%. The UAAL is being amortized ratably over 30 years. Inflation assumptions are included as part of the healthcare cost trend. No benefit increase is anticipated and the benefit is unaffected by changes in salary. 40

122 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 (7) Transactions with Irvine Ranch Water District Revenue Area No. 14 Formation of Revenue Area No. 14 & Excess Purchase Price Over Book Value of Acquired Assets On July 1, 1985, Revenue Area No. 14 was formed as an independent special district as a result of a negotiated agreement between OCSD and Irvine Ranch Water District (IRWD). At the time of Revenue Area 14 s creation, OCSD consisted of eight independent special districts (see Note 1 Reporting Entity). The eight existing districts sold a portion of the joint treatment facilities and land to the newly created district and recorded capacity rights revenue at the time of the sale. In accordance with the negotiated agreement between OCSD and IRWD, IRWD paid OCSD $34,532,000 for an initial 15,000,000 gallons per day capacity in OCSD s joint treatment facilities (with an ultimate collection capacity of 32,000,000 gallons per day) and for a pro-rata interest in real property (based on flow of 32,000,000 gallons per day). The book value of the assets acquired was determined to be $14,553,000 as of June 30, 1986; these assets were recorded at book value in Revenue Area 14. The excess of the purchase price over the assets' book value was $19,979,000 and was recorded as an intangible asset in Revenue Area 14. The excess of the purchase price over the assets book value is being amortized over the remainder of the useful lives of the original assets acquired. As of June 30, 2015, after recognizing current year amortization of $657,709, the unamortized amount of the excess of purchase price over the assets' book value was $905,439. Annual Transactions IRWD entered into a separate agreement with Revenue Area 14 on January 1, 1986 whereby IRWD agreed to fund quarterly payments of Revenue Area 14's proportionate share of OCSD's joint capital outlay revolving fund budget requirements and certain capital improvements during the term of the agreement, for which contributions of $3,168,402 were recorded during the fiscal year ended June 30, IRWD also agreed to fund the annual integration adjustment of Revenue Area 14 s equity share in OCSD s Joint Works Treatment Facilities based on the flows discharged to OCSD. Integration contributions of $5,386,575 to Revenue Area 14 were recognized and reported as contributions from other government during the fiscal year ended June 30, This amount included an integration contributions adjustment of $7,663,397 from a true-up of estimated flow calculation of the Irvine Business Complex area resulting in a reduction of due to other governmental agency. These capital contributions received from or credited to IRWD for their agreed-upon share of capital assets and equity share in OCSD s Joint Works Treatment Facilities are calculated as prescribed in the agreements. In addition, a separate agreement for transfer of IRWD s wastewater solids residuals to OCSD was entered on April 28, IRWD agreed to pay OCSD a charge for interim solids handling charge which include annual capital and quarterly operating expense components designed to compensate OCSD for IRWD s share of the cost of operating and maintaining the existing facilities for the treatment of solids. As a result, $308,449 in annual solids capital handling charges were reported as operating revenue in Consolidated Revenue Area, and $7,929,083 in solids quarterly operating and maintenance charges were reported as operating revenue in Revenue Area No. 14 during the fiscal year ended June 30, Any amounts credited to IRWD are not refunded in cash but are held as a credit to satisfy future contributions required of IRWD resulting in a balance due to other governmental agency of $2,869,329 as of June 30,

123 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 Annual Cash Reserve Requirement The cash reserve contribution requirement from IRWD at June 30, 2015; in accordance with Amendment No. 2 to the Agreement between IRWD and OCSD Acquiring Ownership Interests, Assigning Rights, and Establishing Obligations; is $9.3 million. This cash reserve requirement is recognized as a liability to IRWD. (8) Commitments, Due From Other Governmental Agency, and Contingencies Relocation of the Santa Ana Regional Interceptor: On June 29, 2010, OCSD entered into an agreement to lend the Orange County Flood Control District (OCFCD) 60 percent of the amount of the contract awarded to design and construct the relocation of the Santa Ana Regional Interceptor, but not to exceed $72 million. On December 18, 2012, a new agreement was executed that superseded the prior agreement and reduced OCSD s maximum loan obligation to $59,036,400 based on lower than expected construction costs. OCFCD agrees to repay the loan from any subvention funds received by OCFCD, with the total balance repaid by no later than July 1, Repayment installments will be made within 30 days equal to 60 percent of any subvention funds received by OCFCD. Interest shall accrue on the unpaid balance from July 1, 2018 at an annual interest rate of two percent until the unpaid balance has been repaid. During the fiscal year ended June 30, 2015, OCSD received loan repayments totaling $9,542,217, leaving an outstanding loan receivable balance of $31,080,935. Local Sewer Facilities Transfer: On February 27, 2014, OCSD entered into an agreement to transfer 174 linear miles of local sewer facilities in the unincorporated area of Area 7 and in the City of Tustin, to East Orange County Water District (EOCWD). The transfer is contingent upon receiving Orange County Local Agency Formation Commission (OC LAFCO) approval of EOCWD s request to activate EOCWD s latent powers to provide wastewater services and to slightly adjust EOCWD s boundary, solely for local sewer service, which is not currently within EOCWD s water service area. The agreement was amended on April 22, 2015 to extend the timeframes and term of the original agreement, to provide for a single disbursement of accumulated capital repair and replacement funds, and to prohibit the diversion of wastewater flows away from OCSD. If approved by OC LAFCO, the proposed transfer may then proceed. In addition to the transfer of the sewer facilities, the amended agreement provides for the one-time transfer of $25,000,000 of accumulated capital repair and replacement reserve funds from OCSD to EOCWD payable within five days following OC LAFCO s approval of EOCWD s request. As of June 30, 2015, no transactions have occurred. Pollution Remediation: An Underground Storage Tank (UST) at Plant No. 1 failed the pressure test to ensure its tank integrity. As a result of the test failure, OCSD voluntarily took this UST out of service and tested the immediate surrounding area and determined that both gasoline and diesel were present. During the fiscal year ended June 30, 2015, OCSD approved the initiation of a project to develop a remediation plan for the contaminated soil. No liability has been recorded as of June 30, 2015, because the cost to complete the pollution remediation cannot be estimated at this time. Litigation: Certain claims involving disputed construction costs have arisen in the ordinary course of business. Additionally, OCSD is a defendant in lawsuits. Although the outcome of these matters is not presently determinable, management does not expect that the resolution of these matters will have a material adverse impact on the financial condition of OCSD. 42

124 ORANGE COUNTY SANITATION DISTRICT Notes to Basic Financial Statements For the Year Ended June 30, 2015 (9) Restatement- Adoption of New Accounting Standard During the year ended June 30, 2015, OCSD implemented GASB Statements Nos. 68 and 71. The implementation of GASB Statement No. 68 required to recognize pension expense and report deferred outflows of resources and deferred inflows of resources and unfunded pension obligations related to pensions for its proportionate share of collective pension expenses and collective deferred outflows and inflows for resources. The net position was not restated for deferred inflows and deferred outflows because they were not determinable at the time of implementation of GASB 68 and 71. The retroactive effect of implementing this change in reporting pension costs resulted in a restatement of the beginning net position. The following is a summary of the effect of this adjustment: Beginning net position as previously reported at June 30, 2014 $1,822,294,724 Net pension liability (measurement date as of December 31, 2014) (202,747,516) Deferred outflows of net pension liability - District contributions made during January through June ,246,101 Total adjustment (194,501,415) Net position as restated, July 1, 2014 $ 1,627,793,309 An amount of $6,029,544 represents Revenue Area 14 s proportionate share of the restatement of the beginning net position and is included in the total restatement at June 30, The amount is calculated based on Revenue Area 14 s average proportionate share of the total salaries and benefits costs over a 15 years period. (10) Subsequent Events In May 2015, the OCSD Board of Directors approved the pay down on OCSD s unfunded actuarial accrued liability within the Orange County Employee s Retirement System (OCERS) in the amount of $50 million. This payment was made on September 3,

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126 ORANGE COUNTY SANITATION DISTRICT REQUIRED SUPPLEMENTARY INFORMATION 45

127 ORANGE COUNTY SANITATION DISTRICT Proportionate Share of the Net Pension Liability OCERS Pension Plan Last 10 fiscal Years (1) District's proportion of the net pension liability District's proportionate share of the net pension liability District's covered-employee payroll District's proportionate share of the net pension liability as a percentage of its coveredemployee payroll OCERS' fiduciary net position as a percentage of the total pension liability June 30, 2014 June 30, % 1.13% $ 202,747,516 $ 57,418,760 $ 60,856,218 $ 61,295, % 93.67% 63.14% 89.61% (1) The amounts presented for each fiscal year were determined as of December 31. Data for fiscal years ended June 30, 2006 through 2013 is not available in a comparable format. 46

128 ORANGE COUNTY SANITATION DISTRICT Schedule of District Contributions OCERS Pension Plan Last 10 fiscal Years (1) Contractually required contribution Contributions in relation to the contractually required contribution Contribution deficiency (excess) District's covered-employee payroll Contributions as a percentage of coveredemployee payroll June 30, 2014 June 30, 2015 $ 18,920,212 $ 17,201,569 $ (18,920,212) $ (17,201,569) $ - $ - $ 60,856,218 $ 61,295,869 (31.09%) (28.06%) (1) The amounts presented for each fiscal year were determined as of December 31. Data for fiscal years ended June 30, 2006 through 2013 is not available in a comparable format. 47

129 ORANGE COUNTY SANITATION DISTRICT Schedule of Funding Progress Last Three Actuarial Valuations The schedule of funding progress presents multiyear trend information that shows whether the actuarial value of the plan asset is increasing or decreasing due time relative to the actuarial accrued liabilities for benefits. Additional Retiree Benefit Account (ARBA) Actuarial Valuation Date* Actuarial Accrued Liability (AAL) Actuarial Value of Assets UAAL as a Percentage of Covered Payroll Unfunded AAL (UAAL) Funded Ratio Covered Payroll 7/1/2009 8,904,499-8,904, % 57,681, % 7/1/ ,753,718-10,753, % 59,787, % 7/1/ ,735,277-13,735, % 59,832, % * Based on most recent actuarial valuation available. Other Postemployment Benefits (OPEB) Actuarial Valuation Date* Actuarial Accrued Liability (AAL) Actuarial Value of Assets UAAL as a Percentage of Covered Payroll Unfunded AAL (UAAL) Funded Ratio Covered Payroll 7/1/2009 8,799,624-8,799, % 57,681, % 7/1/ ,706,789-10,706, % 59,787, % 7/1/ ,650,711-10,650, % 59,832, % * Based on most recent actuarial valuation available. 48

130 ORANGE COUNTY SANITATION DISTRICT SUPPLEMENTARY INFORMATION 49

131 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Net Position June 30, 2015 Revenue Consolidated Totals Area No. 14 Revenue Area 2015 Current assets: Cash and cash equivalents $ 527,717 $ 57,806,633 $ 58,334,350 Investments 4,211, ,374, ,586,079 Accounts receivable, net of allowance for uncollectibles $32,844-4,538,036 4,538,036 Accrued interest receivable - 1,251,757 1,251,757 Connection fees receivable - 618, ,742 Property tax receivable - 1,121,558 1,121,558 Inventories - 6,722,734 6,722,734 Prepaid expenses - 1,217,084 1,217,084 Total current assets 4,739, ,650, ,390,340 Noncurrent assets: Restricted: Cash and cash equivalents - 16,028,848 16,028,848 Investments - 16,940,965 16,940,965 Accrued interest receivable - 218, ,852 Unrestricted: Non-depreciable capital assets 7,530, ,638, ,168,784 Depreciable capital assets, net of accumulated depreciation 53,705,955 2,043,105,555 2,096,811,510 Prepaid insurance on outstanding debt payable - 217, ,772 Due from other governmental agency - 31,080,935 31,080,935 Net OPEB asset 116, ,600 Other noncurrent assets, net - 10,344 10,344 Total noncurrent assets 61,236,087 2,508,358,523 2,569,594,610 Total assets 65,975,693 3,043,009,257 3,108,984,950 Deferred outflow of resources: Deferred charges on defeasances - 30,355,758 30,355,758 Deferred outflows of net pension liability 700,381 21,892,565 22,592,946 Total deferred outflow of resources 700,381 52,248,323 52,948,704 Total assets and deferred outflow of resources 66,676,074 3,095,257,580 3,161,933,654 Current liabilities: Accounts payable - 19,459,022 19,459,022 Accrued expenses - 9,370,551 9,370,551 Retentions payable - 4,238,495 4,238,495 Interest payable - 20,059,050 20,059,050 Due to other governmental agency 2,869,329-2,869,329 Current portion of long-term obligations - 49,034,185 49,034,185 Total current liabilities 2,869, ,161, ,030,632 Noncurrent liabilities: Noncurrent portion of long-term obligations - 1,212,134,124 1,212,134,124 Net pension liability 1,779,982 55,638,778 57,418,760 Total noncurrent liabilities 1,779,982 1,267,772,902 1,269,552,884 Total liabilities 4,649,311 1,369,934,205 1,374,583,516 Deferred inflow of resources: Deferred inflows of net pension liability 790,676 24,715,008 25,505,684 Total liabilities and deferred inflow of resources 5,439,987 1,394,649,213 1,400,089,200 Net position: Net investment in capital assets: Collection system 18,373, ,493, ,866,573 Treatment and disposal -Land 406,846 4,068,905 4,475,751 Treatment and disposal system 42,455,765 1,960,182,205 2,002,637,970 Capital assets related debt - (1,177,595,934) (1,177,595,934) Subtotal 61,236,087 1,266,148,273 1,327,384,360 Unrestricted - 434,460, ,460,094 Total net position $ 61,236,087 $ 1,700,608,367 $ 1,761,844,454 50

132 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Revenues, Expenses, and Changes in Net Position For the Year Ended June 30, 2015 Revenue Consolidated Totals Area No. 14 Revenue Area 2015 Operating revenues: Service charges $ 17,461,992 $ 284,086,339 $ 301,548,331 Permit and inspection fees 12, , ,264 Total operating revenues 17,474, ,976, ,450,595 Operating expenses other than depreciation and amortization: Salaries and benefits $ 2,805,683 $ 76,851,498 79,657,181 Utilities 324,483 6,921,664 7,246,147 Supplies, repairs and maintenance 1,468,494 23,100,894 24,569,388 Contractual services 8,529,275 18,148,696 26,677,971 Directors' fees 4, , ,083 Meetings and training 28, , ,485 Feasibility studies 205,355 5,838,030 6,043,385 Other 341,478 3,691,532 4,033,010 Total operating expenses other than depreciation and amortization 13,708, ,518, ,226,650 Operating income before depreciation and amortization 3,765, ,457, ,223,945 Depreciation and amortization 3,252,765 90,932,774 94,185,539 Operating income 513,215 58,525,191 59,038,406 Non-operating revenues: Property taxes 2,201,655 77,633,079 79,834,734 Investment and interest income 54,055 4,752,252 4,806,307 Contributions from other government 8,554,977-8,554,977 Other 28,630 1,411,890 1,440,520 Total non-operating revenues 10,839,317 83,797,221 94,636,538 Non-operating expenses: Interest - 34,111,685 34,111,685 Other 1,650 62,960 64,610 Loss on disposal of assets 51,870 3,051,991 3,103,861 Total non-operating expenses 53,520 37,226,636 37,280,156 Income before capital contributions 11,299, ,095, ,394,788 Capital Contributions: Capital facilities capacity charges - 17,656,357 17,656,357 Change in net position 11,299, ,752, ,051,145 Total net position - beginning, as restated 49,937,075 1,577,856,234 1,627,793,309 Total net position - ending $ 61,236,087 $ 1,700,608,367 $ 1,761,844,454 51

133 ORANGE COUNTY SANITATION DISTRICT Combining Area Schedule of Cash Flows For the Year Ended June 30, 2015 Revenue Consolidated Totals Area No. 14 Revenue Area Eliminations 2015 Cash flows from operating activities: Receipts from (refunds to) customers and users $ (8,763,879) $ 288,265,101 $ - $ 279,501,222 Payments to employees (6,969,289) (207,370,173) - (214,339,462) Payments to suppliers (10,898,061) (34,939,653) - (45,837,714) Net cash provided by (used in) operations (26,631,229) 45,955,275-19,324,046 Cash flows from noncapital financing activities: Proceeds from property taxes 2,201,655 77,717,834-79,919,489 Proceeds from various resources 13,306 1,348,930-1,362,236 Net cash provided by noncapital financing activities 2,214,961 79,066,764-81,281,725 Cash flows from capital and related financing activities: Capital facilities capacity charges - 20,242,080-20,242,080 Additions to capital assets (8,560,429) (155,539,827) 7,426,692 (156,673,564) Disposal of capital assets - (1,128,285) 1,128,285 - Interest paid - (54,850,314) - (54,850,314) Principal payments on debt obligation - (27,875,000) - (27,875,000) Proceeds released to escrow account on defeased debts - (376,545,000) - (376,545,000) Proceeds from debt issuances 365,566, ,566,949 Debt issuance costs - (1,295,923) - (1,295,923) Contribution from other government 8,554,977 - (8,554,977) - Net cash used in capital and related financing activities (5,452) (231,425,320) - (231,430,772) Cash flows from investing activities: Proceeds from the sale of investments 86,288,404 6,997,862,171-7,084,150,575 Purchases of investments (71,402,731) (7,068,870,361) - (7,140,273,092) SARI project payments - 9,542,217-9,542,217 Interest received 81,282 8,029,405-8,110,687 Net cash provided by (used in) investing activities 14,966,955 (53,436,568) - (38,469,613) Net decrease in cash and cash equivalents (9,454,765) (159,839,849) - (169,294,614) Cash and cash equivalents, beginning of year 9,982, ,675, ,657,812 Cash and cash equivalents, end of year $ 527,717 $ 73,835,481 $ - $ 74,363,198 Reconciliation of operating income (loss) to net cash provided by operating activities: Operating income $ 513,215 $ 58,525,191 $ - $ 59,038,406 Adjustments to reconcile operating income (loss) to net cash provided by operations: Depreciation and amortization 3,252,765 90,932,774-94,185,539 Bad debt expense (Net recoveries) - 3,392-3,392 (Increase)/decrease in operating assets: Accounts receivable - 3,288,569-3,288,569 Inventories - (1,722,873) - (1,722,873) Prepaid and other assets - 19,603,792-19,603,792 Increase/(decrease) in operating liabilities: Accounts payable - 2,274,913-2,274,913 Accrued expenses - 2,074,890-2,074,890 Due to other governmental agency (26,237,942) - - (26,237,942) Net pension liability (4,159,267) (130,010,650) - (134,169,917) ARBA/OPEB/Catastrophe leave payable - 251, ,161 Compensated absences - 14,483-14,483 Other payable - 65,188-65,188 Claims and judgments - 654, ,445 Net cash provided by operations $ (26,631,229) $ 45,955,275 $ - $ 19,324,046 Noncash Activities: Unrealized (loss) on the fair value of investments $ (27,227) (2,982,520) $ (3,009,747) Receivable from non-operating activities - 2,592,167 2,592,167 Capital assets acquired through accounts payable - 5,262,051 5,262,051 52

134 ORANGE COUNTY SANITATION DISTRICT STATISTICAL SECTION This part of the comprehensive annual financial report of the Orange County Sanitation District (OCSD) presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about OCSD's overall financial health. Contents Financial Position and Trends These schedules contain current and trend information to help the reader understand OCSD's financial position and how OCSD's financial performance and well-being have changed over time. Pages Revenue Capacity These schedules contain information to help the reader assess OCSD's most significant revenue source of sewer service fees Debt Capacity These schedules present information to help the reader assess the affordability of OCSD's current levels of outstanding debt and OCSD's ability to issue additional debt in the future. All of OCSD's debt is recorded in a proprietary fund; consequently, many of the schedules which are applicable to governmental funds are not presented Operating Information These schedules contain data to help the reader understand how the information in OCSD's financial report relates to the services it provides and the activities it performs Demographic and Economic Factors These schedules offer demographic information to help the reader understand the environment within which OCSD's financial activities take place

135 ORANGE COUNTY SANITATION DISTRICT Net Position by Component (Dollars in Thousands) Last Ten Fiscal Years $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $ Net investment in Capital Assets Restricted for Debt Service & Capital Acquisition Unrestricted Fiscal Year Net investment in Capital Assets Restricted for Debt Service & Capital Acquisition Unrestricted Total Net Position $ 664,060 $ 3,003 $ 422,036 $ 1,089, ,463 3, ,370 1,189, , ,561 1,275, , ,452 1,348, ,121, ,016 1,431, ,131, ,423 1,510, ,125, ,652 1,597, ,180, ,427 1,700, ,204, ,589 1,822, ,327, ,460 1,761,844 (1) (2) (1) Beginning net position restated due to implementation of GASB 65. (2) Beginning net position restated due to implementation of GASB 68. Source: Orange County Sanitation District's Financial Management Division. 54

136 ORANGE COUNTY SANITATION DISTRICT Revenues and Gross Capital Contributions by Source (Dollars in Thousands) Last Ten Fiscal Years $325,000 $300,000 $275,000 $250,000 $225,000 $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $0 -$25, Operating Revenue Non-Operating Revenue Capital Contributions Operating Revenue Non-Operating Revenue Permit & Total Fiscal Service Inspection Total Property Non- Capital Year Charges Fees Operating Taxes Interest Other Operating Contributions $ 154,291 $ 874 $ 155,165 $ 39,958 $ 10,426 $ 3,477 $ 53,861 $32, ,790 1, ,656 60,565 22,244 1,068 83,877 50, ,180 1, ,376 65,210 20, ,458 35, , ,317 66,427 14,836 1,634 82,897 17, , ,688 64,759 19,166 6,939 90,864 (2,406) , ,249 64,307 10,092 11,015 85,414 9, ,491 1, ,521 67,882 15,747 8,486 92,115 8, ,400 1, ,576 79,240 (3,913) 3,781 79,108 12, , ,459 74,944 6,498 12,595 94,037 14, , ,450 79,835 4,806 9,996 94,637 17,656 Source: Orange County Sanitation District's Financial Management Division. 55

137 ORANGE COUNTY SANITATION DISTRICT Expenses by Type (Dollars in Thousands) Last Ten Fiscal Years $250,000 $225,000 $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $ Operating Expense Non-Operating Expense Fiscal Year Salaries & Benefits Utilities Operating Expense Maint & Other Depr & Amort Total Operating Interest Expense Non - Operating Expense $ 53,246 $ 7,563 $ 44,823 $ 49,887 $ 155,519 $ 20,078 $ 18,567 $ 38,645 Other Total Non- Operating ,802 8,072 46,281 53, ,266 21,747 16,089 37, ,629 8,092 56,169 47, ,657 22,517 17,818 40, ,498 7,242 89,816 32, ,076 24,899 13,842 38, ,652 6,934 61,499 52, ,121 27,537 13,736 41, ,112 6,948 63,328 49, ,676 29,129 39,245 68, ,642 7,405 89,272 56, ,370 28,700 8,433 37, ,878 6,403 66,536 63, ,724 42,315 37,335 79, ,179 6,381 60,887 99, ,252 40,450 1,317 41, ,657 7,246 62,323 94, ,412 34,112 3,168 37,280 Source: Orange County Sanitation District's Financial Management Division. 56

138 ORANGE COUNTY SANITATION DISTRICT Change in Net Position (Dollars in Thousands) Last Ten Fiscal Years $2,000,000 $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $ Ending Net Position by Fiscal Year Fiscal Total Total Year Change in Beginning Ending Revenues Expenses Net Position Net Position Net Position $ 242,016 $ 194,164 $ 47,852 $ 1,041,247 $ 1,089, , , ,638 1,089,099 1,189, , ,992 86,250 1,189,737 1,275, , ,817 72,334 1,275,987 1,348, , ,394 82,752 1,348,321 1,431, , ,050 79,413 1,431,073 1,510, , ,503 96,069 1,501,549 1,597, , , ,107 1,597,618 1,700, , , ,570 1,700,725 1,822, , , ,051 1,627,793 1,761,844 (1) (2) (1) Beginning net position restated due to implementation of GASB 65. (2) Beginning net position restated due to implementation of GASB 68. Source: Orange County Sanitation District's Financial Management Division. 57

139 ORANGE COUNTY SANITATION DISTRICT Cash and Investment Reserve Balances (Dollars in Millions) Last Ten Fiscal Years Capital Debt Cash Flow Self- Improvement Service Fiscal Year Contingency Insurance Program Requirements Total $ 132 $ 57 $ 196 $ 105 $ Notes: The Cash Flow Contingency Reserve is to fund operations, maintenance, and certificates of participation debt service expenses for the first half of the fiscal year, prior to the receipt of the first installment of the property tax allocation and sewer service user fees. The Self-Insurance Reserve is to provide requirements for property damage including fire, flood and earthquake, general liability and workers' compensation. The Capital Improvement Program Reserve is to fund annual increments of the capital improvement program with a target level at one half of the average annual capital improvement program through the year The Debt Service Required Reserves are monies held and controlled by a trustee pursuant to the provisions of certificates of participation issues, and the monies are not available for the general needs of the District. Source: Orange County Sanitation District's Financial Management Division. 58

140 ORANGE COUNTY SANITATION DISTRICT Sewer Service Fees Single Family Residence Rate Last Nine Fiscal Years and Next Fiscal Year Sewer service fees are comprised of three categories: residential customers, commercial customers, and industrial customers. Although the majority of sewer service fee revenues are from residential and commercial customers (see the schedule of Number of Accounts and Revenues by Customer Class), the fee paid by each residential and commercial customer is less than the individual fees paid by industrial customers. The rates for commercial and industrial customers are derived from the base sewer service fee charged for a single-family residence and are based on the type of business and the strength and volume of waste that is discharged into the sewer system. Due to the complexity of the rate structure for commercial and industrial customers and since the rates are derivatives of the single-family residence rate, only the single-family residence rate is presented within the statistical section. Sewer Service Fiscal Year Charge $ Annual Sewer Service Fees Single Family Residence SFR Annual Fee Fiscal Year Source: Orange County Sanitation District's Financial Management Division. 59

141 ORANGE COUNTY SANITATION DISTRICT Number of Accounts and Revenues by Customer Class (Dollars in Millions) Last Ten Fiscal Years Residential/Commercial Industrial Number of Total Percentage Total Percentage Equivalent Sewer Svc. of Sewer Number of Sewer Svc. of Sewer Single-Family Charge Service Charge Customer Charge Service Charge Fiscal Dwellings Revenue Revenues Accounts Revenue Revenues , % % , % % , % % , % % , % % , % % , % % , % % , % % , % % $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $ Residential/Commercial Users Industrial Users Source: Orange County Sanitation District's Financial Management Division. 60

142 ORANGE COUNTY SANITATION DISTRICT Principal Sewer Service Customers For the Current Fiscal Year and Nine Years Ago Fiscal Year Ended 6/30/15 Fiscal Year Ended 6/30/06 Industrial Industrial Permittee % to Total Permittee % to Total Service Service Charge Service Service Charge User Charges Rank Revenue Charges Rank Revenue House Foods America Corp. $ 1,055, % $ 480, % Kimberly-Clark Worldwide, Inc. 1,047, % 948, % Stremicks Heritage Foods, LLC 811, % 694, % MCP Foods, Inc. 738, % 875, % Pulmuone Wildwood, Inc. 571, % Jazz Semiconductor 521, % Ameripec Inc. 517, % Nor-Cal Beverage Co. Inc (NCB) 461, % 574, % Alta Dena Certified Dairy, LLC 457, % Nor-Cal Beverage Co. Inc (Main) 387, % Alstyle Apparel-Activewear Mfg. 845, % Disneyland Resort 676, % Disneyland Resort --DCA 534, % Van Law Food Products, Inc. 374, % Pepsi-Cola Bottling Group 326, % $ 6,569, % $ 6,331, % Although the majority of sewer service fee revenues are from residential and commercial customers (see the schedule of Number of Accounts and Revenues by Customer Class), the fee paid by each residential and commercial customer is less than the individual fees paid by industrial customers. Consequently, this schedule shows the largest sewer service fee customers. Source: Orange County Sanitation District's Financial Management Division. 61

143 ORANGE COUNTY SANITATION DISTRICT Ratio of Annual Debt Service to Total Expenses (Dollars in Thousands) Last Ten Fiscal Years 70% 60% 50% 40% 30% 20% 10% 0% Total Fiscal Principal Total Debt Operating Year (1) Interest Service (3) Expenses (2) $ 12,755 $ 29,563 $ 42,318 $ 105, % ,465 32,673 46, , ,025 36,484 47, , ,305 40,840 62, , ,030 46,052 70, , ,895 49,426 75, , ,370 50,975 65, , ,965 53,640 77, , ,590 53,163 92, , ,875 53,586 81, , Notes (1) - Excludes principal reductions due to advanced refunding. (2) - Excludes depreciation and amortization expense. (3) - Debt consists of certificates of participation, revenue obligations, and anticipation notes. Ratio of Debt Service to Total Operating Expenses Source: Orange County Sanitation District's Financial Management Division. 62

144 ORANGE COUNTY SANITATION DISTRICT Debt Coverage Ratios (Dollars in Millions) Last Ten Fiscal Years The Orange County Sanitation District has no legal debt limits as imposed by State legislation. The District does have contractual covenants within the existing Certificates of Participation indenture agreements which require minimum coverage ratios of The coverage ratio is calculated as the ratio of net annual revenues available for debt service payments to total annual debt service requirements Fiscal Year Ending June 30, Operating & Non-operating Revenues: Service Charges, Net of Refunds-Regional $ $ $ $ $ $ $ $ $ $ Service Charges, Net of Refunds-Local Industrial Sewer Service Charges Revenue Area No. 14 Fees Ad Valorem Taxes Interest Earnings (3.6) Other Revenues Total Revenues Operating Expenses (1) Net Revenues $ $ $ $ $ $ $ $ $ $ Debt Service Requirements Principal Payments Interest Payments Total Debt Service Requirements $ 41.9 $ 48.8 $ 42.8 $ 57.6 $ 67.1 $ 72.4 $ 65.4 $ 77.6 $ 92.8 $ 81.5 Coverage Ratios Ending Reserves (2) $ $ $ $ $ $ $ $ $ $ Notes (1) - Operating expenses exclude depreciation and amortization expenses. (2) - Excludes debt service reserves in accordance with the District's reserve policy. Source: Orange County Sanitation District's Financial Management Division. 63

145 ORANGE COUNTY SANITATION DISTRICT Computation of Direct and Overlapping Debt June 30, 2015 Total Debt District s Share 6/30/2015 % Applicable (1) of Debt 6/30/15 OVERLAPPING TAX AND ASSESSMENT DEBT (Based on all property assessed valuation of $354,056,945,332): Metropolitan Water District of Southern California $ 110,420, % $ 16,869,968 Coast Community College District 471,788, ,835,469 North Orange County Joint Community College District 187,039, ,295,692 Rancho Santiago Community College District 347,875, & ,083,128 Brea-Olinda and Laguna Beach Unified School Districts 45,424, & ,133,586 Garden Grove Unified School District 243,995, ,995,160 Los Alamitos Unified School District School Facilities Improvement District No ,560, ,268,791 Newport Mesa Unified School District 231,244, ,244,150 Placentia-Yorba Linda Unified School District 252,627, ,042,757 Rowland Unified School District 268,486, ,772 Saddleback Valley Unified School District 122,240, ,645,574 Santa Ana Unified School District 282,043, ,043,547 Tustin Unified School District School Facilities Improvement District No ,798, ,780,860 Tustin Unified School District School Facilities Improvement District No ,495, ,468,212 Tustin Unified School District School Facilities Improvement District No ,535, ,526,866 Anaheim Union High School District 151,308, ,308,955 Fullerton Joint Union High School District 48,387, ,318,971 Huntington Beach Union High School District 202,489, ,489,397 School Districts 442,662, ,058,090 City of Anaheim 1,360, ,349,202 Irvine Ranch Water District Improvement Districts 502,073,000 Various 444,005,793 Rossmoor Community Services District Special Tax Obligations 225, ,000 Bonita Canyon Community Facilities District No ,890, ,890,000 Irvine Unified School District Community Facilities Districts 591,093, ,093,358 Tustin Unified School District Community Facilities Districts 245,080, ,080,000 City of Tustin Community Facilities Districts 75,890, ,890,000 Other Community Facilities Districts 371,230, ,229,252 Orange County Assessment Districts 78,315, ,315,000 City of Irvine 1915 Act Bonds 806,209, ,209,000 Other 1915 Act bonds 13,716, ,716,762 TOTAL OVERLAPPING TAX AND ASSESSMENT DEBT $5,807,772,312 DIRECT AND OVERLAPPING GENERAL FUND DEBT: Orange County General Fund Obligations $ 98,906, % $ 74,323,903 Orange County Pension Obligation Bonds 366,854, ,676,575 Orange County Board of Education Certificates of Participation 15,190, ,414,677 Brea-Olinda Unified School District Certificates of Participation 21,550, ,546,121 Orange Unified School District Certificates of Participation and Benefit Obligations 115,579, ,144,434 Placentia-Yorba Linda Unified School District Certificates of Participation 106,310, ,223,112 Santa Ana Unified School District Certificates of Participation 73,662, ,662,130 Other Unified School District Certificates of Participation 58,966,874 Various 52,609,378 Union High School District Certificates of Participation 117,424,185 Various 114,963,014 School District Certificates of Participation 72,123,666 Various 71,696,478 City of Anaheim General Fund Obligations 699,187, ,635,917 City of Costa Mesa General Fund Obligations 25,740, ,740,000 City of Garden Grove General Fund Obligations 17,210, ,210,000 City of Huntington Beach General Fund and Judgment Obligation Bonds 56,324, ,614,881 City of La Habra General Fund Obligations 17,830, ,830,000 City of Santa Ana General Fund Obligations 76,210, ,210,000 Other City General Fund Obligations 195,323,192 Various 176,087,540 Orange County Sanitation District (2) Municipal Water District of Orange County Water Facilities Corporation 5,360, ,771,403 TOTAL GROSS OVERLAPPING GENERAL FUND DEBT $1,980,359,563 Less: City of Anaheim self-supporting obligations 693,635,917 Other City self-supporting obligations 555,000 MWDOC Water Facilities Corporation (100% supported) 3,771,403 TOTAL NET OVERLAPPING GENERAL FUND DEBT $1,282,397,243 OVERLAPPING TAX INCREMENT DEBT: $1,121,417, % $1,121,380,948 TOTAL DIRECT DEBT $0 GROSS OVERLAPPING & COMBINED TOTAL DEBT $8,909,512,823 (3) NET OVERLAPPING & COMBINED TOTAL DEBT $8,211,550,503 (1) The percentage of overlapping debt applicable to the district is estimated using taxable assessed property value. Applicable percentages were estimated by determining the portion of the overlapping district's assessed value that is within the boundaries of the sanitation district divided by the district's total taxable assessed value. (2) Excludes wastewater revenue certificates of participation. Previously classified certificates of participation have been reclassified as district revenue supported issues and are no longer included as direct debt in the debt statement. (3) Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations. Qualified Zone Academy Bonds are included based on principal due at maturity. Total Overlapping Tax Gross Combined Net Combined Total Overlapping Ratios to: and Assessment Debt Total Debt Total Debt Tax Increment Debt Land and Improvement Assessed Valuation ($350,480,673,301) 1.66% 2.54% 2.34% All Property Assessed Valuation ($354,056,945,332) 2.52% 2.32% Redevelopment Incremental Valuation ($45,654,442,524) 2.46% Source: California Municipal Statistics 64

146 ORANGE COUNTY SANITATION DISTRICT Ratios of Outstanding Debt Last Ten Fiscal Years Debt as a (5) (3) Percentage Total Median of Median (4) Debt Fiscal Outstanding Family Family Population per Year Debt Income (1) Income Estimate (2) Capita $ 620,520,145 $ 75, % 2,467, $ 807,809,704 $ 78, % 2,481, ,389,769 78, % 2,505, ,096,049,542 84, % 2,522, ,262,936,747 86, % 2,539, ,306,255,753 87, % 2,563, ,427,792,453 84, % 2,457, ,376,404,782 85, % 2,472, ,325,928,512 84, % 2,491, ,278,998,124 84, % 2,521, ,241,140,357 85, % 2,548, Notes & Data Sources (1) - Data is for the entire County of Orange. (2) - Data is for the estimated population served by the Orange County Sanitation District. (3) - Data Source: U.S. Department of Housing and Urban Development. (4) - Data Source: Demographic Research Unit, California Department of Finance. (5) - Data Source: Orange County Sanitation District. Debt includes certificates of participation, revenue obligations, and anticipation notes and is presented net of original issuance discounts and premiums. 65

147 Fiscal Year Millions of Gallons of Collection, Wastewater & Disposal Treatment Treated Cost per Per Million Day Gallons ORANGE COUNTY SANITATION DISTRICT Comparison of the Volume of Wastewater Treated With Revenues and Expenses Last Ten Fiscal Years Total Operating Costs (In Thousands) Total Non-Operating Costs (In Thousands) Total Operating Revenues (In Thousands) Total Non-Operating Revenues (In Thousands) , $ 155,519 $ 38,645 $ 155,165 $ 53, , ,266 37, ,656 83, , ,657 40, ,376 85, , ,076 38, ,317 82, , ,121 41, ,688 90, , ,676 68, ,249 85, , ,370 37, ,521 92, , ,724 79, ,576 79, , ,252 41, ,459 94, , ,412 37, ,450 94,637 A Facilities Master Plan to the year 2030 was completed in December 2009 that projects wastewater treatment flows to increase to 279 millions of gallons per day (mgd) in 2020, to 286 mgd in 2025, and to 294 mgd in the year The anticipated need to meet the projected flows is included in the overall CIP program of $2.0 billion out to Total expenses in FY increased $86.5 million, or 44.6 percent since FY , primarily as a result of OCSD's decision beginning in FY to maximize existing secondary treatment facilities as OCSD moved from a 50/50 mix of primary and secondary effluent treatment to meeting secondary treatment standards as of December 31, Maintenance, chemicals, utilities, and other operating costs represent 20 percent of the increase, primarily due to the increase in the levels of treatment referred to above. Depreciation expense represents another 51 percent of the increase as a result of the previous expansion in capital facilities and the financing associated with the expansion. In FY , personnel expenses rose 0.6 percent over the prior year. This increase is mainly due to increases in health insurance and retirement premiums. The full-time equivalent positions authorized have not changed in FY As depicted from the chart above, actual wastewater treatment flows were 235 mgd in FY Due to unusually dry weather conditions during the last several years, FY had flows of only 187 mgd, a decrease of 48 mgd or 20% since FY Source: Orange County Sanitation District. 66

148 ORANGE COUNTY SANITATION DISTRICT Authorized Full-time Equivalents by Function Last Ten Fiscal Years General Management (1) Human Resources Administrative Services Facilities Support Services Technical Services Engineering Operations and Maintenance Fiscal Year Ending June 30, General Management (1) Human Resources Administrative Services Facilities Support Services Technical Services Engineering Operations and Maintenance Total FTE's Notes (1) - Management Discretion positions used on a temporary basis have been excluded from FTE count. Source: Orange County Sanitation District's Financial Management Division. 67

149 ORANGE COUNTY SANITATION DISTRICT Biosolids Produced Last Ten Fiscal Years 300, , , , ,000 50, Wet Tonnage Dry Tonnage Fiscal Year Wet Tonnage Dry Tonnage ,996 49, ,460 49, ,717 50, ,202 51, ,668 50, ,557 49, ,572 47, ,957 43, ,362 50, ,943 45,515 Source: Orange County Sanitation District's Environmental Compliance Division. 68

150 ORANGE COUNTY SANITATION DISTRICT Capital Asset Statistics Last Ten Fiscal Years Miles of Trunk & Number Primary Secondary Fiscal Subtrunk of Pump Treatment Treatment Year Sewers Stations Capacity (1) Capacity (1) Notes (1) - Capacity is presented as million gallons treated per day. Source: Orange County Sanitation District 69

151 ORANGE COUNTY SANITATION DISTRICT Demographic Statistics Covering The Entire County of Orange (1) Last Ten Fiscal Years Total (5) (6) (2) Personal Per Capita Median Public (7) Fiscal Population Income Personal Family School Unemployment Year Estimates (in thousands) Income Income Enrollment Rate ,072,000 $ 150,598,354 (3) $ 49,023 $ 78, , % ,090, ,446,641 (3) 49,659 78, , % ,108, ,925,156 (3) 50,169 84, , % ,135, ,247,447 (3) 46,331 86, , % ,166, ,138,449 (3) 46,475 87, , % ,030, ,131,535 (3) 50,868 84, , % ,056, ,634,100 (4) 54,527 85, , % ,082, ,792,800 (4) 55,092 84, , % ,114, ,636,600 (4) 56,723 84, , % ,148, ,500,000 (4),(8) 58,926 85, , % Notes and Data Sources (1) - The Orange County Sanitation District services 479 square miles or 60% of the total 799 square miles that make up the boundaries of the County of Orange. (2) - Data Source: Demographic Research Unit, California Department of Finance. (3) - Data Source: Bureau of Economic Analysis, U.S. Department of Commerce. (4) - Data Source: A. Gary Anderson Center for Economic Research, Chapman University. (5) - Data Source: U.S. Department of Housing and Urban Development. (6) - Data Source: California Department of Education, Educational Demographics Unit. (7) - Data Source: State of California, Employment Development Department as of June 30 of each fiscal year. (8) - Forecasted number. 70

152 ORANGE COUNTY SANITATION DISTRICT Estimated Population Served by the Orange County Sanitation District June 30, 2015 Population as of January 1, 2015 Anaheim 351,433 Brea 43,328 Buena Park 82,767 Costa Mesa 113,455 Cypress 49,184 Fountain Valley 57,021 Fullerton 141,042 Garden Grove 174,774 Huntington Beach 198,389 Irvine 250,384 La Habra 62,079 La Palma 15,965 Los Alamitos 11,779 Newport Beach 87,249 Orange 140,094 Placentia 52,427 Santa Ana 335,264 Seal Beach 24,684 Stanton 39,219 Tustin 79,601 Villa Park 5,960 Westminster 92,106 Yorba Linda 67,719 Subtotal Cities (1) 2,475,923 Estimated Population Served in Unincorporated Areas (2) 72,822 2,548,745 Data Sources: (1) Demographic Research Unit, State of California Department of Finance (2) Center for Demographic Research, California State University, Fullerton. 71

153 ORANGE COUNTY SANITATION DISTRICT Principal Orange County Employers (1) For the Current Fiscal Year and Nine Years Ago Fiscal Year Ended 6/30/15 Fiscal Year Ended 6/30/06 Percentage of Percentage of Number of Total County Number of Total County Employers Employees (2) Rank Employment (3) Employees (2) Rank Employment (4) Walt Disney Co. 27, % 21, % University of California, Irvine 22, % 16, % County of Orange 18, % 18, % St. Joseph Health System 12, % 9, % Kaiser Permanente 7, % Boeing Co. 6, % 12, % Walmart 6, % Memorial Care Health System 5, % Bank of America Corp. 5, % Target Corp. 5, % Yum! Brands Incorporated 6, % Ameriquest Capital Corporation 6, % California State University, Fullerton 5, % PacifiCare Health System 5, % Home Depot, Incorporated 5, % Total 116, % 104, % Notes & Data Sources (1) - Data is for the entire County of Orange. (2) - Data Sources: Orange County Business Journal Book of Lists, County of Orange (3) - Data Source: State of California, Employment Development Department. - Percentage is calculated by dividing employees by total employment of 1,530,800 as of June (4) - Data Source: State of California, Employment Development Department. - Percentage is calculated by dividing employees by total employment of 1,533,200 as of June

154 ORANGE COUNTY SANITATION DISTRICT Operating Indicators June 30, 2015 District Organization: The Orange County Sanitation District is one consolidated district made up of two revenue areas which service unincorporated county areas and twenty-three cities and related special districts, as follows: Consolidated Revenue Area County of Orange (unincorporated areas) Cities: Anaheim Huntington Beach Santa Ana Brea Irvine Seal Beach Buena Park La Habra Stanton Costa Mesa La Palma Tustin Cypress Los Alamitos Villa Park Fountain Valley Newport Beach Westminster Fullerton Orange Yorba Linda Garden Grove Placentia Special Districts: Midway City Sanitary District Costa Mesa Sanitary District Yorba Linda Water District Revenue Area No. 14 County of Orange (unincorporated areas) Cities: Irvine Orange Tustin Special District: Irvine Ranch Water District Governing Body: 25-member Board of Directors Authorized Full-Time Equivalent Employees: 624 Operational Date: July 1, 1954 Authority: Services: Service Area: Population Served: Total Miles of Sewers (including force mains): California Health & Safety Code Section 4700 et. seq. Wastewater collection, treatment, and disposal 479 square miles 2.5 million 580 miles Number of Pumping Stations: 17 Wastewater System Treatment Capacities (Million Gallons per Day) Existing Primary Existing Secondary Actual Flows Treatment Capacity Treatment Capacity Plant Plant Total Source: Orange County Sanitation District's Financial Management Division. 73

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156 ORANGE COUNTY SANITATION DISTRICT OTHER DATA & TRENDS Information within this section consists of other data and trends including additional annual disclosures as required by the Sanitation District's debt covenants beyond what is allowed to be reported in the Statistical Section. 75

157 ORANGE COUNTY SANITATION DISTRICT Cash and Investment Portfolio As of June 30, 2015 Net Unrealized Cost Market Value Gain/(Loss) Shares Par Base Base % of Total Base INVESTMENT PORTFOLIO: CASH & CASH EQUIVALENTS (U.S. DOLLAR): CASH EQUIVALENTS $ 104,813 $ 104,813 $ 44, % $ (60,529) COMMERCIAL PAPER - DISCOUNT 19,000,000 18,966,404 18,966, % 142 FEDERAL HOME LOAN BANK - 1 YR OR LESS 28,000,000 27,992,929 27,996, % 3,978 FEDERAL HOME LOAN MORTGAGES - 1 YR OR LESS 15,000,000 14,990,503 14,996, % 5,605 FNMA ISSUES - 1 YR OR LESS 10,000,000 9,994,233 9,998, % 4,667 SHORT TERM INVESTMENT FUNDS (US REGULATED) 3,980,365 3,980,365 3,980, % - PENDING TRADES % - SUBTOTAL - CASH & CASH EQUIVALENTS 76,085,178 76,029,263 75,983, % (46,137) FIXED INCOME SECURITIES (U.S. DOLLAR): ABS - CAR LOANS 13,595,000 13,572,581 13,584, % 11,501 ABS - CREDIT CARDS 9,000,000 9,003,945 9,000, % (3,945) ABS - EQUIPMENT 6,955,000 6,956,439 6,960, % 4,156 ABS - HOME EQUITY 256, , , % 36,909 ABS - SMALL BUSINESS ADMINISTRATION 155, , , % 13,268 ABS - STUDENT LOANS 46,707 46,517 47, % 1,398 BANKING & FINANCE 55,508,000 57,046,720 55,027, % (2,019,309) CHEMICALS 1,000,000 1,001,530 1,000, % (580) COLLATERALIZED MORTGAGE OBLIGATION COMM/C 116, , , % (264) FHLMC MULTICLASS 2,130,892 2,334,335 2,379, % 45,296 FHLMC POOLS 2,750 2,684 2, % 169 FNMA POOLS 2,314,413 2,430,830 2,531, % 100,250 FNMA REMIC 702, , , % 12,165 FOOD BEVERAGE & TOBACCO 1,600,000 1,854,144 1,776, % (77,264) GNMA MULTI FAMILY POOLS 301, , , % 12,447 GNMA REMIC 54,103 54,104 54, % 341 HEALTH CARE 5,300,000 5,327,727 5,348, % 20,468 INSURANCE 500, , , % 1,775 OIL & GAS 7,100,000 7,080,029 7,089, % 9,494 REITS 1,000, ,050 1,083, % 87,320 RETAIL 2,000,000 2,033,930 2,032, % (1,840) SUPRANATIONAL ISSUES 13,000,000 13,035,120 13,027, % (7,860) TAXABLE MUNICIPALS 9,040,000 9,072,384 9,991, % 919,255 TECHNOLOGY 7,000,000 7,003,475 6,973, % (29,795) U.S. TIPS 13,654,376 13,544,535 13,372, % (171,786) US AGENCIES 62,500,000 62,681,638 62,683, % 2,344 US GOVERNMENTS 176,194, ,127, ,995, % 867,938 UTILITY - ELECTRIC 1,000, ,810 1,003, % 3,730 WHOLE LOAN - CMO - COLLATERALIZED MTG OBLIG 580, , , % 1,100 SUBTOTAL - FIXED INCOME SECURITIES 392,608, ,763, ,601, % (161,319) TOTAL INVESTMENT PORTFOLIO $ 468,693, ,792, ,585, % (207,456) DEMAND DEPOSITS AND CASH ON HAND 3,404,930 3,404,930 MONIES HELD WITH FISCAL AGENTS 32,969,813 32,969,813 MONIES WITH THE LOCAL AGENCY INVESTMENT FUND 49,911,655 49,930,420 TOTAL CASH AND INVESTMENTS $ 557,078,933 $ 556,890,242 Source: BNY Mellon Trust and Orange County Sanitation District's Financial Management Division. 76

158 ORANGE COUNTY SANITATION DISTRICT Property Tax Rates - Direct and Overlapping Governments Last Ten Fiscal Years Tax Rate OCSD 1958 OCSD's General Average Fiscal Basic Obligation Total Share of Year Levy Bonds Tax Rate Basic Levy % 0.00% 1.00% 1.65% % 0.00% 1.00% 1.65% % 0.00% 1.00% 1.63% % 0.00% 1.00% 1.64% % 0.00% 1.00% 1.63% % 0.00% 1.00% 1.64% % 0.00% 1.00% 1.64% % 0.00% 1.00% 1.64% % 0.00% 1.00% 1.65% % 0.00% 1.00% 1.63% Notes In 1978, California voters passed Proposition 13 which set the property tax rate at a 1.00% fixed amount of assessed value. This 1.00% is shared by all taxing agencies within which the subject property resides. In addition to the 1.00% fixed amount, property owners were charged taxes as a percentage of assessed property values for the payment of OCSD general obligation bonds (which were paid in full in fiscal year ). Source: County of Orange Auditor-Controller's Office. 77

159 ORANGE COUNTY SANITATION DISTRICT Assessed and Estimated Actual Value of Taxable Property (Dollars In Thousands) Last Ten Fiscal Years $400,000,000 $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $ Secured Unsecured Percent Change in Fiscal Assessed Year Secured Unsecured Total Value $ 236,826,573 $ 5,023,423 $ 241,849, % ,241,033 6,452, ,693, % ,051,467 4,681, ,733, % ,717,479 5,894, ,611, % ,038,654 6,116, ,155, % ,099,034 6,238, ,337, % ,526,970 6,163, ,690, % ,451,986 5,901, ,353, % ,064,994 6,220, ,285, % ,102,030 7,378, ,480, % In 1978, the voters of the State of California passed Proposition 13 which limited property taxes to a total maximum rate of 1% based upon the assessed value of the property being taxed. Each year, the assessed value of property may be increased by an inflation factor which is limited to a maximum increase of 2%. With few exceptions, property is only reassessed at the time that it is sold to a new owner. At that point, the new assessed value is reassessed at the purchase price of the property sold. The assessed valuation data shown above represents the only data currently available with respect to the actual market value of taxable property and is subject to the limitations described above. Consequently, the assessed and estimated values are the same. Source: Orange County Auditor - Controller's Office. 78

160 ORANGE COUNTY SANITATION DISTRICT Property Tax and User Fee Levies and Collections (Dollars in Thousands) Last Ten Fiscal Years $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $ Total Tax and User Fee Levy Total Tax and User Fee Collection Total Tax Current Tax Percent Total Tax % of Total % of Pass- Fiscal and User ERAF III and User Fee of Levy Delinquent and User Fee Collection O/S Delinquencies Through Year Fee Levy Deduction Collection Collected Collection Collection to Levy Delinquencies to Levy Payments $ 191,711 $ (16,198) $ 191, $ 122 $ 191, $ $ , , , , , , (13) (0.01) , , , (14) (0.01) , , , (60) (0.02) , , , (43) (0.01) , , , (56) (0.02) 3, , , , , , , , , , , , ,447 (2) (1) Notes (1) Upon dissolution of California redevelopment agencies during fiscal year , property tax increment formerly remitted to OCSD by its member city redevelopment agencies was instead deposited into the newly formed Redevelopment Property Tax Trust Fund (RPTTF) from which the Auditor/Controller makes disbursements on behalf of the successor agencies. There is no tax levy associated with these collections; thus, they have been excluded from the "% of Total Collection to Levy" calculation. (2) Beginning with fiscal year , the County no longer bills user fees for wholly exempt agencies not subject to property taxes, which are now billed and collected by OCSD. Only tax and user fees included on County property tax billings are shown in this schedule. In fiscal year , user fees of $5 million billed to wholly exempt agencies have been excluded from the levy and collection amounts above. Source: Orange County Auditor - Controller's Office. 79