$41,810,000 SANTA CLARA COUNTY FINANCING AUTHORITY Lease Revenue Bonds (VMC Refunding) 2016 Series A

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1 NEW ISSUE BOOK ENTRY ONLY RATING: S&P: AA+ (See "RATING" herein) In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the 2016 Series A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the 2016 Series A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the 2016 Series A Bonds. See "TAX MATTERS" herein. $41,810,000 SANTA CLARA COUNTY FINANCING AUTHORITY Lease Revenue Bonds (VMC Refunding) 2016 Series A Dated: Date of Delivery Due: November 15, as shown on the inside cover The Santa Clara County Financing Authority Lease Revenue Bonds (VMC Refunding), 2016 Series A (the "2016 Series A Bonds"), will be issuable as fully registered bonds without coupons and will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC"). DTC will act as securities depository for the 2016 Series A Bonds. Purchases of beneficial interests in the 2016 Series A Bonds will be made in book-entry form through DTC participants and no physical delivery of 2016 Series A Bonds will be made to purchasers, except as otherwise described herein. Payment of principal, premium, if any, and interest will be made by The Bank of New York Mellon Trust Company, N.A., as Trustee (the "Trustee") to DTC which is obligated to remit such payments to its participants for subsequent disbursement to the Beneficial Owners of the 2016 Series A Bonds. See APPENDIX D "BOOK-ENTRY SYSTEM" herein. The 2016 Series A Bonds will be issuable in denominations of $5,000 or any integral multiple thereof. The 2016 Series A Bonds will bear interest from the date thereof at the rates set forth on the inside cover, payable on May 15 and November 15 of each year, commencing May 15, The 2016 Series A Bonds are subject to optional and extraordinary redemption prior to maturity as described herein. The 2016 Series A Bonds are being issued to provide funds (i) to refund on a current basis all of the outstanding Santa Clara County Financing Authority Lease Revenue Bonds (VMC Refunding), 1994 Series B, and (ii) to pay costs of issuance of the 2016 Series A Bonds. The 2016 Series A Bonds are being issued by the Authority pursuant to a Trust Agreement, dated as of November 15, 1994, by and between the Santa Clara County Financing Authority (the "Authority") and the Trustee, as supplemented by a First Supplemental Trust Agreement dated as of September 15, 1997, a Second Supplemental Trust Agreement dated as of January 15, 2008, and a Third Supplemental Trust Agreement dated as of September 1, 2016 (together with the supplements thereto, collectively called the "Trust Agreement"). The 2016 Series A Bonds are limited obligations of the Authority payable solely from Revenues of the Authority, consisting primarily of base rental payments to be made by the County of Santa Clara (the "County") to the Authority (the "Base Rental Payments") pursuant to the Master Facility Lease (VMC Facility Replacement Project), dated as of November 15, 1994, by and between the Authority and the County, as amended by a First Amendment to Facility Lease dated as of September 15, 1997 and a Second Amendment to Facility Lease dated as of January 15, 2008 (together with the amendments thereto, the "Master Facility Lease"). Pursuant to the Master Facility Lease, the County has agreed to lease the Leased Facilities (as defined herein) from the Authority. The Base Rental Payments and Additional Payments (together, the "Lease Payments") to be made by the County pursuant to the Master Facility Lease are payable by the County from its General Fund to the Authority for the use and possession by the County of the Leased Facilities, as more fully described herein. The Base Rental Payments will be in amounts calculated to be sufficient to pay principal of and interest on the 2016 Series A Bonds (and on certain parity bond obligations, as described herein) when due. The County has agreed in the Master Facility Lease to make all Lease Payments, subject to abatement of such Lease Payments in the event of material damage to or destruction of the Leased Facilities or a taking of the Leased Facilities in whole or in part under eminent domain. The County has covenanted in the Master Facility Lease to take such action as may be necessary to include Lease Payments in its annual budgets and to make appropriations therefor. The 2016 Series A Bonds are limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or any of its income or receipts, except the Revenues (as described herein). Neither the full faith and credit of the Authority or any member of the Authority nor the County is pledged for the payment of the interest on or principal of the 2016 Series A Bonds nor for the payment of Lease Payments. Neither the payment of the principal of or interest on the 2016 Series A Bonds nor the obligation to make Lease Payments constitutes a debt, liability or obligation of the Authority or any member of the Authority or the County for which any such entity is obligated to levy or pledge any form of taxation or for which any such entity has levied or pledged any form of taxation. The Authority has no taxing power. The Bonds were sold by competitive sale on September 7, 2016, pursuant to the terms of an Official Notice of Sale, dated August 31, See "SALE OF THE 2016 SERIES A BONDS" herein. Maturities, Principal Amounts, Interest Rates and Yields (See Inside Cover) This cover page contains certain information for general reference only. It is not intended to be a summary of the security or terms of the 2016 Series A Bonds. Investors are advised to read the entire Official Statement to obtain information essential to the making of an informed investment decision. Capitalized terms used on this cover page not otherwise defined shall have the meanings set forth herein. The 2016 Series A Bonds will be offered when, as and if issued, subject to the approval as to their validity by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the Authority, and certain other conditions. Certain legal matters will be passed upon for the County by County Counsel and by Hawkins Delafield & Wood LLP, San Francisco, California, Disclosure Counsel. It is anticipated that the 2016 Series A Bonds will be available for delivery through the DTC book-entry system in New York, New York on or about September 20, Dated: September 7, 2016

2 Maturities, Principal Amounts, Interest Rates and Yields Maturity (November 15) Principal Amount Interest Rate Yield 2023 $13,265, % 1.13% LD ,925, LE ,620, (c) LF2 CUSIP (Base ) Copyright, American Bankers Association. CUSIP data herein is provided by Standard and Poor's CUSIP Service Bureau, a division of the McGraw Hill Companies, Inc. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP service. CUSIP numbers are provided for reference only. None of the County, the Authority or the Municipal Advisor takes any responsibility for the accuracy of such numbers. (c) Yield computed to the first optional redemption date of November 15, 2024 at par.

3 No dealer, broker, salesperson or any other person has been authorized to give any information or to make any representations other than those contained in this Official Statement in connection with the offering made hereby and, if given or made, such information or representations must not be relied upon as having been authorized by the Authority or the County. Neither the delivery of this Official Statement nor any sale hereunder will under any circumstances create any implication that there has been no change in the affairs of the Authority or the County since the date hereof. This Official Statement does not constitute an offer or solicitation in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. In connection with this offering, the underwriters may overallot or effect transactions which stabilize or maintain the market price of the 2016 Series A Bonds at levels above those which might not otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. No representation is made that past experience, as it might be shown by financial and other information, will necessarily continue or be repeated in the future. Certain statements included or incorporated by reference in this Official Statement constitute "forward-looking statements." Such statements are generally identifiable by the terminology used such as "plan," "expect," "estimate," "budget," "intend," "projection" or other similar words. All projections, forecasts, assumptions, expressions of opinions, estimates, and other forward-looking statements are expressly qualified in their entirety by the cautionary statements set forth in this Official Statement. 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. Neither the Authority nor the County plan to issue any updates or revisions to those forward-looking statements if or when their expectations, or events, conditions or circumstances on which such statements are based do or do not occur. The 2016 Series A Bonds have not been registered with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended, in reliance upon an exemption contained in such Act. The Trust Agreement has not been qualified under the Trust Indenture Act of 1939, as amended, in reliance upon an exemption contained in such Act. The 2016 Series A Bonds have not been approved or disapproved by the SEC or with the securities commission or any regulatory authority of any state, nor has the SEC or any state securities commission or regulatory agency passed upon or endorsed the merits of this offering or the accuracy or the adequacy of this Official Statement. Any representation to the contrary is a criminal offense. Statements in this Official Statement are made as of the date hereof unless stated otherwise and neither the delivery of this Official Statement at any time, nor any sales thereunder, will under any circumstances create an implication that the information contained herein is correct as of any time subsequent to the date hereof. In making an investment decision, investors must rely on their own examination of the Authority and the County and the terms of the offering, including the merits and risks involved. Prospective investors should not construe the contents of this Official Statement as legal, tax or investment advice. This Official Statement is not to be construed as a contract with the purchasers of the 2016 Series A Bonds.

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5 SANTA CLARA COUNTY FINANCING AUTHORITY BOARD OF DIRECTORS DAVE CORTESE President MIKE WASSERMAN KEN YEAGER CINDY CHAVEZ S. JOSEPH SIMITIAN COUNTY OF SANTA CLARA BOARD OF SUPERVISORS DAVE CORTESE (District 3) President MIKE WASSERMAN (District 1) KEN YEAGER (District 4) CINDY CHAVEZ (District 2) S. JOSEPH SIMITIAN (District 5) COUNTY OFFICIALS JEFFREY V. SMITH County Executive LAWRENCE E. STONE Assessor JAMES R. WILLIAMS, ESQ. Acting County Counsel EMILY HARRISON Director of Finance LAURIE SMITH Sheriff JEFFREY F. ROSEN, ESQ. District Attorney MUNICIPAL ADVISOR KNN Public Finance, LLC Oakland, California BOND COUNSEL Orrick, Herrington & Sutcliffe LLP San Francisco, California DISCLOSURE COUNSEL Hawkins Delafield & Wood LLP San Francisco, California TRUSTEE The Bank of New York Mellon Trust Company, N.A. Los Angeles, California

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7 TABLE OF CONTENTS Page INTRODUCTION... 1 The County and Santa Clara County... 1 Plan of Refunding... 2 The Authority... 2 Authority for Issuance of the 2016 Series A Bonds... 2 Security for the 2016 Series A Bonds... 2 Outstanding Bonds and Parity Obligations... 3 Additional Bonds... 3 Bonds Constitute Limited Obligations; Master Facility Lease Not Debt... 3 Summaries Not Definitive... 4 PLAN OF REFUNDING... 4 DEBT SERVICE SCHEDULE FOR THE BONDS... 5 ESTIMATED SOURCES AND USES OF FUNDS... 6 THE LEASED FACILITIES... 6 THE 2016 SERIES A BONDS... 8 General... 8 Redemption of the 2016 Series A Bonds... 8 SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS Base Rental Payments State Intercept Program Supplemental Reimbursements Reserve Fund Insurance Additional Bonds SPECIAL CONSIDERATIONS RELATING TO THE BONDS General Limited Obligation Base Rental Payments Abatement Substitution of Property Default and Remedies Limitations on Remedies Hazardous Substances Lack of Title Insurance County Obligations Seismic Considerations Limitation on Sources of Revenues; Additional Expenditures State of California Financial Condition... 18

8 CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS THE COUNTY THE AUTHORITY Members Governing Body TAX MATTERS CERTAIN LEGAL MATTERS MUNICIPAL ADVISOR LITIGATION CONTINUING DISCLOSURE RATING SALE OF THE 2016 SERIES A BONDS ADDITIONAL INFORMATION APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F APPENDIX G COUNTY OF SANTA CLARA FINANCES AND OPERATIONS COUNTY OF SANTA CLARA ECONOMIC AND DEMOGRAPHIC INFORMATION COUNTY OF SANTA CLARA AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015 SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS PROPOSED FORM OF OPINION OF BOND COUNSEL DTC AND THE BOOK-ENTRY SYSTEM FORM OF CONTINUING DISCLOSURE AGREEMENT

9 OFFICIAL STATEMENT $41,810,000 SANTA CLARA COUNTY FINANCING AUTHORITY Lease Revenue Bonds (VMC Refunding) 2016 Series A INTRODUCTION This introduction is qualified in its entirety by reference to the more detailed information included and referred to elsewhere in this Official Statement. The offering of the 2016 Series A Bonds to potential investors is made only by means of the entire Official Statement. Capitalized terms used in this Official Statement and not otherwise defined herein shall have the respective meanings assigned to them in APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Certain Definitions." The purpose of this Official Statement, including the cover page and appendices hereto, is to provide certain information concerning the sale and delivery by the Santa Clara County Financing Authority (the "Authority") of its Lease Revenue Bonds (VMC Refunding), 2016 Series A (the "2016 Series A Bonds") in the aggregate principal amount of $41,810,000. The County and Santa Clara County Santa Clara County lies immediately south of San Francisco Bay and is the sixth most populous county in the State based on its population as of January 1, 2016 of approximately 1.93 million. It encompasses an area of approximately 1,316 square miles and contains 15 cities, including Campbell, Cupertino, Gilroy, Los Altos, Los Altos Hills, Los Gatos, Milpitas, Monte Sereno, Morgan Hill, Mountain View, Palo Alto, San Jose, Santa Clara, Saratoga, and Sunnyvale, in which approximately 95.5% of Santa Clara County's residents live. The County was incorporated in 1850 as one of the original 27 counties of the State and operates under a home rule charter, adopted by Santa Clara County's voters in 1950 and amended in 1976 (the "County Charter"). As required under the County Charter and under County ordinances or by State and federal mandate, the County is responsible at the local level for activities involving public welfare, health, collection of property taxes, the maintenance of public records, and certain activities related to courthouses and jails. The County also operates recreational and cultural facilities. The County's budgeted revenue for all County funds for Fiscal Year is approximately $6.1 billion. The legislative body of the County is the five-member Board of Supervisors (the "Board"), elected by district for staggered four-year terms subject to term limits of twelve consecutive years. Other elected officials include the County Assessor, District Attorney and Sheriff. All elected officials serve four-year terms. The County Executive, who is appointed by the Board, administers the daily affairs of the County and carries out policies of the Board. Department heads are appointed by the County Executive, except for the County Counsel, the Public Defender, the Clerk of the Board of Supervisors, the Director of Child Support Services, and the Chief of Correction, who are appointed by the Board. The County owns and operates the Santa Clara Valley Medical Center (the "Valley Medical Center" or "VMC"), a 574-bed licensed acute care hospital in San Jose, California. Capital improvements to the VMC were funded, in part, by the proceeds of the 1994 Series B Bonds (as defined herein), which will be refunded using the proceeds of the 2016 Series A Bonds. See "PLAN OF REFUNDING" and

10 APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Santa Clara Valley Medical Center" herein. Plan of Refunding The 2016 Series A Bonds are being issued to provide funds (i) to refund on a current basis all of the outstanding Santa Clara County Financing Authority Lease Revenue Bonds (VMC Facility Replacement Project), 1994 Series B (the "1994 Series B Bonds"), currently outstanding in the aggregate principal amount of $51,500,000, and (ii) to pay costs of issuance of the 2016 Series A Bonds. See "PLAN OF REFUNDING" and "ESTIMATED SOURCES AND USES OF FUNDS" herein. The Authority The Authority is a joint exercise of powers agency organized under the laws of the State of California (the "State") and composed of the County and the Santa Clara County Central Fire Protection District (the "District"). The Authority was formed to assist in the financing of public capital improvements, such as improvements to the VMC. The District and the County are members ("Members") of the Authority. See "THE AUTHORITY" herein. Authority for Issuance of the 2016 Series A Bonds The 2016 Series A Bonds are being issued pursuant to the Marks-Roos Local Bond Pooling Act of 1985, constituting Article 4 of Chapter 5 of Division 7 of Title I of the Government Code of the State (the "Bond Act"), and a Trust Agreement, dated as of November 15, 1994, by and between the Authority and U.S. Trust Company of California, N.A. (the "Prior Trustee"), as amended and supplemented by a First Supplemental Trust Agreement, dated as of September 15, 1997, by and between the Authority and the Prior Trustee, a Second Supplemental Trust Agreement, dated as of January 15, 2008, by and between the Authority and The Bank of New York Mellon Trust Company, N.A. (as successor to the Prior Trustee) (the "Trustee"), and a Third Supplemental Trust Agreement, dated as of September 1, 2016, by and between the Authority and the Trustee (as supplemented, the "Trust Agreement"), and were authorized by resolutions of the Authority and the County adopted on August 30, The County and the Authority have entered into the Master Facility Lease (as defined below) and amendments thereto pursuant to and in accordance with the Government Code of the State, other applicable laws of the State, and resolutions of the Authority and County. Security for the 2016 Series A Bonds The Bonds are limited obligations of the Authority, payable solely from Revenues of the Authority, consisting primarily of base rental payments (the "Base Rental Payments") payable by the County. The Base Rental Payments are payable by the County pursuant to a Master Facility Lease (VMC Facility Replacement Project) dated as of November 15, 1994, as amended by a First Amendment to Facility Lease dated as of September 15, 1997 by and between the Authority and the County, and a Second Amendment to Facility Lease dated as of January 15, 2008 by and between the Authority and the County (together with the amendments thereto, the "Master Facility Lease"). The Base Rental Payments and additional payments (the "Additional Payments" and, together with the Base Rental Payments, the "Lease Payments") to be made by the County pursuant to the Master Facility Lease are payable by the County from its General Fund to the Authority for the use and possession by the County of the leased facilities (the "Leased Facilities") consisting of the North Tower of the VMC main hospital facility, VMC parking garages, the Methadone Clinic, the Boiler House, the Mechanical/Electrical Building, the Logistics Center, the County Coroner's building and the West Wing of the County administration 2

11 facilities. For a more detailed description of the Leased Facilities, see "THE LEASED FACILITIES" below. Pursuant to a Master Site Lease (VMC Facility Replacement Project) dated as of November 15, 1994, as amended by a First Amendment to Site Lease dated as of September 15, 1997 between the County and the Authority (together with the amendment thereto, the "Master Site Lease"), the County has leased to the Authority the real property upon which the Leased Facilities are located. Outstanding Bonds and Parity Obligations The 2016 Series A Bonds will be payable on a parity with the other outstanding Bonds issued under the Trust Agreement (the "Outstanding Bonds") payable from Revenues of the Authority consisting of the $126,410,000 Santa Clara County Financing Authority Lease Revenue Bonds (VMC Refunding) 2008 Series A (the "2008 Series A Bonds"), currently outstanding in the aggregate principal amount of $97,070,000. The proceeds of the 2008 Series A Bonds were used to current refund a portion of the Authority's Lease Revenue Bonds (VMC Refunding), 1997 Series A (the "1997 Series A Bonds"), which 1997 Series A Bonds advance-refunded a portion of the Authority's Lease Revenue Bonds (VMC Facility Replacement Project), 1994 Series A (the "1994 Series A Bonds") and a portion of the County of Santa Clara, California 1988 Certificates of Participation (Capital Projects) (the "1988 Certificates"). The proceeds of the 1994 Series A Bonds, together with proceeds of the 1994 Series B Bonds, financed a portion of the costs of design, construction, remodeling and equipping of existing and new medical facilities to replace, remodel and expand certain facilities of the VMC, which is owned and operated by the County, while the proceeds of the 1988 Certificates were used to finance the construction of a parking garage and other capital projects for the County. The 2016 Series A Bonds will be secured on a parity with the 2008 Series A Bonds and any future Additional Bonds that may be issued by the Authority. The 2016 Series A Bonds, 2008 Series A Bonds and any future parity bond obligations issued under the Trust Agreement are herein referred to collectively as the "Bonds." Upon issuance of the 2016 Series A Bonds and refunding of the 1994 Series B Bonds (as defined herein), the Authority will have $138,880,000 of Outstanding Bonds under the Trust Agreement. See "PLAN OF REFUNDING" below. The County also has a significant amount of other obligations payable from its General Fund and may enter into additional obligations payable from its General Fund in the future. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Outstanding Long-Term Debt and Lease Obligations" attached hereto. Additional Bonds In addition to the 2016 Series A Bonds, the Authority and the Trustee may, by supplemental Trust Agreement, provide for the issuance of Additional Bonds, subject to satisfaction of certain provisions contained in the Trust Agreement. Additional Bonds are to be payable from the Revenues as provided in the Trust Agreement and secured by a pledge of and charge and lien upon the Revenues equal to the pledge, charge and lien securing the Outstanding Bonds theretofore issued under the Trust Agreement, subject to the terms and conditions of the Trust Agreement. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS Additional Bonds" and APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Trust Agreement Additional Bonds" attached hereto. Bonds Constitute Limited Obligations; Master Facility Lease Not Debt The 2016 Series A Bonds are limited obligations of the Authority and are not secured by a legal or equitable pledge of, or charge or lien upon, any property of the Authority or any of its income or 3

12 receipts, except the Revenues. Neither the full faith and credit of the Authority, the County or any Member of the Authority is pledged for the payment of the interest on or principal of the 2016 Series A Bonds nor for the payment of Lease Payments. Neither the payment of the principal of or interest on the Bonds nor the obligation to make Lease Payments constitutes a debt, liability or obligation of the Authority, the County or any Member of the Authority for which any such entity is obligated to levy or pledge any form of taxation or for which any such entity has levied or pledged any form of taxation. The Authority has no taxing power. Summaries Not Definitive Brief descriptions of the 2016 Series A Bonds, the Authority, the County and the Leased Facilities are included in this Official Statement, together with summaries of the Master Site Lease, the Master Facility Lease and the Trust Agreement. Such descriptions and summaries do not purport to be comprehensive or definitive. All references herein to the 2016 Series A Bonds, the Master Site Lease, the Master Facility Lease and the Trust Agreement are qualified in their entirety by reference to the actual documents, or with respect to the 2016 Series A Bonds, the forms thereof included in the Trust Agreement, copies of all of which are available for inspection at the corporate trust office of the Trustee in San Francisco, California. PLAN OF REFUNDING The proceeds of the 2016 Series A Bonds will be applied to refund on a current basis all of the Outstanding 1994 Series B Bonds. On December 15, 1994, the Authority issued $206,995,000 of its 1994 Series A Bonds and $51,500,000 of its 1994 Series B Bonds. Proceeds of the 1994 Series A Bonds and the 1994 Series B Bonds were used to finance a portion of the costs of design, construction, remodeling and equipping of existing and new medical facilities to replace, remodel and expand certain facilities of the VMC (including certain of the Leased Facilities), which is owned and operated by the County. See "THE LEASED FACILITIES" herein. The 1994 Series B Bonds are outstanding variable rate demand bonds currently bearing interest at a weekly rate and maturing, subject to prior redemption, including mandatory sinking fund redemption, on November 15, 2025 in the principal amount of $51,500,000. The 1994 Series B Bonds have a tender option provided to the owners thereof and liquidity support for the purchase of 1994 Series B Bonds tendered for purchase and not remarketed is provided pursuant to a Standby Bond Purchase Agreement (the "Standby Agreement") that is scheduled to expire November 1, 2016, unless extended. Obligations of the Authority to pay principal of and interest on 1994 Series B Bonds purchased pursuant to the Standby Agreement are payable on a parity with the 1994 Series B Bonds. The Standby Agreement will terminate upon redemption of the 1994 Series B Bonds. The Authority has provided notice of redemption for the 1994 Series B Bonds to be redeemed on September 20, 2016, the expected issuance date of the 2016 Series A Bonds, when it intends to use the proceeds of the 2016 Series A Bonds to redeem the 1994 Series B Bonds in full. 4

13 DEBT SERVICE SCHEDULE FOR THE BONDS The following table sets forth the debt service schedule for the Outstanding Bonds under the Trust Agreement upon the issuance of the 2016 Series A Bonds and refunding of the 1994 Series B Bonds. For information on other long-term debt of the County, see APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Outstanding Debt and Lease Obligations" attached hereto. Period Ending 2008 Series A Bonds 2016 Series A Bonds Annual Debt Service (1) 11/15/2016 $14,316,750 05/15/2017 2,078,250 $1,173,760 $17,568,760 11/15/ ,618, ,050 05/15/2018 1,764, ,050 18,181,100 11/15/ ,934, ,050 05/15/2019 1,435, ,050 18,168,350 11/15/ ,260, ,050 05/15/2020 1,089, ,050 18,148,475 11/15/ ,599, ,050 05/15/ , ,050 18,125,100 11/15/ ,917, ,050 05/15/ , ,050 18,112,600 11/15/ ,292, ,050 05/15/ ,050 18,090,475 11/15/ ,164,050 05/15/ ,425 14,731,475 11/15/ ,492,425 05/15/ ,300 14,711,725 11/15/ ,839,300 14,839,300 Total $114,432,500 $56,244,860 $170,677,360 (1) Totals may not add up due to independent rounding. 5

14 ESTIMATED SOURCES AND USES OF FUNDS The following table sets forth the estimated sources and uses of funds with respect to the 2016 Series A Bonds. Sources 2016 Series A Bond Principal Amount... $41,810,000 Original Issue Premium... 9,470,131 Less: Underwriters' Discount... (64,806) Amount Released from the Reserve Fund (1) ,340 Total Sources... $51,828,665 Uses Redemption of the 1994 Series B Bonds... $51,500,000 Costs of Issuance (2) ,665 Total Uses... $51,828,665 (1) Represents amounts to be released from the Reserve Fund in connection with the refunding of the 1994 Series B Bonds. The Reserve Fund is currently funded in the amount of $19,382,650. Following the issuance of the 2016 Series A Bonds and the redemption of the 1994 Series B Bonds, the Reserve Fund will be funded in the amount of $18,769,310, equal to the Reserve Fund Requirement. (2) Includes financing and consulting fees, fees of Bond Counsel and Disclosure Counsel, printing costs, rating agency fees, Trustee fees, and other miscellaneous expenses. THE LEASED FACILITIES Upon delivery of the 2016 Series A Bonds, the Leased Facilities will consist of the following structures and the real property on which they are located. Unless otherwise indicated below, the Leased Facilities are located within the VMC campus at 751 South Bascom Avenue, San Jose, California, and unless otherwise indicated below, were funded in part by the 1994 Series A Bonds and the 1994 Series B Bonds. A five-story main hospital building, with approximately 315,000 square feet on a site of about 2.5 acres, containing a diagnostic imaging center and surgical departments (the "North Tower"). The North Tower was completed in July 1998, is the central focus of the VMC campus, and is the nucleus for inpatient and outpatient services. The North Tower houses a total of 154 beds, composed of 52 Pediatric and Pediatric Intensive Care beds, 58 beds for Medical/Surgical and Medical Intensive Care and Neurology, and 44 beds for Neonatal Intensive Care and the Birthing Center. The design of the North Tower incorporates technology developed since the 1993 Northridge earthquake in Southern California. The North Tower is designed to be fully functional after the occurrence of the maximum credible earthquake for the area (assumed to be at least an 8.5 magnitude on the San Andreas fault). See "SPECIAL CONSIDERATIONS RELATING TO THE BONDS Seismic Considerations" herein. A parking facility consisting of a 435-car one story parking deck for visitors (the "West Deck"). The West Deck was completed in December 1994, and was constructed as one of 6

15 three parking projects designed to provide much-needed parking capacity for the entire VMC campus. A 10,858 square foot Methadone Clinic (the "Methadone Clinic"), which was completed in December The Methadone Clinic contains treatment and counseling spaces, and is being fully utilized for the County's Hospital and Health System's Methadone and Perinatal Substance Abuse Programs. For more information on the County's Hospital and Health System, see APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS County Services Health Related Services." A 10,900 square foot (approximate) Boiler House (the "Boiler House"), which was completed in February Construction involved the installation of two new boilers, which enabled VMC to comply with the Environmental Protection Agency's 1999 deadline to cease using outdated equipment in its operations. An 11,725 square foot (approximate), two-story mechanical/electrical building (the "Mechanical/Electrical Building") that is adjacent to the North Tower, which was completed in November The Mechanical/Electrical Building houses the main incoming utility power meter and switchgear for the VMC campus and 12kV distribution equipment, centralizes 3600 tons of chiller capacity for the VMC campus, and houses 2700kV emergency generators that supply emergency power for the hospital. A five-story parking structure of about 350,000 square feet, with an approximate capacity of 1,000 vehicles on an 80,000 square foot site (the "Parking Garage"), which was completed in March A 9,400 square foot Logistics Center for the receiving, staging and distribution of laundry and supplies, and holding and removal of waste material (the "Logistics Center"). The Logistics Center also houses four truck bays. Construction of the Logistics Center was completed in May The Leased Facilities also consist of the following structures and the real property on which they are located: The West Wing Government Center is a seven-story building constructed of concrete and steel and is occupied by the County's District Attorney and Public Defender staff (the "West Wing"). The West Wing is a part of the County Government Center complex consisting of several high-rise buildings in the City of San Jose, bordered on the east by First Street, on the north by Hedding Street, and the west by Guadalupe Boulevard. The County Government Center is separate from the VMC campus and houses the principal administrative offices of the County. The West Wing was built in 1960, with major office remodeling, bracing and strengthening completed in 1970, 1976, 1991 and Only the West Wing is part of the Leased Facilities; the other structures within the County Government Center are not part of the Leased Facilities. The County Coroner's Building is a 22,300 square foot, single-story building constructed of steel and concrete located on the VMC campus (the "County Coroner's Building"). The County Coroner's building is occupied by the Coroner and his staff. The County Coroner's building was completed in 1987 and was funded by County funds and grants. 7

16 The Master Facility Lease does not require the County to obtain policies of title insurance with respect to the Leased Facilities other than the portion of the Leased Facilities upon which the Methadone Clinic ($2,562,768 policy coverage), the County Coroner's Building and the West Wing ($14,648,163 policy coverage) are located. The County does not intend to obtain new or additional policies of title insurance in connection with the issuance of the 2016 Series A Bonds. The County has covenanted to commence eminent domain proceedings or a quiet title action if title defects are discovered. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 Series A BONDS Insurance" and "SPECIAL CONSIDERATIONS RELATING TO THE BONDS Lack of Title Insurance" herein. The County and the Authority may substitute other improved real property in substitution for all or part of the Leased Facilities, in accordance with the Master Facility Lease. There is no requirement that any substitute be of the same or a similar nature or function as the then existing Leased Facilities, nor have a market value or fair rental value as great as the then existing Leased Facilities. See "SPECIAL CONSIDERATIONS RELATING TO THE BONDS Substitution" and APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Facility Lease Substitution." General THE 2016 SERIES A BONDS The 2016 Series A Bonds will initially be registered in the name of Cede & Co, as nominee of The Depository Trust Company ("DTC"), New York, New York, which will act as securities depository for the 2016 Series A Bonds. Payments of principal, premium, if any, and interest on the 2016 Series A Bonds will be paid by the Trustee to DTC which is obligated in turn to remit such principal, premium, if any, and interest on the 2016 Series A Bonds to its DTC Participants (as hereinafter defined) for subsequent disbursement to the beneficial owners of the 2016 Series A Bonds. See APPENDIX F - "DTC AND THE BOOK-ENTRY SYSTEM" herein. The 2016 Series A Bonds will bear interest at the rates set forth on the inside cover hereof, payable semiannually on May 15 and November 15 of each year, commencing May 15, The 2016 Series A Bonds will mature in the years and in the amounts set forth on the inside front cover hereof. The 2016 Series A Bonds will be dated their date of delivery, and shall be issued in denominations of $5,000 or any integral multiple thereof ("Authorized Denominations"). Redemption of the 2016 Series A Bonds Optional Redemption. The 2016 Series A Bonds maturing on or prior to November 15, 2024 are not subject to optional redemption. All 2016 Series A Bonds maturing on November 15, 2025 are subject to redemption prior to their maturity at the written direction of the Authority, from moneys deposited by the Authority or the County, as a whole or in part on any date on or after November 15, Any such redemption of the 2016 Series A Bonds shall be made at a redemption price equal to 100% of the principal amount thereof (or the portion of such principal amount to be redeemed), together with accrued interest on such principal amount to the date fixed for redemption, without premium. Extraordinary Redemption. The 2016 Series A Bonds are subject to redemption by the Authority on any date prior to their respective stated maturities, upon notice as provided in the Trust Agreement, as a whole or in part by lot within each stated maturity in integral multiples of Authorized Denominations, from prepayments made by the County from the net proceeds received by the County due to a taking of the Leased Facilities or portions thereof under the power of eminent domain, or from the net proceeds of insurance received for material damage to or destruction of the Leased Facilities or portions 8

17 thereof or from the net proceeds of title insurance, under the circumstances described in the Trust Agreement and Master Facility Lease. The redemption price will be equal to the sum of the principal amount of the 2016 Series A Bonds to be redeemed and accrued interest thereon to the Redemption Date, without premium. Whenever less than all of the Outstanding Bonds are to be redeemed on any one date, the Trustee will select, in accordance with written directions from the Authority, the Bonds to be redeemed in part from the Outstanding Bonds so that the aggregate annual principal amount of and interest on Bonds which are payable after such Redemption Date will be as nearly proportional as practicable to the aggregate annual principal amount of and interest on Bonds Outstanding prior to such Redemption Date. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 Series A BONDS Insurance" and APPENDIX D " SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Facility Lease Fire and Extended Coverage and Earthquake Insurance," " Title Insurance," " Eminent Domain" and " Prepayment" herein. Selection of 2016 Series A Bonds for Redemption. If less than all Outstanding 2016 Series A Bonds maturing by their terms on any one date are to be redeemed at any one time, the Trustee will select the 2016 Series A Bonds of such maturity date to be redeemed in any manner that it deems appropriate and fair and will promptly notify the Authority in writing of the numbers of the 2016 Series A Bonds so selected for redemption. For purposes of such selection, 2016 Series A Bonds will be deemed to be composed of $5,000 multiples and any such multiple may be separately redeemed. Notice of Redemption. Notice of redemption will be mailed by first-class mail by the Trustee, not less than thirty (30) nor more than sixty (60) days prior to the redemption date to the respective Bondholders of the 2016 Series A Bonds designated for redemption at their addresses appearing on the registration books of the Trustee. Failure to receive such notice will not invalidate any of the proceedings taken in connection with such redemption. In the event of redemption of 2016 Series A Bonds, the Trustee will mail a notice of optional or extraordinary redemption, other than any notice that refers to 2016 Series A Bonds that are to be redeemed from proceeds of a refunding bond issue, only if sufficient funds have been deposited with the Trustee to pay the applicable redemption price of the 2016 Series A Bonds to be redeemed. The Authority may, at its option, prior to the date fixed for redemption in any notice of redemption, rescind and cancel such notice of redemption by Written Request to the Trustee, and the Trustee will mail notice of such cancellation to the recipients of the notice of redemption being cancelled. Effect of Redemption. If notice of redemption has been duly given as described above and money for the payment of the redemption price of the 2016 Series A Bonds called for redemption is held by the Trustee, then on the redemption date designated in such notice, the 2016 Series A Bonds so called for redemption will become due and payable, and from and after the date so designated interest on such 2016 Series A Bonds will cease to accrue, and the Bondholders of such 2016 Series A Bonds will have no rights in respect thereof except to receive payment of the redemption price thereof. All 2016 Series A Bonds redeemed pursuant to these provisions will be cancelled by the Trustee and will be destroyed with a certificate of destruction furnished to the Authority upon its request and will not be reissued. 9

18 SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS Base Rental Payments The 2016 Series A Bonds are secured by the Revenues of the Authority, which consist primarily of Base Rental Payments made by the County under the Master Facility Lease. The County's obligation is a General Fund obligation and the County is required under the Master Facility Lease to make Lease Payments from legally available funds. The County has covenanted in the Master Facility Lease to take such action as may be necessary to include all Lease Payments with respect to the Leased Facilities in its annual budget and to make the necessary annual appropriations therefor (except to the extent such payments are abated). The County is obligated to deposit a portion of the annual Base Rental Payments, to the extent required by the Authority for payment of the Bonds in any month, with the Trustee on or before the first day of such month. The Trustee, pursuant to the Trust Agreement, will receive Base Rental Payments for the benefit of the Bond Owners. The Trustee will not have any obligation or liability to the Owners to make payment of principal, premium, if any, or interest with respect to the Bonds except from Base Rental Payments by the County under the Master Facility Lease or other amounts available to it under the Trust Agreement for such purposes. Additional Payments payable by the County under the Master Facility Lease include amounts sufficient to pay certain taxes and assessments, insurance premiums, and certain administrative costs. The County's obligation to make Lease Payments will be abated proportionately during any period in which, by reason of any material damage or destruction (other than by condemnation which is otherwise provided for in the Master Facility Lease), there is substantial interference with the use and occupancy of any portion of the Leased Facilities by the County, in the proportion in which the cost of that portion of the Leased Facilities rendered unusable bears to the cost of the remainder of the Leased Facilities. Such abatement will continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction. The County is also responsible for the repair and maintenance of the Leased Facilities to the extent provided in the Master Facility Lease. Subject to the provisions of the Master Facility Lease relating to abatement, the Master Facility Lease provides that, notwithstanding any dispute between the Authority and the County, the County will make all Lease Payments without deduction or offset of any kind and will not withhold any Base Rental Payments or other payments pending the final resolution of such dispute. The Master Facility Lease provides that the covenants of the County thereunder are deemed to be ministerial duties imposed by law, and it further provides that it will be the duty of each and every public official of the County to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the County to carry out and perform the covenants and agreements of the County contained in the Master Facility Lease. The Master Facility Lease provides that the County will pay Lease Payments from legally available funds. State Intercept Program Pursuant to Section of the California Government Code (herein the "State Intercept Program"), the County has elected to further secure the payment of Base Rental Payments under the Master Facility Lease by providing a mechanism by which the State Controller will make such payments directly to the Trustee from vehicle license fees to which the County is entitled pursuant to California Revenue and Taxation Code (Sections ) (herein the "Vehicle License Fee Allocation Statute"), excluding that portion deposited to the Vehicle License Fee Account of the Local Revenue Fund and allocated for the County pursuant to California Welfare and Institutions Code Section The County may, in the future, elect to have additional obligations secured under the provisions of the 10

19 State Intercept Program. In 1999, the State adopted legislation that significantly reduced the amount of vehicle license fees collected by the State and transferred to the County. Future legislation could further reduce vehicle license fee revenues available to the County. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Vehicle License Fees." Supplemental Reimbursements Senate Bill 1732, later amended by Senate Bill 2665, was adopted as Section of the California Welfare and Institutions Code by the State Legislature in Commonly referred to as "SB 1732," this legislation, which has received concurrence by the federal Health Care Financing Authority, provides for a pass-through of supplemental Medi-Cal payments in an amount equal to an approved portion of debt service to qualifying health facilities. SB 1732 permits health facilities such as the VMC, which serve a disproportionate share of Medi-Cal patients, to receive reimbursement for a portion of the costs of qualified capital projects and directs the State to make supplemental reimbursement payments ("Supplemental Reimbursements") to those health facilities which meet the statutory requirements. The reimbursement is based on a percentage of net debt service equal to the percentage of inpatient days accounted for by Medi-Cal patients. Projects for which reimbursement is permitted include buildings and fixed equipment. Land and moveable equipment are excluded. The project funded by the 1997 Series A Bonds and refunded by the 2008 Series A Bonds was approved for SB 1732 reimbursement, and the County established and maintains a special account known as the "Master Facility Lease Bonds (VMC Facility Replacement Project) Supplemental Reimbursement Account" (the "Supplemental Reimbursement Account"). The County has agreed under the Master Facility Lease that all Supplemental Reimbursements received by it will be deposited as and when received in the Supplemental Reimbursement Account, and all moneys on deposit in the Supplemental Reimbursement Account, including earnings thereon, will be applied to the payment of Base Rental Payments due and payable under the Master Facility Lease. Pursuant to Section of the Welfare and Institutions Code of the State, the County has pledged that the Supplemental Reimbursements will be used for the payment of such Base Rental Payments. In addition, the County has pledged and granted a lien on and security interest in the Supplemental Reimbursement Account to the Authority in order to secure the County's obligation to pay the Base Rental Payments as provided in the Master Facility Lease. As with all Medi-Cal payments, the Supplemental Reimbursements under SB 1732 are dependent on the continued existence of the Medi-Cal programs and appropriations for the program through the State budget process. In addition, since approximately 49.4 percent (preliminary for fiscal year ) of SB 1732 funds are derived from federal Medicaid appropriations, discontinuance of such federal reimbursement is not within the control of the State. Eligible costs, moreover, are defined differently under the federal program and do not include the cost of some outpatient service facility costs. Accordingly, there can be no assurance that either the State or federal payments under the provisions of SB 1732 will continue for the life of the 2016 Series A Bonds. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Supplemental Reimbursements." Reserve Fund There is currently, and upon issuance of the Bonds there will be, on deposit with the Controller and Treasurer of the Authority in the Reserve Fund established pursuant to the Trust Agreement an amount sufficient to satisfy the Reserve Fund Requirement. All moneys in the Reserve Fund will be used and withdrawn by the Authority solely for the purpose of paying the interest on or principal of the Bonds or for the retirement of all the Bonds then outstanding, except that so long as the Authority is not in default under the Trust Agreement, any cash amounts in the Reserve Fund in excess of the Reserve Fund Requirement will be withdrawn from the Reserve Fund and deposited in the Revenue Fund. See 11

20 APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Trust Agreement Creation of Funds and Accounts Reserve Fund." The Reserve Fund is currently funded in the amount of $19,382,650. Following the issuance of the 2016 Series A Bonds and the redemption of the 1994 Series B Bonds, the Reserve Fund will be funded in the amount of $18,769,310, equal to the Reserve Fund Requirement. A surety bond or insurance policy issued to the Trustee, on behalf of the Bond Owners, by a company licensed to issue an insurance policy guaranteeing the timely payment of principal of and interest on the Bonds (a "municipal bond insurer") the claims paying ability of which is rated "Aaa" by Moody's Investors Service and "AAA" by Standard & Poor's or a letter of credit issued or confirmed by a state or national bank, or a foreign bank with an agency or branch located in the continental United States, which has outstanding an issue of unsecured long term debt securities rated at least equal to the second highest rating category (disregarding rating subcategories) of Moody's Investors Service and Standard & Poor's, but in no event less than the rating for the Bonds given by any rating agency which has a then currently effective rating on the Bonds, may be deposited in the Reserve Fund to meet the Reserve Fund Requirement, subject to the terms and conditions of the Trust Agreement. Insurance The Leased Facilities will be insured to the extent set forth in the Master Facility Lease. See APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Facility Lease Fire and Extended Coverage and Earthquake Insurance," " Liability Insurance," and " Rental Interruption or Use and Occupancy Insurance." The Master Facility Lease requires the County to maintain or cause to be maintained insurance against risk of loss or damage by fire and lightning, with extended coverage insurance, vandalism and malicious mischief insurance and sprinkler system leakage insurance, and earthquake insurance (if, in the determination of the County, such insurance is available in the open market from reputable insurers at a reasonable cost). See "SPECIAL CONSIDERATIONS RELATING TO THE BONDS Seismic Considerations." The extended insurance coverage will, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance. Such insurance shall be in an amount equal to the replacement cost (without deduction for depreciation) of all structures constituting any part of the Leased Facilities, excluding the cost of excavations, of grading and filling, and of the land (except that such earthquake insurance may be subject to a deductible clause of not to exceed 10% of such replacement cost for any one loss and except that such other insurance may be subject to deductible clauses for any one loss of not to exceed $250,000 (in 1994 dollars) or a comparable deductible adjusted for inflation), or, in the alternative, shall be in an amount and in a form sufficient (together with moneys in the Reserve Fund, in the event of total or partial loss, to enable all Bonds then outstanding to be redeemed). The proceeds of all property insurance must be used to repair, reconstruct or replace the Leased Facilities or any portion thereof which is destroyed or damaged or to redeem Bonds. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Insurance and Self-Insurance." The County will be required to maintain rental interruption or use and occupancy insurance to cover loss of rental income from or the use of the Leased Facilities as a result of any of the hazards covered by its insurance coverage required by the Master Facility Lease in an amount equal to twice the maximum annual Base Rental Payments under the Master Facility Lease, except that such insurance may be subject to a deductible clause of not to exceed $50,000. Except as otherwise provided therein, the Master Facility Lease requires the County to procure or cause to be procured and maintain or cause to be maintained, throughout the term of the Master Facility Lease, standard comprehensive general liability insurance, in such amounts as provided in the Master 12

21 Facility Lease, in protection of the Authority and the Trustee against all claims of direct or contingent loss or liability for damages for personal injury, death or property damage by reason of the occupation of the Leased Facilities. Under the Master Facility Lease, the County may provide a self-insurance method or plan of protection in lieu of obtaining comprehensive general liability insurance under certain circumstances. The Master Facility Lease does not require the County to obtain policies of title insurance with respect to the Leased Facilities other than the portion of the Leased Facilities upon which the Methadone Clinic ($2,562,768 policy coverage), the County Coroner's Building and the West Wing ($14,648,163 policy coverage) are located. The County does not intend to obtain new or additional policies of title insurance in connection with the issuance of the 2016 Series A Bonds. The County has covenanted to commence eminent domain proceedings or a quiet title action if title defects are discovered. See "THE LEASED FACILITIES" and "SPECIAL CONSIDERATIONS RELATING TO THE BONDS Lack of Title Insurance" herein. Additional Bonds In addition to the 2016 Series A Bonds and the outstanding 2008 Series A Bonds, following the issuance of the 2016 Series A Bonds, the Authority and the Trustee may, by supplemental Trust Agreement, provide for the issuance of Additional Bonds, subject to satisfaction of certain provisions contained in the Trust Agreement. Additional Bonds will be payable from the Revenues as provided in the Trust Agreement and secured by a pledge of and charge and lien upon the Revenues equal to the pledge, charge and lien securing the outstanding Bonds theretofore issued under the Trust Agreement, subject to the terms and conditions of the Trust Agreement. See APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Trust Agreement Additional Bonds" herein. In addition, the County may enter into swap agreements, payments under which would be on a parity with the Bonds. See APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Trust Agreement Pledge of Revenues; Assignment of Rights to Trustee" and " Creation of Funds and Accounts." General SPECIAL CONSIDERATIONS RELATING TO THE BONDS The following factors, along with all other information in this Official Statement, should be considered by potential investors in evaluating the purchase of the 2016 Series A Bonds. The Bonds are payable solely from the Revenues of the Authority under the Trust Agreement consisting primarily of the Base Rental Payments payable by the County pursuant to the Master Facility Lease for the beneficial use and occupancy of the Leased Facilities. The practical realization of any rights upon default by the County under the Master Facility Lease will depend upon the exercise of various remedies specified in such instrument, as restricted by state and federal law. The federal bankruptcy laws may have an adverse effect on the ability of the Trustee to enforce its rights under the Trust Agreement and the Master Facility Lease. See "Default and Remedies" and "Limitation on Remedies" below. In certain situations, certain amendments to the Trust Agreement and the Master Facility Lease may be made. Such amendments could affect the security of the Owners. 13

22 Future economic and other conditions may adversely affect the value or essential nature of the Leased Facilities and, consequently, the value of the Leased Facilities to the Trustee in exercising available remedies upon default by the County. In addition, there are certain other factors discussed below as a result of which the remedies available to the Trustee may not be a viable option. Limited Obligation The obligation of the County to pay Lease Payments when due is a General Fund obligation of the County. The obligation of the County to make Lease Payments under the Master Facility Lease does not constitute an obligation of the County for which the County is obligated to levy or pledge any form of taxation or for which the County has levied or pledged any form of taxation. Neither the Bonds nor the obligation of the County to make Lease Payments under the Master Facility Lease constitutes an indebtedness of the County, the Authority or any member thereof, the State or any of its political subdivisions, within the meaning of any constitutional or statutory debt limitation or restriction. See APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Facility Lease." Base Rental Payments General. The Lease Payments due under the Master Facility Lease (including insurance, payment of costs of repair and maintenance of the Leased Facilities, taxes and other governmental charges and assessments levied against the Leased Facilities) are not secured by any pledge of taxes or other revenues of the County but are payable from any funds lawfully available to the County. The County will incur other obligations in the future payable from the same sources as the Lease Payments. In the event the County's revenue sources are less than its total obligations, the County could choose to fund other municipal services before making Lease Payments, except that the County may only use any moneys in the Supplemental Reimbursement Account for debt service on the Bonds (provided, however, that such payments remain subject to abatement as described below under "SPECIAL CONSIDERATIONS RELATING TO THE BONDS Abatement"). See "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS Supplemental Reimbursements" and APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Supplemental Reimbursements" herein. The same result could occur if, because of State Constitutional limits on expenditures, the County is not permitted to appropriate and spend all of its available revenues. The County's appropriations, however, have never exceeded the limitation on appropriations under Article XIII B of the California Constitution. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS Article XIIIB of the California Constitution." Covenant to Budget and Appropriate. Pursuant to the Master Facility Lease, the County covenants to take such action as may be necessary to include Lease Payments due in its annual budgets and to make the necessary annual appropriations for all such payments. Such covenants are deemed to be duties imposed by law, and it is the duty of the public officials of the County to take such action and do such things as are required by law in the performance of the official duty of such officials to enable the County to carry out and perform such covenants. A court, however, in its discretion, may decline to enforce such covenants. Upon issuance of the 2016 Series A Bonds, Bond Counsel will render its opinion (substantially in the form of APPENDIX E "PROPOSED FORM OF OPINION OF BOND COUNSEL" herein) to the effect that, subject to the limitations and qualifications described therein, the Master Facility Lease constitutes a valid and binding obligation of the County. As to the Trustee's practical realization of remedies upon default by the County, see "Default and Remedies" and "Limitations on Remedies" below. 14

23 Abatement Use and Occupancy. The Lease Payments are paid by the County in each rental payment period for and in consideration of the right of use and occupancy of the Leased Facilities during each such period for which said rental is to be paid. Damage or Destruction. The County's obligation to make Lease Payments will be abated proportionately during any period in which, by reason of any material damage or destruction (other than by condemnation which is otherwise provided for in the Master Facility Lease), there is substantial interference with the use and occupancy of any portion of the Leased Facilities by the County, in the proportion in which the cost of that portion of the Leased Facilities rendered unusable bears to the cost of the rest of the Leased Facilities. Such abatement will continue for the period commencing with such damage or destruction and ending with the substantial completion of the work of repair or reconstruction. In the event of any such damage or destruction, the Master Facility Lease continues in full force and effect and the County waives any right to terminate the Master Facility Lease by virtue of any such damage or destruction. In the event the Leased Facilities cannot be repaired during the period of time that proceeds of the County's rental interruption insurance will be available in lieu of Base Rental Payments (a period of two years) plus the period for which funds are available from the Reserve Fund, or in the event that casualty insurance proceeds are insufficient to provide for complete repair of the Leased Facilities, Lease Payments may be insufficient to cover payments to Bond Owners. See APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Facility Lease Fire and Extended Coverage and Earthquake Insurance" and " Rental Interruption or Use and Occupancy Insurance" herein. Substitution of Property The County and the Authority may substitute other improved real property (the "Substitute Leased Facilities") in substitution for all or part of the Leased Facilities provided that there is no abatement of the County's use and occupancy of the Substitute Leased Facilities and the annual fair rental value of the Substitute Leased Facilities, as supported by a written appraisal from a qualified appraiser who may but need not be an employee of the County, shall at least equal the maximum amount of any Base Rental Payments due in such lease year and in any lease year thereafter during the term of the Master Facility Lease. In addition, there must be delivered to the Trustee and each rating agency then providing a rating for the Bonds executed copies of the new or amended Master Site Lease and Master Facility Lease duly recorded in the official records of the County Recorder of the County, evidence of good title, appropriate opinions and certificates and the consent of the bond insurer for the 1994 Series A Bonds and the 1997 Series A Bonds. There is no requirement that any Substitute Leased Facilities be of the same or a similar nature or function as the then existing Leased Facilities nor have a market value or fair rental value as great as the then existing Leased Facilities. See APPENDIX D "SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL LEGAL DOCUMENTS Facility Lease Substitution." Default and Remedies Upon the occurrence of one of the "events of default" described below, the County will be deemed to be in default under the Master Facility Lease and the Trustee as assignee of the Authority may exercise any and all remedies available pursuant to law or granted pursuant to the Master Facility Lease. Upon any such default, including a failure to pay Base Rental Payments, the Trustee as assignee of the Authority may either (1) terminate the Master Facility Lease and recover certain damages or (2) without terminating the Master Facility Lease, (i) continue to collect rent from the County on an annual basis by seeking a separate judgment each year for that year's defaulted Base Rental Payments and/or (ii) reenter 15

24 the Leased Facilities and relet them. In the event of default, there is no right to accelerate the total Lease Payments due over the term of the Master Facility Lease, and the Trustee is not empowered to sell the Leased Facilities and use the proceeds of such sale to prepay the Bonds or pay debt service thereon. Events of default under the Master Facility Lease include (i) the failure of the County to make Lease Payments under the Master Facility Lease when the same become due and payable, (ii) the failure of the County to keep, observe or perform any term, covenant or condition of the Master Facility Lease to be kept or performed by the County after notice and the elapse of a 30-day grace period and (iii) the bankruptcy or insolvency of the County. Limitations on Remedies The rights of the Owners of the 2016 Series A Bonds are subject to certain limitations on legal remedies against counties and other governmental entities in the State, including but not limited to a limitation on enforcement against funds that are otherwise needed to serve the public welfare and interest. Additionally, the rights of the Owners of the 2016 Series A Bonds may be subject to (i) bankruptcy, insolvency, reorganization, moratorium, or similar laws limiting or otherwise affecting the enforcement of creditors' rights generally (as such laws are now or hereafter may be in effect), (ii) equity principles (including but not limited to concepts of materiality, reasonableness, good faith and fair dealing) and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or law, (iii) the exercise by the United States of America of the powers delegated to it by the Constitution, and (iv) the reasonable and necessary exercise, in certain exceptional situations, of the police powers inherent in the sovereignty of the State and its governmental bodies in the interest of serving a significant and legitimate public purpose. Bankruptcy proceedings, or the exercise of such governmental powers by federal or State officials, if initiated, could result in limitations on or modification of the rights of the Owners of the 2016 Series A Bonds and/or delays in the enforcement of such rights. Hazardous Substances Owners and operators of real property may be required by law to remedy conditions of the property relating to releases or threatened releases of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as "CERCLA" or the "Superfund Act," is the most well known and widely applicable of these laws, but California laws with regard to hazardous substances are also stringent and similar. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner (or operator) has anything to do with creating or handling the hazardous substance. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling it. All of these possibilities could significantly and adversely affect the operations and finances of the County. The County knows of no existing hazardous substances which require remedial action on or near the Leased Facilities. However, it is possible that such substances do currently or potentially exist and that the County is not aware of them. Lack of Title Insurance The County has not obtained policies of title insurance with respect to the Leased Facilities other than the portion of the Leased Facilities upon which the Methadone Clinic ($2,562,768 policy coverage), the County Coroner's building, and the West Wing ($14,648,163 policy coverage) are located. The 16

25 County does not intend to obtain new or additional policies of title insurance in connection with the issuance of the 2016 Series A Bonds. Based upon the County's review of (i) title reports obtained by the County for the Leased Facilities, (ii) title documentation reviewed by County Counsel with respect to the Leased Facilities and (iii) the absence of any knowledge by the County of material title defects, the County has determined that the substantial cost of title insurance policies for the full value of the Leased Facilities is not warranted. The County has covenanted to commence eminent domain proceedings or a quiet title action if title defects are discovered. See "THE LEASED FACILITIES" and "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS Insurance" herein. County Obligations The County has a significant amount of obligations payable from its General Fund, including but not limited to debt obligations, pension obligations and other obligations related to post-employment retirement benefits as well as certain other liabilities. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS" for further discussion of the County's obligations. Seismic Considerations The State, including the County, is a seismically active region. There are several geological faults in the area which have the potential to cause serious earthquakes and damage to the Leased Facilities. The County is required under the Facility Lease to maintain earthquake insurance on the Leased Facilities only if, in the determination of the County, such insurance is available in the open market from reputable insurers at a reasonable cost. The County currently maintains earthquake insurance coverage in the amount of approximately $332.3 million on all of the Leased Facilities, subject to a 2% deductible per insured facility, up to replacement value. The County's earthquake insurance coverage is provided through pooled insurance arrangements sponsored by the CSAC Excess Insurance Authority, a California joint powers authority in which various California counties, including the County, are members. In the event of earthquake damage to insured Leased Facilities, coverage of the insured Leased Facilities would be subject to the availability of sufficient assets and reinsurance proceeds through the various insurance pools applicable to the insured Leased Facilities. There can be no assurance that such coverage will continue to be available. If an earthquake were to cause serious damage to the Leased Facilities during any period when such facilities were not insured for earthquake damage, or if the proceeds of any earthquake insurance were insufficient to replace or repair the damaged Leased Facilities, the County would be limited to its General Fund, reserves, and emergency grants, if any, in seeking to make appropriate repairs. Pending such repairs, the County's obligation to make Base Rental Payments would be subject to abatement and rental interruption insurance proceeds likely would not be available. The County will not be obligated to repair or restore the Leased Facilities in the event of uninsured damage caused by an earthquake. See "SPECIAL CONSIDERATIONS RELATING TO THE BONDS Abatement." Senate Bill 1953 ("SB 1953") is an amendment to the 1973 Hospital Facilities Seismic Safety Act ("HFSSA") that requires all acute care hospitals in California, including the VMC, to comply with certain seismic safety standards within a certain time frame. SB 1953 generally requires that by 2013, all hospital buildings must remain standing during a major earthquake so that patients can be evacuated safely, and by 2030, all hospital buildings must remain standing and functioning during a major earthquake. Through its Seismic Compliance and Modernization Program ("SCMP"), the County plans to make seismic improvements to certain of its hospital facilities. The list of facilities to be seismically improved under the SCMP does not include the North Tower which is part of the Leased Facilities. This is because the North Tower was built to be fully functional after the occurrence of the maximum credible earthquake for the area (assumed to be at least an 8.5 magnitude on the San Adreas fault), and thus, the 17

26 County deems the North Tower compliant with SB See "THE LEASED FACILITIES" above. Construction of the seismic upgrades under the SCMP began and have been funded in part by the Silicon Valley Tobacco Securitization Authority Tobacco Settlement Asset-Backed Bonds (Santa Clara County Tobacco Securitization Corporation) Series 2007, issued in January 2007 (approximately $100 million of which was allocated to the seismic upgrades), and pass-through revenues from the San Jose Redevelopment Agency (amounting to approximately $15.4 million). See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS County Budget Outstanding Long-Term Debt and Lease Obligations" attached hereto. The County issued or caused to be issued bonds in the total amount of $840 million and allocated another $158 million of other funds for a total of $998 million in order to comply with SB 1953's 2013 mandated seismic standards. That deadline was extended by Senate Bill 90 to To date, the County has expended $808 million toward meeting SB 1953's 2020 goal. The County estimates that an additional $657 million will be required to meet SB 1953's mandated 2030 seismic standards. The County has not yet identified sources of funds to comply fully with all of SB 1953's 2030 standards. The County estimates that compliance with SB 1953's requirements will require $1.66 billion. Limitation on Sources of Revenues; Additional Expenditures There are limitations on the ability of the County to increase revenues payable to the County General Fund. The ability of the County to increase taxes is limited by Article XIII A, Article XIII B, Article XIII C and Article XIII D of the State Constitution, Proposition 62, Proposition 1A, Proposition 22 and Proposition 26. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" herein. In addition to limitations that have been imposed on the ability of the County to raise revenues, State and federally mandated expenditures by counties for justice, health and welfare have increased. For a number of years, the annual increase in mandated expenditures has exceeded the annual increase in County revenues. The County has begun implementing additional security and public safety measures. Expenditures for such measures are not presently expected to be material to the financial position of the County. The County does not guarantee, however, that additional actions affecting the County will not have a material adverse financial impact on the County. In the event the County's revenues are less than its total outstanding obligations, the County may be required by federal or State law to fund other municipal services prior to the payment of any Base Rental Payments. State of California Financial Condition The County receives a significant portion of its funding from the State. Changes in the revenues received by the State can affect the amount of funding, if any, to be received from the State by the County and other counties in the State. The County cannot predict the extent of the budgetary problems the State will encounter in this or in any future fiscal years, and, it is not clear what measures would be taken by the State to balance its budget, as required by law. Accordingly, the County cannot predict the final outcome of future State budget negotiations, the impact that such budgets will have on its finances and operations or what actions will be taken in the future by the State Legislature and Governor to deal with changing State revenues and expenditures. Current and future State budgets will be affected by national and State economic conditions and other factors over which the County has no control. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Funding by the State of California" attached hereto. 18

27 U.S. Government Finances The County receives substantial federal funds for assistance payments, social service programs and other programs. A portion of the County's assets are also invested in securities of the United States government. The County's finances may be adversely impacted by fiscal matters at the federal level, including but not limited to cuts to federal spending. On March 1, 2013 automatic spending cuts to federal defense and other discretionary spending (referred to as "sequestration") went into effect and will continue for nine years unless amended or repealed. From October 1, 2013 to October 16, 2013, the United States federal government entered a partial shutdown, with furloughs of certain federal workers and suspension of certain services, due to Congressional failure to enact a regular budget or a continuing resolution for the 2014 fiscal year. In the event Congress and the President fail to enact appropriations, budgets or debt ceiling increases on a timely basis in the future, such events could have a material adverse effect on the financial markets and economic conditions in the United States and an adverse impact on the County's finances. The County cannot predict the outcome of future federal budget deliberations and the impact that such budgets will have on the County's finances and operations. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Federal Funding and Welfare Programs." CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS California law permits citizens to effect changes to the State's Constitution and statutes, without involvement by the legislature, through the initiative process. Under this process, initiative supporters submit petitions to State election officials, who are required to submit the initiative to voters if the petitions meet statutory requirements. Many provisions of State law have been added or affected by initiatives. The initiatives described as follows have materially adversely affected the County's ability to raise revenues or spend money. Article XIII A. Article XIII A of the California Constitution limits the amount of ad valorem tax on real property to 1% of the full cash value of the real property plus amounts necessary to pay debt service on specified indebtedness approved by voters. Full cash value means "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 newly constructed, or when 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 a reduction in the consumer price index or comparable local data for the area or may be reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. In the general election of November 7, 1978, California voters approved an amendment to Article XIII A commonly known as Proposition 8 ("Proposition 8"). Proposition 8, among other things, generally allows the Assessor to reduce the value of a property that has been substantially damaged, destroyed, or whose value has been reduced by other factors such as economic conditions. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Levy, Tax Rate and Valuation Proposition 8 Reductions and Appeals to Assessed Value" herein. Article XIII B. Article XIII B of the California Constitution limits the annual appropriations of governmental agencies. The appropriations limit for the County in each year is based on the limit for the prior year, adjusted for changes in the costs 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, with other provisions applicable in case of emergency. The change in the cost of living is, at 19

28 the County's option, either (i) the percentage change in State per capita personal income, or (ii) the percentage change in the local assessment roll for the jurisdiction due to the addition of nonresidential new construction. The measurement of change in population is a blended average of statewide overall population growth, and change in attendance at local school and community college districts. Article XIII B permits the County to change the appropriations limit by vote of the electorate in conformity with statutory and Constitutional voting requirements, but any such voter-approved change can only be effective for a maximum of four years. Appropriations subject to Article XIII B include generally any authorization to expend during the fiscal year the proceeds of taxes levied by the County, exclusive of State subventions, refunds of taxes, benefit payments from retirement, unemployment insurance and disability insurance funds. Appropriations subject to limitation pursuant to Article XIII B do not include debt service on specified indebtedness, appropriations required to comply with mandates of courts or the Federal government and appropriations for qualified outlay projects. "Proceeds of taxes" include, but are not limited to, all tax revenues and the proceeds to the County from (i) regulatory licenses, user charges, and user fees to the extent such proceeds exceed the cost of providing the service or regulation, (ii) the investment of tax revenues and (iii) State subventions received by the County. The appropriations limit is tested over consecutive two-year periods. Any excess of the aggregate "proceeds of taxes" received by the County over such two-year period above the combined appropriations limits for those two years is to be returned to taxpayers by reductions in tax rates or fee schedules over the subsequent two years. The County's appropriations limit for fiscal year was $3,693,517,082 and the amount subject to the limitation was $656,764,530. The County's appropriations limit for fiscal year was $3,938,777,547 and the amount subject to the limitation was $778,164,837. The County's appropriations limit for fiscal year was $3,988,246,993 and the amount subject to the limitation was $817,698,748. Proposition 62. Provisions of State law added by the voter approval of Proposition 62 in 1986 (a) require that any new or higher taxes for general governmental purposes imposed by the County be approved by a two-thirds vote of the Board of Supervisors and by a majority vote of the voters of the County voting in an election on the tax, (b) require that any special tax (defined as taxes levied for other than general governmental purposes) imposed by the County be approved by a two-thirds vote of the voters of the County voting in an election on the tax, (c) restrict the use of revenues from a special tax to the purposes or for the service for which the special tax was imposed, (d) prohibit the imposition of ad valorem taxes on real property by the County except as permitted by Article XIII A of the California Constitution and (e) prohibit the imposition of transaction taxes and sales taxes on the sale of real property by the County. Article XIII C. Articles XIII C and XIII D of the California Constitution were added in Article XIII C requires that all new local taxes be submitted to the electorate before they become effective. Taxes for general governmental purposes of the County require a majority vote and taxes for specific purposes require a two-thirds vote. In addition Article XIII C removed many of the limitations on the initiative power in matters of reducing or repealing any local tax, assessment, fee or charge. As a result, voters of the County could approve initiatives which reduce or repeal local taxes, assessments, fees or charges currently comprising a substantial part of the County's general fund. No such initiative is currently pending, or to the knowledge of the County, proposed. Article XIII D. Article XIII D imposes requirements and limitations for "assessments" for governmental services and programs. "Assessment" is defined to mean any levy or charge upon real property for a special benefit conferred upon the real property. Article XIII D limits "fees" and "charges," defined to mean "any levy other than an ad valorem tax, a special tax, or an assessment, imposed by a 20

29 local government upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service." Property related fees and charges (i) must not generate revenues exceeding the funds required to provide the property related service, (ii) must not be used for any purpose other than those for which the fees and charges are imposed, (iii) must be for a service actually used by, or immediately available to, the owner of the property in question, or (iv) must not be used for general governmental services, including police, fire or library services, where the service is available to the public at large in substantially the same manner as it is to property owners. Further, before any property related fee or charge may be imposed or increased, written notice must be given to the record owner of each parcel of land affected by such fee or charge. The County must then hold a hearing upon the proposed imposition or increase, and if written protests against the proposal are presented by a majority of the owners of the identified parcels, the County may not impose or increase the fee or charge. Moreover, except for fees or charges for sewer, water and refuse collection services, or fees for electrical and gas service, which are not treated as "property related" for purposes of Article XIII D, no property related fee or charge may be imposed or increased without majority approval by the property owners subject to the fee or charge or, at the option of the local agency, two-thirds voter approval by the electorate residing in the affected area. Proposition 1A. Proposition 1A, proposed by the Legislature in connection with the Budget Act, approved by the voters in November 2004 and generally effective in Fiscal Year , 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. The State may also approve voluntary exchanges of local sales tax and property tax revenues among local governments within a county. Proposition 1A also provides that if the State reduces the vehicle license fee rate currently in effect, 0.65 percent of vehicle value, the State must provide local governments with equal replacement revenues. Further, Proposition 1A requires the State, beginning July 1, 2005, to suspend State mandates affecting cities, counties and special districts, excepting mandates relating to employee rights, schools or community colleges, in any year that the State does not fully reimburse local governments for their costs to comply with such mandates. See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS Funding by the State of California." Proposition 1A may result in increased and more stable County revenues. The magnitude of such increase and stability is unknown and would depend on future actions by the State. However, Proposition 1A could also result in decreased resources being available for State programs. This reduction, in turn, could affect actions taken by the State to resolve budget difficulties. Such actions could include increasing State taxes, decreasing spending on other State programs or other action, some of which could be adverse to the finances of the County. Proposition 22. Proposition 22 ("Proposition 22") which was approved by California voters in November 2010, prohibits the State, even during a period of severe fiscal hardship, from delaying the distribution of tax revenues for transportation, redevelopment, or local government projects and services and prohibits fuel tax revenues from being loaned for cash-flow or budget balancing purposes to the State General Fund or any other State fund. In addition, Proposition 22 generally eliminates the State's 21

30 authority to temporarily shift property taxes from cities, counties, and special districts to schools, temporarily increase a school and community college district's share of property tax revenues, prohibits the State from borrowing or redirecting redevelopment property tax revenues or requiring increased passthrough payments thereof, and prohibits the State from reallocating vehicle license fee revenues to pay for State-imposed mandates. In addition, Proposition 22 requires a two-thirds vote of each house of the State Legislature and a public hearing process to be conducted in order to change the amount of fuel excise tax revenues shared with cities and counties. Proposition 22 prohibits the State from enacting new laws that require redevelopment agencies to shift funds to schools or other agencies. While Proposition 22 will not change overall State and local government costs or revenues by the express terms thereof, it will cause the State to adopt alternative actions to address its fiscal and policy objectives. Proposition 26. Proposition 26 ("Proposition 26"), which was approved by California voters in November 2010, revises the California Constitution to expand the definition of "taxes." Proposition 26 re-categorizes many State and local fees as taxes. Proposition 26 requires the approval of two-thirds of both houses of the State Legislature for any proposed change in State statutes, which would result in any taxpayer paying a higher tax. Proposition 26 eliminates the previous practice whereby a tax increase coupled with a tax reduction that resulted in an overall neutral fiscal effect was subject only to a majority vote in the State Legislature. Furthermore, pursuant to Proposition 26, any increase in a fee above the amount needed to provide the specific service or benefit is deemed to be a tax and the approval thereof will require such two-thirds vote of approval to be effective. In addition, for State imposed fees and charges, any fee or charge adopted after January 1, 2010 with a majority vote of approval of the State Legislature which would have required a two-thirds vote of approval of the State Legislature if Proposition 26 were effective at the time of such adoption is repealed as of November 2011 absent the re-adoption by the requisite two-thirds vote. Proposition 26 amends Article XIII C of the State Constitution to state that a "tax" means a levy, charge or exaction of any kind imposed by a local government, except (1) a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege; (2) a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product; (3) a charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof; (4) a charge imposed for entrance to or use of local government property or the purchase rental or lease of local government property; (5) a fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government as a result of a violation of law; (6) a charge imposed as a condition of property development; or (7) assessments and property related fees imposed in accordance with the provisions of Proposition 218. Proposition 26 applies to any levy, charge or exaction imposed, increased, or extended by local government on or after November 3, 2010, unless exempted, as stated above. Accordingly, fees adopted prior to that date are not subject to the measure until they are increased or extended or if it is determined that an exemption applies. Future Initiatives. Article XIII A, Article XIII B, Article XIII C and Article XIII D of the State Constitution, Proposition 62, Proposition 1A, Proposition 22 and Proposition 26 were all adopted pursuant to the State's initiative process. The limitations imposed upon the County by these provisions hinder the County's ability to raise revenues through taxes or otherwise and may therefore prevent the County from meeting increased expenditure requirements. The County expects that other initiative 22

31 measures will be adopted, some of which may place further limitations on the ability of the State, the County or local districts to increase revenues or to spend money or which could have other financially adverse effects such as requiring the County to undertake new responsibilities. Such other initiatives could have a material adverse effect on the County's financial condition. California law permits citizens to effect changes to the State's Constitution and statutes, without involvement by the legislature, through the initiative process. Under this process, initiative supporters submit petitions to State election officials, who are required to submit the initiative to voters if the petitions meet statutory requirements. Many provisions of State law have been added or affected by initiatives. Some of these types of initiatives have materially adversely affected the County's ability to raise revenues or spend money. On April 25, 2013, the California Supreme Court in McWilliams v. City of Long Beach (April 25, 2013, No. S202037), held that the claims provisions of the Government Claims Act (Government Code Section 900 et. seq.) govern local tax and fee refund actions (absent another State statue governing the issue), and that local claims presentation ordinances were without effect as to these actions. The effect of the McWilliams case is that local governments could face class actions over disputes involving taxes and fees. Such cases could expose local governments to significant refund claims in the future. The County cannot predict whether any such class claims will be filed against it in the future, the outcome of any such claim or its impact on the County. THE COUNTY The County of Santa Clara lies immediately south of San Francisco Bay and is the sixth most populous county in California based on its January 1, 2016 estimated population of approximately 1.93 million. It encompasses an area of approximately 1,316 square miles and contains 15 cities, including Campbell, Cupertino, Gilroy, Los Altos, Los Altos Hills, Los Gatos, Milpitas, Monte Sereno, Morgan Hill, Mountain View, Palo Alto, San Jose, Santa Clara, Saratoga, and Sunnyvale, in which approximately 95.4% of the County residents live. The County was incorporated in 1850 as one of the original 27 counties of the State and operates under a home rule charter, adopted by County voters in 1950 and amended in As required under the County Charter and under County ordinances, or by State and federal mandate, the County is responsible at the local level for activities involving public welfare, health and justice (courts and jails), collection of property taxes and for the maintenance of public records. The County also operates recreational and cultural facilities serving the County. The legislative body of the County is a five-member Board of Supervisors elected by district for staggered four-year terms subject to term limits of twelve consecutive years. Other elected officials include the County Assessor, District Attorney and Sheriff. All elected officials serve four-year terms. The County Executive, who is appointed by the Board, administers the daily affairs of the County and carries out policies of the Board of Supervisors. Department heads are appointed by the County Executive. The County provides health services through the Santa Clara Valley Health and Hospital System, which includes the County-owned and operated VMC. In addition to the VMC, the Health and Hospital System also includes the Departments of Health, Mental Health, Children's Shelter & Custody Services, Alcohol and Drug Programs, and Community Health Services, and the Valley Health Plan (a health maintenance organization owned and operated by the County). See APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS County Services Health Related Services" and " Santa Clara Valley Medical Center." 23

32 For certain economic, demographic and financial information with respect to the County, see APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS," APPENDIX B "COUNTY OF SANTA CLARA ECONOMIC AND DEMOGRAPHIC INFORMATION" and APPENDIX C "COUNTY OF SANTA CLARA AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015" attached hereto. THE AUTHORITY The Authority is a joint exercise of powers authority, organized pursuant to the provisions of Article 1, Chapter 5, Division 7, Title I of the California Government Code, commencing with Section 6500, and a Joint Exercise of Powers Agreement, dated as of October 1, 1994, between the County and the District. The Authority is a separate entity constituting a public instrumentality of the State of California and was formed for the public purpose of providing enhanced health and safety services to the public and assisting in the financing of public projects. The Authority has previously issued lease revenue bonds and other obligations in order to finance facilities for the County and may in the future issue additional obligations. Members The County. For information with respect to the County, see "THE COUNTY" herein and APPENDIX A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS," APPENDIX B "COUNTY OF SANTA CLARA ECONOMIC AND DEMOGRAPHIC INFORMATION" and APPENDIX C "COUNTY OF SANTA CLARA AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015" attached hereto. The District. The District is a fire protection district organized and existing pursuant to the provisions of the Fire Protection District Law of The District is governed by a five-member Board. Governing Body The Authority is governed by a Board of Directors, which is made up of the five members of the Board of Supervisors of the County. The officers of the Authority, which are appointed by the Board of Directors, include the Chair and the Executive Director. By the terms of the Joint Exercise of Powers Agreement, the Director of Finance of the County is the Treasurer and Controller of the Authority. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the 2016 Series A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the 2016 Series A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix E hereto. To the extent the issue price of any maturity of the 2016 Series A Bonds is less than the amount to be paid at maturity of such 2016 Series A Bonds (excluding amounts stated to be interest and payable 24

33 at least annually over the term of such 2016 Series A Bonds), the difference constitutes "original issue discount," the accrual of which, to the extent properly allocable to each beneficial owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the 2016 Series A Bonds is the first price at which a substantial amount of such maturity of the 2016 Series A Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the 2016 Series A Bonds accrues daily over the term to maturity of such 2016 Series A Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such 2016 Series A Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such 2016 Series A Bonds. Beneficial owners of the 2016 Series A Bonds should consult their own tax advisors with respect to the tax consequences of ownership of 2016 Series A Bonds with original issue discount, including the treatment of beneficial owners who do not purchase such 2016 Series A Bonds in the original offering to the public at the first price at which a substantial amount of such 2016 Series A Bonds is sold to the public Series A Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ("Premium Bonds") will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a beneficial owner's basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such purchaser. Beneficial owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the 2016 Series A Bonds. The Authority and the County have made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the 2016 Series A Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the 2016 Series A Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the 2016 Series A Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel's attention after the date of issuance of the 2016 Series A Bonds may adversely affect the value of, or the tax status of interest on, the 2016 Series A Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. Although Bond Counsel is of the opinion that interest on the 2016 Series A Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of amounts treated as interest on, the 2016 Series A Bonds may otherwise affect a beneficial owner's federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Owner or the Owner's other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the 2016 Series A Bonds to be subject, directly or indirectly, in whole or 25

34 in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest. For example, the Obama Administration's budget proposals in recent years have proposed legislation that would limit the exclusion from gross income of interest on the Bonds to some extent for high-income individuals. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the 2016 Series A Bonds. Prospective purchasers of the 2016 Series A Bonds should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel's judgment as to the proper treatment of the 2016 Series A Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service ("IRS") or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority and the County, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The Authority and the County have covenanted, however, to comply with the requirements of the Code. Bond Counsel's engagement with respect to the 2016 Series A Bonds ends with the issuance of the 2016 Series A Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority, the County or the beneficial owners regarding the tax-exempt status of the 2016 Series A Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the Authority, the County and their appointed counsel, including the beneficial owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Authority or the County legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the 2016 Series A Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the 2016 Series A Bonds, and may cause the Authority, the County or the beneficial owners to incur significant expense. CERTAIN LEGAL MATTERS Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the Authority, will render an opinion with respect to the validity of the 2016 Series A Bonds. A complete copy of the proposed form of the opinion to be delivered by Bond Counsel is contained in Appendix E. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain legal matters will be passed upon by Hawkins Delafield & Wood LLP, San Francisco, California, Disclosure Counsel. Certain legal matters will be passed upon for the Authority and the County by County Counsel. Bond Counsel and Disclosure Counsel will receive compensation from the Authority contingent upon the sale and delivery of the 2016 Series A Bonds. MUNICIPAL ADVISOR The County has entered into an agreement with, KNN Public Finance, LLC (the "Municipal Advisor"), whereunder the Municipal Advisor provides financial recommendations and guidance to the County with respect to preparation for sale of the 2016 Series A Bonds, timing of sale, tax-exempt bond market conditions, costs of issuance and other factors related to the sale of the 2016 Series A Bonds. The Municipal Advisor has read and participated in the drafting of certain portions of this Official Statement. 26

35 The Municipal Advisor has not audited, authenticated or otherwise verified the information set forth in the Official Statement. LITIGATION No litigation is pending or threatened concerning the validity of the 2016 Series A Bonds, the Master Site Lease, the Master Facility Lease or the Trust Agreement. The Authority is not aware of any litigation pending or threatened to restrain or enjoin the execution, sale or delivery of any of the 2016 Series A Bonds, contesting the existence or powers of the Authority or the County or contesting the County's ability to appropriate or make Base Rental Payments. There are no lawsuits or claims pending against the County which would materially impair the ability of the County to make Base Rental Payments or otherwise meet its outstanding lease or debt obligations. CONTINUING DISCLOSURE The County will undertake all responsibilities for any continuing disclosure to owners and beneficial owners of the 2016 Series A Bonds as described herein. The County and Digital Assurance Certification, L.L.C, as dissemination agent, will enter into a Continuing Disclosure Agreement, to be dated the date of delivery of the 2016 Series A Bonds (the "Continuing Disclosure Agreement"), which provides for certain disclosure obligations on the part of the County. Under the Continuing Disclosure Agreement, the County will covenant for the benefit of owners and beneficial owners of the 2016 Series A Bonds to provide certain financial information and operating data relating to the County by not later than March 30 of each year, commencing with the reports for the fiscal year ending June 30, 2016 which is to be filed by March 30, 2017 (the "Annual Reports"), and to provide notices of the occurrence of certain enumerated events (the "Listed Events"). The Annual Reports and notices of Listed Events will be filed with the Municipal Securities Rulemaking Board ("MSRB"). These covenants will be made in order to assist the purchasers in complying with S.E.C. Rule 15c2-12(b)(5), as amended. For the proposed form of the Continuing Disclosure Agreement, see APPENDIX G "FORM OF CONTINUING DISCLOSURE AGREEMENT" attached hereto. In connection with the issuance of certain obligations of the County, the County has covenanted to submit an annual report to the MSRB containing the County's audited financial statements and certain other financial information and operating data relating to the County. In the last five years, the County filed its audited financial statements in a timely manner but did not file in a timely manner certain of its other required annual financial information. The County has made corrective filings and has taken steps to provide for future compliance. RATING S&P Global Ratings ("S&P") has assigned the 2016 Series A Bonds the rating of "AA+." Certain information was supplied by the Authority and the County to S&P to be considered in evaluating the 2016 Series A Bonds. Such rating expresses only the views of S&P and is not a recommendation to buy, sell or hold the 2016 Series A Bonds. There is no assurance that such rating will continue for any given period of time or that it will not be reduced or withdrawn entirely by S&P if, in its judgment, circumstances so warrant. The Authority, the County and the Trustee undertake no responsibility to oppose any such revision or withdrawal, although the County will covenant in the Continuing Disclosure Agreement to provide notice of any 27

36 rating changes to the Municipal Securities Rulemaking Board. Any such downward revision or withdrawal may have an adverse effect on the market price of the 2016 Series A Bonds. SALE OF THE 2016 SERIES A BONDS The 2016 Series A Bonds were sold at competitive bid on September 7, 2016, as provided in the Official Notice of Sale, dated August 31, 2016 (the "Official Notice of Sale"). The 2016 Series A Bonds were awarded to Citigroup Global Markets Inc. at a purchase price of $51,215, (consisting of the principal amount of the 2016 Series A Bonds, plus original issue premium of $9,470,130.80, and less an underwriter's discount of $64,805.50). The Official Notice of Sale provided that all 2016 Series A Bonds would be purchased if any were purchased, the obligation to make such purchase being subject to certain terms and conditions set forth in the Official Notice of Sale, the approval of certain legal matters by Bond Counsel and certain other conditions. Citigroup Global Markets Inc. has represented to the County that the 2016 Series A Bonds have been reoffered to the public at the yields stated on the inside cover page hereof. ADDITIONAL INFORMATION The purpose of this Official Statement is to supply information to prospective buyers of the 2016 Series A Bonds. Quotations and summaries and explanations of the 2016 Series A Bonds and of statutes and documents contained in this Official Statement do not purport to be complete, and reference is made to such documents and statutes for full and complete statements of their provisions. The execution and delivery of this Official Statement have been duly authorized by the Authority and the County. SANTA CLARA COUNTY FINANCING AUTHORITY By: /s/ Emily Harrison Treasurer and Controller COUNTY OF SANTA CLARA By: /s/ Emily Harrison Director of Finance 28

37 APPENDIX A COUNTY OF SANTA CLARA FINANCES AND OPERATIONS

38 TABLE OF CONTENTS GENERAL... A-1 COUNTY GOVERNMENT... A-1 COUNTY SERVICES... A-1 SANTA CLARA VALLEY MEDICAL CENTER... A-3 COUNTY BUDGET... A-6 FINANCIAL STATEMENTS... A-11 LEVY, TAX RATE AND VALUATION... A-13 PAYMENT DATES AND LIENS... A-16 TEETER PLAN... A-17 EDUCATIONAL REVENUE AUGMENTATION FUND... A-18 LARGEST TAXPAYERS... A-19 TAXATION OF STATE-ASSESSED UTILITY PROPERTY... A-19 FUNDING BY THE STATE OF CALIFORNIA... A-20 VEHICLE LICENSE FEES... A-24 SUPPLEMENTAL REIMBURSEMENTS... A-25 FEDERAL FUNDING AND WELFARE PROGRAMS... A-26 OTHER TAXES AND REVENUES... A-27 REDEVELOPMENT DISSOLUTION... A-28 OUTSTANDING DEBT AND LEASE OBLIGATIONS... A-31 DIRECT AND OVERLAPPING DEBT REPORT... A-34 COUNTY EMPLOYEES, EMPLOYEE RELATIONS AND COLLECTIVE BARGAINING... A-37 COUNTY EMPLOYEE BENEFIT PLANS... A-37 INSURANCE AND SELF-INSURANCE... A-52 THE COUNTY INVESTMENT POOL... A-54 CAPITAL IMPROVEMENT PLAN... A-56

39 APPENDIX A COUNTY OF SANTA CLARA FINANCES AND OPERATIONS The information in this Appendix A provides investors with information concerning the finances and operations of the County and is provided as supplementary information to assist investors in evaluating the County. The following description of the finances and operations of the County has been collected from the County or, as noted, third party sources. Throughout this Appendix A, the term "County" refers to the County of Santa Clara as a political subdivision of the State of California (the "State"), while the term "Santa Clara County" generally refers to Santa Clara County as a geographical area. The County maintains a website. The information presented on such website is not incorporated by reference as part of this Official Statement and should not be relied upon in making investment decisions with respect to the Bonds. General Santa Clara County is located at the southern end of the San Francisco Bay, approximately 48 miles south of San Francisco, and encompasses approximately 1,316 square miles. Named after Mission Santa Clara, which was established in 1777 and named for Saint Clara of Assisi, Italy, the County was one of the original 27 counties of the State. Santa Clara County is the sixth most populated county in the State based on its January 1, 2016 estimated population of approximately 1.93 million, approximately 4.5% of the State's population. The taxable property in Santa Clara County has the fourth highest assessed valuation in the State based on its fiscal year total gross assessment roll. There are 15 cities located within Santa Clara County, including Campbell, Cupertino, Gilroy, Los Altos, Los Altos Hills, Los Gatos, Milpitas, Monte Sereno, Morgan Hill, Mountain View, Palo Alto, San Jose, Santa Clara, Saratoga, and Sunnyvale, and approximately 95.5% of Santa Clara County's residents live in those cities. County Government The County seat is located in San Jose, which is the tenth largest city in the United States, the third largest city in the State and the largest city in the Bay Area. The County operates under a Home Rule Charter (the "County Charter") adopted by the voters of the County. The legislative body of the County is the five-member Board of Supervisors (the "Board") elected by district for staggered four-year terms. Board members are subject to term limits of twelve consecutive years. Other elected officials include the Assessor, District Attorney and Sheriff. All elected officials serve four-year terms. The County Executive, who is appointed by the Board, administers the daily affairs of the County and carries out Board policies. Department heads are appointed by the County Executive, except for the County Counsel, the Public Defender, the Clerk of the Board of Supervisors, the Director of Child Support Services, and the Chief of Correction, who are appointed by the Board. County Services The County provides a wide range of services to its residents. Many of the County's functions are required under the County Charter and ordinances or by State or federal law, including public welfare, health, the maintenance of public records, and certain functions related to courthouses and jails. State and federally mandated programs, primarily in the social and health service areas, are required to be maintained at certain minimum levels, which may under certain conditions limit the County's ability to A-1

40 control its budget. However, under certain State and federal programs, eligible costs are subject to reimbursement according to specific guidelines. According to the California Department of Finance, as of January 1, 2015, approximately 87,200 people lived in the unincorporated area of Santa Clara County. For this unincorporated area, the Board serves as the elected governing body, and County departments provide all municipal services, including law enforcement, fire protection, land use and zoning, building and business permits, local road building and maintenance, care and control, and public libraries. Health Related Services. Under State law, the County has historically been required to administer State and federal health and welfare programs and to provide for a portion of the costs of these programs with local revenues, such as sales and property taxes. People in all parts of the County receive benefits from these programs. The County provides health services through the Santa Clara Valley Health and Hospital System ("HHS"), an integrated health care delivery system created in HHS includes one County hospital, eight health centers, the Departments of Public Health, Mental Health, Custody Services, Alcohol and Drug Programs and Community Health Services, and Valley Health Plan (an HMO owned and operated by the County). See "Santa Clara Valley Medical Center" below. While many of these patients are indigent or covered by Medi-Cal (the State's Medicaid program), the County health care delivery system is available to provide health care to the entire community. Through affiliations with Stanford University School of Medicine, five schools of nursing and other training affiliates, HHS is one of the major suppliers of health care personnel for the region. Further, the County provides the countywide paramedic training and certification program. Under State law, counties also have the responsibility to provide and help pay for community mental health and drug and alcohol prevention and treatment programs. These services are located in facilities operated by a network of private providers under contract with the County as well as County facilities. In addition, the County provides public health, immunization and environmental services, and paramedic services. The County also has established a countywide emergency medical system. The medical center operated by the County is included in the State trauma network. Disaster Services. The County coordinates an entire network of disaster services to handle floods, fires, storms, earthquakes, bioterrorism, mass casualty and other major emergencies such as hazardous waste incidents. Command centers can be established centrally or at various work sites located throughout Santa Clara County. Justice Services. The County criminal justice network is supported almost entirely by local County revenues. The Sheriff provides countywide law enforcement services and services to local police departments on request, including training of thousands of police officers employed by cities throughout Santa Clara County, narcotics and vice enforcement, and investigation of arson, homicides and consumer fraud. While the Superior Courts are an independent branch of State government, State law requires the County to provide services such as bailiffs and probation investigators. The County also provides payroll and services by contract to the County of Santa Clara Superior Court. A-2

41 In 2011, Governor Edmund G. Brown Jr. signed Assembly Bill 109 ("AB 109"), which included the first phase of a proposal to realign certain government services, returning authority and responsibility for certain of those services to counties, cities, special districts and school districts. Pursuant to those realignment provisions, effective October 1, 2011, certain lower-level offenders were sentenced, held, supervised and treated locally, and were supervised by local law enforcement upon release from State prison. AB 109 also authorized counties to contract with public community correctional facilities to house county jail inmates. Subsequent State budgets, including the Governor's proposed budget for fiscal year , contain other provisions which continue the Governor's plan to modify the correctional system and realign responsibilities between the State and counties. See "Funding by the State of California" herein. The County maintains a jail system which is one of the largest among California counties. As of September 30, 2011 (one day prior to the commencement of AB 109), the daily jail population total was 3,429. As of August 31, 2016, the daily jail population total was 3,578. General Government Services. The County is responsible for the administration of the property tax system, including property assessment, assessment appeals, collection of taxes, and distribution of taxes to cities, successor agencies of dissolved community redevelopment agencies, special districts, local school districts and the County. A second major government service is the County's voter registration and election system which provides approximately 800 polling places throughout the County. Recreation. The County operates a network of regional recreational facilities, including 29 regional and community parks and two regional golf courses. Santa Clara Valley Medical Center General. The County provides health services through its hospital, Santa Clara Valley Medical Center ("VMC"), a specialty center, and eight Valley Health Centers located throughout Santa Clara County. VMC has maintained a long tradition of service to the residents of Santa Clara County since it was founded in VMC also serves members of the Valley Health Plan (the "VHP"), a licensed HMO owned and operated by the County with over 100,000 members. VMC is affiliated with Stanford University School of Medicine, various schools of nursing, and allied health professional training and research centers in the San Francisco Bay Area. The proceeds of the 2016 Series A Bonds will be applied to refund the 1994 Series B Bonds which, together with the 1994 Series A Bonds, provided funds for the construction of the five-story main hospital building of VMC known as the "North Tower" and other related facilities (collectively, the "Project"), constituting a portion of the Leased Facilities. See "THE LEASED FACILITIES" in the forepart of this Official Statement. The North Tower is the central focus of the VMC campus, and the construction of the Project was essential to the fulfillment of the County's obligation to provide the public health and hospital services mandated by State law. VMC is one of the busiest hospitals in Santa Clara County, with the busiest Emergency Department in Santa Clara County. The hospital is critical to the local healthcare market place, having served one in four residents over the last four years. Total acute care licensure for VMC is 574 beds. VMC had an average daily census of patients for fiscal year , a 3.3% increase from the previous year. In fiscal year , VMC had 795,479 outpatient visits, representing a 1.0% decrease from the 803,818 outpatient visits in fiscal year VMC has maintained its Open Door Policy to provide healthcare to all residents regardless of their ability to pay. A-3

42 VMC provides patient care in several specialty areas, many of which are available locally only at VMC. Many specialty services are provided to people in the five-county Bay Area Region and even to all of northern California, these include: CARF-accredited Rehabilitation Center for spinal cord and brain injuries; Level I Trauma Center; a Burn Trauma Center, which is one of only two burn trauma centers north of Los Angeles; the Paramedic Base Station for Santa Clara County, with a heliport station; a Level III Neonatal Intensive Care Unit; and a High-Risk Pregnancy Program. VMC also provides patient care in other specialty areas, which include: a wide-range of Pediatric sub-specialties including Pediatric Intensive Care; Adult Intensive and Transitional Care; Neurosurgery and Neurosurgical Transitional Care; OB/Gyn services; and Urology, including specialists in comprehensive pelvic medicine that encompasses care for both male and female patients. Emergency Psychiatric Services, an acute psychiatric emergency services facility, provides patient screening, assessment, crisis intervention and stabilization 24 hours a day. Barbara Arons Pavilion, an acute psychiatric hospital, provides short-term inpatient care. VMC provides an extensive array of outpatient healthcare services through a network of neighborhood clinics supported by four mobile health and dental service units. The ten clinics are located throughout Santa Clara County and offer Pediatric, Obstetrics/Gynecology, Adult Medicine, Geriatric, Sub-Specialty, Dental and Urgent Care. Finances and Operations. VMC's financial operations are the largest of the County's businesstype activities, and are undertaken as a separate enterprise fund. For fiscal year , VMC had $1.22 billion in operating revenues, $1.23 billion in operating expenses, and $13.35 million in net non-operating expenses, resulting in a $21.3 million loss before capital contributions, transfers, and County general fund subsidy. The Lease Payments to be made by the County to the Authority in connection with the County's use and possession of the Leased Facilities are payable from the County's General Fund and certain other sources, and not from VMC's operations. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS" and "SPECIAL CONSIDERATIONS RELATING TO THE BONDS Limited Obligation" and " Base Rental Payments." VMC is a public health care facility and revenues collected by VMC from State and federal programs, insurance companies and cash-paying patients are generally insufficient to fully cover expenditures. As such, VMC has historically relied upon a County's general fund subsidy and VMC operating reserves to finance a portion of VMC's cash flow needs and to fund a portion of VMC's operating expenses. The general fund subsidy includes vehicle license fees, the general fund grant (discretionary money), reimbursement for services provided to other County departments, and the tobacco settlement revenue pass-through. The following table shows a history of the general fund subsidy components to VMC. [Remainder of Page Intentionally Left Blank.] A-4

43 COUNTY OF SANTA CLARA GENERAL FUND SUBSIDY TO VMC (In Millions) Adopted Budget Estimated Actual Adopted Budget Subsidy Component Actual Actual Actual VLF Revenue $47.1 $52.9 $31.7 $35.5 $35.5 $37.5 Tobacco Revenue Inmate Care General Fund Grant (1) Ongoing Subsidy $87.1 $175.7 $73.7 $151.7 $66.7 $98.0 (1) The Affordable Care Act (the "ACA") has caused enrollment in Medi-Cal Managed Care and Medi-Cal Expansion (MCE) to increase, and has changed VMC's payor mix (as of June 2016, the uninsured represents 3% of all inpatient days and 6% of outpatient clinic visits, compared to 30% and 30%, respectively, prior to ACA). As a result, VMC's total revenues are estimated to have increased from fiscal year to fiscal year by approximately $174 million. The improvement to VMC's revenues has resulted in a decrease in the amount of County subsidy to VMC. Source: County Director of Finance, the FY 2016 Adopted Budget and FY 2017 Recommended Budget. VMC receives a majority of its funds from federal and State sources including Medicare, Medi- Cal and other funds for uninsured and underinsured patients. See "Funding by the State of California" and "Federal Funding and Welfare Programs" herein. VMC has seen increases in reimbursements as a result of ACA, as noted in the table above. However, the costs of providing care have continued to escalate. Escalation in costs combined with low Medi-Cal reimbursement rates are among the challenges that many hospitals in California, and particularly public hospitals such as VMC, continue to face. There can be no assurances that VMC will not continue to experience significant operating losses. In such circumstances, there can be no assurances that additional general fund and operating reserve contributions will not be required to subsidize future shortfalls relating to VMC. Valley Health Plan. VHP, the County's HMO, maintains provider contracts to offer a comprehensive provider network including VMC and select regional hospitals, the VMC ambulatory network, independent practice providers, local community clinics, and other traditional safety net providers of health care to Medi-Cal and underserved populations. VHP operates as an independent health plan with business responsibilities including premium collections, capitation payments, claims payments, and risk management. VHP as a health plan offers two commercial products, i.e., an individual plan product and an employer group product. The individual plan product is offered under the Covered California Affordable Care Act insurance exchange that closed the 2015 open and special enrollment periods on February 15, 2015, and April 30, 2015 respectively. The employer group plan is not publically offered and is currently offered only to the following: County employees and retirees Sourcewise employees In-Home Supportive Services Independent Providers Valley Medical Center Foundation employees Valley Transportation Authority employees and retirees A-5

44 County Budget Budget Process. The County is required by State law to adopt a balanced budget by August 30 of each year. This involves a multi-step process. In January, the County Executive prepares a preliminary forecast of the County's budget based on projected expenditures and revenue trends. The County Executive next prepares and presents a recommended budget to the Board. Absent the adoption of a County budget by June 30, the current existing budget is continued into the new fiscal year until a budget is adopted. After conducting public hearings and deliberating the details of the budget, the Board adopts the County's budget by the legislative deadline of August 30. The Board modifies the budget year-round to continuously align County expenditures with revenue expectations and to constantly maintain a balanced budget. In order to ensure that the budget remains in balance throughout the fiscal year, the County Executive continuously monitors actual expenditures and revenue receipts. In the event of a projected year-end deficit, the County takes steps, in accordance with the State Constitution, to reduce expenditures. The County's ability to increase its revenues is limited by State laws which prohibit the imposition of fees to raise general revenue, except to recover the cost of regulation or provision of services. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" in the forepart of this Official Statement. Occasionally, unexpected events may cause the County to commit its reserves or use other resources to fund unplanned events and costs. The difference between the original and final budgets represents supplemental appropriations and other budget adjustments approved by the Board. [Remainder of Page Intentionally Left Blank.] A-6

45 Historical and Current Budgets. The table below sets forth the County's adopted budgets for the general fund, the County's chief operating fund, for fiscal years through EXPENDITURES: COUNTY OF SANTA CLARA GENERAL FUND FINAL ADOPTED BUDGET FOR THE FISCAL YEARS THROUGH Adopted County Budget Adopted County Budget Adopted County Budget Adopted County Budget Adopted County Budget Salaries & Employee Benefits $1,082,178,526 $1,168,618,963 $1,268,708,581 $1,403,069,154 $1,505,089,370 Service & Supplies 1,082,872,827 1,100,573,443 1,165,436,396 1,296,506,365 1,457,135,224 Other Charges 20,819,515 22,991,150 24,413,165 19,607,259 20,091,907 Fixed Assets 712, , ,500 4,039,750 1,900,013 Operating-Equity Transfers 120,988, ,031, ,322, ,623, ,382,567 Reserves 119,875, ,205, ,704, ,223, ,574,673 Expenditure Transfers (189,986,426) (194,424,011) (211,720,915) (235,956,831) (275,493,710) Total Net Expenditures $2,237,460,708 $2,483,640,132 $2,588,269,079 $2,910,112,433 $3,187,680,044 REVENUES: Taxes $695,075,000 $798,706,701 $860,741,000 $935,529,000 $1,015,150,000 Licenses, Permits, Franchises 8,797,342 10,118,567 10,256,723 10,846,473 11,766,022 Fines, Forfeitures, Penalties 16,366,635 14,593,336 16,206,659 11,180,922 11,445,635 Rev. from Use of Money/Prop. 3,679,679 2,848,180 3,177,906 5,496,324 8,959,662 Intergovernmental Revenue 1,000,752,536 1,020,208,431 1,068,243,184 1,163,909,588 1,210,243,641 Charges for Services 100,992,411 99,711, ,240, ,863, ,453,452 Other Financing Sources 284,197, ,103, ,494, ,752, ,235,926 Subtotal Revenues $2,109,860,707 $2,278,290,131 $2,407,361,380 $2,610,577,797 $2,789,254,338 Available Balance 127,600, ,350, ,907, ,534, ,425,706 Total Revenues $2,237,460,708 $2,483,640,132 $2,588,269,079 $2,910,112,433 $3,187,680,044 Source: County Director of Finance A-7

46 Adopted Budget for Fiscal Year In June 2015, the County adopted the budget for fiscal year (the "FY 2016 Adopted Budget"). As in prior years, General Fund revenues continue to be derived from three major sources: property taxes, State revenue and federal revenue. General Fund revenues are projected to total approximately $2.61 billion in fiscal year , compared to $2.41 billion in the adopted budget for fiscal year (the "FY 2015 Adopted Budget"), representing an increase of approximately $200 million or 8.4%. The increase is generally attributable to an increase in property tax revenues of approximately $71.8 million, increase in State revenues of approximately $71.8 million, and increase in federal revenues of approximately $23.7 million. (1) Increase in property tax revenues. For fiscal year , the County projects property tax revenues of $824.9 million, representing a 9.5% increase from the adopted budget for fiscal year (the "FY 2015 Adopted Budget") projection of $753.1 million. These projections reflect a continued improvement in the real estate market; however, the FY 2016 Adopted Budget cautions that it is important to monitor the housing market and fiscally prepare for the likelihood of slowdown in the coming years. (2) Increase in State revenues. The FY 2016 Adopted Budget projects State revenues of $682.9 million, or $71.8 million more than the $611.1 million projected in the FY 2015 Adopted Budget. Approximately $11 million of this increase is attributable to projected growth in public safety sales tax, from $ million in the FY 2015 Adopted Budget to $205.0 million in the FY 2016 Adopted Budget. Other State revenues are expected to fund health and social service programs, and provide reimbursement revenues for Medi-Cal, child welfare, CalWORKs and others. (3) Increase in federal revenues. The FY 2016 Adopted Budget projects revenues from federal sources of $480.3 million, a $23.7 million increase over the $456.6 million projected in the FY 2015 Adopted Budget. The majority of federal revenues are budgeted in the Social Services Agency, In- Home Supportive Services, probation, and the health and hospital system. Changes in federal legislation in any of these policy areas could jeopardize projections related to these revenues. The FY 2016 Adopted Budget projects General Fund total net expenditures to be $2.91 billion, representing a 12.4% increase from the FY 2015 Adopted Budget expense projection of $2.59 billion. The most significant categories of General Fund expense are Salaries and Benefits and Services and Supplies, comprising approximately 85.8% of gross expenditures. Compared to the FY 2015 Adopted Budget, Salaries and Benefits and Services and Supplies together increased by 10.6%. Considering the 8.4% increase in revenue, the County cautions that this level of expenditure increase would not be sustainable. The FY 2016 Adopted Budget provided an allowance for a Contingency Reserve at more than 5% of General Fund revenues, net of pass-throughs, or $155.6 million. The recovering national, State and local economy supports an improving tax base that the County anticipates to continue to grow through The FY 2016 Adopted Budget projects that the cost of employee wages and benefits will continue to grow sharply for at least another five years, which will be brought about by, among others, the implementation of five-year labor contracts, changes in the County's pension contribution formula, changes in County policy with respect to funding retiree healthcare and increases in health insurance premiums. See "County Employees, Employee Relations and Collective Bargaining" and "County Employee Benefit Plans." Mid-Year Budget Review for Fiscal Year In February 2016, the County's Office of Budget and Analysis presented its Fiscal Year Mid-Year Budget Review (the "Mid-Year Budget Review") to the Board. A-8

47 The Mid-Year Budget Review recommended adjusting the Contingency Reserve in order to replenish the Contingency Reserve to 5% of General Fund revenue less pass-through revenue, resulting in an adjusted balance of $129.3 million. The Mid-Year Budget Review also recommended a one-time allocation of an additional $27 million to Santa Clara Valley Medical Center ("VMC") to complete the Bed Building 1 Project, which is the largest portion of VMC's Seismic Safety Program. See "Santa Clara Valley Medical Center." The Mid-Year Budget Review also proposed a one-time deposit into the California Employers' Retiree Benefit Trust of approximately $7.2 million, from the allocation of assets and property sales from the redevelopment agency dissolution process. See "County Employee Benefit Plans Post-Retirement Health Care Benefits and Retiree Health Program" and "Redevelopment Dissolution" herein. Other significant recommendations from the Mid-Year Budget Review include the reappropriation of approximately $12.4 million of Measure A fund balance to VMC for its Emergency Room construction project (see "Other Taxes and Revenues"); the appropriation of $30.6 million of onetime excess revenues from the Educational Revenue Augmentation Fund into the Contingency Reserve (see "Educational Revenue Augmentation Fund"); and the allocation of approximately $4.8 million in a reserve for various jail capital projects that require funding in the short-term. Recommended Budget for Fiscal Year On May 1, 2016, the County Executive presented the County's Fiscal Year Recommended Budget (the "FY 2017 Recommended Budget") to the Board. The FY 2017 Recommended Budget projects General Fund revenues to total approximately $2.77 billion, representing a 6.1% increase from the $2.61 billion in General Fund revenues projected in the FY 2016 Adopted Budget. The increase is generally attributable to an increase of $59.3 million in current property tax revenues and an increase of $38.6 million from the Federal government. The overall increase is also attributable in part to an increase of $37.7 million from "Other Financing Sources," generally consisting of State revenue from Public Safety Realignment (AB 109) and Health Realignment (SB 1020) accounts. In fiscal year , improvements in VMC's patient flow, combined with expanded funding of the Affordable Care Act, enabled the County to redirect $75 million in VMC subsidy funds from the General Fund toward the County's one-time needs. Property tax revenues for fiscal year are projected to be $884.2 million of the total General Fund revenue, representing an increase of 7.2% from the amount budgeted in fiscal year The County is projecting an increase in the secured roll of 6.5%, reflecting continued improvement in the performance of the real estate market. While the property tax roll continues to grow, the County cautions that it is important to monitor the housing market and prepare for the likelihood of a slowdown in coming years. State revenue is projected to contribute $689.0 million of total General Fund revenue, or $6.0 million more than was budgeted for fiscal year Public safety sales tax accounts for $205.0 million of this projection, which is the same amount budgeted for fiscal year Federal aid accounts for $518.9 million of General Fund revenues, representing a $38.6 million increase over budgeted revenues in fiscal year The large majority of federal revenues are budgeted in the Social Services Agency, In-Home Supportive Services Program, the Probation Department, and the Health and Hospital System. Changes in federal legislation for any of these policy areas could jeopardize projections related to these revenues. "Other Financing Sources" are projected to contribute $410.5 million of total General Fund revenue, or $37.7 million more than budgeted for fiscal year Major revenues reflected in this category are transfers from restricted funds to the General Fund and include revenues from the State A-9

48 related to AB 109 Realignment ($56.2 million) and the Mental Health Services Act ($94.7 million). These revenue sources are tied to specific expenditures for specific programs and services. The appropriations for expenditures exceed estimated revenues by $385.4 million in the General Fund for fiscal year This difference is expected to be covered by available fiscal year fund balance. Appropriations are 8.4% higher in the FY 2017 Recommended Budget than the FY 2016 Adopted Budget. This increase, particularly in light of a 6.1% increase in revenue, indicates a rising cost of doing business that the County believes may not be sustainable. The most significant categories of General Fund expense are Salaries and Benefits and Services and Supplies. These categories represent nearly 86% of gross expenditures. The FY 2017 Recommended Budget anticipates continued growth through 2017, and states that it is unclear if fiscal year or beyond will reflect a flattening or decline in revenue growth. The FY 2017 Recommended Budget further identifies the following challenges to the County: The FY 2017 Recommended Budget projects that the cost of employee wages and benefits will continue to grow sharply for at least another four years. The implementation of five-year labor contracts in 2014 and 2015 establishes a firmly set growth projection for wages. The California Public Employees Retirement System ("PERS") has adjusted its pension contribution formula to factor in current trends in life expectancy, retirement age, and investment returns, and implemented a more aggressive amortization of unfunded actuarial liability to improve funding for employee pension obligations. The County has implemented a funding formula to address its retiree healthcare insurance unfunded liabilities to attain full funding in 30 years. This requires an acceleration of contributions from the General Fund to the retiree healthcare irrevocable trust fund. Health insurance premiums for current County employees and their dependents continue to grow in cost each year, and there is still a general expectation for health insurance premiums to continue rising for several years. Adopted Budget for Fiscal Year On June 17, 2016, the Board approved a balanced Fiscal Year Adopted Budget (the "FY 2017 Adopted Budget"), with a General Fund budget of approximately $3.2 billion. The FY 2017 Adopted Budget generally adopted the FY 2017 Recommended Budget of the County Executive. The FY 2017 Adopted Budget focuses on services and initiatives to address homelessness and affordable housing, investing in custody operations and custody health programs in the correctional system, and rebuilding the County's staffing levels and aging facility infrastructure. The FY 2017 Adopted Budget includes $17.2 million to address affordable housing and homelessness, $10 million of which will support initiatives for new units of permanent supportive housing for the chronically homeless, housing for homeless veterans, support for certain homeless children, housing for survivors of intimate partner violence and/or human trafficking, transitional housing such as emergency shelter and outreach services, and improvements at certain shelters. The FY 2017 Adopted Budget also contemplates significant investments in improving the County's correctional system. AB 109, changing jail populations, and a State grant for a new jail facility, all build upon the County's need to restore and improve critical custody operations and custody health A-10

49 services that suffered from funding reductions during the recession. The FY 2017 Adopted Budget includes $7.5 million for staff and program improvements, including adding staff to provide behavioral health services such as mental health clinicians, substance use treatment clinicians, and custody staff to improve the process of providing treatment to inmates. The County will also establish an ongoing reserve of $2.5 million for jail reform and oversight. The FY 2017 Adopted Budget also projects augmenting staffing and operational funding to adequately support upcoming capital projects totaling $135.1 million, including $31.9 million for VMC Emergency Department improvements, and $28 million to begin the design and building of a new jail facility. See "Capital Improvement Plan" herein. Financial Statements Excerpts of the County Financial Statements for fiscal year are included as Appendix C to this Official Statement and should be read in their entirety. The following table presents information on the results of the general fund from the Comprehensive Annual Financial Reports for fiscal years through that were prepared by the County Director of Finance and derived from financial statements that were audited by independent Certified Public Accountants each year. [Remainder of Page Intentionally Left Blank.] A-11

50 COUNTY OF SANTA CLARA COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN GENERAL FUND BALANCE FOR FISCAL YEARS THROUGH (In Thousands) Revenues Taxes $ 625,516 $ 641,051 $ 688,233 $ 811,660 $ 870,809 Licenses & permits 12,025 12,223 13,251 13,922 14,396 Fines, forfeitures & penalties 64,259 55,074 52,834 52,401 58,620 Interest and investment income 8,658 10,341 5,809 8,732 10,941 Net securities lending activities 3 Intergovernmental revenues 1,097,449 1,075,939 1,077,021 1,217,760 1,256,252 Charges for services 143, , , , ,532 Other 20,475 27,244 34,802 41,290 67,981 Total Revenues $1,972,165 $1,931,473 $1,981,375 $2,255,023 $2,400,531 Expenditures General government $ 197,469 $ 174,276 $ 197,631 $ 240,782 $ 258,309 Public protection 662, , , , ,407 Public ways and facilities 1,472 3,445 2,402 5, Health & sanitation 396, , , , ,963 Public assistance 672, , , , ,832 Capital Outlay 2,845 1,027 1, ,730 Debt service (1) Principal retirement 11,557 12,174 9,332 10,056 10,021 Interest and Fiscal Charges 12,924 14,578 14,375 12,487 11,036 Total Expenditures $1,956,527 $1,818,214 $1,899,882 $2,070,359 $2,230,544 Excess (Deficiency) of Revenues Over (Under) Expenditures $ 15,638 $ 113,259 $ 81,493 $ 184,664 $ 214,553 Other Financing Sources (Uses) Proceeds from sale of capital assets $ 4,000 $ 9,943 $ 17,347 $ 5,008 $ 16,244 Transfers in 126,228 59,076 77,708 79,140 73,120 Transfers out (156,547) (154,132) (127,512) (227,679) (109,762) Net other fin. (uses) / sources ($ 26,319) ($ 85,113) ($ 32,457) ($ 143,531) ($ 20,398) Net change in fund balances ($ 10,681) $ 28,146 $ 49,036 $ 41,133 $ 149,589 Changes in Fund Balances Fund Balances, beg. of year $ 257,352 $ 246,644 $ 274,790 $ 323,826 $ 364,959 Fund balances, end of year $ 246,644 $ 274,790 $ 323,826 $ 364,959 $ 514,548 (1) Represents that portion of debt service accounted for in the general fund only. A significant portion of debt service is accounted for in the County's Enterprise Fund for Santa Clara Valley Medical Center. Source: County Director of Finance and audited financial statements for fiscal years through A-12

51 Levy, Tax Rate and Valuation According to the requirements of Article XIII A of the California Constitution (initially adopted by California voters as Proposition 13 in 1978), the County levies a 1% ad valorem property tax on behalf of all taxing agencies in the County and the ad valorem property tax for payment of the general obligation bonds of school districts and other governmental entities in Santa Clara County. The 1% ad valorem property tax is assessed and collected by the County at the same time and on the same tax rolls. The proceeds of the 1% ad valorem property taxes are apportioned on the basis of a formula established by State law. Under this formula, the County and all other taxing entities receive a base year allocation plus an allocation on the basis of "situs" growth in assessed value prorated among the jurisdictions which serve the tax rate areas within which the growth occurs. Tax rate areas are specifically defined geographic areas which were developed to permit the levying of taxes for less than countywide or less than citywide special districts. Certain other ad valorem property taxes and assessments and other per-parcel taxes and assessments are also included in the levy pursuant to the County's tax rolls. The assessed valuation of property located within Santa Clara County is established by the County Assessor, except for public utility property, which is assessed by the State Board of Equalization. Assessed valuations are reported at 100% of the full cash value of the property, as defined in Article XIII A of the California Constitution. Full cash value is defined as "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 newly constructed, or when 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 a reduction in the consumer price index or comparable local data for the area or may be reduced in the event of declining property value caused by damage, destruction or other factors including a general economic downturn. The full cash value may also be adjusted due to change of ownership or new construction. See "CONSTITUTIONAL AND STATUTORY TAX LIMITATIONS ON TAXES AND APPROPRIATIONS" in the forepart of this Official Statement. The County Assessor may also temporarily reduce assessed values of property within Santa Clara County. Pursuant to Proposition 8, a voter-approved Constitutional amendment adopted in November 1978 ("Proposition 8"), property owners are entitled to the lower of the fair market value of their property as of January 1 or the assessed value as determined at the time of purchase or construction, and increased by no more than 2% annually. See "Levy, Tax Rate and Valuation Proposition 8 Reductions and Appeals to Assessed Value" herein. Article XIII A has had the general effect of stabilizing assessed valuation such that it does not fluctuate to the same degree as the market value of property in a taxing area, but instead gradually reflects changes in ownership of longer held properties that are reassessed upon transfer and other permitted increases and decreases of assessed value. As a result of Article XIII A and its restrictions on the County Assessor's ability to increase assessed value, property that has been owned by the same taxpayer for many years can have an assessed value that is much lower than the market value of the property. Property that is similarly situated that has recently been acquired may have a substantially higher assessed value reflecting the recent acquisition price. Increases in assessed value in a taxing area may occur due to the change in ownership of property even when the rate of inflation or consumer price index do not permit a full 2% annual increase in assessed valuation of other property located in the taxing area. As described above, the full cash value base of real property used in determining taxable value may be adjusted from year to year to reflect the inflationary rate, not to exceed a 2% increase for any given year, or may be reduced to reflect a reduction in the consumer price index ("CPI") or comparable local data. For fiscal year , the State Board of Equalization set an adjustment of negative 0.237% which impacted the assessment roll for fiscal year Consequently, 350,000 property owners in Santa Clara County received a reduction in the assessed value, totaling $6 billion. In fiscal years , and , the inflationary rate increase was below the 2% cap at 0.75%, 0.45% and 1.99%, A-13

52 respectively. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS Article XIII A" in the forepart of this Official Statement. The table below shows a history of assessed valuations of property within Santa Clara County since fiscal year COUNTY OF SANTA CLARA ASSESSED VALUATION HISTORY FISCAL YEARS THROUGH (In Thousands) Fiscal Year Secured Unsecured State Assessed Total (1) Percent Increase (Decrease) $283,903,536 $22,225,682 $3,664,035 $309,793, % ,939,519 23,021,092 3,717, ,677, ,220,200 22,417,525 3,904, ,541, ,318,558 23,239,529 4,218, ,776, ,058,176 24,439,939 4,209, ,707, (1) Values shown differ from the information reported by the County Assessor, as the County Assessor's numbers include aircraft valuation, but exclude State-assessed values. Source: County of Santa Clara Office of the Controller-Treasurer. According to the County Assessor's Fiscal Year Annual Report (the "Assessor's Annual Report"), the fiscal year assessment roll grew by approximately $31 billion (to $388.3 billion) over the fiscal year assessment roll, representing an increase of approximately 8.67%. According to the County Assessor, the primary drivers of the increase were property sales and new construction. These two factors accounted for 59% of the $31 billion increase. Other factors contributing to the increase include assessment increases for properties under Proposition 8 that received partial or full restorations of their factored base year value as a result of an improving residential market. [Remainder of Page Intentionally Left Blank.] A-14

53 The following table shows the local secured assessed valuation and number of parcels by land use category for real property located in Santa Clara County for fiscal year COUNTY OF SANTA CLARA REAL PROPERTY ASSESSED VALUATION AND PARCELS BY LAND USE FISCAL YEAR Property Type Parcel Count Assessed Valuation (In Billions) (1) Percentage AV Growth From FY Single Family (Detached) 333,880 $ % Condominiums 83, Office 5, Apartments (5+ units) 5, Other Industrial (Non-Mfg.) 3, R&D Industrial Specialty Retail & Hotels 5, Single Family (2-4 Units) 15, Other Urban 7, Major Shopping Centers Electronic & Machinery Mfg Other Industrial Mfg. 2, Agricultural 6, Public & Quasi-Public 3, (2) Residential Miscellaneous ,789 $ % (1) Net of non-reimbursable exemptions. Does not include mobile homes. Includes possessory interest assessments which, until fiscal year , were billed as unsecured assessments. (2) Increase is primarily attributable to the construction of Levi's Stadium in Santa Clara. Source: County of Santa Clara Assessor's Office. Proposition 8 Reductions and Appeals to Assessed Value. In November 1978, State voters passed Proposition 8, which provides that property owners are entitled to an assessment based on the lower of the fair market value of their property as of the lien date (January 1), or the assessed value as determined at the time of purchase or construction, and increased by no more than 2% annually. As a matter of policy and in accordance with Proposition 8, the County Assessor has proactively responded to declining market values by temporarily reducing assessed values. As the real estate market rebounds, the County Assessor is required to "restore" the assessed values for properties previously reduced during a downturn. The restoration of the property's assessed value is not limited to the 2% limit, until the market value of the property reaches its purchase price, plus the annual inflation increased by a maximum of 2%. In the assessment year, approximately 38,000 properties were assessed below their purchase price (representing a total reduction in assessed value of approximately $8 billion), as a result of the decline of the residential real estate market during the recession. In the assessment year, that number had decreased to approximately 22,400 properties (representing a total reduction in assessed value of approximately $4.9 billion), primarily residential parcels that were still valued less than their purchase price and qualifying them for the temporary reduction in property assessment. In the assessment year, the County Assessor fully restored the assessed values of approximately 13,600 properties, because the market value of those properties now exceeds the original purchase price. In the A-15

54 assessment year, the County Assessor fully restored the values of approximately 38,640 properties. In general, a taxpayer who disagrees with the assessed value of his or her property may request a review of his or her assessment. If the County Assessor finds that an adjustment is appropriate, the assessment is revised accordingly. If a difference of opinion still exists by July 1, the taxpayer may file an appeal. Between July 1, 2014 and June 30, 2015, 4,853 assessment appeals were filed by homeowners and business property owners, representing a disputed assessed value of approximately $30.04 billion. Between July 1, 2013 and June 30, 2014, 5,443 appeals were filed with the County Assessor's Office, representing a disputed assessed value of approximately $22.75 billion. These numbers include all appeals filed between the relevant period, including appeals later determined to be invalid. Between July 1, 2014 and June 30, 2015, the Assessor's Office resolved 5,591 appeals. The Assessment Appeals Board considered 1,842 cases. Of those, 303 appeals went to a full hearing. The Assessment Appeals Board sustained approximately 96% of the Assessor's originally enrolled assessed values disputed by appellants. The resolved appeals resulted in a reduction to assessed value in the amount of approximately $1.6 billion. As of July 1, 2016, an aggregate of 4,884 appeals remain pending and unresolved, representing approximately $61.8 billion in requested reductions to value (representing the difference between the property's assessed value and the applicant's opinion of value). Payment Dates and Liens Taxes are levied for each fiscal year from July 1 to June 30 on taxable real and personal property situated in Santa Clara County as of the preceding January 1. However, upon a change in ownership of property or completion of new construction, State law permits an accelerated recognition and taxation of increases in real property assessed valuation (known as a "floating lien date"). For assessment and collection purposes, all property (both real and personal) is classified either as "secured" or "unsecured" and is listed accordingly on separate parts of the assessment roll. Property taxes arising on a floating lien date are posted on a supplemental assessment roll (secured or unsecured, as the case may be). The "secured roll" is that part of the assessment roll containing (i) property, the taxes on which are secured by a lien on the real property which is sufficient, in the opinion of the County Assessor, to secure payment of the taxes and (ii) State Board of Equalization assessed (public utilities) property. The "unsecured roll" is that part of the assessment roll containing property, such as business property or leased or rented premises, which is not secured by the underlying real property. California law provides partial exemptions from taxation for owner-occupied residences (the "homeowner's exemption") in an amount of up to $7,000 per single family residence. Under State law, revenues lost to local governments due to this exemption are reimbursed by the State. Property taxes on the secured roll are due in two installments, on November 1 and February 1 of each fiscal year. If unpaid, such taxes become delinquent on December 10 and April 10, respectively, and a 10% penalty attaches to any delinquent payment. In addition, property on the secured roll with respect to which taxes are delinquent is declared to be in default on or about October 30 of the fiscal year. Such property may thereafter be redeemed by payment of the delinquent taxes and the delinquency penalty, plus a redemption penalty of 1.5% per month to the time of redemption. If taxes are unpaid for a period of five years or more, the tax-defaulted property is declared to be subject to the County Tax Collector's power of sale and may be subsequently sold within two years by the County Tax Collector. A-16

55 Property taxes on the unsecured roll are due as of the January 1 lien date and become delinquent, if unpaid, on August 31. A 10% penalty attaches to delinquent taxes on property on the unsecured roll, and an additional penalty of 1.5% per month begins to accrue beginning November 1. The taxing authority has four ways of collecting unsecured personal property taxes: (1) a civil action against the taxpayer; (2) filing a certificate in the office of the County Clerk specifying certain facts in order to obtain a judgment lien on certain property of the taxpayer; (3) filing a certificate of delinquency for recordation in the County Recorder's office, in order to obtain a lien on certain property of the taxpayer; and (4) seizure and sale of personal property, improvements or possessory interests, belonging to the assessee. A summary of full cash value of the secured roll, secured property tax levies and delinquencies for each year since fiscal year are shown in the following table. Fiscal Year COUNTY OF SANTA CLARA SUMMARY OF FULL CASH VALUE AND AD VALOREM PROPERTY TAXATION AND DELINQUENCIES FISCAL YEARS THROUGH Full Cash Value (1) Secured Property Tax Levies (2) Levy Delinquent June 30 Percentage Levy Delinquent June 30 (3) $277,598,761,276 $3,310,923,661 $63,318, % ,238,203,317 3,327,317,883 43,350, ,567,571,619 3,467,347,410 31,842, ,656,829,780 3,760,571,768 27,591, ,124,703,936 4,045,658,272 18,492, (1) Aggregate of secured and State assessed property determined in accordance with State law. Does not reflect market value of all property. (2) Includes taxes payable to the County and all other applicable taxing entities. (3) Reflects collection within the fiscal year originally levied. Source: County Director of Finance Teeter Plan In 1994, the County instituted the Alternative Method of Distribution of Tax Levies and Collections and of Tax Sale Proceeds (the "Teeter Plan") as provided for in Section 4701 et seq. of the Revenue and Taxation Code of the State (the "Teeter Plan Law"). Generally, the Teeter Plan provides for a tax distribution procedure in which secured roll taxes are distributed to taxing agencies within Santa Clara County on the basis of the full amount of the current tax levy, rather than on the basis of actual current tax collections less delinquencies. The County then receives and retains any excess delinquent tax payments, penalties and interest. The County and the taxing agencies within Santa Clara County participate in the Teeter Plan. Generally, the tax levies subject to the Teeter Plan (the "Teeter Secured Levy") include each participant's share of the 1% ad valorem secured levy plus any ad valorem levy for the debt service of voter-approved general obligations bonds. Not included in the Teeter Secured Levy are the tax levy for certain 1915 Act assessment bonds and special taxes for Mello Roos bonds. The County determines which moneys in the County treasury (including those credited to the tax losses reserve fund described below) will be available to be drawn on to the extent of the amount of uncollected taxes. The County currently uses tax payments from prior years' delinquencies to cover advances of current delinquencies and draws on the tax losses reserve fund as necessary. A-17

56 Pursuant to the Teeter Plan Law, the County is required to establish a tax losses reserve fund. The Teeter Plan Law permits any county to draw down the tax losses reserve fund to a balance equal to 1% of the total of all taxes and assessments levied on the secured roll for that year, or alternatively, 25% of the current year's delinquent secured tax levy. For fiscal years , and , the County elected the latter method. The Teeter Plan is to remain in effect unless the County orders its discontinuance or if, prior to the commencement of any fiscal year, the County receives a petition for its discontinuance adopted by resolution of two-thirds of the participating revenue districts in the County. Further, the County may, by resolution adopted not later than July 15 of any subsequent fiscal year after a public hearing, discontinue the Teeter Plan as to any tax levying or assessment levying agency if the rate of secured tax delinquency in that agency in any year exceeds 3% of the total of all taxes and assessments levied on the secured rolls for that agency. The County has not discontinued the Teeter Plan for any of its agencies. Educational Revenue Augmentation Fund Beginning in 1992, counties, cities, and certain special districts were forced to shift a portion of their property tax shares to the Educational Revenue Augmentation Fund ("ERAF") established within each county. This was done to offset the State's General Fund contributions to school districts under Proposition 98. Under the Revenue & Taxation Code, once schools receive their guaranteed minimum amount of funding based on average daily attendance, any excess ERAF amounts are required to be returned to the taxing entities that contributed into it. This excess distribution occurred for the first time in Santa Clara County in fiscal year , when the County received approximately $2 million. In fiscal year , the County received $34.4 million in excess ERAF amounts, and received $75.3 million for fiscal year The significant fluctuation in the excess ERAF amount is due to changes in the State local school funding formula. There can be no assurance that the County will continue to receive ERAF amounts in the future. [Remainder of Page Intentionally Left Blank] A-18

57 Largest Taxpayers The ten largest taxpayers in the County for fiscal year and their taxable assessed values are set forth in the following table. These ten largest taxpayers paid a total of approximately $190.4 million in taxes, as shown in the table below. COUNTY OF SANTA CLARA TEN LARGEST PROPERTY TAXPAYERS FISCAL YEAR (in thousands) Taxpayer Taxable Assessed Value (1) Rank Percentage of Taxable Assessed Value Total Taxes Paid (2) Pacific Gas & Electric Company $2,082, % $43,549.7 Forty Niners SC Stadium 921, ,477.2 Google, Inc. 1,529, ,240.0 Cisco Technology Inc. 1,590, ,752.0 Campus Holdings, Inc. 1,538, ,110.7 Apple Computer Inc. 1,310, ,596.4 The Irvine Company LLC 793, ,321.4 Lockheed Missiles and Space Co. Inc. 1,156, ,671.1 Westfield Malls 865, ,341.5 Intel Corporation 798, ,335.2 Total $12,586, % $190,395.2 Net Assessed Value of Taxable Property $377,485,174.7 (1) The taxable assessed value includes tax assessments on real property and personal property. (2) Represents taxes paid on the Fiscal Year secured tax roll, including local and State assessees. Source: County of Santa Clara Tax Collector's Office Taxation of State-Assessed Utility Property The State Constitution provides that most classes of property owned or used by regulated utilities be assessed by the State Board of Equalization (the "BOE") and taxed locally. Property valued by the BOE as an operating unit in a primary function of the utility taxpayer is known as "unitary property," a concept designed to permit assessment of the utility as a going concern rather than assessment of each individual element of real and personal property owned by the utility taxpayer. State-assessed unitary and "operating nonunitary" property (which excludes nonunitary property of regulated railways) is allocated to the counties based on the situs of the various components of the unitary property. Except for unitary property of regulated railways and certain other excepted property, all unitary and operating nonunitary property is taxed at special county-wide rates and distributed to taxing jurisdictions according to statutory formulae generally based on the distribution of taxes in the prior year. Assembly Bill 454 ("AB 454") (Chapter 921, Statutes of 1986) provides that revenues derived from unitary property, commencing with fiscal year , will be allocated as follows: (i) each jurisdiction will receive up to 102% of its prior year State-assessed revenue; and (ii) if county-wide revenues generated from unitary property are less than the previous year's revenues or greater than 102% of the previous year's revenues, each jurisdiction will share the burden of the shortfall or excess revenues A-19

58 by a specified formula. This provision applies to all unitary property except railroads, the valuation of which continues to be allocated to individual tax rate areas. The provisions of AB 454 do not constitute an elimination of the assessment of any Stateassessed properties nor a revision of the methods of assessing utilities by the State Board of Equalization. Generally, AB 454 allows valuation growth or decline of unitary property to be shared by all jurisdictions in a county. In the past, the State has passed legislation that resulted in a decrease in the amount of assessed utility property and corresponding tax revenues allocated to the State's local taxing agencies, including the County. The County is unable to predict whether legislation will be proposed or enacted in the future in response to industry restructuring, or whether any future legislation or litigation may affect the State's methods of assessing utility property and the allocation of assessed value to local taxing agencies. Funding by the State of California General. California counties administer numerous health and social service programs as the administrative agent of the State and pursuant to State law. Many of these programs have been either wholly or partially funded with State revenues which have been subject each year to the State budget and appropriation process. Over the last several years, State and federally mandated expenditures in justice, health and welfare have grown at a greater rate than the County's discretionary general purpose revenues. The County is heavily dependent upon the State for a portion of its revenues. The FY 2016 Adopted Budget projects that in fiscal year , approximately 26.2% (or approximately $682.9 million) of general fund revenues will come from State aid, and the FY 2017 Recommended Budget projects that in fiscal year , approximately 24.9% (or approximately $689 million) of general fund revenues will come from State aid. See "County Budget" above. The State Budget Process. The State's fiscal year begins on July 1 and ends on June 30. Pursuant to the State Constitution, the Governor of the State is required to propose a budget for the next fiscal year (the "Governor's Budget") to the State Legislature no later than January 10 of each year. The Governor's Budget is then revised in May and a final budget must be adopted by each house of the State Legislature by no later than June 15. The budget becomes law upon the signature of the Governor. Under State law, the annual proposed Governor's Budget cannot provide for projected expenditures in excess of projected revenues and balances available from prior fiscal years. Following the submission of the Governor's Budget, the State Legislature takes up the proposal. Under the State Constitution, money may be drawn from the State Treasury only through an appropriation made by law. The primary source of the annual expenditure authorizations is the Budget Act as approved by the State Legislature and signed by the Governor. The Budget Act must be approved by each house of the State Legislature. The Governor may reduce or eliminate specific line items in the Budget Act or any other appropriations bill without vetoing the entire bill. Such individual line-item vetoes are subject to override by a two-thirds majority vote of each house of the State Legislature. Appropriations also may be included in legislation other than the Budget Act. Bills containing appropriations (except for K-14 education) must be approved by each house of the State Legislature and be signed by the Governor. Continuing appropriations, available without regard to fiscal year, may also be provided by statute or the State Constitution. Funds necessary to meet an appropriation need not be in the State Treasury at the time such appropriation is enacted; revenues may be appropriated in anticipation of their receipt. However, delays in the adoption of a final State budget in any fiscal year may affect payments of State funds during such budget impasse. A-20

59 Fiscal Year Proposed State Budget. On January 7, 2016, the Governor released the Fiscal Year Proposed State Budget (the "FY 2017 Proposed State Budget"), which projects fiscal year State General Fund revenues and transfers of $121.2 billion (inclusive $6.7 billion in fund balance from fiscal year ), total expenditures of $116.1 billion and a year-end surplus of $5.2 billion, of which $966 million would be reserved for the liquidation of encumbrances and $4.2 billion would be deposited in a reserve for economic uncertainties. The FY 2017 Proposed State Budget projects fiscal year State General Fund revenues and transfers of $125.8 billion (inclusive $5.2 billion in fund balance from fiscal year ), total expenditures of $122.6 billion and a year-end surplus of $3.2 billion, of which $966 million would be reserved for the liquidation of encumbrances and $2.2 billion would be deposited in a reserve for economic uncertainties. The FY 2017 Proposed State Budget states that, with California's complicated budget, there will continue to be year-to-year fluctuations, risk and cost pressures, including from the federal government and ballot initiatives, and maintaining a balanced budget for the long term will be an ongoing challenge that requires fiscal restraint and prudence. Features of the FY 2017 Proposed State Budget affecting counties in general include, but are not limited to, the following: 1. The FY 2017 Proposed State Budget includes $1.1 billion in managed care organization ("MCO") tax receipts to fund Medi-Cal services, including administrative funding for the Coordinated Care Initiative and other critical health care services, and $9.2 billion for the In-Home Supportive Services ("IHSS") program. There is also proposed a new three-year tiered MCO tax plan that is estimated to result in $1.3 billion in net revenues, which will be used to fund current Medi-Cal activities, including the full-year restoration of the 7-percent across-the-board cuts to IHSS hours. 2. The FY 2017 Proposed State Budget includes an estimated $7.5 billion in expenditures for the federal Temporary Assistance for Needy Families program in fiscal year , of which $5.4 billion is for CalWORKs program expenditures and $2.1 billion is for other programs. 3. The FY 2017 Proposed State Budget includes an estimated $741.9 million in fiscal year and $564.5 million in fiscal year for amounts redirected from counties pursuant to Assembly Bill 85 (Redirection of 1991 State Health Realignment). 4. The FY 2017 Proposed State Budget includes $1.107 billion base funding for fiscal year (with an estimated additional $96.8 million in funding, depending on growth) for 2011 Realignment programs, $489.9 million in vehicle license fee revenues (with additional amounts to be included depending on State revenue receipts) to fund various local assistance programs and $129.7 million for recidivism reduction programs pursuant to Senate Bill 678 (2011) with respect to community corrections multidisciplinary teams. 5. The FY 2017 Proposed State Budget includes a $3.1 billion cap and trade spending plan, which includes funds for a new local climate program for disadvantaged communities, increased spending for investments in waste management, and increases to the forestry sector, $323.1 million in one-time funding for critical drought response efforts, and increased investments in resource management and wildfire protection. LAO Analysis of the FY 2017 Proposed State Budget. On January 11, 2016, the Legislative Analyst's Office (the "LAO") released its analysis of the FY 2017 Proposed State Budget, entitled "The Budget: Overview of the Governor's Budget" (the "LAO Overview"). The LAO Overview suggests that the Legislature, in preparing the State budget for fiscal year , should begin the process with a robust target for reserves for the end of fiscal year and concentrate spending on one-time purposes, which would leave certain funds available for targeted ongoing commitments A-21

60 (particularly if the Legislature passes an extension of a proposed managed care organization tax) and better position the State for any near-term economic downturn. The LAO Overview states that the FY 2017 Proposed State Budget's emphasis on reserves is prudent and focus on the State's infrastructure makes sense, although the latter proposal raises certain issues for the Legislature to consider, including whether the proposed funding sources are appropriate, whether funding is allocated to the highest priority and most cost-effective infrastructure needs and whether there is sufficient legislative oversight. May Revision to the FY 2017 Proposed State Budget. On May 13, 2016, the Governor released his May Revision to the Fiscal Year Proposed State Budget (the "May Revision"). The May Revision projects fiscal year State General Fund total available resources of $124.9 billion (being revenues and transfers of $120.1 billion and prior year's balance of $4.8 billion), total expenditures of $122.2 billion and a year-end surplus of $2.8 billion ($966 million of which would be reserved for the liquidation of encumbrances and $1.8 billion of which would be deposited in a reserve for economic uncertainties), and $6.7 billion on deposit in the Budget Stabilization Account. The May Revision states that, barring any significant changes, the State budget over the next two years will be in balance. However, by fiscal year , the annual shortfall between State spending and revenues is projected to be over $4 billion. This shortfall does not take into account the likelihood of an economic slowdown or recession, or an extension of the Proposition 30 income tax rates, which will be decided by voters in November Features of the May Revision affecting counties in general include, but are not limited to, the following: 1. The May Revision includes estimated statewide savings of $749.9 million in fiscal year and $643.4 million in fiscal year in 1991 Health Realignment funding from counties to the State. The estimates will affect the amount of health realignment revenues to be redirected by counties to the State. 2. The May Revision includes $188.2 million statewide to extend Medi-Cal benefits to undocumented children under 19 years of age effective May 1, The May Revision includes a $265.8 million increase in funding to reflect the restoration of the 7-percent reduction to IHSS hours. The restoration is expected to remain in effect until June 30, 2019, when the MCO tax passed by the State Legislature expires. 4. The May Revision includes a proposal to provide $127.3 million for the implementation of the Child Welfare Continuum of Care Reform enacted under Assembly Bill 403 (Chapter 773, Statutes of 2015), which address home-based family care and a reduction in the number of foster youth in group home care. 5. The May Revision includes as part of the 2011 Public Safety Realignment Funding an estimated $1.2 billion in fiscal year base allocation funding, $85.1 million in fiscal year growth funds and $102.0 million in anticipated fiscal year growth funds. 6. The May Revision estimates that counties will receive $710.0 million in general purpose revenue as a result of the dissolution of redevelopment agencies. LAO Analysis of the May Revision. On May 15, 2016, the LAO released a series of analyses of the May Revision entitled "The May Revision: LAO Analyses" (as originally released, the "LAO Analyses"). The LAO Analyses states that certain new ongoing budgetary commitments made by the State since January 2016 carry substantial ongoing costs for the State in future years and that these A-22

61 changes, together with reduced estimates of State revenues and reserves, result in less capacity to make additional budgetary commitments. The LAO Analyses also states that, relative to the State's budgetary position as set forth in the FY 2017 Proposed State Budget, the additional budgetary commitments leave the State budget more vulnerable to the next economic downturn. The LAO suggests that the State Legislature adopt a robust target for budget reserves for the end of fiscal year , which may include a target for total reserves that is at least as large as the $8.5 billion amount (being the $1.8 billion year-end reserve for economic uncertainties surplus plus the $6.7 billion in the Budget Stabilization Account described) in the May Revision. Fiscal Year Adopted State Budget. On June 27, 2016, the Governor signed the California State Budget for Fiscal Year (the "FY 2017 Adopted State Budget"). The FY 2017 State Budget increases the Rainy Day Fund to a total balance of $6.7 billion and limits new ongoing spending obligations in anticipation of the next forecasted recession. The FY 2017 Adopted State Budget focuses on new spending on one-time activities, such as repairing and replacing aged infrastructure, building affordable housing, and addressing the effects of the drought. It begins implementation of raising the State minimum wage to $15 per hour and implements the managed care financing package proposed earlier in the year. The FY 2017 Adopted State Budget projects fiscal year State General Fund total available resources of $125.2 billion (being revenues and transfers of $120.3 billion and prior year's balance of $4.9 billion), total expenditures of $122.5 billion and a year-end surplus of $2.7 billion ($966 million of which would be reserved for the liquidation of encumbrances and $1.8 billion of which would be deposited in a reserve for economic uncertainties), and $6.7 billion on deposit in the Budget Stabilization Account. Additional issues that were addressed in the FY 2017 Adopted State Budget affecting counties in general include, but are not limited to, the following: 1. Education. The FY 2017 Adopted Budget adds $2.9 billion in new funding, raising the total to $71.9 billion, in minimum guaranteed funding (Proposition 98) for K-14 schools in fiscal year For K-12 schools, funding levels will increase by over $3,600 per student in fiscal year over fiscal year levels. 2. Poverty. The FY 2017 Adopted Budget implements a $10.50 per hour minimum wage beginning on January 1, The FY 2017 Adopted Budget also provides for the first cost-of-living increase for SSI/SSP recipients since 2005; repealed the maximum family grant rule in CalWORKs, which denied aid to children who were born while their parents were receiving aid; and limits asset recovery from the estates of deceased Medi-Cal recipients to the extent federally required. 3. Affordable Housing. The FY 2017 Adopted Budget supports $3.6 billion in State and federal funding for various affordable housing and homelessness programs across the State. This includes a set-aside of $400 million for affordable housing programs contingent upon the passage of a "by right" approval process for affordable housing. Under a "by right" process, a local government could not require a discretionary local government review for affordable housing projects. The FY 2017 Adopted Budget also includes provisions for the No Place Like Home program, which addresses homelessness for individuals with mental health needs through the provision of permanent supportive housing. Financing is expected to be provided through the issuance of $2 billion in bonds to be secured by a portion of future Proposition 63 mental health revenues. The bond issuance will require additional legislation; the FY 2017 Adopted Budget includes first-year funding of $267 million, contingent upon enactment of that legislation. The FY 2017 Adopted Budget also includes $149.4 A-23

62 million for other homelessness programs such as the SSI Outreach, CalWORKS Housing Support Program, and CalWORKS Homeless Assistance. 4. Administration of Justice. The FY 2017 Adopted Budget includes $270 million in lease revenue bonds for jail construction projects. The funding is directed to counties that have not received an allocation or a full allocation in the past. In addition, $67.5 million was included for community infrastructure grants, which funds can be used to build or renovate facilities that provide mental health services or other treatment services to the offender population. Also, $25 million was allocated for transitional housing for offenders released from prison or jail. Future Updates and State Budgets. As described above, the County receives a significant portion of its funding from the State. Changes in the revenues received by the State can affect the amount of funding, if any, to be received from the State by the County and other counties in the State. The County cannot predict the extent of the budgetary problems the State may encounter in this or in any future fiscal years, nor is it clear what measures could be taken by the State to balance its budget, as required by law. In addition, the County cannot predict the outcome of any elections impacting fiscal matters, the outcome of future State budget negotiations, the impact that such budgets will have on its finances and operations or what actions will be taken in the future by the State Legislature and Governor to deal with changing State revenues and expenditures. Current and future State budgets will be affected by national and State economic conditions and other factors, including the current economic downturn, over which the County has no control. See "SPECIAL CONSIDERATIONS State of California Financial Condition" in the forepart of this Official Statement. Information about the State budget is regularly available at various State-maintained websites. Text of the State budget may be found at the Department of Finance website, under the heading "California Budget." An analysis of the budget is posted by the California Legislative Analyst's Office at In addition, various State official statements, many of which contain a summary of the current and past State budgets, may be found at the website of the State Treasurer, The information in such websites is prepared by the respective State agency maintaining each website and not by the County, and the County takes no responsibility for the continued accuracy of the internet addresses or for the accuracy or timeliness of information posted there, and such information is not incorporated herein by these references. Vehicle License Fees Pursuant to the State Intercept Program, the County has elected to further secure the payment of Base Rental Payments under the Master Facility Lease by providing a mechanism by which the State Controller will make certain payments directly to the Trustee from vehicle license fees ("VLF") to which the County is entitled pursuant to the Vehicle License Fee Allocation Statute. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS State Intercept Program" in the forepart of this Official Statement. VLF imposed for the operation of vehicles on State highways are collected by the State Department of Motor Vehicles. VLFs were historically assessed in the amount of 2% of a vehicle's depreciated market value for the privilege of operating a vehicle on the State's public highways. Beginning in 1999, the VLF paid by vehicle owners was offset (or reduced) to the effective rate of 0.65%. In connection with the offset of the VLF, the State Legislature authorized appropriations from the State General Fund to "backfill" the offset so that local governments, which receive all of the vehicle license fee revenues, would not experience any loss of revenues. The legislation that established the VLF offset program also provided that if there were insufficient State General Fund moneys to fully "backfill" the A-24

63 VLF offset, the percentage offset would be reduced proportionately (i.e., the license fee payable by drivers would be increased) to assure that local governments would not be underfunded. In June 2003, the State Director of Finance ordered the suspension of VLF offsets due to a determination that insufficient State General Fund moneys would be available for this purpose, and, beginning in October 2003, the VLF paid by vehicle owners were restored to the 2% level. However, the offset suspension was rescinded by the Governor on November 17, 2003, and State offset payments to local governments resumed. Local governments received "backfill" payments totaling $3.80 billion in fiscal year "Backfill" payments totaling $2.65 billion were paid to local governments in fiscal year As part of the 2004 Budget Act negotiations, an agreement was made between the State and local government officials (the "State-local agreement") under which the VLF rate was permanently reduced from 2% to 0.65%. In order to protect local governments, the reduction in VLF revenue to cities and counties from this rate change was replaced by an increase in the amount of property tax they receive. Under the State-local agreement, for fiscal years and only, the replacement property taxes that cities and counties receive were reduced by $700 million. Commencing in fiscal year , local governments began to receive their full share of replacement property taxes, and those replacement property taxes now enjoy constitutional protection against certain transfers by the State due to the approval of Proposition 1A at the November 2004 election. See "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" in the forepart of this Official Statement. In fiscal year , the County received $231,435,830 in VLF revenues, including $196,271,877 in replacement property taxes from the State. In fiscal year , the County received $218,100,962 in VLF revenues, including $209,587,149 in replacement property taxes from the State. In fiscal year , the County received $261,156,241 in VLF revenues, including $227,748,243 in replacement property taxes from the State. Supplemental Reimbursements Senate Bill 1732, later amended by Senate Bill 2665, was adopted as Section of the California Welfare and Institutions Code by the State Legislature in Commonly referred to as "SB 1732," this legislation, which has received concurrence by the federal Health Care Financing Authority, provides for a pass-through of an approved portion of debt service to both the State and federal governments. SB 1732 permits health facilities such as the VMC, which serve a disproportionate share of Medi-Cal patients, to receive reimbursement for a portion of the costs of qualified capital projects and directs the State to make supplemental reimbursement payments ("Supplemental Reimbursements") to those health facilities which meet the statutory requirements. The reimbursement is based on a percentage of net debt service equal to the percentage of inpatient days accounted for by Medi-Cal patients. Projects for which reimbursement is permitted include structures and fixed equipment. Land and moveable equipment are excluded. The reimbursement is made by the State as part of its payment to a hospital under the hospital's Medi-Cal contract. For any fiscal year during which a hospital is eligible to receive the Supplemental Reimbursement under SB 1732, the amount of the Supplemental Reimbursement is calculated annually by multiplying the amount of annual net debt service on the obligations (related to the qualified costs of the project) issued to finance the project by the ratio of the hospital's total paid Medi-Cal patient days to total patient days, except that, at least with regard to the 50 percent State share of such reimbursement, in no instance shall the percentage figure determined pursuant to the ratio of the total paid Medi-Cal patient days to total patient days be decreased by more than ten percent of the initial ratio prior to retirement of the secured obligation. The 50 percent federal share of such reimbursement currently does not contain any such specified percentage floor, and accordingly may be reduced by a greater percentage should the A-25

64 proportion of Medi-Cal patient days decline. The HHS currently estimates its ratio of Medi-Cal days to be percent. The County does not presently expect a significant decline in its Medi-Cal patient ratio in the future. The County's ability to receive capital cost pass-through amounts under SB 1732 is evidenced by a contract with the State Department of Health Services to receive cost reimbursements from Medi-Cal. SB 1732 also requires that in order to be eligible to receive funds, a hospital must meet the criteria defining disproportionate share status for the three most recent years for which final data is available. VMC currently meets the disproportionate share status requirement. In fiscal years and the County received approximately $8.04 million and $7.07 million in Supplemental Reimbursements, respectively. The County estimates receiving $7.08 million in Supplemental Reimbursements in fiscal year As with all Medi-Cal payments, the Supplemental Reimbursements under SB 1732 are dependent on the continued existence of the Medi-Cal programs and appropriations for the program through the State budget process. In addition, since approximately 50 percent of SB 1732 funds are derived from federal Medicaid appropriations, discontinuance of such federal reimbursement is not within the control of the State. Eligible costs, moreover, are defined differently under the federal program and do not include the cost of some outpatient service facility costs. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS Supplemental Reimbursements" in the forepart of this Official Statement. Federal Funding and Welfare Programs A substantial portion of the County's budget comes from federal aid. The FY 2016 Adopted Budget projects that in fiscal year , approximately 18.4% (or approximately $480.3 million) of general fund revenues will come from federal aid, and the FY 2017 Recommended Budget projects that in fiscal year , approximately 18.74% (or approximately $518.9 million) of general fund revenues will come from federal aid. See "County Budget" herein. The human services departments receive substantial federal funds for assistance payments and social service programs. VMC also receives funding from the federal government. See "Santa Clara Valley Medical Center" herein. CalWORKS is the basic State welfare program which became effective January 1, 1998 and replaced the former programs, Aid to Families with Dependent Children ("AFDC") and Greater Avenues to Independence ("GAIN"). CalWORKS is a federal program that provides temporary cash assistance to families with children by strengthening low-income parents' access to the resources needed to care for their children through employment and other related services. These services are time-limited for adults. As of July 1, 2015, there were approximately 9,912 CalWORKS cases in the County, which include Medi-Cal and generally also include food stamps. As of July 1, 2016, there were approximately 8,027 CalWORKS cases in the County. Central to CalWORKS is the linkage of eligibility to work participation requirements. Administration of the Welfare-to-Work program is largely undertaken at the county level, and counties are given financial incentives for success. In February 2006, the Federal Deficit Reduction Act ("DRA") was passed, which brought significant revisions to state work participation rates and a recalibration of the base for CalWORKS. The County's average work participation rate for fiscal years , and were 59.49%, 66.49% and 66.88%, respectively. In fiscal year , CalWORKS clients were placed in jobs at an average wage of $12.81 per hour. A-26

65 The County receives substantial federal funds for assistance payments, social service programs and other programs. A portion of the County's assets are also invested in securities of the United States government. The County's finances may be adversely impacted by fiscal matters at the federal level, including but not limited to cuts to federal spending. See "SPECIAL CONSIDERATIONS U.S. Government Finances" in the forepart of this Official Statement and "The County Investment Pool" below. Other Taxes and Revenues In addition to revenues from the State and federal governments, ad valorem property tax revenues and the other revenues described above, the County has certain other tax and revenue sources. Sales Tax. The State collects and rebates to the County a 1% tax on retail transactions within unincorporated areas of the County along with the State's own sales taxes. An additional sales tax of onehalf of 1% will be subvened to the County on a population based formula pursuant to realignment and revenue transfers enacted by the State in fiscal year In addition, a State constitutional amendment, Proposition 172, was approved by the electorate in a special Statewide election in November 1993 to permanently extend a one-half of 1% sales tax for counties and cities for public safety purposes. On November 6, 2012, in a Countywide election the electorate approved Measure A, which imposes a 1/8-cent local sales tax for ten years. This measure is expected to generate approximately $498.5 million over the ten-year period to fund various County programs. The County has declared its intent to use these revenues for law enforcement and public safety, trauma and emergency room services, health coverage for low-income children, economic development and job creation, housing for the homeless, programs to help students stay in school, and other uses; however, the revenues are general tax revenues and thus may be used for any lawful purpose. In fiscal year , the County received $45 million in Measure A revenues, of which $16.8 million was unspent as of the end of fiscal year In fiscal year , the County received $47 million in Measure A revenues, of which $6.6 million was unspent as of the end of fiscal year For fiscal year , the County is on track to receive $49 million in Measure A revenues. The FY 2017 Adopted Budget assumes the County will receive $51 million from Measure A proceeds during fiscal year Property Transfer Tax. A tax on the transfer of real property recorded in Santa Clara County is authorized by the State Revenue and Taxation Code and local ordinance. The transfer of real property tax is $1.10 per $1,000 in Santa Clara County, with 50% of the tax shared with the cities in incorporated areas of Santa Clara County. The Cities of San Jose and Mountain View collect $4.40 per $1,000, of which $1.10 is paid to the County. Transient Occupancy Tax. A transient occupancy tax of 8% is levied on the charge for renting any hotel or motel accommodation within unincorporated areas of Santa Clara County. Licenses and Permits. License and permit revenues are received by the County from the licensing of animals and businesses within Santa Clara County and the issuance of building, road and zoning permits. Fines, Forfeitures and Penalties. These revenues are generated from court fines and forfeitures of bail for violations of State law. Use of Money and Property. These revenues include the interest earned on bank deposits and other investments, as well as gains and losses on the sale of security investments. A-27

66 Charges for Current Services. These revenues include assessment and tax collection fees, booking fees, court fees and costs, sanitation services fees and park and recreation fees. Redevelopment Dissolution The California Community Redevelopment Law authorized city or county redevelopment agencies to issue bonds and enter into other enforceable obligations payable from the allocation of tax revenues resulting from increases in assessed values of properties within designated project areas. In effect, local taxing authorities other than the redevelopment agency realized tax revenues only on the "frozen" tax base. The County did not have its own redevelopment agency, but was affected by nine citysponsored redevelopment agencies within Santa Clara County. On an aggregate basis, the rate of growth of assessed values of redevelopment project areas had historically been greater than that of the balance of the County. In addition, under State law, redevelopment projects were required to contribute a portion of the property tax funds they received to increasing the availability of housing for families with low and moderate income. The following table shows the full cash value increments and the total tax allocations to community redevelopment agencies in the County for each year since fiscal year COUNTY OF SANTA CLARA COMMUNITY REDEVELOPMENT AGENCY PROJECTS ASSESSED VALUE INCREMENTS AND TAX ALLOCATIONS FISCAL YEARS THROUGH Fiscal Year Assessed Value Increments (1) Total Tax Allocations (2) $30,544,558,981 $322,300, ,374,017, ,740, ,217,222, ,172, ,362,566, ,625, ,181,319, ,813,192 (1) Assessed values for all redevelopment projects above the "frozen" base year valuations. This data represents growth in assessed values generating tax revenues for use by the community redevelopment agencies. (2) Actual tax revenues collected by the County and subsequently paid to community redevelopment agencies. As of February 1, 2012, these tax revenues were deposited into the redevelopment property tax trust fund ("RPTTF") for each of the former redevelopment agencies and disbursed in accordance with the provisions of the Redevelopment Dissolution Law, as discussed below. Source: County Director of Finance ABX1 26. On June 28, 2011, the Governor signed the Adopted State Budget and Assembly Bill 26 ("ABX1 26") and Assembly Bill 27 ("ABX1 27"). ABX1 26 would have dissolved all redevelopment agencies effective October 1, ABX1 27 would have allowed redevelopment agencies to continue to exist if the cities and/or counties that created them made certain voluntary payments to the pertinent county auditor-controllers to offset the impacts of redevelopment property tax diversions to educational entities and certain special districts. ABX1 26 and ABX1 27 were challenged in court, and on December 29, 2011 the California Supreme Court issued a decision upholding ABX1 26 requiring the dissolution of redevelopment agencies but invalidating ABX1 27 (California Redevelopment Ass'n v. Matosantos (2011) 53 Cal.4 th 231 ("Matosantos")) regarding the constitutionality of the A-28

67 Redevelopment Bills. The Matosantos decision also modified various deadlines for the implementation of ABX1 26 in fiscal year As a consequence of the Matosantos decision, all California redevelopment agencies dissolved by operation of law on February 1, AB Assembly Bill 1484 ("AB 1484") was enacted on June 27, AB 1484 clarified and expanded upon the redevelopment dissolution provisions of ABX1 26. Among other things, AB 1484 provided more clarity regarding how successor agencies and successor agency oversight boards were to be operated, strengthened the oversight of the State Department of Finance, and added several provisions addressing how former redevelopment agency assets were to be quantified and distributed. SB 107. Senate Bill 107 ("SB 107") was enacted on September 22, SB 107 was enacted to clarify and simplify the redevelopment agency dissolution process. Among other things, SB 107 provides for an annual Recognized Obligation Payment Schedule ("ROPS") process rather than a semi-annual one. SB 107 also makes several other substantive amendments to ABX1 26 and AB ABX1 26, AB 1484 and SB 107 are collectively referred to herein as the "Redevelopment Dissolution Law." All property tax revenues that previously would have been allocated to redevelopment agencies are now allocated to the applicable Redevelopment Property Tax Trust Fund ("RPTTF") created by the county auditor-controller for the successor agency to each former redevelopment agency. The county auditor-controller is required to determine the amount of property taxes that the redevelopment agencies would have received had they not been dissolved pursuant to ABX1 26 and deposit such amount in the RPTTF. The RPTTF is administered by the county auditor-controller for the benefit of the holders of enforceable obligations and the taxing entities that receive pass-through payments and property tax distributions. The RPTTF funds are to be used for payments in the following priority: (i) statutory or contractual "pass-through" payments to taxing entities; (ii) on indebtedness and other "enforceable obligations" (as defined in the Redevelopment Dissolution Law) ; and (iii) to pay certain administrative costs; any amounts in excess of those obligations and costs will be distributed to taxing agencies. In situations where there are insufficient funds from the RPTTF and other revenue sources to make all of these payments, the distribution is altered pursuant to Health and Safety Code section 34183(b) and, among other things, may result in reduced pass-through revenues to taxing entities whose pass-through payments are expressly subordinated to the extent necessary to ensure that there are sufficient funds for servicing bond debt. There is a pending lawsuit against the County Auditor-Controller that was filed by the City of San Jose (City of San Jose v. Vinod K. Sharma, Sacramento County Superior Court Case No ), alleging that the County Auditor-Controller violated its duties under ABX1 26. A decision on this case has issued from the Superior Court and an appeal is pending with the Third District Court of Appeal. If the City prevails, in part because of SB 107, the County does not expect such outcome to have a material adverse impact on the County's finances or operations. Additionally, the City of Sunnyvale has initiated a lawsuit against the Director of the State Department of Finance and the County Auditor-Controller disputing the invalidation of certain enforceable obligations (Successor Agency to the Redevelopment Agency of the City of Sunnyvale v. Matosantos et al., Sacramento County Superior Court Case No ). A decision on this case has issued from the Superior Court in favor of the Department of Finance and the County Auditor- Controller and an appeal by the City of Sunnyvale is pending with the Third District Court of Appeal. If this case is resolved in the County Auditor-Controller's favor, then there would likely be a favorable A-29

68 impact on the affected taxing entities, including the County. If the City of Sunnyvale prevails, then the amount of redevelopment revenues and assets distributed to the County and other taxing entities would be somewhat lower, but not in a manner that would significantly affect the adopted County budget. The City of Sunnyvale recently filed a second lawsuit related to the first that raises overlapping claims. A decision in this case has issued from the Superior Court in favor of the Department of Finance and the County Auditor-Controller and an appeal by the City of Sunnyvale Successor Agency is pending in the Third District Court of Appeal. If this case is resolved in the County Auditor-Controller's favor, then there would likely be a favorable impact on the affected taxing entities, including the County. If the City of Sunnyvale prevails, then the amount of redevelopment revenues and assets distributed to the County and other taxing entities would be somewhat lower, but not in a manner that would significantly affect the adopted County budget. The Redevelopment Dissolution Law provides that all rights, powers, duties and obligations of a redevelopment agency under the California Community Redevelopment Law that have not been repealed, restricted or revised pursuant to the Redevelopment Dissolution Law are vested in the successor agency, which is charged with administering the wind-down process. The successor agency for each redevelopment agency is generally the county or city that authorized the creation of the redevelopment agency. There were nine redevelopment agencies within Santa Clara County, sponsored by the cities of Campbell, Cupertino, Milpitas, Morgan Hill, Mountain View, San Jose, Santa Clara, Sunnyvale and the Town of Los Gatos. The County did not have its own redevelopment agency. Each sponsoring city within Santa Clara County has affirmatively opted into being successor agency to its respective redevelopment agency. The Cupertino Successor Agency and Mountain View Successor Agency have been fully dissolved after payment of all outstanding obligations and distribution of all remaining assets. The County expects that implementation of the Redevelopment Dissolution Law will have a significant positive fiscal impact for the County. The County estimates that the dissolution of redevelopment agencies in Santa Clara County could eventually result in significant revenues for local taxing agencies within Santa Clara County and the County itself. The County does not anticipate any direct fiscal impact on the County related to the appointment of members to oversight boards, as all administrative costs associated with the oversight boards are the responsibility of the successor agencies. Under the Redevelopment Dissolution Law, any assets, including cash, transferred out of redevelopment agencies to other public agencies after January 1, 2011 are subject to "claw back" to the Successor Agencies unless those assets were contractually committed to non-public agency third parties before June 28, With the exception of governmental use assets, the real properties of the former redevelopment agencies are to be disposed of in accordance with an adopted long-range property management plan. Unencumbered cash is to be distributed to taxing entities, including the County. The County Auditor-Controller was previously engaged in litigation with the City of Santa Clara that was intended to reverse asset transfers that allegedly violated the Redevelopment Dissolution Law. After the County Auditor-Controller prevailed in the trial court, a settlement agreement was reached which resulted in the transfer of substantial monies and valuable real property assets from the City to the Successor Agency. It is anticipated that the funds transferred to the Successor Agency as well as the sales proceeds from the real property will be used to retire the enforceable obligations of the Successor Agency. Once these obligations are retired, any additional remaining funds will be distributed to the taxing entities including the County. Sale of Elmwood Property. In June 2003, the Milpitas Redevelopment Agency (the "MRDA") entered into an agreement of purchase and sale with the County of approximately 35 acres of surplus lands located near the County's Elmwood detention facilities. Under the agreement, the County will receive a stream of payments in the total amount of $208.2 million from the sale of surplus land to the MRDA and the Sales Tax Sharing Agreement with the City of Milpitas. As of June 30, 2016, the A-30

69 County received a total of approximately $133.2 million in relation to the sale of Elmwood surplus lands. At June 30, 2016, the County had $75 million in receivables representing the remaining estimated future cash flow related to the sale of the Elmwood facilities. During fiscal year , the County recognized proceeds from the sale in the amount of $5 million as revenue in its General Fund. This agreement has been listed as an enforceable obligation of the MRDA Successor Agency on all of its Recognized Obligation Payment Schedules to date, and has been approved by the MRDA Successor Agency Oversight Board and the State Department of Finance on each such schedule. San Jose Redevelopment Agency. In 1983, the County and the San Jose Redevelopment Agency (the "SJRDA") entered into a tax sharing agreement under which the SJRDA would pay a portion of tax increment revenue generated within an identified area. In December 1993 (and as amended in May 2001), the County, the City of San Jose and the SJRDA entered into a Settlement Agreement, whereby the SJRDA agreed to make certain pass-through payments to the County. In September 2009, SJRDA informed the County that it did not have sufficient unrestricted funds to make the fiscal year pass-through payments. The SJRDA also informed the County that it was holding funds for the fiscal year pass-through payments pending negotiations regarding the payments. As of June 30, 2010, the County recorded a receivable from SJRDA in the amount of $45.2 million, comprising the fiscal year and pass-through payments. In March 2011, a settlement agreement was reached and entered into between the County, the City of San Jose and the SJRDA in which the SJRDA agreed to pay the County $26.5 million during fiscal year and transferred title to the former San Jose City Hall (valued at $8.6 to $10 million) to the County. SJRDA also agreed to pay the remaining $23.78 million in five equal annual installments no later than June 30 of 2014, 2015, 2016, 2017 and As discussed above, the Redevelopment Dissolution Law provides for the continued payment of statutory and contractual property tax revenues ("pass-through" payments) to affected taxing entities. Taxing entities are also to receive their proportionate share of any residual revenues that may remain in the RPTTFs established for the former redevelopment agencies for each six-month distribution period. The former SJRDA is in a funding insufficiency situation. Therefore, it is anticipated that the RPTTF for the former SJRDA will not have sufficient revenues to fully pay subordinated pass-through obligations, inclusive of past-due amounts, or generate any residual revenues for some years to come. The County has not received the $4.8 million owed under the March 2011 settlement for fiscal year or fiscal year The County did, however, receive an allocation of approximately $28.9 million towards unpaid pass-through in June 2016 due to available funds beyond those needed for the payment of bond debt in accordance with the insufficiency provisions of the Redevelopment Dissolution Law. A portion of these amounts are also the subject of dispute as part of the City of San Jose v. Vinod K. Sharma litigation referenced earlier. Outstanding Debt and Lease Obligations The County has never defaulted on the payment of principal of or interest on any of its indebtedness or any lease purchase agreements. Following is a brief summary of the County's outstanding debt and lease obligations. General Obligation Debt. The voters of Santa Clara County approved the issuance by the County of up to $840 million in general obligation bonds for the seismic improvement of Santa Clara Valley Medical Center ("Measure A") at an election held on November 4, The County issued $350,000,000 in aggregate principal amount of general obligation bonds pursuant to Measure A on May 27, 2009 (the "2009 GO Bonds") and $490,000,000 in aggregate principal amount of general obligation A-31

70 bonds pursuant to Measure A on March 6, 2013 (the "2013 GO Bonds"). The 2009 GO Bonds are currently outstanding in the aggregate principal amount of $312,500,000, and the 2013 GO Bonds are currently outstanding in the aggregate principal amount of $480,085,000. Other than the 2009 GO Bonds and the 2013 GO Bonds, the County currently has no other general obligation bonds outstanding and no other general obligation bond authorizations other than Measure A Taxable Pension Bonds. On July 6, 2007, the County issued $389,484, in aggregate principal amount of its Taxable Pension Funding Bonds, Series 2007 (the "2007 Taxable Pension Bonds"). The 2007 Taxable Pension Bonds were used to refinance a portion of the County's statutory obligations to make payments to the State of California Public Employees' Retirement System ("PERS") for certain amounts arising as a result of retirement benefits accruing to County employees. The 2007 Taxable Pension Bonds are currently outstanding in the aggregate principal amount of $371,443, Tobacco Settlement Asset-Backed Bonds. The Silicon Valley Tobacco Securitization Authority (the "Tobacco Authority") is a public entity created pursuant to a Joint Exercise of Powers Agreement between the County and the El Camino Hospital District. On January 24, 2007, the Tobacco Authority issued its $102,030, in aggregate principal amount of Tobacco Settlement Asset-Backed Bonds Series 2007 (the "2007 Tobacco Bonds") to enable the Santa Clara County Tobacco Securitization Corporation (the "Tobacco Corporation") to purchase a portion of the County's rights, title and interest in tobacco settlement revenues. The 2007 Tobacco Bonds are primarily secured by a portion of tobacco settlement revenues that are payable to the County and sold to the Tobacco Corporation. In accordance with GASB Technical Bulletin , the Tobacco Authority and the Tobacco Corporation have been included in the basic financial statements of the County as blended component units of the County. See APPENDIX C "COUNTY OF SANTA CLARA AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015." Lease Obligations. Upon issuance of the 2016 Series A Bonds and defeasance of the 1994 Series B Bonds, the County will have $138,880,000 of Bonds Outstanding under the Trust Agreement. See "INTRODUCTION Outstanding Bonds and Parity Obligations" in the forepart of this Official Statement. The Reserve Fund has a current balance of $19,382,650 and, upon the issuance of the 2016 Series A Bonds and defeasance of the 1994 Series B Bonds, will have a balance of $18,769,310 equal to the Reserve Fund Requirement, which will be available to pay debt service on the Bonds. See "SECURITY AND SOURCES OF PAYMENT FOR THE 2016 SERIES A BONDS Reserve Fund" in the forepart of this Official Statement. See also "DEBT SERVICE SCHEDULE FOR THE BONDS" in the forepart of this Official Statement, for the estimated debt service schedule for the Bonds. The following table summarizes the estimated outstanding long-term general fund lease obligations of the County as of August 15, 2016: [Remainder of Page Intentionally Left Blank] A-32

71 COUNTY OF SANTA CLARA ESTIMATED LONG TERM GENERAL FUND LEASE OBLIGATIONS (AS OF AUGUST 15, 2016) Lessor Entity Issue and Purpose Issue Date Santa Clara County Financing Authority Final Maturity Original Principal (000s) Outstanding Principal (000s) Maximum Annual Payment (1) (000s) 1994B Bonds Capital Projects (3)(4)(7) 12/15/94 11/15/25 $258,495 $51,500 $18,837 Series 2004A Bonds Refunding (2) 09/10/04 09/01/29 3,550 2, Series 2006 Bonds Capital Projects (2) 10/12/06 09/01/38 5,125 4, Series 2007 Bonds Multiple Facilities Projects 08/15/07 05/15/17 93,540 2,335 2,388 Series 2008A Bonds VMC Refunding 02/14/08 11/15/22 126,410 97,070 16,428 Series 2008L Bonds Refunding 05/22/08 05/15/18 112,840 2,420 1,239 Series 2008M Bonds Refunding (5) 05/29/08 05/15/35 143, ,600 8, Series A Capital Projects (6) 02/10/11 02/02/26 20,368 12,586 2, Series B Capital Projects (6) 10/28/11 02/01/26 3,639 2, Series A Capital Projects 08/08/12 02/01/24 86,920 67,195 10, Series O Multiple Facilities Projects 04/08/14 05/15/23 11,715 9,415 1, Series P Refunding 06/03/15 05/15/31 102, ,435 9, Series Q Refunding 06/08/16 05/15/37 168, ,345 20,702 Santa Clara County Airport Project 07/01/02 07/01/32 6,780 4, (1) Calculated on a fiscal year basis. (2) County has a guarantee obligation only. (3) Includes $51,500,000 principal amount of variable rate obligations with an assumed interest rate of 3.5% per annum; actual interest rate will vary; actual rates have averaged approximately 2.0% over the last several years. (4) Represents parity obligations secured by that certain Master Facility Lease, dated as of November 15, 1994, as amended. (5) Includes $143,105,000 principal amount of variable rate obligations with an assumed interest rate of 3.5% per annum; actual interest rate will vary; actual rates have averaged approximately 3.0%. $142,050,000 of such bonds was swapped under a 2005 Swap Agreement to a fixed rate of 3.185%. The obligation of the Authority to make regularly scheduled payments under the 2005 Swap Agreement is insured pursuant to a surety bond. The 2005 Swap Agreement may be terminated upon the occurrence of certain events. In the event the 2005 Swap Agreement is terminated, a termination payment will be payable either by the Authority or the 2005 Swap Provider. Such termination payments may be substantial, although certain termination payments are insured pursuant to a surety bond. (6) Private placement. (7) The 1994 Series B Bonds will be refunded using the proceeds of the 2016 Series A Bonds. Source: County Director of Finance A-33

72 Direct and Overlapping Debt Report Contained within the County's tax rate area are numerous municipalities, school districts and special purpose districts providing public services, a number of which have issued general obligation bonds and lease obligations. Direct debt constitutes debt directly issued by the County while overlapping debt constitutes that portion of debt issued by different public entities within the same tax rate area as the County's. The County is not responsible for the overlapping debt of other local agencies. The statement of direct and overlapping debt (the "Debt Report") set forth below was prepared by California Municipal Statistics, Inc., and is dated as of June 30, The Debt Report includes only such information as has been reported to California Municipal Statistics, Inc. by the issuers of the debt described therein and by others. The Debt Report is included for general information purposes only. The County has not independently verified its completeness or accuracy and makes no representations in connection therewith. [Remainder of Page Intentionally Left Blank] A-34

73 COUNTY OF SANTA CLARA ESTIMATED DIRECT AND OVERLAPPING BONDED DEBT AS OF JUNE 30, 2016 SANTA CLARA COUNTY Assessed Valuation: $391,651,146,026 (includes unitary utility valuation) County's Share of DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT: % Applicable Debt 6/30/16 Santa Clara County 100. % $ 792,585,000 Foothill-DeAnza Community College District ,782,455 San Jose-Evergreen Community College District ,326,151 West Valley-Mission Community College District ,588,233 Other Community College Districts ,196,425 Gilroy Unified School District ,307,495 Palo Alto Unified School District ,673,766 San Jose Unified School District ,110,285 Santa Clara Unified School District ,270,000 Other Unified School Districts ,080,485 Campbell Union High School District ,765,000 East Side Union High School District ,877,862 Fremont Union High School District ,975,088 Other High School Districts ,970,925 Campbell Union School District ,271,229 Cupertino Union School District ,848,688 Evergreen School District and Community Facilities District No ,826,562 Franklin McKinley School District ,229,608 Los Altos School District ,555,000 Los Gatos Union School District ,485,000 Moreland School District ,092,251 Oak Grove School District ,444,352 Sunnyvale School District ,445,820 Other School Districts ,525,967 City of Gilroy ,355,000 City of Palo Alto ,345,000 City of San Jose ,085,000 City of Saratoga ,060,000 Saratoga Fire Protection District ,333,492 El Camino Hospital District ,280,000 City Community Facilities Districts ,490,000 City of San Jose Special Assessment Bonds ,505,000 Other City 1915 Act Bonds (Estimate) ,383,649 Midpeninsula Regional Open Space District ,321,350 Santa Clara Valley Water District Benefit Assessment District ,060,000 TOTAL DIRECT AND OVERLAPPING TAX AND ASSESSMENT DEBT $8,271,452,138 Ratios to Assessed Valuation: Direct Debt ($792,585,000) % Total Overlapping Tax and Assessment Debt % A-35

74 County's Share of DIRECT AND OVERLAPPING GENERAL FUND DEBT: % Applicable Debt 6/30/16 Santa Clara County General Fund Obligations 100. % $ 677,526,121 (1) Santa Clara County Pension Obligation Bonds ,118,349 Santa Clara County Office of Education Certificates of Participation ,380,000 Foothill-De Anza Community College District General Fund Obligations ,723,341 San Jose-Evergreen Community College District Other Post-Employment Benefit Obligations ,450,000 West Valley-Mission Community College District General Fund Obligations ,516,379 Gilroy Unified School District Certificates of Participation ,625,000 Other Unified School District School General Fund Obligations ,840,000 East Side Union High School District Benefit Obligations ,955,000 Other Union High School District General Fund Obligations ,509,785 Alum Rock Union School District Certificates of Participation ,000,000 Other School District General Fund Obligations ,016,331 City of Cupertino Certificates of Participation ,835,000 City of Gilroy Certificates of Participation ,515,000 City of San Jose General Fund Obligations ,905,000 City of Santa Clara General Fund Obligations ,050,000 City of Sunnyvale General Fund Obligations ,465,000 Other City General Fund Obligations ,099,296 Santa Clara County Vector Control District Certificates of Participation ,890,000 Midpeninsula Regional Park District General Fund Obligations ,128,566 TOTAL GROSS DIRECT AND OVERLAPPING GENERAL FUND DEBT $2,210,548,168 Less: Santa Clara County self-supported obligations 469,870,116 TOTAL NET DIRECT AND OVERLAPPING GENERAL FUND DEBT $1,740,678,052 OVERLAPPING TAX INCREMENT DEBT (Successor Agencies): 100. % $2,185,644,618 TOTAL GROSS DIRECT DEBT $1,837,229,470 TOTAL NET DIRECT DEBT $1,367,359,354 TOTAL COMBINED OVERLAPPING DEBT $10,830,415,454 GROSS COMBINED TOTAL DEBT $12,667,644,924 (2) NET COMBINED TOTAL DEBT $12,197,774,808 (1) Includes lease revenue bonds that are repaid with VMC and airport operating revenues. (2) Includes all bonded debt obligations that are supported in whole or in part by a property tax or assessment or are supported by a pledge of the general fund or general taxing power of a governmental entity. Only long-term debt obligations are included. Excludes tax and revenue anticipation notes, enterprise revenue, mortgage revenue and non-bonded capital lease obligations, bond premiums, discounts and accreted interest. Qualified Zone Academy Bonds are included based on principal due at maturity. Ratios to Assessed Valuation: Total Gross Direct Debt ($1,837,229,470) % Total Net Direct Debt ($1,367,359,354) % Gross Combined Total Debt % Net Combined Total Debt % Ratios to Redevelopment Successor Agencies Incremental Valuation ($43,181,319,193): Total Overlapping Tax Increment Debt 5.06% Source: California Municipal Statistics, Inc. A-36

75 County Employees, Employee Relations and Collective Bargaining The County is one of the largest employers in Santa Clara County, with 16,837 full-time equivalent employees as of June 30, As of May 22, 2016, the County had 17,202 full-time equivalent employees. A summary of County employee levels from fiscal year to follows. Some employees are hired under various federally funded programs. COUNTY OF SANTA CLARA EMPLOYEES As of June 30 (1) Unaudited figures. Source: County Controller's Office. Number of Full-Time Equivalent Employees (1) , , , , ,837 Currently, 97% of all County employees are covered by negotiated agreements. County employees are represented by 16 different labor organizations, the largest one being SEIU Local 521 which represents approximately 58% of all County employees. The County has not experienced a major County employee work stoppage since The table below indicates the expiration dates of the largest negotiated agreements. Group COUNTY OF SANTA CLARA NEGOTIATED LABOR AGREEMENTS Percentage of Work Force Contract Expiration SEIU Local % June 16, 2019 Nurses 11 October 20, 2019 County Employees Management Assoc. 9 June 22, 2019 Correctional Officers 4 August 23, 2020 Probation Officers 2 October 20, 2019 Sheriffs 3 September 6, 2020 Others 10 Various Total 97% Source: County Labor Relations Director County Employee Benefit Plans The following section includes information concerning PERS that is excerpted from publicly available sources. PERS should be contacted directly at PERS, Lincoln Plaza, 400 Q Street, Lincoln Plaza East, Sacramento, California, Telephone: (888) for other information, including information relating to its financial position and investments. The financial information provided by PERS is usually for dates and periods ending more than a year in the past. Further, the valuations and A-37

76 actuarial calculations involved in providing financial information on a large pension fund are complex and based on many assumptions. Among other items, declines in the market value of various investments will not be reported until long after such declines have occurred. General. The County provides retirement benefits to all qualified permanent and probationary County employees through contracts with PERS. PERS provides retirement and disability benefits, annual cost-of-living adjustments and death benefits to PERS members and beneficiaries. PERS acts as a common investment and administrative agent for participating public entities within the State. PERS is a contributory plan deriving funds from employee contributions as well as from employer contributions and earnings from investments. PERS maintains a Safety Plan (the "Safety Plan") and a Miscellaneous Plan (the "Miscellaneous Plan" and, together with the Safety Plan, the "PERS Plans") for the County. The Miscellaneous Plan includes employees and retirees of the Superior Court of California. The Superior Court is not part of the County's reporting entity and are the responsibility of the Superior Court of California. The County currently contributes to PERS amounts equal to the recommended rates for the PERS Plans multiplied by the payroll of those employees of the County who are eligible under PERS. Beginning in the June 30, 2015 valuation, PERS will collect the County's employer contributions toward the plans' unfunded liability as dollar amounts instead of the prior method of a contribution rate. PERS will continue to collect the County's normal cost contributions as a percentage of payroll. Information regarding the Safety Plan and the Miscellaneous Plan for the County was obtained from PERS' "Safety Plan of the County of Santa Clara Annual Valuation Report as of June 30, 2015" (the "2015 PERS Safety Valuation") and "Miscellaneous Plan of the County of Santa Clara Annual Valuation Report as of June 30, 2015" (the "2015 PERS Miscellaneous Valuation") and the County's audited financial statements for fiscal years ended June 30, 2011 through June 30, 2015, which reports are the most recent actuarial valuations and audited financial statements available to the County as of the date of this Official Statement. PERS also maintains separate plans for the Santa Clara County Central Fire District (the "Central Fire District") and the Housing Authority of the County of Santa Clara (the "Housing Authority"). For additional information on the County's various employee benefit plans, see APPENDIX C "THE COUNTY OF SANTA CLARA AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015 Note (12)." On January 1, 2013, California legislation known as the Public Employees' Pension Reform Act of 2013 ("PEPRA") took effect. PEPRA includes a number of measures intended to reduce long-term public pension costs, most of which apply only to public employees who first became PERS members on or after January 1, 2013 (the "New Members"). A "Classic" PERS member (i.e., employees who are not New Members) generally becomes eligible for service retirement benefits upon attainment of age 50 with at least five years of credited service. The service retirement benefit is a monthly allowance equal to the product of a benefit multiplier, the employee's retirement age and final compensation. The current retirement benefit for County employees in the Miscellaneous Plan is the "2.5% at 55" plan. For a vested employee, the actual individual pension benefit is based on three factors: (1) age at retirement, (2) number of service years, and (3) amount of final compensation. Age at retirement defines the benefit multiplier which is 2.5% each year when a member retires at age 55. The benefit multiplier under the "2.5% at 55" Plan varies between 2% for those retiring at age 50 to 2.4% for those retiring at age 54. For those that retire at age 55 or above, the multiplier stays constant at 2.5%. For public safety members, the County's retirement plan remains at "3% at 50" which has been in place since October 15, PEPRA required that all state, school and local government employers offer a reduced benefit formula and increased retirement ages to New Members. The new defined benefit formula is "2% at 62" for New Members in the Miscellaneous Plan and "2.7% at 57" for New Members in the Safety Plan. A-38

77 The following table sets forth the membership in the County PERS Plans as of June 30, COUNTY OF SANTA CLARA PERS PLANS MEMBERSHIP (as of June 30, 2015) Miscellaneous (1) Safety Total Inactive employees or beneficiaries 12,015 2,192 14,207 currently receiving benefits Inactive employees entitled to but not yet 6, ,249 receiving benefits Active employees 14,213 1,960 16,173 Total Membership 33,029 4,600 37,629 (1) Includes employees and retirees of the Superior Court of California. Sources: 2015 PERS Miscellaneous Valuation and 2015 PERS Safety Valuation. PERS Practices and Assumptions. The staff actuaries at PERS prepare annually an actuarial valuation which covers a fiscal year ending approximately 13 months before the actuarial valuation is prepared (thus, the actuarial valuation delivered to the County in August 2016 covered PERS' fiscal year ended June 30, 2015). The actuarial valuations express the County's required contribution rates in percentages of payroll for normal cost and dollar amounts for unfunded accrued actuarial liability, which the County must contribute in the fiscal year immediately following the fiscal year in which the actuarial valuation is prepared (thus, the County's required contribution derived from the actuarial valuation as of June 30, 2015, which was prepared in August 2016, will affect the County's fiscal year ). PERS' rules require the County to implement the actuary's recommended rates and dollar amounts. The actuarial assessments contain "forward looking" information that reflects the judgment of PERS and their independent accountants and actuaries. The actuarial assessments are based upon a variety of assumptions described below, one or more of which may prove to be inaccurate or be changed in the future, and will change with the future experience of the pension plans. In calculating the required contribution, the PERS actuary calculates on the basis of certain assumptions the actuarial present value of benefits that PERS will fund under the PERS Plans, which includes two components, the "Normal Cost" and the Unfunded Accrued Actuarial Liability ("UAAL"). The Normal Cost represents the actuarial present value of benefits that PERS will fund under the PERS Plans that are attributed to the current year, and the UAAL represents the actuarial present value of benefits that PERS will fund that are attributed to past years. The UAAL represents an estimate of the actuarial shortfall between assets on deposit at PERS and the present value of the benefits attributable to past service that PERS will pay under the PERS Plans to retirees and active employees upon their retirement. The UAAL is based on several assumptions such as, among others, the rate of investment return, average life expectancy, average age of retirement, inflation, salary increases and occurrences of disabilities. In addition, the UAAL includes certain actuarial adjustments such as, among others, the actuarial practice of smoothing losses and gains over multiple years. As a result, prospective investors are encouraged to consider the UAAL as an estimate of the unfunded actuarial present value of the benefits that PERS will fund under the PERS Plans to retirees and active employees upon their retirement and not as a fixed or hard expression of the liability the County owes to PERS under the PERS Plans. On January 1, 2013, PEPRA took effect. PEPRA includes a number of measures intended to reduce long-term public pension costs, most of which apply only to New Members. These include reduced pension benefit formulas, establishment of a cap on pensionable compensation, and a requirement that New Members pay at least half of the Normal Cost required to fund their pensions. A-39

78 PEPRA requires that a public employer's contribution to a defined benefit plan, in combination with the employee contributions to that plan, shall not be less than the Normal Cost rate. The impact of most of the PEPRA changes were reflected in the assumptions and the benefit provision listings of the County's June 30, 2013 valuation for the fiscal year rates. For complete updated inflation and actuarial assumptions and additional information on PEPRA, please contact PERS at the above-referenced address. On April 17, 2013, PERS approved new amortization and smoothing policies. Prior to this change, PERS employed an amortization and smoothing policy that spread investment returns over a 15- year period with experience gains and losses paid for over a rolling 30-year period. Beginning with the June 30, 2013 valuations that set the fiscal year rates, PERS no longer uses an actuarial value of assets and will employ an amortization and rate smoothing policy that will pay for all gains and losses over a fixed 30-year period, with the increases or decreases in the rate spread directly over a 5-year period. On February 19, 2014, the PERS Board adopted changes to the current asset allocation that will reduce the expected volatility of returns. The adopted asset allocation is expected to have a long-term blended return that continues to support a discount rate assumption of 7.5%. The PERS Board also approved several changes to the demographic assumptions that more closely align with actual experience. The most significant of these is mortality improvement to acknowledge the greater life expectancies of members. The County anticipates these assumption changes to result in increases in the County's contribution rates over the next five years. Such increases could be substantial. See "COUNTY BUDGET" herein. In November 2015, the PERS Board adopted its Funding Risk Mitigation Policy, the fundamental purpose of which is to lower the discount rate in years of strong investment returns, help pay down the unfunded liability, and provide greater predictability and less volatility in contribution rates for employers. Under the policy, a mechanism will be established whereby PERS investment performance that significantly outperforms the discount rate by at least 4.0% triggers adjustments to the discount rate, expected investment return and strategic asset allocation targets. The 4.0% threshold would work to offset increases to employer contribution rates that would otherwise increase when the discount rate is lowered, and help pay down PERS' unfunded liability. Beginning with fiscal year , PERS will collect employer contributions towards the plans' unfunded liability as dollar amounts instead of the prior method of a contribution rate. This change will address potential funding issues that could arise from a declining payroll or reduction in the number of active members in the plans. Funding the unfunded liability as a percentage of payroll could lead to the underfunding of the plans. Although employers will be invoiced at the beginning of the fiscal year for their unfunded liability payment, each plan's normal cost contribution will continue to be collected as a percentage of payroll. The following summarizes certain economic actuarial assumptions and methods used by PERS to calculate the total pension liability of the County as of June 30, 2015: Valuation Date: June 30, 2015 Measurement Date: June 30, 2015 Actuarial Cost Method: Entry-age normal cost method Investment Rate of Return: 7.50% net of pension plan investment expense, including inflation Inflation: 2.75% A-40

79 Projected Salary Increases: Discount Rate: Basic COLA: Varies by Entry Age and Service 7.50% as of June 30, 2015 (net of pension plan, investment and administrative expenses, including inflation) Contract COLA up to 2.75% until purchasing power allowance floor on purchasing power applies, 2.75% thereafter Pension Contributions. The contribution requirements of plan members and the County are established and may be amended by PERS. The County is required to contribute at an actuarially determined rate or prepay a discounted required contribution between July 1 and July 15. Beginning fiscal year , only the UAAL portion of the employer contribution can be prepaid, which must be received in full no later than July 31. Plan Normal Cost percentage of payroll contributions will continue to be collected as part of the bi-weekly payroll reporting process. For the year ended June 30, 2015, the County's actuarial determined contributions for the Miscellaneous Plan and the Safety Plan were approximately $199.4 million and $60.1 million, respectively. In addition to making annual contributions to PERS in accordance with the applicable actuarial valuation, the County is also obligated pursuant to the collective bargaining arrangements with the County's employee bargaining units to pay a portion of the employees' required contribution to PERS (these payments by the County are referred to herein as the "Employee Offsets"), which, for Classic Members of the Miscellaneous Plan (including Court employees) is 0% to 8% of their salary and which, for Classic Members of the Safety Plan is between 0% and 9% of their salary. Pursuant to the collective bargaining arrangements with the County's employee bargaining units, employees contribute a portion of the County's employer required contributions ranging from 0% to 10.08% of an employee's salary [Remainder of Page Intentionally Left Blank] A-41

80 The following table shows the percentage of salary that the County was responsible for contributing to PERS from fiscal year through fiscal year and the County's projected contribution percentages for fiscal year to satisfy its retirement funding obligations. It also shows the County's pension plan contribution payments. Employer Normal Cost (Misc) COUNTY OF SANTA CLARA SCHEDULE OF EMPLOYER CONTRIBUTION RATES & PAYMENTS (FOR FISCAL YEARS THROUGH ) AND PROJECTED CONTRIBUTION RATES & PAYMENTS FOR FISCAL YEAR Employer Normal Cost (Safety) Unfunded Liability Rate/Cost (Misc) (1) Unfunded Liability Rate/Cost (Safety) (1) Actual County Contribution Rate Paid Rate Paid Employee Offsets Fiscal Year (Misc) (2) (Safety) (2) Amount (3),(4) Paid by County (3) % % 6.797% 9.314% % % $166,904,758 $74,271, ,721,178 68,480, ,104,948 (5) 55,992,597 (5) Not Available Not Available Not Available Not Available $154,789,022 $42,768, Not Available Not Available (1) Beginning in fiscal year , required contribution for the UAAL is expressed as a dollar amount. (2) Does not include percentage of employee rate paid by the County pursuant to collective bargaining agreements. (3) Contribution totals are combined amount for the County's two PERS plans. (4) The actual County contribution amount presented in this column does not equal required contribution because a portion of it is contributed by employees pursuant to various collective bargaining agreements. For example, in fiscal year total required contribution for both PERS plans was approximately $222.4 million. The County's actual contribution amount was approximately $166.9 million, and County employees contributed approximately $55.5 million to the required contribution amount. In fiscal year , total required contribution for both PERS plans was approximately $236.3 million. The County's actual contribution amount was approximately $191.7 million, and County employees contributed approximately $44.6 million to the required contribution amount. (5) Beginning in fiscal year , the Actual County Contribution Amount and Employee Offsets Paid by County exclude amounts for Superior Court of California employees. In fiscal year , total required contribution was approximately $216.1 million, and County employees contributed approximately $43.4 million to the required contribution amount. Sources: 2015 PERS Miscellaneous Valuation and 2015 PERS Safety Valuation; actual contribution amounts are from the County Controller's Office. A-42

81 The table below sets forth the employee contribution rates, employer contribution rates and employees share paid by the County for fiscal year : Plan Employer Contribution Rate New Members Classic (PEPRA) COUNTY OF SANTA CLARA PERS PLANS CONTRIBUTION RATES (AS OF JUNE 30, 2015) (Dollars in Thousands) Employee Contribution Rate Employer Contributions Employee Contributions New Members Employer Employee Employer Employee Classic (PEPRA) Paid Paid Paid Paid Miscellaneous % % 8.00% 6.50% $157,478 $41,956 $54,491 $36,396 Safety % % 9.00% 10.75% 58,636 1,449 1,493 16,554 Source: County of Santa Clara Comprehensive Annual Financial Report for Fiscal Year ; actual contribution amounts are from the County Controller's Office. Pension Funding Status. As described below under "Recent GASB Statement Relating to Pension Accounting," GASB 68 does not require the calculation of a required contribution but requires the County to include as a liability on its balance sheet the City's "net pension liability," as defined by GASB 68. The following table sets forth the County's net pension liability as of June 30, 2014 and June 30, 2015 for the County Miscellaneous Plan and Safety Plan. The net pension liability is measured as the total pension liability less the fiduciary net position for each plan. Total Pension Liability COUNTY OF SANTA CLARA NET PENSION LIABILITY FOR FISCAL YEARS AND (In Thousands) Miscellaneous Plan Fiduciary Net Position Net Pension Liability (Asset) Total Pension Liability Safety Plan Fiduciary Net Position Net Pension Liability (Asset) 6/30/14 $7,760,812 $5,444,900 $2,315,912 $2,290,704 $1,576,385 $714,319 6/30/15 8,197,583 6,332,253 1,865,330 2,401,079 1,819, ,570 Source: County of Santa Clara Comprehensive Annual Financial Report for Fiscal Year For fiscal year , the County recognized pension expense of approximately $222.7 million. Pension expense represents the change in the net position liability during the measurement period, adjusted for actual contributions and the deferred recognition of changes in investment gain or loss, actuarial gain or loss, actuarial assumptions or method, and plan benefits. A-43

82 Based on PERS methodology, as of June 30, 2015, the most recent actuarial valuation date, the Miscellaneous Plan was 73.9% funded. The actuarial accrued liability for benefits was approximately $9.0 billion, and the market value of assets was approximately $6.7 billion, resulting in an unfunded actuarial accrued liability ("UAAL") of approximately $2.4 billion. The covered payroll, which is the annual payroll of active employees covered by the plan, was approximately $1.3 billion, and the ratio of the UAAL to covered payroll was 183.7%. As of June 30, 2015, the most recent actuarial valuation date, the Safety Plan was 71.6% funded. The actuarial accrued liability for benefits was approximately $2.5 billion, the market value of assets was approximately $1.8 billion, and the UAAL was approximately $722 million. The covered payroll was approximately $200 million, and the ratio of the UAAL to covered payroll was 360.6%. The following table sets forth the schedule of funding progress in connection with the County's PERS Miscellaneous Plan. Actuarial Valuation Date Actuarial Value of Assets (1) (a) COUNTY OF SANTA CLARA SCHEDULE OF FUNDING PROGRESS (MISCELLANEOUS PLAN) (In Thousands) Market Value of Assets (1) (b) Actuarial Accrued Liability (c) Unfunded Actuarial Accrued Liability (d) Funded Ratio (a/c) Annual Covered Payroll (e) UAAL as Percentage of Covered Payroll (d/e) 6/30/11 $5,741,951 $5,099,645 $6,930,682 $1,188, % $1,152, % 6/30/12 6,069,267 5,060,726 7,336,967 1,267, ,143, /30/13 5,670,790 5,670,790 7,728,971 2,058, ,158, /30/14 N/A 6,596,905 8,541,119 1,944, (2) 1,205, /30/15 N/A 6,668,174 9,022,262 2,354, ,281, (1) Beginning with the June 30, 2013 valuation, actuarial value of assets equals the market value of assets, in accordance with PERS' new amortization and rate smoothing policies approved April 7, (2) Beginning with the June 30, 2014 valuation, the funded ratio is calculated as Market Value of Assets (b)/actuarial Accrued Liability (c). Source: 2015 PERS Miscellaneous Valuation. [Remainder of Page Intentionally Left Blank] A-44

83 The following table sets forth the schedule of funding progress in connection with the County's PERS Safety Plan. Actuarial Valuation Date Actuarial Value of Assets (1) (a) COUNTY OF SANTA CLARA SCHEDULE OF FUNDING PROGRESS (SAFETY PLAN) (In Thousands) Market Value of Assets (1) (b) Actuarial Accrued Liability (c) Unfunded Actuarial Accrued Liability (d) Funded Ratio (a/c) Annual Covered Payroll (e) UAAL as Percentage of Covered Payroll (d/e) 6/30/11 $1,635,628 $1,447,676 $1,991,108 $355, % $197, % 6/30/12 1,700,830 1,418,066 2,068, , , /30/13 1,572,741 1,572,741 2,168, , , /30/14 N/A 1,816,505 2,418, , (2) 185, /30/15 N/A 1,820,207 2,542, , , (1) Beginning with the June 30, 2013 valuation, actuarial value of assets equals the market value of assets, in accordance with PERS' new amortization and rate smoothing policies approved April 7, (2) Beginning with the June 30, 2014 valuation, the funded ratio is calculated as Market Value of Assets (b)/actuarial Accrued Liability (c). Source: 2015 PERS Safety Valuation. The County's current total UAAL with respect to County employees may be more or less than the most recent actuarial valuations provided by PERS. The actual amount of unfunded liability, if any, will depend on a variety of factors, including but not limited to future investment performance. In general, increases in benefits will increase the County's pension obligations, however, the County cannot predict the extent of such increases. Many factors influence the amount of the County's pension funding obligation, including, without limitation, inflationary factors, changes in statutory provisions of applicable public employee retirement system laws, changes in the levels of benefits provided or in the contribution rates of the County, increases or decreases in the number of covered employees, changes in actuarial assumptions or methods, and differences between actual and anticipated investment experience of the County's public employee retirement system. Any of these factors could give rise to additional liability of the County as a result of which the County would be obligated to make additional payments to its public employee retirement system. PERS Projections. The PERS actuary, in the June 30, 2015 actuarial valuations, determined that the County's contribution rate under the Miscellaneous Plan for fiscal year will be 8.645% for normal cost and $154,789,022 for the UAAL. The County's contribution rate under the Safety Plan for fiscal year will be % for normal cost and $42,768,327 for the UAAL. The following table sets forth PERS projections of the County's employer contribution rates (before cost sharing) for the Miscellaneous Plan and the Safety Plan for the fiscal years through The projected rates for fiscal year are based on certain assumptions and information, including an estimated 0.0% investment return for fiscal year These are important assumptions, because gains and losses do occur and can have a significant impact on the County's employer contribution rates. The actual employer contribution rates for fiscal year will be provided in the report as of the June 30, 2015 actuarial date. The projections for fiscal years through A-45

84 assume a return of 7.50% for fiscal year and every year thereafter, and that all other actuarial assumptions will be realized and that no further changes to assumptions, contributions, benefits or funding will occur until the beginning of fiscal year The projections below do not take into account potential rate increases from likely future assumption changes. COUNTY OF SANTA CLARA NEW RATE FOR FISCAL YEAR AND PROJECTED EMPLOYER CONTRIBUTION RATES FOR FISCAL YEARS THROUGH (In Thousands) Fiscal Year Miscellaneous Plan Safety Plan Normal Cost UAAL Normal Cost UAAL % $154, % $42, , , , , , , , , , ,854 Sources: 2015 PERS Miscellaneous Valuation and 2015 PERS Safety Valuation. PERS Asset Allocation. PERS adheres to an Asset Allocation Strategy which establishes asset class allocation policy targets and ranges, and manages those asset class allocations within their policy ranges. On February 19, 2014, the PERS Board adopted changes to the current asset allocation as shown in the Policy Target Allocation below expressed as a percentage of total assets. The asset allocation has an expected long term blended rate of return of 7.5%. The following table sets forth the asset allocations for the PERS Public Employees Retirement Fund (the "PERF"), of which the assets for the Safety Plan and the Miscellaneous Plan are a part and are invested accordingly, and the PERS Fund investment portfolio for the fiscal year ended June 30, PERS PUBLIC EMPLOYEES RETIREMENT FUND INVESTMENT ASSET ALLOCATION ($ in Billions) As of June 30, 2015 Asset Class Market Value Policy Target Allocation Global Equity $ % Private Equity Global Fixed Income Liquidity Real Assets Inflation Sensitive Assets Other Total Fund $ % Sources: 2015 PERS Miscellaneous Valuation and 2015 PERS Safety Valuation. A-46

85 The following table sets forth the annualized rate of return on investments in PERF, which includes the County's Miscellaneous Plan and Safety Plan, for the fiscal years ended June 30, 2006 through June 30, PERS PUBLIC EMPLOYEES RETIREMENT FUND INVESTMENT RESULTS Fiscal Years through Fiscal Year Ended June 30 Annualized Rates of Return % (5.1) 2009 (24.0) Sources: 2015 PERS Miscellaneous Valuation and 2015 PERS Safety Valuation. Court Employees. Pursuant to State legislation, responsibility for the trial courts has been transitioning from the counties to the State. Most of this transitioning has occurred, although the court employees are still members of the County's PERS pension plans. Pursuant to an agreement with the County, the State has certain obligations with respect to funding the pension plan contributions of Court employees. In the future, court employees may leave the County's PERS pension plan and transfer to a different plan. The County cannot predict whether or when this transfer may occur and what the impact would be on the funding and liabilities of its PERS pension plans. Retirement Levy. The County collects a County-wide tax (the "Retirement Levy") that provides revenues for the County's retirement obligations. The Retirement Levy is levied on the ad valorem tax roll at the rate of up to three and eighty-eight hundredths cents (3.88 ) for each $100 of assessed valuation. The Retirement Levy was initiated in 1944 and has no stated expiration date. The Retirement Levy is based on a fixed percentage of assessed value, and funds only a portion of the County's retirement obligations. The Retirement Levy revenues are subject to a variety of risks, including among others real estate values, voter initiatives and legal challenges and there can be no assurance that the Retirement Levy revenues will be available at any particular level in the future. See "Levy, Tax Rate and Valuation" and "CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS" in the forepart of this Official Statement. A-47

86 COUNTY OF SANTA CLARA RETIREMENT LEVY COLLECTION HISTORY FISCAL YEARS THROUGH Fiscal Year Retirement Levy Collected (1) Percent Increase (Decrease) $111,405, % ,218, ,108,367 (2) ,545,846 (2) ,518,151 (3) (3) (1) Reflects Retirement Levy rate of % per $100 of assessed valuation. (2) These amounts do not include that portion of the levy formerly distributed to redevelopment agencies, and which are subject to pending litigation as described under "Redevelopment Dissolution." (3) The significant increase in fiscal year is due to SB107. See "Redevelopment Dissolution." Source: County of Santa Clara Office of the Controller-Treasurer Recent GASB Statements Related to Pension Accounting. Governmental Accounting Standards Board ("GASB") Statement No. 27, "Accounting for Pensions by State and Local Governmental Employers" ("GASB 27"), applied to the County for fiscal years prior to July 1, Pursuant to GASB 27, the County was required to measure and disclose in its annual audited financial statements an amount known as the "annual pension cost" ("APC"). The APC is generally equal to the "annual required contribution" ("ARC"), which is the amount sufficient to pay (i) the normal cost and (ii) the amortization of unfunded accrued liability, plus an adjustment to offset the effect of the actuarial amortization of past under- or over-contributions by the County. GASB 27 does not establish funding requirements for the County but rather is an accounting and financial reporting standard. In June 2012, GASB issued two new standards, Statement No. 67, "Financial Reporting for Pension Plans An Amendment of GASB Statement No. 25" ("GASB 67") and Statement No. 68, "Accounting and Financial Reporting for Pensions An Amendment of GASB Statement No. 27" ("GASB 68") to improve the guidance for accounting and reporting on the pensions that governments provide to their employees. In November 2013, GASB issued GASB Statement No. 71, "Pension Transition for Contributions Made Subsequent to the Measurement Date an amendment of GASB Statement No. 68" ("GASB 71"), which seeks to eliminate the source of a potential significant understatement of restated beginning net position and expense in the first year of implementation of GASB 68 in the accrual-basis financial statements of employers and non-employer contributing entities and clarifies reporting for contributions made after the measurement date of the pension liability. The County does not report a pension trust fund and as such the implementation of GASB 67 did not have an impact on the County for the fiscal year ended June 30, The County simultaneously implemented GASB 68 and GASB 71 in fiscal year The statements relate to accounting and financial reporting and do not apply to a government's approach for funding of its pension plan. Previously, there was a close connection between the ways many governments fund pensions and how they account for and report information about them in financial statements. The statements separate how the accounting and financial reporting is determined from how pensions are funded. GASB 68 does not require the calculation of an ARC but requires the County to include as a liability on its balance sheet the City's "net pension liability," as defined by GASB 68. A-48

87 As a result of the implementation of GASB. 68 and 71, the beginning net position on the County's government wide statements was reduced by $3.31 billion ($2.36 billion governmental activities and $952.6 million business-type activities). The restatement resulted in establishing a net pension liability balance of $3.2 billion. The County's total net position decreased by $3.07 billion for the year ended June 30, 2015 due primarily to the implementation of GASB. 68 and 71. Without the impact of GASB 68, the County's governmental activities net position would have increased by $202.0 million For additional information, see APPENDIX C "THE COUNTY OF SANTA CLARA AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015 Note 1(q)." Post-Retirement Health Care Benefits and Retiree Health Care Program. The County's defined benefit post-employment healthcare plan provides healthcare benefits to eligible County employees (excluding employees of the Central Fire District and the Housing Authority) and their dependents, and certain employees of the Superior Court. However, the County does not cover premium costs associated with dependents. Additionally, the post-employment costs for the Superior Court employees, except judges, are the responsibility of Superior Court of California. As further described below, beginning July 1, 2015, Superior Court employees participated in a separate post-employment healthcare plan. The Superior Court has established a separate account with the California Employers' Retiree Benefit Trust Fund (as further discussed below). Central Fire District and Housing Authority employees have separate defined benefit postemployment healthcare plans. For additional information on the post-employment healthcare plans for the Central Fire District, Housing Authority and Health Authority employees, see APPENDIX C "THE COUNTY OF SANTA CLARA AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015 Note (13)." All County employees hired prior to August 12, 1996, with at least five years of service and who directly retire from County employment after attaining age 50 are covered under the County's Retiree Health Care Program upon retirement. For employees hired after August 12, 1996 and on or before June 18, 2006, the eligibility requirements were increased to a minimum of eight years of service after attaining age 50. For employees hired after June 19, 2006 and mostly on or before September 30, 2013, the eligibility requirements were increased to a minimum of 10 years of service, who directly retire from County employment after attaining age 50. For a majority of employees hired after September 30, 2013, the eligibility requirements for such employees were increased to a minimum of 15 years of service, who directly retire from County employment after attaining age 50. In June 2004, GASB issued Statement No. 45 ("GASB 45"), which addresses how state and local governments should account for and report their costs and obligations related to post-employment health care and other non-pension benefits ("OPEB"). GASB 45 generally requires that employers account for and report the annual cost of OPEB and the outstanding obligations and commitments related to OPEB in essentially the same manner as they currently do for pensions. Annual OPEB cost for most employers will be based on actuarially determined amounts that, if paid on an ongoing basis, generally would provide sufficient resources to pay benefits as they come due. The provisions of GASB 45 may be applied and do not require governments to fund their OPEB plans. GASB 45 establishes disclosure requirements for information about the plans in which an employer participates, the funding policy followed, the actuarial valuation process and assumptions, and for certain employers, the extent to which the plan has been funded over time. GASB has issued an exposure draft of new accounting and financial reporting standards for OPEB that will supersede GASB 45 and parallel the pension accounting changes of GASB 68 and 71. The GASB 45 requirements were effective for the County's fiscal year Starting in fiscal year , the County began to participate in the California Employers' Retiree Benefit Trust ("CERBT") Fund, a trust fund managed by PERS that allows public employers such as the County to prefund the future cost of OPEB. Generally, GASB 45 recognizes only the amounts deposited in an A-49

88 irrevocable trust fund as assets available for OPEB liabilities (however, as described below, the County has also set aside other reserves for OPEB). Since 2008, the County has obtained annual reports analyzing the County's OPEB assets, liabilities and funding requirements from an actuarial consulting firm. On November 4, 2015, the County received the Actuarial Valuation and Review of Other Postemployment Benefits (OPEB) as of June 30, 2015 in Accordance with GASB Statements No. 43 and No. 45 from The Segal Company (the "Segal Report"). The annual required contribution ("ARC") is an amount actuarially determined in accordance with the parameters of GASB 45 and represents a level of funding that, if paid on an ongoing basis, is projected to cover normal costs each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. The ARC for fiscal year , excluding the Superior Court employees, calculated as of the valuation dated June 30, 2014 is 11.55% (approximately $178.9 million) of payroll. The ARC for fiscal year , excluding the Superior Court employees, calculated in the June 30, 2015 Segal Report is 10.52% (approximately $149.9 million) of payroll. Due to budgetary constraints, the County contributed less than 100% of its ARC between fiscal years through , resulting in an increase in unfunded liability to $1.8 billion. In August 2013, the County adopted an ordinance that incrementally increases the OPEB contributions with the goal of paying 100% of the ARC by fiscal year The County funded 92.8% of the ARC in fiscal year , 85.2% in fiscal year , and plans to contribute 90% in fiscal year and 100% in fiscal year In fiscal year , the County contributed a total of $169.2 million towards OPEB. This amount included payments of $76.6 million towards retiree benefit costs and $92.6 million deposited into the CERBT funded by $81.5 million from the County Retiree Medical Trust Fund, a one-time contribution from the County of $6.3 million, and $4.8 million contributed by employees. The County contributed 92.8% of the ARC at $169.2 million in fiscal year Beginning July 1, 2015, the Santa Clara County Superior Court established its own retiree benefit trust with PERS for its retiree medical costs. As part of this effort, the Superior Court worked with the County to: a) establish policies and procedures for dealing with its retirees on health plan matters; and b) determine the Superior Court's share of the contributions that are now held in the County retiree benefit trust with PERS. These amounts will be transferred from the County's trust to the Superior Court's trust upon approval of the respective governing bodies. The contribution requirements of plan members are in accordance with the provisions in the member's respective representation unit labor contract. County contributions are established and may be amended by the Board at any time. The County's contribution is generally funded from the General Fund and other County funds (such as the VMC). For future years, The Board may allocate funds that either exceed or are less than the ARC should the Board determine that an adjustment would be in the best interests of the County. The funding plan established pursuant to the ordinance aims to eliminate the unfunded liability by The table below sets forth a summary of the County's annual OPEB costs and net OPEB obligations for the fiscal years through For fiscal year , the June 30, 2015 Segal Report projects an annual OPEB cost of approximately $157.9 million. A-50

89 COUNTY OF SANTA CLARA ANNUAL OPEB COSTS FISCAL YEARS THROUGH (in Thousands) Fiscal Year Annual OPEB Cost Percentage of Annual OPEB Cost Contributed Net OPEB Obligation $141, % $119, , , , , , , , ,088 Source: County of Santa Clara Comprehensive Annual Financial Reports for Fiscal Year through The table below sets forth the schedule of funding progress relating to the County's OPEB obligations: Actuarial Value of Assets (a) COUNTY OF SANTA CLARA SCHEDULE OF FUNDING PROGRESS (POST-RETIREMENT HEALTH CARE) (In Thousands) Actuarial Accrued Liability (b) Unfunded Actuarial Accrued Liability (c) Funded Ratio (a)/(b) Covered Payroll (d) UAAL as a % of Covered Payroll (c)/(d) As of 6/30/11 $251,789 $2,035,456 $1,783, % $1,328, % 6/30/12 264,139 2,121,600 1,857, ,291, /30/13 329,185 2,204,484 1,875, ,401, /30/14 560,257 2,430,157 1,869, ,462, /30/15 620,275 2,150,410 1,530, ,434, Source: County of Santa Clara Comprehensive Annual Financial Reports for Fiscal Years through Accumulated Unpaid Vacation and Sick Pay. Upon separation from County employment, employees are generally paid for accumulated vacation days earned and for up to 50% of accumulated sick leave. Government fund types record as a liability the portion expected to be paid within the next year, and the remaining portion is reflected in the Statement of Net Position. Proprietary fund types record both the current and non-current liability. Deferred Compensation Plan. The County offers all of its full-time employees a deferred compensation plan (the "Plan") created in accordance with Section 457 of the Code. The Plan permits employees to defer a portion of their salary until future years. The deferred compensation is not available to the employees until termination, retirement, death or emergency. Supplemental Benefit Plan. In fiscal year , the County established a defined contribution payment plan (the "Supplemental Plan") whereby County employees hired before July 1, 2008 and with compensation in excess of the threshold provided in Section 401(a)(17) of the Code are A-51

90 eligible to participate. The Supplemental Plan is a tax-deferred plan that is subject to an annual contribution limit under the Code and any supplemental benefits in excess of the Code limit will be paid to the employee as taxable income. The County will contribute and deposit the supplemental benefits into the Supplemental Plan at the end of January. Employer contributions become fully vested at the time of the contribution. The Supplemental Plan had 105 participants and had an ending cash value of approximately $20.9 million as of June 30, The County contributed approximately $2.0 million to the Supplemental Plan during fiscal year Insurance and Self-Insurance The County is exposed to various risks of loss related to torts; medical malpractice; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; natural disasters; unemployment; and health benefits to employees and retirees. The County is self-insured for its general liability, workers' compensation, unemployment, medical malpractice liability and auto liability. The County has chosen to establish risk financing Internal Service Funds where assets are set aside for claim settlements associated with the above risks of loss up to certain limits. Excess coverage is provided by the California State Association of Counties' Excess Insurance Authority (Insurance Authority), a joint powers authority, the purpose of which is to develop and fund programs of excess insurance and provide the joint purchase of coverage from independent third parties for its member entities. The Insurance Authority is governed by a Board of Directors consisting of representatives of its member entities. The County operates a funded self-insurance program, which is based on independent actuarial studies and a confidence band determined by the Board. At June 30, 2015, the County's workers compensation internal service fund had a $34.5 million unrestricted net fund deficit after liabilities that the County will eliminate by increasing inter-departmental service charges over the next six years. Such inter-departmental service charges are projected to increase fund assets to the actuarially determined level by June 30, The County's other internal service funds for its general liability, unemployment, medical malpractice and auto liability programs had a combined $6.6 million unrestricted net fund position after liabilities. [Remainder of Page Intentionally Left Blank] A-52

91 Self-insurance and Insurance limits as of June 30, 2016 are as follows: Type of coverage COUNTY OF SANTA CLARA INSURANCE INFORMATION AS OF JUNE 30, 2016 Self-insurance (000's per occurrence) Self-retained (1) (000's) Purchase Insurance Policies (000's-per occurrence) Automobile Up to $2,000 $33,000 General liability Up to $2,000 $33,000 Medical malpractice Up to $500 $1,500 per occurrence $20,000 $50,000 annual aggregate $33,000 excess insurance Workers' compensation Up to $4,000 $1,000 per occurrence Statutory Property damage (All Risk) Up to $50 (2) (Deductible) Flood Up to $100 (Deductible) Earthquake 2% of property value per occurrence $100 min. deductible per occurrence $3,000 per occurrence $10,000 annual aggregate Up to $1,200,000 (3) Up to $1,150,000 (4) Up to $715,000 (5) Cyber Liability (6) Up to $100 $250 to $2,000 $20,000 annual aggregate Airport None $30,000 Crime Bond Up to $25 $15,000 Pollution Up to $250 $10,000 (1) The self-retained layer is required by the insurance company and acts as an additional amount to pay claims before the insurance company pays a loss. The member entities contribute this self-retained layer, which remains part of their assets. Once the self-retained layer is exhausted, the insurance company pays all claims above the County's self-insurance amount. Any funds left in the self-retained layer can be used to fund self-retained amounts in future years. (2) Deductible for the Fairgrounds is $5,000 per occurrence. All properties are insured at full replacement value. (3) Insured values are split among three schedules with limits of $300 million each, plus a rooftop of $300 million for a total of $1.2 billion. (4) Insured values are split among three schedules with limits of $300 million each, plus a rooftop of $250 million, for a total of $1.15 billion. (5) Insured values are split among three schedules with limits of $100 million each, plus a rooftop of $415 million for a total of $715 million. Such earthquake insurance covers only a portion of the County's property. (6) $50,000 per claim for each member with total insurable value up to $500,000 at the time of loss. $100,000 per claim for each member with total insurable value greater than $500,000 at the time of loss. Source: County of Santa Clara, Employee Services Agency (Risk Management) All enterprise funds of County departments participate in the self-insurance program and make payments to the insurance funds and internal service funds. The insurance funds are responsible for A-53

92 collecting fees from other County funds, administering and paying claims and arranging the purchase of property and stop loss insurance. It is the County's practice to obtain full actuarial studies annually for the self-insured automobile liability, general liability, medical malpractice, and workers' compensation liability issues. The unpaid claims liabilities included in the Self-Insurance Internal Service Funds for these risks are based on the results of actuarial studies and include amounts for claims incurred but not reported and loss adjustment expenses. Claim liabilities are calculated considering the effects of inflation, recent claim settlement trends, including frequency and amount of payouts, and other economic and social factors. As of June 30, 2015, the unpaid claims liability for the County's self-insurance internal service funds was $147.8 million. The County's insurance coverages may change at any time. There can be no assurance that such types or levels of coverage will be available in the future. The County Investment Pool The County Treasurer manages common cash and investment pools (the "Investment Pool"), for the County, school and community college districts, special districts and other local public agencies. The Investment Pool is not registered with the Securities and Exchange Commission as an investment company. State law requires the County and its public school districts to invest with the County treasury ("Involuntary Depositors"). In addition, certain agencies, including community college districts, invest certain of their funds in the County treasury on a voluntary basis ("Voluntary Depositors," and, together with the Involuntary Depositors, the "Depositors"). Deposits made by the County and the various local agencies are commingled in the Investment Pool. As of June 30, 2016, approximately 84% of the total funds in the Investment Pool were deposited by Involuntary Depositors and approximately 16% were deposited by Voluntary Depositors. Under State law, Depositors in the Investment Pool are permitted to withdraw funds which they have deposited on 30 days' notice. The County does not expect that the Investment Pool will encounter liquidity shortfalls based on its current portfolio and investment guidelines or realize any losses that may be required to be allocated among all Depositors in the Investment Pool. The County maintains a contract with Bank of New York to provide custodial services for the Investment Pool securities. Investment Policy. The County invests assets in the Investment Pool pursuant to the County's investment policy (the "Investment Policy"), which is approved annually by a Treasury Oversight Committee. The Treasury Oversight Committee, together with the Internal Audit Division of the County, insures that the Treasurer's activities are in compliance with the Investment Policy. The Treasury Oversight Committee meets semi-annually and is composed of County officials, a member of the public, and representatives of the school districts and special districts. Investments permitted by the Investment Policy include U.S. Treasury or government agency issues, repurchase agreements and reverse repurchase agreements, securities lending, collateralized time deposits, negotiable certificates of deposit, bankers' acceptances, commercial paper, medium term corporate notes or deposit notes, local agency investment funds, money market funds, asset backed securities, agency mortgage backed securities and supranational debt obligations. Status of the Investment Portfolio. As of June 30, 2016, the size of the portfolio of the Investment Pool was $6,262,622,531 (at cost) with a market value of $6,281,466,969, for a net unrealized gain of $18,844,438 of the cost of the Investment Pool. Throughout the year the balance in the A-54

93 Investment Pool typically ranges from approximately $5.0 billion to $7.0 billion depending on the tax collection schedule. As of June 30, 2016, the portfolio posted a weighted average maturity of 439 days with a weighted average yield to maturity of 0.90%. The following table sets forth a summary of the average maturities within the Investment Pool, as of June 30, COUNTY OF SANTA CLARA INVESTMENT PORTFOLIO AVERAGE MATURITIES AS OF JUNE 30, 2016 Average Maturities Percent of Portfolio * Overnight 15.16% 1-30 days days days years years years years % * Based on book value. Source: County of Santa Clara Finance Agency Investment Summary Report. The following table sets forth a summary of the County's investments, by type of investment, as of June 30, As described above, a wide range of investments is authorized by state law. Legislation which would modify the currently authorized investments and place restrictions on the ability of municipalities to invest in various securities is considered from time to time by the California State Legislature. In addition, the value of the various investments in the Investment Pool will fluctuate on a daily basis as a result of a multitude of factors, including generally prevailing interest rates and other economic conditions. Consequently, there can be no assurance that the values of the various investments in the Investment Pool will not vary significantly from the values described herein. The Investment Pool currently has no investments in any corporation that has filed for bankruptcy. There is no leverage nor does the County invest in any security that could result in zero interest accrual if held to maturity. A-55

94 Investments COUNTY OF SANTA CLARA INVESTMENT PORTFOLIO SUMMARY AS OF JUNE 30, 2016 Book Value Percentage of Portfolio Federal Agencies $3,389,397, % Corporate Bonds 328,843, Repurchase Agreements 100,000, Commercial Paper 404,074, Asset Backed Securities (ABS) 198,856, ABS Green Bonds 3,999, Municipal Securities 120,216, US Treasuries 115,454, Negotiable CDs 805,002, LAIF 40,115, Money Market Funds 594,209, Supranational 117,452, Supranational Green Bonds 45,000, TOTAL PORTFOLIO (1) $6,262,622, % (1) Totals may not add up due to independent rounding. Source: County of Santa Clara Finance Agency All investments contain a certain degree of risk. Such risks include, but are not limited to, a lower rate of return than expected, loss of market value and loss or delayed receipt of principal. The occurrence of these events with respect to amounts held under the Trust Agreement or by the County could have a material adverse effect on the security of the Bonds. Capital Improvement Plan The County has a long-term capital improvement plan ("CIP") that identifies where the County's one-time funds should be allocated to address the County's most pressing infrastructure needs over a five year period. The CIP includes general fund, roads, airports, parks and VMC capital projects that are underway or planned for the future. While the CIP covers a five year planning horizon, it is updated annually to reflect ongoing changes as new projects are added, existing projects are modified, and completed projects deleted from the CIP. The CIP does not appropriate funds; rather it serves as a budgeting tool, identifying those capital budget appropriations to be made through the adoption of the County's annual budget. The current CIP was presented to the Board on May 1, This CIP includes an allocation of $135.1 million for capital projects for fiscal year , with a focus on upgrading and maintaining County-owned buildings and current public safety and health facilities. The largest allocations in fiscal year are $31.9 million for the emergency department at VMC, $28 million for the construction of new jail facilities, and $10 million for the design of a new surgicenter at VMC. The CIP has a five-year project plan totaling approximately $958.9 million, which would be funded by a variety of sources. A-56

95 In addition to the capital projects identified in the CIP (which are generally funded using onetime funds), the County has also identified certain future capital projects for which it currently plans to issue debt. These current projects and the estimated amount of debt to be issued for each project are shown below. The County may change these projects and estimated financing costs at any time. Project Estimated Date of Debt Issuance Estimated Amount of Financing New Jail Project (1) 2017 $145,000,000 Outpatient Surgicenter at VMC ,000,000 Vietnamese Service Center ,000,000 Receiving and Intake Center at East Valley Clinic 2017/ ,000,000 New Animal Shelter 2017/ ,000,000 Completion of the Seismic Retrofit Project at VMC ,000,000 TOTAL $443,000,000 (1) The proposed project consists of the replacement of an outdated jail facility at the County's Main Jail Complex with a new jail building immediately adjacent to the existing Main Jail North facility. On December 17, 2015, the County received a letter from the State Public Works Board confirming the conditional award of an $80 million grant in the form of California State Lease Revenue Bond financing to build the requested facility. The Board has also voted to include in the November 2016 ballot a general obligation bond measure to raise approximately $950 million for low income and homeless housing within Santa Clara County. A-57

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97 APPENDIX B SANTA CLARA COUNTY ECONOMIC AND DEMOGRAPHIC INFORMATION The information in this Appendix B provides investors with economic and demographic information concerning Santa Clara County ("Santa Clara County") and is provided as supplementary information to assist investors in evaluating the County of Santa Clara (the "County"). The following economic and demographic information about Santa Clara County has been collected from the County or, as noted, third party sources. General Information Santa Clara County ("Santa Clara County") lies immediately south of San Francisco Bay and is the sixth most populous county in the State of California (the "State"). It encompasses an area of approximately 1,316 square miles. Named after Mission Santa Clara, which was established in 1777, and named for Saint Clara of Assisi, Italy, the County of Santa Clara (the "County") was incorporated in 1850 as one of the original 28 counties of the State and operates under a home rule charter adopted by County voters in 1950 and amended in 1976 (the "County Charter"). The southern portion of Santa Clara County has retained the agricultural base which once existed throughout the area and has two cities, separated by roughly twenty miles. The northern portion of Santa Clara County is densely populated, extensively urbanized and heavily industrialized. It contains 15 cities, the largest of which is the City of San Jose, the third largest city in the State and the county seat. The uppermost northwestern portion of Santa Clara County, with its concentration of high-technology, electronics-oriented industry, is popularly referred to as the "Silicon Valley." Large employers include Cisco Systems, Inc., Stanford University, Apple Computer, Inc., Kaiser Permanente, and Google, Inc. See "Major Employers" herein. Neighboring counties include San Mateo in the northwest, Santa Cruz in the southwest, San Benito in the south, Merced and Stanislaus in the east and Alameda in the northeast. The City of San Jose is approximately 48 miles south of San Francisco and 42 miles south of the City of Oakland. These are the three largest cities of the nine-county San Francisco Bay Area, with the City of San Jose being the largest. As required under the County Charter and under County ordinances or by State and federal mandate, the County is responsible at the local level for activities involving public welfare and health, certain activities related to courts and jails, and for the maintenance of public records. The County also operates recreational and cultural facilities serving the unincorporated areas of Santa Clara County and the region. See Appendix A "COUNTY OF SANTA CLARA FINANCES AND OPERATIONS County Services." Population Historical Population Growth. Over the past sixty years, Santa Clara County's population growth pattern has exhibited three decades of rapid growth followed by three decades of more sustainable growth rates. According to U.S. Census figures, the number of residents in Santa Clara County grew by 66 percent between 1940 and 1950, with most of the increase concentrated in the unincorporated areas and in the largest cities of San Jose, Palo Alto and Santa Clara. From 1950 to 1960, population grew by 121 percent with every major city as well as the unincorporated areas experiencing huge increases. The B-1

98 County also recorded the incorporation of four new cities during the 1950s, raising the total number of cities to its current level of 15. Santa Clara County's population growth subsided somewhat during the 1960s, although the 66 percent growth rate was more than four times the 15.4 percent statewide increase. The population of San Jose doubled for the second decade in a row, while the cities of Mountain View, Santa Clara and Sunnyvale added at least 23,000 residents each. As a result of the incorporation of four cities, the unincorporated area of Santa Clara County posted its first decline in the 1960s, setting the stage for further drops in each of the subsequent three decades. Santa Clara County's population growth rate fell to 21.5 percent during the 1970s. San Jose continued to add more residents (183,621) than any other city, while two of the larger cities (Palo Alto and Santa Clara) recorded small population declines and residents in the unincorporated area fell by 25,160. The slower growth of the 1970s reflected a slowing urbanization, due in part to policies adopted by the County to preserve agricultural areas. The data from the 2000 U.S. Census indicate that Santa Clara County's population reached 1,682,585, representing a 12.4 percent increase from the population base in Over the same period, statewide population grew more rapidly at a rate of 13.8 percent. San Jose surpassed San Francisco as the most populous city in the Bay Area, with a population of 894,943. According to the 2010 census data, Santa Clara County's population as of April 2010 was 1,781,642, while total State population was 37,253,956. The proportion of residents living in cities is currently over 95 percent, in contrast to Santa Clara County's makeup in 1940 when urban residents made up only 6.5 percent of Santa Clara County's population. Since the 1940s, the increasing maturation of Santa Clara County's employment and economic sectors has resulted in the incorporation of new cities as well as the expansion of city boundaries, resulting in a shrinking fraction (currently five percent) of residents living in unincorporated areas. Recent Annual Population Changes. Approximately 4.5 percent of Santa Clara County's residents live in unincorporated areas. The City of Morgan Hill had the largest percentage increase in population from January 1, 2015 to January 1, 2016, with a 3.0 percent gain. The Cities of Los Altos and Milpitas followed with a gain of 2.8 percent and 1.9 percent, respectively. The following table provides a historical summary of population in Santa Clara County and its incorporated cities as of January 1 of calendar years 2012 through [Remainder of Page Intentionally Left Blank] B-2

99 SANTA CLARA COUNTY POPULATION AS OF JANUARY Campbell 39,852 40,390 41,871 41,857 42,584 Cupertino 58,981 56,603 59,777 59,756 58,185 Gilroy 50,123 51,528 52,264 53,000 55,170 Los Altos 29,439 29,783 29,884 30,036 31,353 Los Altos Hills 8,021 8,262 8,330 8,341 8,658 Los Gatos 29,832 30,237 30,443 30,505 31,376 Milpitas 66,922 67,878 69,903 72,606 75,521 Monte Sereno 3,370 3,418 3,439 3,451 3,475 Morgan Hill 39,100 40,067 41,079 41,779 43,645 Mountain View 75,228 76,250 76,582 77,914 77,925 Palo Alto 65,502 66,355 66,682 66,932 68,207 San Jose 971, ,575 1,002,274 1,016,479 1,042,094 Santa Clara 118, , , , ,752 Saratoga 30,342 30,697 30,798 30,799 30,219 Sunnyvale 142, , , , ,372 Incorporated 1,730,216 1,757,304 1,780,992 1,802,456 1,840,536 Balance Of County 86,303 87,046 87,046 87,182 87,352 County Total 1,816,519 1,844,350 1,868,038 1,889,638 1,927,888 Source: State of California, Department of Finance. Employment and Industry Santa Clara County is home to a highly skilled and diverse work force, a situation that has traditionally translated into lower countywide average unemployment rates when compared to State and national average unemployment rates. However, in 2002 and 2003, Santa Clara County's unemployment rate rose sharply as a result of the retraction in the communications and high technology industries that dominate Santa Clara County's employment base. In 2003 alone, annual average employment figures showed a drop in jobs within Santa Clara County of approximately 36,500 in comparison to In 2003 Santa Clara County's unemployment rate was reported to have reached an average of 8.3 percent, 1.5 percent higher than that of the State's. These estimates are based solely on unemployment benefit claims, which excludes those who have chosen other options as an alternative to unemployment (such as early retirement or relocation) or have exhausted unemployment benefits. Cycles of business growth and retraction are customary in Santa Clara County, particularly in the high-tech industry. In 2009, the unemployment rate in Santa Clara County jumped by 5.1 percent to 11.1 percent due to the economic recession in California and the United States. As of May 2016, the Employment Development Department reported preliminary numbers (not seasonally adjusted) showing that there were an estimated 1,027,600 people in the labor force in Santa Clara County, with 993,500 employed and 34,100 unemployed. The unemployment rate in Santa Clara County as of May 2016 was 3.3 percent, which is lower than the nationwide unemployment rate of 4.7 percent, and the State unemployment rate of 4.7 percent during the same period (unemployment rates provided are not seasonally adjusted). B-3

100 Development of high technology has been enhanced by the presence of Stanford University, Santa Clara University, San Jose State University, other institutions of higher education, research and development facilities such as SRI International, the Stanford Linear Accelerator Center, and Ames Research Center (NASA) within Santa Clara County. In addition, the Rincon de los Esteros Redevelopment Area in northern San Jose has been the site of industrial/research and development submarkets in Silicon Valley. The following table lists wage and salary employment in Santa Clara County by industry from 2011 to [Remainder of Page Intentionally Left Blank] B-4

101 SANTA CLARA COUNTY WAGE AND SALARY EMPLOYMENT BY INDUSTRY ANNUAL AVERAGE (1) Civilian Labor Force 940, , , ,300 1,018,400 Civilian Employment 853, , , , ,100 Civilian Unemployment 87,400 76,300 63,700 51,700 42,300 Civilian Unemployment Rate 9.3% 7.9% 6.5% 5.2% 4.2% Total, All Industries 876, , , ,400 1,032,200 Total Farm 3,400 3,300 3,300 3,400 3,600 Total Nonfarm 873, , , ,100 1,028,600 Goods Producing 183, , , , ,800 Mining and Logging Construction 30,900 33,900 36,400 38,300 42,100 Manufacturing 152, , , , ,400 Durable Goods 143, , , , ,100 Nondurable Goods 9,400 9,700 9,800 10,200 10,300 Service Providing 689, , , , ,800 Trade, Transportation & Utilities 125, , , , ,800 Wholesale Trade 33,600 34,600 35,900 36,400 36,000 Retail Trade 79,700 81,900 82,500 83,400 84,900 Transportation, Warehousing & Utilities 11,800 12,700 13,700 14,600 15,000 Information 51,200 54,100 58,600 66,300 74,700 Financial Activities 32,100 33,000 33,500 34,800 35,000 Finance & Insurance 19,200 20,200 20,700 21,500 21,800 Real Estate & Rental & Leasing 12,900 12,800 12,800 13,300 13,200 Professional & Business Services 166, , , , ,900 Professional, Scientific & Technical Services 109, , , , ,600 Management of Companies & Enterprises 9,000 9,800 10,800 11,600 12,700 Administrative & Support & Waste Services 47,700 50,300 54,200 57,300 60,600 Educational & Health Services 124, , , , ,400 Educational Services 37,200 38,600 39,800 42,600 44,200 Health Care & Social Assistance 87,700 94, , , ,100 Leisure & Hospitality 76,300 81,300 86,300 90,500 94,500 Other Services 24,100 24,400 25,000 26,000 26,700 Government 89,900 88,700 89,000 90,900 89,900 Federal Government 10,000 9,700 9,800 9,800 9,800 State Government 6,200 6,200 6,100 6,200 6,400 Local Government 73,700 72,800 73,100 74,900 73,600 (1) The unemployment rate is calculated using unrounded data. Totals may not add up due to independent rounding. Source: State of California Information Division, Employment Development Department, Labor Market. B-5

102 Major Employers Santa Clara County is home to numerous high technology and computer software and hardware manufacturing companies, which, together with public sector employers, continue to top the list of the largest employers in Santa Clara County. The County ranks as the number one public sector employer, with all departments collectively employing over 16,800 full-time employees in fiscal year Although there have been hiring freezes and cut-backs that have impacted public-sector organizations, such organizations typically tend to remain more stable in a volatile job market. Income The table below lists the 10 largest employers in Santa Clara County in fiscal year SANTA CLARA COUNTY TEN LARGEST EMPLOYERS Rank Employer Name Estimated No. of Full-Time Employees 1 Apple Computer, Inc. 16,000 23,400 2 Santa Clara County 16,837 3 Cisco Systems Inc. 15,800 4 Stanford University 15,053 5 Kaiser Permanente 13,500 6 Google Inc. 11,000 16,500 7 Stanford Healthcare 7,689 8 Lockheed Martin Space Systems Co. 7,000 9 Intel Corporation 6, City of San Jose 5,759 Source: County of Santa Clara Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, Owing to the presence of relatively high-wage skilled jobs and wealthy residents, Santa Clara County historically achieves high rankings relative to the rest of the State and the nation on a variety of income measurements. According to the U.S. Census Bureau, the median household income in Santa Clara County from was $93,854, compared to the State level of $61,489 and the national level of $53,482. Per capita income in the County from (measured by the U.S. Census Bureau in 2014 dollars) was $42,666, compared to the State level of $29,906 and the national level of $28,555. Commercial Activity Santa Clara County is an important center of commercial activity. Taxable sales activity at business and personal service outlets, as well as at other non-retail commercial establishments, are a significant component of Santa Clara County's commercial activity. The following table provides a summary of taxable transactions by sector for the calendar years 2010 through 2014 (the most recent annual data available). B-6

103 SANTA CLARA COUNTY TAXABLE TRANSACTIONS BY SECTOR CALENDAR YEAR 2010 THROUGH 2014 (In Thousands) Retail and Food Services Motor Vehicle and Parts Dealers $2,538,029 $2,894,898 $3,480,485 $4,039,030 $3,959,149 Furniture and Home Furnishings 474, , , , ,357 Electronics and Appliance Stores 1,355,839 1,459,039 1,487,911 1,362,785 1,411,732 Bldg. Matrl. and Garden Equip. and 1,245,941 1,316,953 1,406,177 1,574,275 1,757,717 Supplies Food and Beverage Stores 984,824 1,022,790 1,066,463 1,110,420 1,169,209 Health and Personal Care Stores 523, , , , ,241 Gasoline Stations 2,104,764 2,559,500 2,679,491 2,598,458 2,526,502 Clothing and Clothing Accessories 1,824,590 1,997,291 2,189,462 2,312,465 2,417,856 Stores Sporting Goods, Hobby, Book, 644, , , , ,433 Music Stores General Merchandise Stores 2,368,820 2,448,046 2,532,297 2,558,623 2,593,287 Miscellaneous Store Retailers 635, , , , ,622 Nonstore Retailers 147, , , , ,190 Food Services and Drinking Places 2,848,824 3,097,359 3,355,097 3,669,125 4,031,458 Total Retail and Food Services $17,695,858 $19,419,542 $21,116,708 $22,424,642 $23,271,753 All Other Outlets 12,827,464 14,011,675 15,103,737 15,196,964 16,356,902 Totals All Outlets (1) $30,523,322 $33,431,217 $36,220,445 $37,621,606 $39,628,655 (1) Totals may not add up due to independent rounding. Source: State Board of Equalization, Taxable Sales in California (Sales & Use Tax). Construction Activity The following tables provide a summary of residential building permit valuations and the number of new dwelling units authorized in Santa Clara County since Year Single Family Multiple Family SANTA CLARA COUNTY BUILDING PERMIT VALUATIONS 2011 TO 2015 Residential Alteration & Addition Total (1) 2011 $366,126,366 $315,852,996 $323,905,080 $1,005,884, ,168, ,544, ,105,125 1,524,818, ,884, ,420, ,739,588 2,060,044, ,472,707 1,196,127, ,747,109 2,230,347, ,331, ,321, ,069,779 1,854,723,338 (1) Totals may not add up due to independent rounding. Source: Construction Industry Research Board. B-7

104 Year SANTA CLARA COUNTY NUMBER OF NEW DWELLING UNITS 2011 TO 2015 Single Family Multiple Family Total ,234 3, ,432 4,245 5, ,859 6,009 7, ,602 8,310 9, ,675 3,477 5,152 Source: Construction Industry Research Board. B-8

105 APPENDIX C COUNTY OF SANTA CLARA AUDITED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 2015

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107 Certified Public Accountants Sacramento Walnut Creek San Francisco Oakland Los Angeles Independent Auditor s Report Century City Newport Beach The Board of Supervisors County of Santa Clara San José, California San Diego Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the County of Santa Clara, California (County), as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the County 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 opinions on these financial statements based on our audit. We did not audit the financial statements of the FIRST 5 Santa Clara County; the Santa Clara County Health Authority; the County Sanitation District 2 3 of Santa Clara County; the Santa Clara County Vector Control District; and the Santa Clara County Central Fire Protection District, the South Santa Clara County Fire District, and the Los Altos Hills County Fire District (collectively, Fire Districts ), which collectively represent the following percentages of the assets, net position/fund balances, and revenues/additions of the following opinion units. Macias Gini & O Connell LLP 2121 N. California Blvd., Suite 750 Walnut Creek, CA Net Position/ Fund Balances Revenues/ Additions Opinion Unit Assets Governmental activities 3.5% 6.2% 4.1% Business-type activities 0.4% 19.6% 0.2% Aggregate discretely presented component units 35.7% 32.8% 73.4% Aggregate remaining fund information 1.9% 2.1% 0.8% Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 entity s preparation and fair presentation of the financial statements in order to design

108 audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity 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 opinions. Opinions In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the County as of June 30, 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matters Change in Accounting Principles As described in Note 1(q) to the basic financial statements, effective July 1, 2014, the County adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27 and Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an amendment of GASB Statement No. 68. Deficit Net Positions As discussed in Note 2, several County internal service funds have deficit net positions at June 30, 2015, which include the Workers Compensation, Retiree Healthcare, and Pension Obligation internal service funds with deficit net positions of $34.5 million, $234.6 million, and $426.3 million, respectively. Our opinion is not modified with respect to these matters. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis; the schedule of changes in net pension liability and related ratios; the schedule of the cost sharing plans proportionate share of the net pension liability; the schedule of pension plans contributions; the schedule of funding progress other postemployment benefits; and the budgetary comparison schedule General Fund budgetary basis listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB, who 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 and other auditors 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. 2

109 Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the County s basic financial statements. The accompanying schedule of expenditures of federal awards, as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, is presented for purposes of additional analysis, and is not a required part of the basic financial statements. The schedule of expenditures of federal awards is the responsibility of management and was derived from and relates 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 schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 31, 2015 on our consideration of the County s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the County s internal control over financial reporting and compliance. Walnut Creek, California December 31, 2015, except for our report on the schedule of expenditures of federal awards, as to which the date is March 30,

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111 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited As management of the County of Santa Clara (the County), we offer readers of the County s financial statements this narrative overview and analysis of the financial activities of the County for the fiscal year which ended June 30, We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal, which can be found on pages i to v of this report. FINANCIAL HIGHLIGHTS The liabilities and deferred inflows of resources of the County exceeded its assets and deferred outflows of resources by $1.51 billion (net position) at June 30, Of this amount, a negative $3.02 billion (unrestricted net position) resulted from the implementation of Governmental Accounting Standards Board (GASB) Statement Nos. 68 and 71 and its requirement to record a net pension liability in the amount of $2.57 billion on the government-wide financial statements. The $469.0 million (restricted net position) may be used for the County s ongoing obligations related to programs with external restrictions. The County s net investment in capital assets was $1.01 billion. (See further detail in Table 1 on page 8). In FY2015, the County implemented GASB Statement Nos. 68 and 71 and restated the beginning net position on the government wide statements by $3.31 billion ($2.36 billion governmental activities and $952.6 million businesstype activities). The restatement resulted in establishing the deferred outflows of resources balance of $271.9 million related to the County s pension contributions made subsequent to the measurement date of June 30, 2014 and the net pension liability balance of $3.2 billion and the removal of the net pension asset of $377.5 million measured under the prior pension standards. GASB Statement No. 68 also changed the way the County measured pension costs under the accrual basis of accounting. Under GASB Statement No. 68, pension expense reflects the change in net pension liability and related pension deferred outflows and inflows of resources. This is different than the prior accounting requirement, where the expense is measured as the County s actuarially determined annual required contributions. The County s total net position decreased by $3.07 billion for the year due primarily to the implementation of GASB Statement Nos. 68 and 71 as explained above. The County did not restate the prior years balances because the information was not available. (See further detail in Table 2 on page 12). At June 30, 2015, the County governmental funds reported combined fund balances of $1.07 billion, an increase of $183.4 million from the prior year. Approximately 57.3 percent of the combined fund balances, $610.7 million, is available to meet the County s current and future needs. The County s investment in capital assets increased by $72.9 million or 3.2 percent. (See further detail in Table 5 on page 19). The County s total long-term debt decreased by $30.8 million or 1.4 percent during the current fiscal year mainly due to scheduled debt service payments. The County also issued 2015 Series P Lease Revenue Bonds to advance refund 2006 Series I Lease Revenue Bonds during the year (See further detail in Table 6 on page 20). At June 30, 2015, the County s unassigned fund balance for the General Fund was $364.9 million, 16.4 percent of total General Fund expenditures. OVERVIEW OF THE FINANCIAL STATEMENTS Management s discussion and analysis are intended to serve as an introduction to the County s basic financial statements. The County s basic financial statements comprise three components 1) government-wide financial statements, 2) fund financial statements, and 3) notes to the basic financial statements. Required supplementary information is included in addition to the basic financial statements. 5

112 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited Government-wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of County finances, in a manner similar to a private-sector business. The statement of net position presents information on all County assets, deferred outflows of resources, liabilities, and deferred inflows of resources with the difference reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the County is improving or deteriorating. The statement of activities presents information showing how net position changed during the most recent fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in the government-wide statements for some items that will result in cash flows in future fiscal periods (e.g., uncollected taxes and earned but unused vacation leave). The government-wide financial statements distinguish functions of the County that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or a significant portion of their costs through user fees and charges (business-type activities). The governmental activities of the County include general government, public protection, public ways and facilities, health and sanitation, public assistance, education and recreation and culture. The business-type activities of the County include healthcare operations [a hospital Santa Clara Valley Medical Center (SCVMC) and a health plan (Valley Health Plan)], airport operations (2 airports - Reid Hillview and South County), and a sanitation district (County Sanitation District No. 2-3 of Santa Clara County). Component units are included in the basic financial statements and consist of legally separate entities for which the County is financially accountable. Because of the governing board relationship and the exclusivity of County services, the financial operations of some component units are blended in the County s basic financial statements. These component units are the Santa Clara County Central Fire Protection District, South Santa Clara County Fire District, Los Altos Hills County Fire District, Santa Clara County Library, Santa Clara County Vector Control District, County Sanitation District No. 2-3 of Santa Clara County, Santa Clara County Financing Authority, Santa Clara County Tobacco Securitization Corporation and the Silicon Valley Tobacco Securitization Authority. The Housing Authority of Santa Clara County, Santa Clara County Health Authority, and the FIRST 5 Santa Clara County are reported separately as discrete component units of the County. The government-wide financial statements can be found on pages of this report. Fund Financial Statements A fund is a grouping of related accounts that are used to maintain control over resources that have been segregated for specific activities or objectives. The County, like other state and local governments, uses fund accounting to ensure and demonstrate finance-related legal compliance. All of the funds of the County can be divided into three categories: governmental funds, proprietary funds, and fiduciary funds. Governmental funds Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental funds financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the County s near-term financing requirements. 6

113 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, the reader may better understand the long-term impact of the government s near-term financing decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues, expenditures and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The County maintains 25 individual governmental funds. Information is presented separately in the governmental funds balance sheet and in the governmental funds statement of revenues, expenditures and changes in fund balances for the General Fund. Data from other governmental funds are combined into a single aggregated presentation. Individual fund data for each of these non-major governmental funds is provided in the form of combining statements and schedules elsewhere in this report. The governmental funds financial statements can be found on pages of this report. Proprietary funds The County maintains two kinds of proprietary funds. Enterprise funds are used to report the same functions presented as business-type activities in the government-wide financial statements. The County uses enterprise funds to account for one hospital - Santa Clara Valley Medical Center (SCVMC), one health plan (Valley Health Plan), two airports (Reid Hillview and South County), and one sanitation district (County Sanitation District No. 2-3 of Santa Clara County). Internal service funds are an accounting device used to accumulate and allocate costs internally among the County s various functions. The County uses internal service funds to account for its information services, fleet management, insurance, printing services, unemployment insurance, workers compensation, employee benefits, pension obligations, and retirees healthcare. The internal service funds have been allocated between the governmental activities and business-type activities based on the relative percentage of use of the internal service funds in these activities. Proprietary fund statements provide the same type of information as the business-type activities column in the government-wide financial statements, but with more detail. The proprietary fund financial statements provide separate information for the SCVMC and Valley Health Plan, which are considered major funds. The financial statements of the non-major enterprise funds (Airport and Sanitation District) are combined into a single aggregated presentation. Similarly, the County s nine internal service funds are combined into a single aggregated presentation in the proprietary funds financial statements. Individual fund data for the enterprise funds and the internal service funds is provided in the form of combining statements section of this report. The proprietary funds financial statements can be found on pages of this report. Fiduciary funds The Fiduciary Funds are used to account for resources held for the benefit of parties outside the County. Fiduciary funds are not reflected in the government-wide financial statements because the resources of those funds are not available to support the County s own programs. The accounting used for fiduciary funds is much like that used for proprietary funds except for agency funds. The fiduciary funds financial statements can be found on pages of this report. Notes to the Basic Financial Statements The notes to the basic financial statements provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes can be found on pages of this report. 7

114 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited Required Supplementary Information The required supplementary information (RSI) is presented with additional information related to County s defined benefit pension plans and other postemployment benefits (OPEB) to its employees, and the County General Fund budgetary comparison schedule. The County adopts an annual appropriated budget for its General Fund. A budgetary comparison schedule has been provided for the General Fund to demonstrate compliance with this budget. Required supplementary information can be found on pages of this report. Combining Statements and Schedules The combining and individual fund statements and schedules referred to earlier provide information for discrete component units, non-major governmental funds, non-major enterprise funds, internal service funds, and certain fiduciary funds and are presented immediately following the required supplementary information. Combining and individual fund statements and schedules can be found on pages of this report. GOVERNMENT-WIDE FINANCIAL ANALYSIS The County s liabilities and deferred inflows of resources exceeded its assets and deferred outflows of resources by $1.54 billion (net position) at June 30, As stated earlier, the County s negative change in net position was due to the implementation of GASB Statement Nos. 68 and 71, which required governments to record a net pension liability on their accrual basis financial statements including the government-wide financial statements. When applicable, prior year numbers have been reclassified to make them comparable to the current year. However, the County did not reclassify nor restate the prior years amounts related to the implementation of these statements because the information was not available Table 1 Net Position (in thousands) Governmental Business-type Total Activities Activities Total Dollar Percent Change Change Assets Current and other assets $ 2,057,137 $ 2,037,367 $ 696,259 $ 723,698 $ 2,753,396 $ 2,761,065 $ 7, % Capital assets 1,157,137 1,215,325 1,113,980 1,128,705 2,271,117 2,344,030 72, % Total assets 3,214,274 3,252,692 1,810,239 1,852,403 5,024,513 5,105,095 80, % Deferred outflows of resources ,401 26, ,355 27, , , % Liabilities Current and other liabilities 295, , , , , , , % Long-term liabilities 2,242,289 2,291, , ,046 2,864,950 2,894,734 29, % Net pension liability - 1,741, ,128-2,573,277 2,573,277 n/a Noncurrent derivative instrument liabilities ,976 18,206 16,976 18,206 1, % Total liabilities 2,537,602 4,527, ,266 1,818,488 3,503,868 6,346,129 2,842, % Deferred inflows of resources 13, , ,556 13, , , % Net position: Net investment in capital assets 959,157 1,022, , , ,361 1,014,864 32, % Restricted 456, , , , , ,998 11, % Unrestricted (751,862) (2,985,047) (110,596) (983,562) 94,398 (3,019,052) (3,113,450) % Total net position $ 663,688 $ (1,493,904) $ 870,502 $ (41,286) $ 1,534,210 $ (1,535,190) $ (3,069,400) % In accordance with GASB guidance, the County reclassified $289.6 million of the primary government s total net position amounts from restricted to unrestricted and $660.0 million from net investment in capital assets to unrestricted. Additional information on the presentation can be found in Note 11 on page 83 of this report. 8

115 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited Assets and Deferred Outflows of Resources The County s total assets and deferred outflows of resources increased $356.9 million or 7.1 percent primarily due to the following: Governmental activities. Total assets and deferred outflows of resources for the governmental activities increased by $223.9 million or 7.0 percent. Current and other assets decreased by $19.8 million. The primary reason was an increase of $363.6 million in unrestricted cash and investments, which was offset by a removal of $377.5 million in net pension assets. The removal in net pension assets was due to change in new pension reporting requirements under GASB Statement No. 68. The increase in unrestricted cash was due to increases of $246.3 million in State funding for various County programs related to public assistance and public health, $76.8 million from Proposition 63 funding for mental health programs, and $9.0 million from Senate Bill (SB) 90 State Mandated Programs. Additionally, there was an excess in the Educational Revenue Augmentation Funds (ERAF) apportionment which resulted in an increase of $34.7 million for the County at the end of the current fiscal year. Capital assets increased $58.2 million or 5.0 percent. Non-depreciable capital assets increased by $53.7 million and depreciable capital assets increased by $4.5 million. Changes in capital assets will be discussed in the Capital Assets section on page 19 and Note 6 on page 60. Deferred outflow of resources increased by $185.5 million mainly due to the implementation of GASB Statement No. 71 which changed the reporting of pension contributions made subsequent to the measurement date in FY2014. Business-type activities. Total assets and deferred outflows of resources for the business-type activities increased by $133.0 million or 2.6 percent. Current and other assets increased $27.4 million and capital assets increased $14.7 million. The increase in current and other assets of $27.4 million was primarily a result of higher cash receipts from patients, governmental agencies, insurers and others. In addition, deferred outflows of resources increased $90.8 million due primarily to the implementation of GASB Statement No. 71 which changed the reporting of pension contributions made subsequent to the measurement date in FY2014. Changes in capital assets will be discussed in the Capital Assets section on page 19 and Note 6 on page 60. Liabilities and Deferred Inflows of Resources The County s total liabilities and deferred inflows of resources increased by $3.42 billion or 97.4 percent mainly due to the following: Governmental activities. Total liabilities and deferred inflows of resources for the governmental activities increased by $2.38 billion or 93.3 percent due to increases of current and other liabilities of $193.5 million, noncurrent liabilities of $55.4 million, and deferred inflows of resources of $391.6 million. In addition, the County recorded a net pension liability of $1.74 billion in accordance with GASB Statement No. 68 as previously discussed. The increases in current and other liabilities of $193.5 million was due primarily to the following: Increase of $135.2 million in unearned revenues primarily due to $89.3 million in property tax and $30.0 million in vehicle license fee receipts that were set aside for uncertainties. Furthermore, the County recorded $15.3 million related to advances received from the State for Title IV-E Waiver and Wrap-around services contracts. Increase of $76.9 million in due to other government agencies due to increases in the Short Doyle Medi-Cal program as a result of additional audit reserves for this uncertainty. The increases in other long term liabilities will be discussed further in the Long-term Debt section on page 20. Business-type activities. Total liabilities and deferred inflows of resources for the business-type activities increased by $1.04 billion or percent from increases of $38.5 million in current and other liabilities and a decrease of 9

116 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited $19.6 million in long-term liabilities. In addition, the County recorded a net pension liability of $832.1 million in accordance with GASB Statement No. 68 as previously discussed. Net Position The County s unrestricted net position of negative $3.0 billion as noted earlier was due to the implementation of GASB Statement No. 68, which required local governments to record a net pension liability on their governmentwide financial statements. A large portion of the County s net position of $1.0 billion reflects its investment in capital assets (e.g., land, buildings and improvements, infrastructure, and equipment and vehicles) net of accumulated depreciation, less any related outstanding debt used to acquire those assets. The County uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the County s investment in its capital assets is reported net of related debt, the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. The remaining $469.0 million of the County s net position represents resources that are subject to external restrictions on how they may be used. At the end of the current fiscal year, the County reported positive balances in both net investment in capital assets and restricted categories of net position for its governmental activities and for its business-type activities. The unrestricted net position resulted in a negative balances of $2.98 billion and $983.6 million of its governmental activities and business-type activities, respectively. The negative unrestricted net position balances were partially offset on the County-wide level through reclassifications of $289.6 million from restricted and $660.0 million from net investment in capital assets. Governmental activities The governmental activities without the impact of the restatement related to GASB Statement No. 68 increased the County s net position by $202.0 million. Revenues exceeded expenses by $253.3 million. Furthermore, net transfers of $51.3 million were made to the business-type activities primarily for providing operational support to SCVMC. As an arm of the state government, the County provides various mandated services, such as public assistance, public health, and mental health. Revenues directly generated by or attributable to a specific governmental function are called program revenues. These include charges for services and restrictive (program specific) grants and contributions, both operating and capital. The following chart shows the County s program revenues and expenses for the year. Not included in this chart are the general revenues: taxes (property, business, and sales), unrestricted grants, investment income, gain on sale of capital assets, and other revenue. These general revenues are not shown by program, but are available to support the program activities countywide. 10

117 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited Expenses and Revenues - Governmental Activities $900 $848 $800 $738 $ $700 $638 i n M i l l i o n s $600 $500 $400 $300 $364 $347 $353 $519 $279 Expenses Program Revenues $200 $100 $38 $50 $35 $41 $55 $3 $7 $0 $- General government Public protection Public ways & facilities Health & sanitation Public assistance Education Recreation & Culture Interest on long-term debt 11

118 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited Changes in the County s net position from its governmental activities are explained in the context of changes in revenues and expenses: Table 2 The Change in Net Position (in thousands) Governmental Business-type Total Activities Activities Total Dollar Percent Change Change Revenues: Program revenues: Charges for services $ 264,674 $ 273,683 $ 1,015,340 $ 1,593,733 $ 1,280,014 $ 1,867,416 $ 587, % Operating grants and contributions 1,300,352 1,394, , ,566 1,409,161 1,514, , % Capital grants and contributions 6,799 8,254 7,234 7,930 14,033 16,184 2, % General revenues: Property taxes 919,612 1,050, ,612 1,050, , % Sales and use taxes 49,537 52,254 5,553-55,090 52,254 (2,836) (5.1%) Other taxes 35,597 9, ,597 9,188 (26,409) (74.2%) Unrestricted grants & contributions 15,765 20, ,765 20,149 4, % Unrestricted investment income 8,391 9,185 3,680 2,617 12,071 11,802 (269) (2.2%) Other revenue 79,837 74, ,837 74,167 (5,670) (7.1%) Total revenues 2,680,564 2,892,213 1,140,616 1,723,846 3,821,180 4,616, , % Program expenses: General government 336, , , ,847 27, % Public protection 832, , , ,280 16, % Public ways and facilities 60,332 38, ,332 38,266 (22,066) (36.6%) Health and sanitation 487, , , ,489 32, % Public assistance 687, , , ,319 50, % Education 36,294 35, ,294 35,352 (942) (2.6%) Recreation and culture 40,270 40, ,270 40, % Interest on long-term liabilities 56,922 54, ,922 54,596 (2,326) (4.1%) Healthcare - - 1,332,671 1,728,849 1,332,671 1,728, , % Airport - - 3,810 3,238 3,810 3,238 (572) (15.0%) Sanitation - - 1,818 2,205 1,818 2, % Total expenses 2,536,566 2,638,939 1,338,299 1,734,292 3,874,865 4,373, , % Excess (deficiency) before transfers 143, ,274 (197,683) (10,446) (53,685) 242, ,513 (552.3%) Transfers (159,557) (51,255) 159,557 51, Change in net position (15,559) 202,019 (38,126) 40,809 (53,685) 242, ,513 (552.3%) Net position, beginning of year, as restated 679,247 (1,695,923) 908,628 (82,095) 1,587,875 (1,778,018) (3,365,893) (212.0%) Net position, end of year $ 663,688 $ (1,493,904) $ 870,502 $ (41,286) $ 1,534,190 $ (1,535,190) $ (3,069,380) % Revenues The County s governmental activities revenues increased $211.6 million or 7.9 percent to $2.89 billion. Program revenues increased by $105.0 million or 6.7 percent, while general revenues increased by $106.7 million or 9.6 percent. Over the past three years, the County s program revenues from its governmental activities have contributed about 64.0 percent of the cost of running those governmental programs. The general revenues support the programs by covering the remaining 36.0 percent of costs. The largest source of program revenues for the County s governmental activities is federal and state grants and contributions, both operating and capital. These revenues amount to 83.7 percent of the County s program revenues and 48.5 percent of its total revenues. For the year, operating grants increased by $94.5 million and capital grants increased by $1.5 million. The reasons for these changes will be discussed in the governmental funds area. The County s governmental activities general revenues increased by $106.7 million or 9.6 percent. General revenues are not directly related to governmental programs and include: taxes (property, business, and sales), unrestricted grants, investment income, and other revenues. General revenues support government programs by 12

119 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited defraying costs, which those programs cannot cover from their own revenues. Tax revenues are the County s second largest revenue source - grants and contributions being the largest. The County earned $1.11 billion in tax revenues (property tax, sales and use tax, and other taxes) for the current year. This is approximately 91.5 percent of the general revenues and 36.3 percent of the total revenues. These general revenues provide the Board of Supervisors (the Board) with most of its discretionary spending ability. The reasons for these changes will be discussed in the governmental funds area. The County s general revenues increase of $106.7 million was mainly due to an increase of $130.8 million in property taxes primarily due to a 6.8 percent increase in total property assessed values. This resulted in an increase in secured property tax collection of $45.0 million, $7.4 million in unsecured property taxes, $23.3 million in property tax collection to pay for General Obligation Bonds Series A and B, and $13.5 million in property tax in lieu of vehicle license fee. Offsetting this increase was a decrease of $26.4 million in other taxes mainly due to the reduction in 1991 State health realignment from motor vehicle license fee. These topics will be discussed in Financial Analysis of the County s Funds section on page 15. General Revenues By Source - Governmental Activities Property tax 86.4% Sales tax 4.3% Other taxes 0.8% Unrestricted grants & contributions 1.7% Investment earnings and securities lending activities 0.8% Other revenue 6.1% Program Revenues By Source - Governmental Activities Charges for services 16.3% Operating grants & contributions 83.2% Capital grants & contributions 0.5% Expenses and Transfers Expenses for governmental activities increased by $102.4 million or 4.0 percent. All categories experienced higher costs than in the prior year except public ways and facilities, education, and interest on long-term liabilities. The primary reasons for the changes are explained below: 13

120 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited General Government expenses increased by $27.6 million or 8.2 percent mainly due to increase in payroll and benefit costs. Public Protection expenses increased by $16.3 million or 2.0 percent mainly due to a 2.0 percent increase in staffing, 2.0 to 3.0 percent countywide salary increase and health insurance rate increase. This increase was offset by a decrease of $16.8 million in pension expense due to the change in measuring pension costs as previously discussed. Public Ways and Facilities expenses decreased by $22.1 million or 36.6 percent mainly due to decrease in bridge and road repairs and maintenance cost. Health and sanitation increased by $32.5 million or 6.7 percent due to the following: Increase of $15.2 million in salaries and benefits resulting from a 3.8 percent increase in staffing, 2.0 to 3.0 percent countywide salary increase, and health insurance rate and employee retirement plan rate increases. Increase of $17.5 million in contracts and professional services to assist children and youth with complex behavioral health challenges. These increases was offset by a decrease of $3.8 million in pension expense due to the change in measuring pension costs. Public Assistance increased by $50.8 million or 7.4 percent primarily due to the following: Increase of $24.8 million in salaries and benefits resulting from a 4.8 percent increase in staffing, 2.0 to 3.0 percent countywide salary increase, and health insurance rate and employee retirement plan rate increases. Increase of $12.0 million in health benefit cost due to the increased number of In Home Support Services (IHSS) providers enrolled in health benefits. Increase of $5.8 million mainly due to an adjustments to the County s IHSS MOE calculation which increased the County s share of the costs Increase of $5.3 million primarily due to larger contributions to provide housing units for the homeless. These increases was offset by a decrease of $5.8 million in pension expense due to the change in measuring pension costs. Transfers decreased by $108.3 million primarily due to a reduction in operating subsidy made by the General Fund to SCVMC this fiscal year. The following chart shows the County s expenses by functional category for the governmental activities. Expenses By Function/Program - Governmental Activities Education 1.4% Health and Sanitation 19.9% Public ways and facilities 1.8% Interest on long-term debt 2.0% Public Assistance 28.2% General Government 12.6% Recreation & Culture 1.6% Public Protection 32.5% 14

121 COUNTY OF SANTA CLARA Management s Discussion and Analysis Required Supplementary Information Unaudited Business-type activities The business-type activities without the impact of the restatement related to GASB Statement No. 68 increased the County s net position by $40.8 million. The business-type activities had a net loss before transfers of $10.4 million, which was partially offset by net transfers of $51.3 million. The largest of the County s business-type activities, healthcare operations, had $1.7 billion in expenses and $1.7 billion in program revenues for the year. This is about 99.7 percent of the program revenues of all business-type activities. The reasons for these revenues and expenses changes will be discussed in the enterprise funds area. In addition, transfers decreased by $108.3 million primarily due to a reduction in operating subsidy received from the General Fund. The other enterprise operations airport and sanitation district are very small in size and did not change appreciably in the year. The first chart below shows expenses and revenues by each business activity, while the second chart shows revenues by source for the business activities. Expenses and Program Revenues - Business-type Activities (Dollars in millions) Revenues By Source - Business-type Activities $1,729 $1,716 Expenses $2,000 Program Revenue $1,500 $1,000 $500 $3 $2 $2 $3 Charges for services 92.4% Investment earnings 0.2% $- Health Care Airport Sanitation District Operating grants & contributions 7.0% Capital grants & contributions 0.5% FINANCIAL ANALYSIS OF THE COUNTY S FUNDS The County uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. When applicable, prior year numbers have been reclassified to make them comparable to the current year. Governmental funds The general government s functions are reported in the general, special revenue, debt service, and capital project funds. The focus of these governmental funds is to provide information on near-term inflows, outflows, and balances of unrestricted resources. Such information is useful in assessing the County s financing resources. In particular, unassigned fund balance at the end of the fiscal year can serve as a useful measure of the County s net resources available for spending. At June 30, 2015, the County s governmental funds reported total fund balances of $1.1 billion, an increase of $183.4 million or 20.8 percent from the prior year. Approximately 57.0 percent of the combined fund balance, $610.7 million, constitutes fund balance that is available to meet the County s current and future needs (committed, assigned and unassigned). The remainder of the fund balance totaling $455.9 million is either in non-spendable form or restricted for specific spending. This includes $10.9 million in items that are not expected to be converted 15