$496,195,000 COUNTY OF SACRAMENTO Airport System Senior Revenue Bonds Series 2008 $169,575,000 Series 2008A (Non-AMT)

Transcription

1 NEW ISSUE; BOOK-ENTRY ONLY Ratings: See Ratings herein. In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the County, 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 Series 2008A Bonds, Series 2008B Bonds, Series 2008D Bonds and Series 2008E Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the Code ), except that no opinion is expressed as to the status of interest on any Series 2008B Bonds or Series 2008E Bonds for any period that such Series 2008B Bond or Series 2008E Bond is held by a substantial user of the facilities financed or refinanced by the Series 2008B Bonds or Series 2008E Bonds or by a related person within the meaning of Section 147(a) of the Code. In the further opinion of Bond Counsel, interest on the Series 2008A Bonds and Series 2008D 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 observes, however, that interest on the Series 2008B Bonds and Series 2008E Bonds is a specific preference item for purposes of the federal individual and corporate alternative minimum taxes. Bond Counsel also observes that interest on the Series 2008C Bonds is not excluded from gross income for federal income tax purposes under Section 103 of the Code. Bond Counsel is also of the opinion that interest on the Series 2008 Bonds is exempt from present State of California personal income taxes. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See TAX MATTERS. $496,195,000 COUNTY OF SACRAMENTO Airport System Senior Revenue Bonds Series 2008 $169,575,000 Series 2008A (Non-AMT) $314,340,000 Series 2008B (AMT) $12,280,000 Taxable Series 2008C $89,430,000 COUNTY OF SACRAMENTO Airport System Subordinate and PFC Revenue Refunding Bonds Series 2008 $46,390,000 Series 2008D (Non-AMT) $43,040,000 Series 2008E (AMT) Dated: Date of Delivery Due: July 1, as shown on the inside cover pages The County of Sacramento (the County ) is issuing its $169,575,000 Airport System Senior Revenue Bonds, Series 2008A (Non-AMT) (the Series 2008A Bonds ), $314,340,000 Airport System Senior Revenue Bonds, Series 2008B (AMT) (the Series 2008B Bonds ), $12,280,000 Airport System Senior Revenue Bonds, Taxable Series 2008C (the Series 2008C Bonds ), $46,390,000 Airport System Subordinate and PFC Revenue Refunding Bonds, Series 2008D (Non-AMT) (the Series 2008D Bonds ), and $43,040,000 Airport System Subordinate and PFC Revenue Refunding Bonds, Series 2008E (AMT) (the Series 2008E Bonds and, collectively with the Series 2008A Bonds, the Series 2008B Bonds, the Series 2008C Bonds and the Series 2008D Bonds, the Series 2008 Bonds ) to: (i) finance a portion of the cost of certain capital improvements for the County s Airport System (as defined herein); (ii) establish irrevocable escrow funds to refund and defease certain currently outstanding County of Sacramento Airport System Revenue Bonds as more particularly described herein (the Prior Bonds ); (iii) pay the cost of separate Municipal Bond Debt Service Reserve Insurance Policies to satisfy the Senior Debt Service Reserve Requirement and the Subordinate Debt Service Reserve Requirement (each as defined herein); (iv) fund certain payments in connection with the termination of a swap agreement relating to certain of the Prior Bonds; (v) fund capitalized interest in an amount equal to a portion of the debt service on the Series 2008 Bonds; and (vi) pay certain costs of issuance of the Series 2008 Bonds, all as more fully described herein. The Prior Bonds were originally issued to finance or refinance a portion of the costs of various capital improvements at the County s Airport System. See PLAN OF FINANCE. The Series 2008A Bonds, Series 2008B Bonds and Series 2008C Bonds are being issued pursuant to a Master Indenture of Trust, dated as of May 1, 2008, between the County and The Bank of New York Trust Company, N.A., as trustee (the Trustee ) (the Master Indenture ), as supplemented by a First Supplemental Indenture of Trust, dated as of May 1, 2008, between the County and the Trustee (the First Supplemental Indenture ). The Series 2008D Bonds and Series 2008E Bonds are being issued pursuant to the Master Indenture, as supplemented by a Second Supplemental Indenture of Trust, dated as of May 1, 2008, between the County and the Trustee (the Second Supplemental Indenture and, together with the Master Indenture, as supplemented and amended from time to time, and the First Supplemental Indenture, the Indenture ). The Series 2008 Bonds are secured by the Trust Estate (as defined herein), subject to the application of the moneys included in the Trust Estate on the terms and conditions and for the purposes set forth in the Indenture. The primary component of the Trust Estate is the Net Revenues (as defined herein) derived by the County from the operation of the Airport System. The Series 2008A Bonds, Series 2008B Bonds and Series 2008C Bonds constitute Senior Obligations (as defined herein) pursuant to the Indenture. The Indenture provides that the County may issue additional Senior Obligations secured by the Trust Estate and payable from the Net Revenues on a parity with the Series 2008A Bonds, Series 2008B Bonds and Series 2008C Bonds, subject to the terms and conditions of the Indenture, as more fully described herein. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Additional Senior Obligations. The Series 2008D Bonds and Series 2008E Bonds constitute Subordinate Obligations (as defined herein) pursuant to the Indenture, secured by the Trust Estate and payable from the Net Revenues on a priority subordinate to the Senior Obligations. The Indenture provides that the County may incur additional Obligations (as defined herein) secured by the Trust Estate and payable from the Net Revenues on a priority subordinate to the Senior Obligations ( Subordinate Obligations and Junior Subordinate Obligations ), subject to the terms and conditions of the Indenture. Any additional Subordinate Obligations would be secured by the Trust Estate and payable from the Net Revenues on a parity with the Series 2008D Bonds and the Series 2008E Bonds. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Additional Subordinate Obligations and -Junior Subordinate Obligations, Junior Obligations and Special Facility Obligations. Principal of and interest on the Series 2008D Bonds and Series 2008E Bonds is additionally payable from and secured by Available PFC Revenues, which consist of a portion of the Passenger Facility Charges approved by the Federal Aviation Administration and imposed and collected with respect to the International Airport (as defined herein) in an amount described herein under the caption SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS - Availability of Available PFC Revenues to Pay Series 2008 Subordinate Bonds Debt Service. Pursuant to the Indenture, after June 30, 2016, the County may reduce or eliminate the amount of Available PFC Revenues that secure the Series 2008D Bonds and Series 2008E Bonds. In addition, at any time and from time to time, the County may elect to use Available PFC Revenues securing the Series 2008D Bonds and Series 2008E Bonds to secure any additional future Obligations to the extent designated by the County consistent with the covenants set forth in the Indenture. The County is not required to increase the amount of Available PFC Revenues upon the issuance or incurrence of any additional Obligations secured by Available PFC Revenues. Interest on the Series 2008 Bonds is payable semiannually on January 1 and July 1 of each year, commencing July 1, 2008, at the fixed rates set forth on the inside cover pages. THE PRINCIPAL, OR REDEMPTION PRICE, OF AND INTEREST ON THE SERIES 2008 BONDS ARE PAYABLE SOLELY FROM THE TRUST ESTATE PLEDGED FOR THE PAYMENT THEREOF, AND THE COUNTY IS NOT OBLIGATED TO PAY THE SERIES 2008 BONDS EXCEPT FROM THE TRUST ESTATE. THE GENERAL FUND OF THE COUNTY IS NOT LIABLE AND THE FULL FAITH AND CREDIT OR TAXING POWER OF THE COUNTY IS NOT PLEDGED FOR THE PAYMENT OF THE PRINCIPAL, OR REDEMPTION PRICE, OF OR INTEREST ON THE SERIES 2008 BONDS. NO TAX OR ASSESSMENT SHALL EVER BE LEVIED OR COLLECTED TO PAY THE PRINCIPAL, OR REDEMPTION PRICE, OF OR INTEREST ON THE SERIES 2008 BONDS AND THE SERIES 2008 BONDS ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF OR CHARGE, LIEN OR ENCUMBRANCE UPON ANY OF THE PROPERTY OF THE COUNTY OR ANY OF ITS INCOME OR RECEIPTS EXCEPT THE TRUST ESTATE AS PROVIDED IN THE INDENTURE. NEITHER THE PAYMENT OF THE PRINCIPAL, OR REDEMPTION PRICE, OF OR INTEREST ON THE SERIES 2008 BONDS IS A GENERAL DEBT, LIABILITY OR OBLIGATION OF THE COUNTY OR THE STATE OF CALIFORNIA. The Series 2008 Bonds will be issued in fully registered form in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), and will be available to beneficial owners in denominations of $5,000 or any integral multiple thereof, through the book-entry system maintained by DTC. The principal of, premium, if any, and interest on the Series 2008 Bonds is payable by the Trustee, to DTC, which is obligated in turn to remit such payments to its participants for subsequent disbursement to beneficial owners as described herein. See APPENDIX E BOOK-ENTRY ONLY SYSTEM. The scheduled payment of principal of and interest on the Series 2008A Bonds maturing on July 1 of the years 2010 through 2041, inclusive, the Series 2008B Bonds maturing on July 1 of the years 2010 through 2039, inclusive, the Series 2008C Bonds maturing on July 1, 2012, the Series 2008D Bonds maturing on July 1 of the years 2011 through 2026, inclusive, and the Series 2008E Bonds maturing on July 1 of the years 2011 through 2024, inclusive, (collectively, the Insured Bonds ) when due will be guaranteed under an insurance policy (the Policy ) to be issued concurrently with the delivery of the Insured Bonds by Financial Security Assurance Inc. ( Financial Security or the Insurer ). See BOND INSURANCE and APPENDIX H FORM OF MUNICIPAL BOND INSURANCE POLICY. The Series 2008A Bonds and Series 2008B Bonds are subject to optional redemption and mandatory redemption prior to their respective stated maturities as described herein. The Series 2008C Bonds are not subject to optional redemption but are subject to mandatory redemption prior to their stated maturity as described herein. The Series 2008D Bonds and Series 2008E Bonds are subject to optional redemption and mandatory redemption prior to their respective maturities as described herein. See THE SERIES 2008 BONDS Redemption Provisions. This cover page, including the inside cover pages hereto, contains certain information for general reference only. It is not intended to be a summary of this issue. Potential purchasers must read the entire Official Statement, including but not limited to INVESTMENT CONSIDERATIONS, to obtain information essential to making an informed investment decision. The Series 2008 Bonds are offered when, as and if issued and received by the Underwriters, and subject to the approval of legality by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the County. Certain matters will be passed upon on behalf of the County by the Sacramento County Counsel, and by Stradling Yocca Carlson & Rauth, a Professional Corporation, Sacramento, California, its Disclosure Counsel, and on behalf of the Underwriters by its counsel, Lofton & Jennings, San Francisco, California. It is expected that the Series 2008 Bonds in book-entry form will be available for delivery through the DTC book-entry system in New York, New York, on or about May 1, Morgan Stanley Bear, Stearns & Co. Inc. Goldman, Sachs & Co. Citi De La Rosa & Co. UBS Securities LLC Dated: April 18, 2008

2 MATURITY SCHEDULE $169,575,000 Series 2008A Bonds (Non-AMT) $88,885,000 Series 2008A Serial Bonds Maturity (July1) Principal Amount Interest Rate Price or Yield CUSIP No. 2008** $ 2,900, % 1.850% HF2 2009** 2,980, HG ,095, HH ,170, HJ ,245, HK ,345, HL ,465, HM ,575, HN ,125, HQ ,580, HP ,865, HR ,135, HT ,870, HS ,360, HU ,525, * HV ,465, * HW ,685, * HX ,925, * HY ,215, * HZ ,490, * JA ,020, * JB , JC ,150, JD5 $5,495, % Series 2008A Bonds Due July 1, Price %* - CUSIP JE3 $6,305, % Series 2008A Bonds Due July 1, Price % - CUSIP JF0 $10,675, % Series 2008A Bonds Due July 1, Price %* - CUSIP JG8 $58,215, % Series 2008A Bonds Due July 1, Price %* - CUSIP JH6 $314,340,000 Series 2008B Bonds (AMT) $2,610,000 Series 2008B Serial Bonds Maturity (July1) Principal Amount Interest Rate Yield CUSIP No. 2008** $ 580, % 2.500% JJ2 2009** 2,030, JK9 $8,355, % Series 2008B Bonds Due July 1, Price % - CUSIP JL7 $10,895, % Series 2008B Bonds Due July 1, Price % - CUSIP JM5 $13,940, % Series 2008B Bonds Due July 1, Price %* - CUSIP JN3 $27,780, % Series 2008B Bonds Due July 1, Price %* - CUSIP JP8 $86,355, % Series 2008B Bonds Due July 1, Price % - CUSIP JQ6 $164,405, % Series 2008B Bonds Due July 1, Price % - CUSIP JR4 Copyright 2008, American Bankers Association. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by the CUSIP Service Bureau, operated by Standard & Poor s, a division of The McGraw- Hill Companies, Inc. This data is not intended to create a database and does not serve in anyway as a substitute for the CUSIP Services Bureau. CUSIP numbers have assigned by an independent company not affiliated with the County and the Underwriters and are included solely for the convenience of the registered owners of the Series 2008 Bonds. Neither the County or the Underwriters take any responsibility for the accuracy of such numbers. * Priced to July 1, 2018 call date at par. ** Uninsured Bonds.

3 $12,280,000 Series 2008C Bonds (Taxable) $12,280, % Series 2008C Bonds Due July 1, Price % - CUSIP JS2 $46,390,000 Series 2008D Bonds (Non-AMT) $39,925,000 Series 2008D Serial Bonds Maturity (July1) Principal Amount Interest Rate Price or Yield CUSIP No. 2008** $ 795, % 2.250% JT0 2009** 440, JU7 2010** 1,415, JV ,075, JW ,130, JX ,195, JY ,265, JZ ,340, KA ,425, KB ,510, KC ,605, KD ,705, KE ,815, KF ,930, KG ,055, KH ,335, KJ ,855, * KK ,550, KL ,785, * KM , KN , KP6 $6,465, % Series 2008D Bonds Due July 1, Price %* - CUSIP KQ4 $43,040,000 Series 2008E Bonds (AMT) $5,580,000 Series 2008E Serial Bonds Maturity (July1) Principal Amount Interest Rate Yield CUSIP No. 2008** $ 695, % 2.500% KR2 2009** 2,420, KS0 2010** 2,465, KT8 $7,545, % Series 2008E Bonds Due July 1, Price % - CUSIP KU5 $13,090, % Series 2008E Bonds Due July 1, Price % - CUSIP KV3 $16,825, % Series 2008E Bonds Due July 1, Price %* - CUSIP KW1 Copyright 2008, American Bankers Association. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by the CUSIP Service Bureau, operated by Standard & Poor s, a division of The McGraw- Hill Companies, Inc. This data is not intended to create a database and does not serve in anyway as a substitute for the CUSIP Services Bureau. CUSIP numbers have assigned by an independent company not affiliated with the County and the Underwriters and are included solely for the convenience of the registered owners of the Series 2008 Bonds. Neither the County or the Underwriters take any responsibility for the accuracy of such numbers. * Priced to July 1, 2018 call date at par. ** Uninsured Bonds.

4 No dealer, broker, salesperson or other person has been authorized by the County or the Underwriters to give any information or to make any representations other than those contained herein and, if given or made, such other information or representation must not be relied upon. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Series 2008 Bonds in any jurisdiction in which it is unlawful to make such offer, solicitation or sale. This Official Statement is not to be construed as a contract with the purchasers of the Series 2008 Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact. The information set forth herein has been furnished by the County and other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation, by the Underwriter. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in affairs of the County since the date hereof. This Official Statement, including any supplement or amendment hereto, is intended to be deposited with one or more repositories. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with and as part of their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2008 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Other than with respect to information concerning Financial Security Assurance Inc. ("Financial Security" or the Insurer ) contained under the caption "BOND INSURANCE" and APPENDIX H - "FORM OF MUNICIPAL BOND INSURANCE POLICY" herein, none of the information in this Official Statement has been supplied or verified by Financial Security and Financial Security makes no representation or warranty, express or implied, as to (i) the accuracy or completeness of such information; (ii) the validity of the Series 2008 Bonds; or (iii) the tax exempt status of the interest on the Series 2008 Bonds. Certain statements included or incorporated by reference in the following information constitute forward-looking statements. Such statements are generally identifiable by the terminology used such as plan, expect, estimate, budget or other similar words. The achievement of certain results or other expectations contained in such forward-looking statements 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. No assurance is given that actual results will meet the County s forecasts in any way. Except as set forth in the Continuing Disclosure Certificate, a form of which is attached as Appendix F, the County does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations, or events, conditions or circumstances on which such statements are based occur. The Series 2008 Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon an exemption from the registration requirements contained in such Act. The Series 2008 Bonds have not been registered or qualified under the securities laws of any state.

5 County of Sacramento BOARD OF SUPERVISORS Jimmie R. Yee Chair, District 2 Susan Peters Vice Chair, District 3 Roger Dickinson Supervisor, District 1 Roberta MacGlashan Supervisor, District 4 Don Nottoli Supervisor, District 5 Terry Schutten Robert A. Ryan, Jr. Navdeep S. Gill Dave P. Irish County Officials County Executive County Counsel Chief Operations Officer Director of Finance Sacramento County Airport System Staff G. Hardy Acree Director of Airports Lisa J. Stanton Chief Administrative Officer Special Services BOND COUNSEL ORRICK, HERRINGTON & SUTCLIFFE LLP SACRAMENTO, CALIFORNIA TRUSTEE THE BANK OF NEW YORK TRUST COMPANY, N.A. LOS ANGELES, CALIFORNIA VERIFICATION AGENT CAUSEY, DEMGEN & MOORE INC. DENVER, COLORADO DISCLOSURE COUNSEL STRADLING YOCCA CARLSON & RAUTH, A PROFESSIONAL CORPORATION SACRAMENTO, CALIFORNIA FINANCIAL ADVISOR FIRST SOUTHWEST COMPANY SANTA MONICA, CALIFORNIA AIRPORT CONSULTANT JACOBS CONSULTANCY BURLINGAME, CALIFORNIA

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7 TABLE OF CONTENTS Page INTRODUCTION... 1 PURPOSE... 1 THE AIRPORT SYSTEM... 2 THE SERIES 2008 BONDS... 2 SECURITY FOR THE SERIES 2008 BONDS... 3 BOND INSURANCE... 4 CAPITAL IMPROVEMENT PROGRAM... 4 RATE COVENANT... 4 SENIOR DEBT SERVICE RESERVE FUND... 4 SUBORDINATE DEBT SERVICE RESERVE FUND... 5 INVESTMENT CONSIDERATIONS... 5 CONTINUING DISCLOSURE... 5 REPORT OF THE AIRPORT CONSULTANT... 6 SUMMARIES AND ADDITIONAL INFORMATION... 6 PLAN OF FINANCE... 6 PLAN OF REFUNDING PROJECT... 7 ESTIMATED SOURCES AND USES OF FUNDS... 7 THE SERIES 2008 BONDS... 8 GENERAL... 8 REDEMPTION PROVISIONS... 8 SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS PLEDGE OF TRUST ESTATE; NET REVENUES RELEASED REVENUES OBLIGATIONS ISSUED OR INCURRED UNDER INDENTURE FLOW OF AIRPORT SYSTEM REVENUES AVAILABILITY OF AVAILABLE PFC REVENUES TO PAY SERIES 2008 SUBORDINATE BONDS DEBT SERVICE SENIOR DEBT SERVICE RESERVE FUND SUBORDINATE DEBT SERVICE RESERVE FUND ADDITIONAL SENIOR OBLIGATIONS ADDITIONAL SUBORDINATE OBLIGATIONS JUNIOR SUBORDINATE OBLIGATIONS, JUNIOR OBLIGATIONS AND SPECIAL FACILITY OBLIGATIONS RATE COVENANT LIMITATION ON REMEDIES BOND INSURANCE BOND INSURANCE POLICY MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICIES FINANCIAL SECURITY ASSURANCE INC THE AIRPORT SYSTEM GENERAL SACRAMENTO INTERNATIONAL AIRPORT OTHER AIRPORTS INSURANCE CAPITAL IMPROVEMENT PLAN ENVIRONMENTAL REGULATIONS MANAGEMENT OF THE AIRPORT SYSTEM BACKGROUND i

8 ADMINISTRATION LABOR RELATIONS AIRPORT SYSTEM OPERATIONS BACKGROUND SUMMARY OF FINANCIAL OPERATIONS SOURCES OF AIRPORT SYSTEM REVENUES AIRLINE AGREEMENTS AND RATE ORDINANCE REVENUES, EXPENSES AND CHANGES IN NET ASSETS OPERATING REVENUES EXCLUDED REVENUES PASSENGER FACILITY CHARGES AIP GRANTS OPERATING EXPENSES INVESTMENT OF AIRPORT SYSTEM FUNDS; COUNTY POOL SUMMARY OF HISTORICAL REVENUES, EXPENSES AND DEBT SERVICE COVERAGE AIRPORT CONSULTANT S REPORT CALCULATION OF FORECAST AIRPORT SYSTEM REVENUES, OPERATING EXPENSES AND DEBT SERVICE COVERAGE AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM TERMINAL MODERNIZATION PROGRAM TMP CONSTRUCTION ADDITIONAL PROJECTS FINANCING PLAN FOR TMP; FUTURE FINANCINGS INVESTMENT CONSIDERATIONS RATE COVENANT NOT A GUARANTEE; FAILURE TO MEET PROJECTIONS INFORMATION CONCERNING THE AIRLINES EFFECT OF AIRLINE BANKRUPTCIES EFFECT OF CONCESSIONAIRE BANKRUPTCIES EFFECT OF COUNTY BANKRUPTCY UNCERTAINTIES OF THE AIRLINE INDUSTRY COMPETITION FEDERAL LAW AFFECTING AIRPORT RATES AND CHARGES ADDITIONAL OBLIGATIONS CAN BE ISSUED WITHOUT BONDHOLDER CONSENT COLLATERAL CAN BE RELEASED TO THE COUNTY SUBORDINATE DEBT SERVICE RESERVE FUND DOES NOT SECURE SENIOR BONDS COST OF CAPITAL IMPROVEMENT PROGRAM UNAVAILABILITY OF, OR DELAY IN, ANTICIPATED FUNDING SOURCES REPORT OF THE AIRPORT CONSULTANT IMPACT OF POTENTIAL FLOODS IMPACT OF POTENTIAL EARTHQUAKES POSSIBLE RECOGNITION OF TAXABLE GAIN OR LOSS UPON DEFEASANCE OF THE SERIES 2008C BONDS LITIGATION VERIFICATION OF MATHEMATICAL COMPUTATIONS RATINGS TAX MATTERS SERIES 2008A BONDS, SERIES 2008B BONDS, SERIES 2008D BONDS AND SERIES 2008E BONDS SERIES 2008C BONDS LEGAL MATTERS CONTINUING DISCLOSURE ii

9 FINANCIAL ADVISOR UNDERWRITING FINANCIAL STATEMENTS MISCELLANEOUS APPENDIX A REPORT OF THE AIRPORT CONSULTANT... A-1 APPENDIX B COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEARS ENDED JUNE 30, 2006 AND 2007 AND CERTAIN UNAUDITED FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 2007 AND B-1 APPENDIX C CERTAIN INFORMATION CONCERNING THE PRIOR BONDS... C-1 APPENDIX D SUMMARY OF THE INDENTURE... D-1 APPENDIX E BOOK-ENTRY ONLY SYSTEM... E-1 APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE... F-1 APPENDIX G FORM OF OPINIONS OF BOND COUNSEL... G-1 APPENDIX H FORM OF MUNICIPAL BOND INSURANCE POLICY... H-1 APPENDIX I FORM OF MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICIES... I-1 iii

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11 $169,575,000 Series 2008A (Non-AMT) OFFICIAL STATEMENT $496,195,000 COUNTY OF SACRAMENTO Airport System Senior Revenue Bonds Series 2008 $314,340,000 Series 2008B (AMT) $12,280,000 Taxable Series 2008C $89,430,000 COUNTY OF SACRAMENTO Airport System Subordinate and PFC Revenue Refunding Bonds Series 2008 $46,390,000 Series 2008D (Non-AMT) INTRODUCTION $43,040,000 Series 2008E (AMT) This introduction contains only a brief summary of certain of the terms of the Series 2008 Bonds being offered and a brief description of the Official Statement. All statements contained herein are qualified in their entirety by reference to the entire Official Statement. References to, and summaries of, provisions of the Constitution and laws of the State of California and any documents referred to herein do not purport to be complete, and such references are qualified in their entirety by reference to the complete provisions. Capitalized terms used in this Official Statement and not defined elsewhere herein have the meanings given to such terms under the Indenture. See APPENDIX D SUMMARY OF THE INDENTURE CERTAIN DEFINITIONS. Purpose The purpose of this Official Statement, which includes the cover page, the inside cover pages and appendices hereto, is to set forth certain information concerning the issuance and sale of $169,575,000 County of Sacramento Airport System Senior Revenue Bonds, Series 2008A (Non-AMT) (the Series 2008A Bonds ), $314,340,000 County of Sacramento Airport System Senior Revenue Bonds, Series 2008B (AMT) (the Series 2008B Bonds ), $12,280,000 County of Sacramento Airport System Senior Revenue Bonds, Taxable Series 2008C (the Series 2008C Bonds and, collectively with the Series 2008A Bonds and the Series 2008B Bonds, the Series 2008 Senior Bonds ), $46,390,000 County of Sacramento Airport System Subordinate and PFC Revenue Refunding Bonds, Series 2008D (Non-AMT) (the Series 2008D Bonds ), and $43,040,000 County of Sacramento Airport System Subordinate and PFC Revenue Refunding Bonds, Series 2008E (AMT) (the Series 2008E Bonds and, together with the Series 2008D Bonds, the Series 2008 Subordinate Bonds ). The Series 2008 Senior Bonds and the Series 2008 Subordinate Bonds are referred to in this Official Statement as the Series 2008 Bonds. The Series 2008 Bonds are being issued to: (i) finance a portion of the cost of certain capital improvements for the Airport System (defined herein) of the County of Sacramento (the County ); (ii) establish irrevocable escrow funds to refund and defease certain currently outstanding County of Sacramento Airport System Revenue Bonds as more particularly described herein (the Prior Bonds ); (iii) pay the cost of separate Municipal Bond Debt Service Reserve Insurance Policies to satisfy the Senior Debt Service Reserve Requirement and the Subordinate Debt Service Reserve Requirement (as defined herein); (iv) fund certain payments in connection with the termination of a swap agreement relating to certain of the Prior Bonds; (v) fund capitalized interest in an amount equal to a portion of the debt service on the Series 2008 Bonds; and (vi) pay certain costs of issuance of the Series 2008 Bonds, all as more fully described herein. The Prior Bonds were originally issued to finance or refinance a portion of the costs of various capital improvements at the Airport System. See PLAN OF FINANCE. 1

12 The Airport System The County is a political subdivision of the State of California. The County s Board of Supervisors oversees the operation of the Airport System, which is comprised of the Sacramento International Airport (the International Airport ), Sacramento Mather Airport ( Mather Airport ), Sacramento Executive Airport ( Executive Airport ), and Franklin Field. The Airport System is owned by the County (except for Mather Airport and Executive Airport, which are leased as described herein), is operated as a self sufficient enterprise and is administered by the Director of Airports (the Director ). The Director reports to the County Executive. See THE AIRPORT SYSTEM and MANAGEMENT OF THE AIRPORT SYSTEM. The International Airport is the primary commercial airport facility serving the County and portions of seven neighboring counties and is classified as a medium air traffic hub by the Federal Aviation Administration (the FAA ). Mather Airport is a civilian cargo and general aviation airport and Executive Airport is a general aviation facility. Franklin Field is a general aviation training facility. The International Airport primarily serves origin-destination passengers (i.e., passengers beginning or ending their journeys at the International Airport). According to data published by Airports Council International, the International Airport was the nation s 38 th busiest airport in calendar year 2006 in terms of enplaned passengers. In Fiscal Year , ended June 30, 2007, 5,307,289 passengers were enplaned at the International Airport, an increase of 3% over the prior Fiscal Year. As of March 1, 2008, 18 scheduled passenger airlines, including 3 low-cost carriers and 2 foreign-flag airlines, offered 168 daily non-stop flights at the International Airport. (Aloha Airlines recently filed for bankruptcy protection and ceased operations March 31, In addition, on April 10, 2008, Frontier Airlines filed for bankruptcy protection, stating that it intended to continue normal operations during the reorganization process. See INVESTMENT CONSIDERATIONS - Effect of Airline Bankruptcies. ) In addition, the Airport System is also served by 2 scheduled all-cargo airlines. See THE AIRPORT SYSTEM. The Series 2008 Bonds The Series 2008 Senior Bonds are being issued pursuant to a Master Indenture of Trust, dated as of May 1, 2008, between the County and The Bank of New York Trust Company, N.A., as trustee (the Trustee ) (the Master Indenture ), as supplemented by a First Supplemental Indenture of Trust, dated as of May 1, 2008, between the County and the Trustee (the First Supplemental Indenture ). The Series 2008 Subordinate Bonds are being issued pursuant to the Master Indenture, as supplemented by a Second Supplemental Indenture of Trust, dated as of May 1, 2008, between the County and the Trustee (the Second Supplemental Indenture and, together with the Master Indenture, as supplemented and amended from time to time, and the First Supplemental Indenture, the Indenture ). See APPENDIX D SUMMARY OF THE INDENTURE. The Series 2008A Bonds and Series 2008B Bonds are subject to optional redemption and mandatory redemption prior to their stated maturities as described herein. The Series 2008C Bonds are subject to mandatory redemption prior to their stated maturities as described herein. The Series 2008D Bonds and Series 2008E Bonds are subject to optional redemption prior to their stated maturities as described herein. See THE SERIES 2008 BONDS Redemption Provisions. The Series 2008 Bonds are being issued in fully registered form in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), and will be made available to beneficial owners through the book entry only system maintained by DTC. See APPENDIX E BOOK-ENTRY ONLY SYSTEM. 2

13 Security for the Series 2008 Bonds The Series 2008 Bonds are secured by the Trust Estate (as defined herein), subject to the application of the moneys included in the Trust Estate on the terms and conditions and for the purposes set forth in the Indenture. The primary component of the Trust Estate is the Net Revenues (as defined herein) derived by the County from the operation of the Airport System. The Series 2008 Senior Bonds constitute Senior Obligations (as defined herein) pursuant to the Indenture. The Indenture provides that the County may issue additional Senior Obligations secured by the Trust Estate and payable from the Net Revenues on a parity with the Series 2008 Senior Bonds, subject to the terms and conditions of the Indenture, as more fully described herein. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Additional Senior Obligations. The Series 2008 Subordinate Bonds constitute Subordinate Obligations (as defined herein) pursuant to the Indenture, secured by the Trust Estate and payable from the Net Revenues on a priority subordinate to the Senior Obligations. The Indenture provides that the County may incur additional Obligations (as defined herein) secured by the Trust Estate and payable from the Net Revenues on a priority subordinate to the Senior Obligations ( Subordinate Obligations, Junior Subordinate Obligations and Junior Obligations ), subject to the terms and conditions of the Indenture. Any additional Subordinate Obligations would be secured by the Trust Estate and payable from the Net Revenues on a parity with the Series 2008 Subordinate Bonds. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Additional Subordinate Obligations and -Junior Subordinate Obligations, Junior Obligations and Special Facility Obligations. Principal of and interest on the Series 2008 Subordinate Bonds is additionally payable from and secured by Available PFC Revenues, which consist of a portion of the Passenger Facility Charges approved by the FAA and imposed and collected with respect to the International Airport in an amount described herein under the caption SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Availability of Available PFC Revenues to Pay Series 2008 Subordinate Bonds Debt Service. Pursuant to the Indenture, after June 30, 2016, the County may reduce or eliminate the amount of Available PFC Revenues that secure the Series 2008 Subordinate Bonds. In addition, at any time and from time to time, the County may elect to use Available PFC Revenues securing the Series 2008 Subordinate Bonds to secure additional future Obligations to the extent designated by the County consistent with the covenants set forth in the Indenture. The County is not required to increase the amount of Available PFC Revenues upon the issuance or incurrence of any additional Obligations secured by Available PFC Revenues. The Indenture provides that the Insurer (as defined herein) shall be deemed to be the sole Holder of the Insured Bonds (as defined herein) for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the Holders of the Insured Bonds are entitled to take pursuant to the Indenture pertaining to (a) defaults and remedies, (b) the duties and obligations of the Trustee and (c) amendments to the Indenture; provided, however, that the giving of any such consent by the Insurer to any amendment shall be in the sole discretion of the Insurer. In connection with the capital improvement plan for the Airport System, the County currently anticipates the issuance from time to time of approximately $293 million of additional Senior Obligations and approximately $478 million of additional Subordinate Obligations through Fiscal Year See AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM Financing Plan for TMP; Future Financings. THE PRINCIPAL, OR REDEMPTION PRICE, OF AND INTEREST ON THE SERIES 2008 BONDS ARE PAYABLE SOLELY FROM THE TRUST ESTATE PLEDGED FOR THE PAYMENT THEREOF, AND THE COUNTY IS NOT OBLIGATED TO PAY THE SERIES 2008 BONDS EXCEPT FROM THE TRUST ESTATE. THE GENERAL FUND OF THE COUNTY IS NOT LIABLE AND THE FULL FAITH AND CREDIT OR TAXING POWER OF THE COUNTY IS NOT PLEDGED FOR THE PAYMENT OF THE PRINCIPAL, OR REDEMPTION PRICE, 3

14 OF OR INTEREST ON THE SERIES 2008 BONDS. NO TAX OR ASSESSMENT SHALL EVER BE LEVIED OR COLLECTED TO PAY THE PRINCIPAL, OR REDEMPTION PRICE, OF OR INTEREST ON THE SERIES 2008 BONDS AND THE SERIES 2008 BONDS ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF OR CHARGE, LIEN OR ENCUMBRANCE UPON ANY OF THE PROPERTY OF THE COUNTY OR ANY OF ITS INCOME OR RECEIPTS EXCEPT THE TRUST ESTATE AS PROVIDED IN THE INDENTURE. NEITHER THE PAYMENT OF THE PRINCIPAL, OR REDEMPTION PRICE, OF OR INTEREST ON THE SERIES 2008 BONDS IS A GENERAL DEBT, LIABILITY OR OBLIGATION OF THE COUNTY OR THE STATE OF CALIFORNIA. Bond Insurance The scheduled payment of principal of and interest on the Series 2008A Bonds maturing on July 1 of the years 2010 through 2041, inclusive, the Series 2008B Bonds maturing on July 1 of the years 2010 through 2039, inclusive, the Series 2008C Bonds maturing on July , the Series 2008D Bonds maturing on July 1 of the years 2011 through 2026, inclusive, and the Series 2008E Bonds maturing on July 1 of the years 2011 through 2024, inclusive, (collectively, the Insured Bonds ) when due will be guaranteed under an insurance policy (the Policy ) to be issued concurrently with the delivery of the Insured Bonds by Financial Security Assurance Inc. ( Financial Security or the Insurer ). See BOND INSURANCE and APPENDIX H FORM OF MUNICIPAL BOND INSURANCE POLICY. Capital Improvement Program The County has developed a multi-year capital improvement program ( CIP ) for the Airport System for Fiscal Years that totals approximately $1.4 billion. The Terminal Modernization Program ( TMP ) represents the largest project in the CIP with an estimated cost of $1.27 billion. See AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM. A portion of the proceeds of the Series 2008 Bonds will be used to pay the initial portion of the projected costs of the CIP. The Report of the Airport Consultant, dated April 4, 2008 (the Airport Consultant s Report ), which is contained in Appendix A of this Official Statement, contains a summary of the CIP, as well as expected funding sources, which include a portion of the proceeds of the Series 2008 Bonds, internally generated cash flow, Passenger Facility Charges, state and federal grants, and the proceeds of additional Senior Bonds and Subordinate Bonds. See APPENDIX A REPORT OF THE AIRPORT CONSULTANT for a description of the financing plan for the CIP. Rate Covenant The County has covenanted in the Indenture to establish, fix, prescribe and collect rates, tolls, fees, rentals and charges in connection with the ownership and operation of the Airport System and for services rendered in connection therewith, at levels specified in the Indenture. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Rate Covenant and APPENDIX D SUMMARY OF THE INDENTURE THE MASTER INDENTURE - Covenants and Obligations of the County Rates and Charges. Senior Debt Service Reserve Fund The Indenture provides that the Series 2008 Senior Bonds will be secured by the Senior Debt Service Reserve Fund established pursuant to the Indenture. The Indenture requires that the Senior Debt Service Reserve Fund be funded in an amount equal to the Senior Debt Service Reserve Requirement (as defined herein). Amounts in the Senior Debt Service Reserve Fund are to be used solely for the purpose of payment of principal of and interest on the Series 2008 Senior Bonds and any other Participating Senior Bonds in the event that amounts on deposit in the Senior Debt Service Fund are insufficient for such purpose, or for the retirement of all Senior Bonds (as defined herein) upon the terms provided in the Indenture. Participating Senior Bonds are defined in the Indenture as all Series of Senior Bonds except 4

15 those which are determined by the County pursuant to a Supplemental Indenture not to be secured by the Senior Debt Service Reserve Fund. In lieu of the deposits and transfers to the Senior Debt Service Reserve Fund, the Indenture authorizes the County to utilize a Reserve Guaranty or Reserve Guaranties to satisfy all or a portion of the Senior Debt Service Reserve Requirement. The Senior Debt Service Reserve Fund does not secure payment of principal, or Redemption Price, of or interest on the Series 2008 Subordinate Bonds or any other Subordinate Obligation, Junior Subordinate Obligation or Junior Obligation. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Senior Debt Service Reserve Fund. The County has elected to satisfy the Senior Debt Service Reserve Requirement by utilizing a Municipal Bond Debt Service Reserve Insurance Policy to be issued by the Insurer. See BOND INSURANCE - Municipal Bond Debt Service Reserve Insurance Policies and APPENDIX I FORM OF MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICIES. Subordinate Debt Service Reserve Fund The Indenture provides that the Series 2008 Subordinate Bonds will be secured by the Subordinate Debt Service Reserve Fund established pursuant to the Indenture. The Indenture requires that the Subordinate Debt Service Reserve Fund be funded in an amount equal to the Subordinate Debt Service Reserve Requirement (as defined herein). Amounts in the Subordinate Debt Service Reserve Fund are to be used solely for the purpose of payment of principal of and interest on the Series 2008 Subordinate Bonds and any other Participating Subordinate Bonds in the event that amounts on deposit in the Subordinate Debt Service Fund are insufficient for such purpose, or for the retirement of all Subordinate Bonds (as defined herein) upon the terms provided in the Indenture. Participating Subordinate Bonds are defined in the Indenture as all Series of Subordinate Bonds except those which are determined by the County pursuant to a Supplemental Indenture not to be secured by the Subordinate Debt Service Reserve Fund. In lieu of the deposits and transfers to the Subordinate Debt Service Reserve Fund, the Indenture authorizes the County to utilize a Reserve Guaranty or Reserve Guaranties to satisfy all or a portion of the Subordinate Debt Service Reserve Requirement. The Subordinate Debt Service Reserve Fund does not secure payment of principal, or Redemption Price of, or interest on the Series 2008 Senior Bonds or any other Senior Obligation, Junior Subordinate Obligation or Junior Obligation. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Subordinate Debt Service Reserve Fund. The County has elected to satisfy the Subordinate Debt Service Reserve Requirement by utilizing a Municipal Bond Debt Service Reserve Insurance Policy to be issued by the Insurer. See BOND INSURANCE - Municipal Bond Debt Service Reserve Insurance Policies and APPENDIX I FORM OF MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICIES. Investment Considerations An investment in the Series 2008 Bonds involves risk. For a summary of certain risk factors associated with an investment in the Series 2008 Bonds, see INVESTMENT CONSIDERATIONS. Continuing Disclosure The County has covenanted for the benefit of the holders and beneficial owners of the Series 2008 Bonds to provide certain financial information and operating data relating to the Airport System by not later than 210 days following the end of the County s Fiscal Year (presently June 30) (the Annual Report ), commencing with the report for Fiscal Year , and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed by the County with each Nationally Recognized Municipal Securities Information Repository. The notices of material events will be filed by the County with the Municipal Securities Rulemaking Board. The specific nature of the information to be contained in the Annual Report and the notice of material events is set forth in 5

16 APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE. These covenants have been made in order to assist the Underwriters in complying with S.E.C. Rule 15c2-12(b)(5). The County has not failed to comply with such requirements in all material respects in the last five years. See CONTINUING DISCLOSURE. Report of the Airport Consultant In preparing this Official Statement, the County has relied, in part, upon studies, considerations, assumptions, and opinions set forth in the Airport Consultant s Report furnished by Jacobs Consultancy, Burlingame, California, as Airport Consultant (the Airport Consultant ), a copy which is attached hereto as Appendix A. See AIRPORT CONSULTANT S REPORT and APPENDIX A REPORT OF THE AIRPORT CONSULTANT. The Airport Consultant has provided various consulting and advisory services to the County in connection with the planning, business, and financial operations of the Airport System. SUMMARIES AND ADDITIONAL INFORMATION There follows in this Official Statement a description of the Airport System and its management and operations, and certain information relating to the County and sources of payment for the Series 2008 Bonds, together with summaries of the terms of the Series 2008 Bonds and certain provisions of the Indenture. All references herein to agreements and documents are qualified in their entirety by reference to the definitive forms thereof, and all references to the Series 2008 Bonds are further qualified by reference to the information with respect thereto contained in the Indenture. This Official Statement speaks only as of its date. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale on the basis hereof shall, under any circumstances, create any implication that there has been no change in the affairs of the County or the Airport System since the date hereof. Plan of Refunding PLAN OF FINANCE A portion of the proceeds of the sale of the Series 2008 Bonds, together with other available funds, will be used to establish irrevocable escrow funds to refund the bonds described in Appendix C, which constitute all of the County s currently outstanding bonds secured by revenues of the Airport System, except one series of such Bonds which will be defeased with unspent balances in the bond funds (the Prior Bonds ). In addition, a portion of the proceeds of the Series 2008 Bonds will be used to fund certain payments in connection with the termination of a swap agreement relating to certain of the Prior Bonds. Certain information with respect to the Prior Bonds is set forth in Appendix C. Upon the issuance of the Series 2008 Bonds, a portion of the proceeds thereof, together with other available funds, shall be applied to the purchase of certain direct obligations of the United States of America, the interest on and maturing principal of which will satisfy the Airport System s debt service payment obligations with respect to the Prior Bonds until their maturity or redemption dates. These direct obligations shall be deposited in separate escrow funds for each series of Prior Bonds held by U.S. Bank National Association as escrow agent for the Prior Bonds (the Escrow Agent ) established under separate escrow agreements entered into by the County and the Escrow Agent, each dated as of May 1, 2008 (the Escrow Agreements ) that will require the Escrow Agent to apply the principal of and interest on such obligations, together with other funds held by the Escrow Agent, to the payment or redemption of the Prior Bonds on the respective dates set forth in Appendix C. 6

17 The obligations of the United States of America so deposited with the Escrow Agent in the escrow funds for each series of Prior Bonds will bear interest at such rates and will be scheduled to mature at such times and in such amounts that, when paid in accordance with their terms together with any other funds held by the Escrow Agent under the respective Escrow Agreements, sufficient moneys will be available to make full and timely payment of the principal of and interest on the Prior Bonds on the respective dates set forth in Appendix C and to pay the redemption price of the full principal amount which remains outstanding until the dates set forth under Maturity or Redemption Dates set forth in Appendix C with respect to the particular series of Prior Bonds. For information on mathematical verification for the sufficiency of scheduled payments with respect to such obligations of the United States of America and other funds held by the Escrow Agent to make such payments, see VERIFICATION OF MATHEMATICAL COMPUTATIONS. Upon such irrevocable deposit with the Escrow Agent and the receipt by the Escrow Agent of irrevocable escrow instructions from the County, the Prior Bonds will be defeased and will no longer be entitled to the benefits of the resolutions pursuant to which such Prior Bonds were issued. Such escrow funds will solely be available to pay debt service and redemption premiums related to the Prior Bonds, as provided in the Escrow Agreements, and will not be available to pay debt service on the Series 2008 Bonds Project A portion of the proceeds of the Series 2008 Senior Bonds are expected to be used to finance a portion of the projected costs of the CIP described herein in AIRPORT SYSTEM CAPITAL IMPROVEMENT PLAN through approximately September The financing plan for the CIP includes the issuance of additional Senior Bonds and additional Subordinate Bonds through July The first such planned issuance of additional Senior Bonds and additional Subordinate Bonds is currently expected to occur in December 2008, in order to meet the funding needs of certain project elements and subsequent to the anticipated receipt of certain PFC related approvals. See AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM and Table 10 Planned Issuance of Additional Bonds. ESTIMATED SOURCES AND USES OF FUNDS The estimated sources and uses of funds for the Series 2008 Bonds are as follows: Series 2008A Bonds Series 2008B Bonds Series 2008C Bonds Series 2008D Bonds Series 2008E Bonds SOURCES: Par Amount $169,575, $314,340, $12,280, $46,390, $43,040, Original Issue Premium/(Discount) 2,448, (2,898,200.35) 184, ,484, Transfer from Prior Bonds Accounts 9,702, , ,389, , ,130, TOTAL $181,725, ,382, ,669, ,720, ,655, USES: Escrow Funds for Prior Bonds $121,077, $34,863, $14,466, $45,687, $41,920, Series 2008A Construction Account 50,561, Series 2008B Construction Account 217,681, Swap Termination Payment 2,338, ,811, Senior Debt Service Fund (1) 5,964, ,868, Costs of Issuance (2) 4,122, ,630, , ,032, , TOTAL $181,725, $312,382, $14,669, $46,720, $45,655, (1) (2) Represents capitalized interest in an amount equal to a portion of debt service on the Series 2008A Bonds and Series 2008B Bonds through January 1, Includes fees of Bond Counsel, Disclosure Counsel, the Airport Consultant, the Financial Advisor, the Trustee, the Escrow Agent, the Verification Agent, and the Rating Agencies, Underwriters discount, bond insurance and debt service reserve insurance policies premiums, printing costs and other miscellaneous expenses. For a description of the Underwriters discount, see UNDERWRITING. 7

18 THE SERIES 2008 BONDS General The Series 2008 Bonds shall be dated the date of delivery, shall be issued in fully registered form in denominations of five thousand dollars ($5,000) or any integral multiple of five thousand dollars ($5,000) (not exceeding the principal amount of Series 2008 Bonds maturing at any one time), and shall mature on the dates and in the principal amounts as set forth on the inside cover pages. Interest on the Series 2008 Bonds is payable on July 1, 2008 and semiannually thereafter on January 1 and July 1 in each year, at the rates set forth on the inside cover pages. The Series 2008 Bonds will be issued in book-entry form only and, when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the Series 2008 Bonds. For so long as Cede & Co., as nominee of DTC, is registered owner of the Series 2008 Bonds, payments of the principal of, premium, if any, and interest on the Series 2008 Bonds will be made directly to DTC. Disbursement of such payment to Direct Participants and Indirect Participants is the responsibility of the Direct Participants and the Indirect Participants, each such term as hereinafter defined. See APPENDIX E BOOK-ENTRY ONLY SYSTEM. Redemption Provisions Optional Redemption. Series 2008A Bonds. The Series 2008A Bonds maturing on and after July 1, 2019 are subject to redemption prior to their stated maturities, at the option of the County and from any source of funds, in whole or in part (in such amounts as may be specified by the County) on any date on or after July 1, 2018 at the Redemption Price equal to the principal amount of the Series 2008A Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Series 2008B Bonds. The Series 2008B Bonds maturing on and after July 1, 2019 are subject to redemption prior to their stated maturities, at the option of the County and from any source of funds, in whole or in part (in such amounts as may be specified by the County) on any date on or after July 1, 2018 at the Redemption Price equal to the principal amount of the Series 2008B Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Series 2008C Bonds. The Series 2008C Bonds are not subject to optional redemption. Series 2008D Bonds. The Series 2008D Bonds maturing on and after July 1, 2019 are subject to redemption prior to their stated maturities, at the option of the County and from any source of funds, in whole or in part (in such amounts as may be specified by the County) on any date on or after July 1, 2018 at the Redemption Price equal to the principal amount of the Series 2008D Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Series 2008E Bonds. The Series 2008E Bonds maturing on and after July 1, 2019 are subject to redemption prior to their stated maturities, at the option of the County and from any source of funds, in whole or in part (in such amounts as may be specified by the County) on any date on or after July 1, 2018 at the Redemption Price equal to the principal amount of the Series 2008E Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Mandatory Redemption. Series 2008A Bonds. The Series 2008A Bonds maturing on July 1, 2028 which bear interest at 5.000% per annum, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2027, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 8

19 2008A Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2027 $2,890, ,605,000 The Series 2008A Bonds maturing on July 1, 2032 which bear interest at 4.850% per annum, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2029, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008A Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2029 $1,500, ,550, ,600, ,655,000 The Series 2008A Bonds maturing on July 1, 2032 which bear interest at 5.000% per annum, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2029, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008A Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2029 $2,440, ,585, ,745, ,905,000 9

20 The Series 2008A Bonds maturing on July 1, 2041, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2040, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008A Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2040 $28,400, ,815,000 Series 2008B Bonds. The Series 2008B Bonds maturing on July 1, 2013, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2010, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008B Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2010 $2,070, ,080, ,100, ,105,000 The Series 2008B Bonds maturing on July 1, 2018, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2014, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008B Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2014 $2,115, ,145, ,185, ,210, ,240,000 The Series 2008B Bonds maturing on July 1, 2024, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2019, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount 10

21 of such Series 2008B Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2019 $2,270, ,290, ,315, ,340, ,360, ,365,000 The Series 2008B Bonds maturing on July 1, 2028, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2025, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008B Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2025 $ 365, , ,135, ,890,000 The Series 2008B Bonds maturing on July 1, 2033, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2029, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008B Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2029 $14,690, ,460, ,265, ,120, ,820,000 The Series 2008B Bonds maturing on July 1, 2039, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2034, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008B Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. 11

22 Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2034 $24,020, ,280, ,605, ,005, ,475, ,020,000 Series 2008C Bonds. The Series 2008C Bonds are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2009, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008C Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2009 $2,840, ,990, ,145, ,305,000 Series 2008D Bonds. The Series 2008D Bonds maturing on July 1, 2026 which bear interest at the rate of 5.000% per annum, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2025, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008D Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2025 $2,945, ,520,000 Series 2008E Bonds. The Series 2008E Bonds maturing on July 1, 2013, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2011, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008E Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. 12

23 Sinking Fund Installment Date (July 1) Maturity Date 13 Sinking Fund Installment 2011 $2,495, ,515, ,535,000 The Series 2008E Bonds maturing on July 1, 2018, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2014, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008E Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2014 $2,540, ,575, ,630, ,650, ,695,000 The Series 2008E Bonds maturing on July 1, 2024, are subject to mandatory redemption prior to their maturity, or payment at maturity, as the case may be, by the County, in part by lot on July 1 of each year on and after July 1, 2019, from and in the amount of the Sinking Fund Installments due and payable on the dates and in the amounts, as provided below, at the Redemption Price equal to the principal amount of such Series 2008E Bonds to be redeemed, plus unpaid accrued interest thereon to the date fixed for redemption, without premium. Sinking Fund Installment Date (July 1) Maturity Date Sinking Fund Installment 2019 $2,735, ,755, ,790, ,825, ,855, ,865,000 Selection of Series 2008 Bonds to Be Redeemed. If less than all of an Outstanding Series of the Series 2008 Bonds is to be redeemed at the option of the County at any one time, the County may select the principal amounts and maturities of such Series of the Series 2008 Bonds to be redeemed (which Series, maturities and principal amounts to be redeemed shall be determined by the County in its sole discretion, subject to any limitations with respect thereto contained in the Indenture and provided that, with respect to any Series 2008 Bond to be redeemed in part, the portion of such Series 2008 Bond which is not to be redeemed shall be in an Authorized Denomination). Notice. Notice of redemption shall be mailed, by first class mail, postage prepaid, not more than sixty (60) nor less than thirty (30) days before the redemption date to the Owners of any Series 2008 Bonds to be redeemed (in whole or in part) at their addresses appearing in the Bond Register. Such notice

24 shall specify the Series and maturity date of the Series 2008 Bonds to be redeemed, the redemption date and the place or places where amounts due upon such redemption shall be payable and, if less than all of the Series 2008 Bonds of any like Series and maturity are to be redeemed, the letters and numbers or other distinguishing marks of such Series 2008 Bonds so to be redeemed, and, in the case of Series 2008 Bonds to be redeemed in part only, such notice shall also specify the respective portion of the principal amount thereof to be redeemed. Such notice shall further state that on such date there shall become due and payable upon each Series 2008 Bond to be redeemed the Redemption Price thereof, or the Redemption Price of the specified portion of the principal amount thereof to be redeemed in the case of Series 2008 Bonds to be redeemed in part only, and that, if sufficient moneys are available on the redemption date to pay the Redemption Price of all Series 2008 Bonds to be redeemed, from and after such date interest on such Series 2008 Bond or the portion of such Series 2008 Bond to be redeemed shall cease to accrue and be payable. Receipt of such notice shall not be a condition precedent to the redemption of Series 2008 Bonds and failure of any Owner of a Series 2008 Bond to receive any such notice or any insubstantial defect in such notice shall not affect the validity of the proceedings for the redemption of Series 2008 Bonds. Any defect in such notice given to the Owners of less than all of the Series 2008 Bonds to be redeemed shall not affect the validity of the proceedings for the redemption of the Series 2008 Bonds as to which the notice of redemption did not contain such defect. In the event that funds required to pay the Redemption Price of the Series 2008 Bonds are not on deposit with the Trustee at the time the notice with respect to any redemption of Series 2008 Bonds at the option of the County is given, such notice shall state that such redemption is conditioned upon the receipt by the Trustee, on or prior to the date fixed for such redemption, of moneys sufficient to pay the Redemption Price of the Series 2008 Bonds to be redeemed, and that if such moneys shall not have been so received said notice shall be of no force and effect and the County shall not be required to redeem such Series 2008 Bonds. In the event a notice of redemption of Series 2008 Bonds contains such a condition and such moneys are not so received, the redemption of Series 2008 Bonds as described in the conditional notice of redemption shall not be made and the Trustee shall, within a reasonable time after the date on which such redemption was to occur, give notice to the Persons and in the manner in which the notice of redemption was given that such moneys were not so received and that there shall be no redemption of Series 2008 Bonds pursuant to the conditional notice of redemption. Effect of Redemption. If notice of redemption has been duly mailed to the Owners of the Series 2008 Bonds to be redeemed (in whole or in part) and the amounts necessary to pay the Redemption Price of the Series 2008 Bonds to be redeemed being available therefor on the date fixed for redemption then the Series 2008 Bonds, or portions thereof, designated for redemption shall, on the date fixed for redemption, become due and payable at the applicable Redemption Price thereof, the Series 2008 Bonds or portions thereof so designated for redemption shall be deemed to be no longer Outstanding and such Series 2008 Bonds or portions thereof shall cease to bear further interest and after the date fixed for redemption no Owner of such Series 2008 Bonds or portions thereof so designated for redemption shall be entitled to any of the benefits of the Indenture, or any other rights, except with respect to payment of the Redemption Price thereof from the amounts so made available. SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Pledge of Trust Estate; Net Revenues Subject to the application of the moneys included in the Trust Estate on the terms and conditions and for the purposes set forth in the Indenture, and with the respective priorities set forth therein, the Series 2008 Bonds are payable from and secured by the Trust Estate. The primary component of the Trust Estate is the Net Revenues derived by the County from the operation of the Airport System. 14

25 Under the Indenture, the Airport System means the whole and each and every part of the existing airport system of the County, including the International Airport, Mather Airport, Executive Airport and Franklin Field and any other airport or aviation facility owned or operated by the County and designated by the County to be part of the Airport System, including runways, taxiways, landing pads, aprons, ramps, beacon sites, obstruction lights, navigational and landing aids, control towers, facilities for storage of aircraft and for parking of automobiles, roadways, passenger and freight terminals, land, easements and rights in land for clear zone and approach purposes, maintenance hangars and related facilities and all equipment, buildings, grounds, facilities, utilities and structures owned, leased or operated in connection with or for the promotion or the accommodation of air commerce and air navigation and services in connection therewith, together with all additions, betterments, extensions, replacements, renewals and improvements thereto which may hereafter be undertaken. The term Airport System, however, does not include a Special Facility so long as Special Facility Obligations are Outstanding with respect to such Special Facility. The Indenture defines Net Revenues as, for any period of time, the Revenues (defined below) for such period less the Operating Expenses (defined below) for such period. Under the Indenture Revenues means all income, receipts, earnings and revenues received by or accrued to the Sacramento County Airport System from the ownership or operation of the Airport System, excluding, except to the extent deposited in the Revenue Fund: (a) gifts, grants and other funds otherwise included in the definition of Revenues which are restricted by their terms to purposes inconsistent with the payment of Operating Expenses or payment of Obligations; (b) Net Proceeds and other insurance proceeds, to the extent the use of such Net Proceeds or other proceeds are restricted by the terms of the policy under which they are paid to a use inconsistent with the payment of Operating Expenses or the payment of Obligations; (c) except as and to the extent included in calculations made pursuant to the rate covenant contained in the Indenture and described under Rate Covenant, any Transfer; (d) except as provided in the Indenture, any Special Facility Revenue; (e) any gain from the sale, exchange or other disposition of capital assets of the Airport System; (f) any Released Revenues; (g) any unrealized gains on securities held for investment by or on behalf of the County; (h) any gains resulting from changes in valuation of any Swap; (i) any unrealized gains from the write-down, reappraisal or revaluation of assets; (j) the proceeds of Obligations; (k) Facilities Construction Credits; (l) Passenger Facility Charges; (m) Customer Facility Charges; (n) Grant Funds; (o) investment income derived from any moneys or securities which may be placed in escrow or trust to defease Obligations; (p) any arbitrage earnings which are required to be paid to the United States of America pursuant to Section 148 of the Code; and (q) interest earnings or other investment earnings on any Account in the Construction Fund established by any Supplemental Indenture unless otherwise provided in such Supplemental Indenture. The Indenture provides that for purposes of testing compliance with the rate covenant contained in the Indenture and described below under Rate Covenant and the limitations on the issuance of Obligations contained in the Indenture and described under Additional Senior Obligations, Additional Subordinate Obligations and Junior Subordinate Obligations, Junior Obligations and Special Facility Obligations, Revenues will be calculated based upon Generally Accepted Accounting Principles, except that such calculation will include and exclude those items specifically included or excluded in the definition thereof described above or in the definition of Accrued Debt Service or Aggregate Adjusted Annual Debt Service, as applicable. In addition, the Indenture provides that for purposes of meeting any of the tests prescribed by the Indenture, including the rate covenant contained in the Indenture and described below under Rate Covenant and the limitations on the issuance of Obligations contained in the Indenture and described under Additional Senior Obligations, Additional Subordinate Obligations and Junior Subordinate Obligations, Junior Obligations and Special Facility Obligations, any transfers from the Capital Improvement Fund to the Revenue Fund will be deemed to be Revenues. These transfers are not subject to any limit on amount. 15

26 The term Operating Expenses is defined in the Indenture as the reasonable and necessary costs and expenses of operating, maintaining and administering the Airport System, determined in accordance with Generally Accepted Accounting Principles, including (among other things) salaries and wages, payments in connection with medical, pension and post-retirement medical plans, fees for services, costs of materials, supplies and fuel, reasonable expenses of management, repairs and other expenses necessary to maintain and preserve the Airport System in good repair and working order, reasonable amounts for administration, insurance, taxes (if any) and other similar costs, legal fees and expenses, the fees and expenses of the Fiduciaries, charges under management agreements for the operation and maintenance of the Airport System, the fees and expenses of remarketing agents, auction agents and broker-dealers, the regularly scheduled fees to be paid pursuant to any Credit Support Agreement, expenses (but not debt service) incurred in connection with the purchase or redemption of Obligations, and all other costs properly allocable to the operation, maintenance or administration of the Airport System, but excluding in all cases: (a) amortization of intangibles or other bookkeeping entries of a similar nature; (b) amortization and depreciation of Airport System facilities and assets; (c) charges for the payment of principal, Redemption Price, Purchase Price, interest or other payments on any Obligations; (d) any items chargeable to a capital account; (e) any loss from the sale, exchange or other disposition of capital assets of the Airport System; (f) any unrealized losses on securities held for investment by or on behalf of the County for the Airport System; (g) any losses resulting from changes in valuation of any Swap; (h) any unrealized losses from the write-down, reappraisal or revaluation of assets including investments for other than temporary declines in book value; (i) any extraordinary losses; (j) any loss resulting from extinguishment of indebtedness; and (k) the costs and expenses of operating, maintaining and administering any Special Facility. The Indenture provides that for purposes of testing compliance with the rate covenant contained in the Indenture and described below under Rate Covenant and the limitations on the issuance of Obligations contained in the Indenture and described under Additional Senior Obligations, Additional Subordinate Obligations and Junior Subordinate Obligations, Junior Obligations and Special Facility Obligations, Operating Expenses will be calculated based upon Generally Accepted Accounting Principles, except that such calculation will include and exclude those items specifically included or excluded in the definition thereof described above. The Indenture provides that the Insurer shall be deemed to be the sole Holder of the Insured Bonds for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the Holders of the Insured Bonds are entitled to take pursuant to the Indenture pertaining to (a) defaults and remedies, (b) the duties and obligations of the Trustee and (c) amendments to the Indenture; provided, however, that the giving of any such consent by the Insurer to any amendment shall be in the sole discretion of the Insurer. THE PRINCIPAL, OR REDEMPTION PRICE, OF AND INTEREST ON THE SERIES 2008 BONDS ARE PAYABLE SOLELY FROM THE TRUST ESTATE PLEDGED FOR THE PAYMENT THEREOF, AND THE COUNTY IS NOT OBLIGATED TO PAY THE SERIES 2008 BONDS EXCEPT FROM THE TRUST ESTATE. THE GENERAL FUND OF THE COUNTY IS NOT LIABLE AND THE FULL FAITH AND CREDIT OR TAXING POWER OF THE COUNTY IS NOT PLEDGED FOR THE PAYMENT OF THE PRINCIPAL, OR REDEMPTION PRICE, OF OR INTEREST ON THE SERIES 2008 BONDS. NO TAX OR ASSESSMENT SHALL EVER BE LEVIED OR COLLECTED TO PAY THE PRINCIPAL, OR REDEMPTION PRICE, OF OR INTEREST ON THE SERIES 2008 BONDS AND THE SERIES 2008 BONDS ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF OR CHARGE, LIEN OR ENCUMBRANCE UPON ANY OF THE PROPERTY OF THE COUNTY OR ANY OF ITS INCOME OR RECEIPTS EXCEPT THE TRUST ESTATE AS PROVIDED IN THE INDENTURE. NEITHER THE PAYMENT OF THE PRINCIPAL, OR REDEMPTION PRICE, OF OR INTEREST ON THE SERIES 2008 BONDS IS A GENERAL DEBT, LIABILITY OR OBLIGATION OF THE COUNTY OR THE STATE OF CALIFORNIA. 16

27 Released Revenues The Indenture permits the County to cause a category of income, receipts or other revenues then included in the definition of Revenues to be excluded from such definition for all purposes of the Indenture (such Revenues so excluded constituting Released Revenues ). Such exclusion will be effective from the date the County files all of the following with the Trustee: (a) a written request from an Authorized Airport Representative to release such category of income, receipts and other revenues from the definition of Revenues contained in the Indenture, accompanied by a written certificate of an Authorized Airport Representative certifying that the County is in compliance with all requirements of the Indenture; (b) a certificate of an Authorized Airport Representative or a report of an Independent Certified Public Accountant to the effect that Net Revenues, excluding the category of Revenues proposed to become Released Revenues, for each of the two Fiscal Years for which audited financial statements are available immediately preceding the date of such certificate or report, were sufficient to satisfy the rate covenant set forth in the Indenture and described under Rate Covenant for each of the two such Fiscal Years, assuming that 150% (instead of 125%) was used in the provisions of the Indenture described in subparagraph (b)(i) under the subheading Rate Covenant below, 125% (instead of 110%) was used in the provisions of the Indenture described in subparagraph (b)(ii) under the subheading Rate Covenant below and 110% (instead of 100%) was used in the provisions of the Indenture described in subparagraph (b)(iii) under the subheading Rate Covenant below; (c) a certificate of an Authorized Airport Representative or an Airport Consultant retained by the County to the effect that based upon current knowledge of the operations of the Airport System, Net Revenues, excluding the category of Revenues proposed to become Released Revenues, for the current Fiscal Year (and the preceding Fiscal Year if such year is not included in the certificate required by the Indenture described in clause (b) of this paragraph) are expected to be sufficient to satisfy the rate covenant set forth in the Indenture and described under Rate Covenant below for such Fiscal Year, assuming that 150% (instead of 125%) was used in the provisions of the Indenture described in subparagraph (b)(i) under the subheading Rate Covenant below, 125% (instead of 110%) was used in the provisions of the Indenture described in subparagraph (b)(ii) under the subheading Rate Covenant below and 110% (instead of 100%) was used in the provisions of the Indenture described in subparagraph (b)(iii) under the subheading Rate Covenant below; and (d) a Rating Confirmation in connection with the withdrawal of the category of income, receipts and other revenues proposed to become Released Revenues. Obligations Issued or Incurred under Indenture Under the Indenture, Obligations may be issued or incurred subject to the terms, conditions and limitations established under the Master Indenture, any Supplemental Indenture or Issuing Instrument. Obligations may consist of Bonds or any other obligation of the County issued pursuant to the Master Indenture, any Supplemental Indenture or Issuing Instrument and are secured under the Indenture as Senior Obligations, Subordinate Obligations or Junior Subordinate Obligations. In addition, nothing in the Indenture prohibits the County from issuing obligations payable from and secured by the Trust Estate if such obligations are subordinate in payment and priority to the Junior Subordinate Obligations, the Subordinate Obligations and the Senior Obligations (each, a Junior Obligation ). Pursuant to the Indenture, all Senior Obligations shall be senior in payment and priority to all Subordinate Obligations, Junior Subordinate Obligations and Junior Obligations. The Series 2008 Senior Bonds are Senior Obligations under the Indenture. Senior Obligations include Senior Bonds, Reimbursement Obligations related to Senior Bonds and Net Payments due under Qualified Swaps related to Senior Bonds but do not include Termination Payments under Qualified Swaps related to Senior Bonds. The Series 2008 Subordinate Bonds are Subordinate Obligations under the Indenture. Subordinate Obligations include Termination Payments under Qualified Swaps related to Senior Bonds, Subordinate Bonds, Reimbursement Obligations related to Subordinate Bonds and Net Payments under 17

28 Qualified Swaps related to Subordinate Bonds but do not include Termination Payments under Qualified Swaps related to Subordinate Bonds. Junior Subordinate Obligations include any Termination Payments under Qualified Swaps for Subordinate Bonds, Junior Subordinate Bonds, Reimbursement Obligations related to Junior Subordinate Bonds and Net Payments and Termination Payments under Swaps related to Junior Subordinate Bonds. As of the date of issuance of the Series 2008 Bonds, there will be no Junior Subordinate Obligations or Junior Obligations Outstanding under the Indenture. See APPENDIX D SUMMARY OF THE INDENTURE. Flow of Airport System Revenues Under the Indenture all Revenues are required to be promptly deposited upon receipt thereof to the credit of a special fund designated as the Revenue Fund held by the County. As soon as practicable in each month, but in any case no later than the first Business Day of such month, the County will withdraw moneys from the Revenue Fund and apply such moneys to the deposits and payments indicated below, in the amounts and in the priority, set forth below. In the event there is not then on deposit in the Revenue Fund sufficient moneys to make all such deposits and payments, then such deposits and payments will be made in the priority of the lettered paragraphs below. In the event any of the lettered paragraphs below requires more than one such deposit or payment and there is not then on deposit in the Revenue Fund sufficient moneys to make all such deposits and payments, then such deposits and payments will be made pro rata (based on the total amount of such deposits and payments then due) to the extent of available moneys. (a) First, to the Operating Fund (to be held by the County) the amount which, together with any amount therein available to pay such Operating Expenses (other than amounts in the Operating Reserve Account), is equal to the total amount appropriated for Operating Expenses in such month pursuant to the then current Annual Budget. (b) Second: (i) to the Senior Debt Service Fund (to be held by the Trustee), the amount, if any, required so that the balance in said Fund shall equal the Accrued Debt Service on all Outstanding Senior Bonds (including the Series 2008 Senior Bonds) as of the last day of such month; (ii) to the extent not included in Debt Service on Senior Bonds, to each Credit Provider of a Credit Support Instrument relating to the Senior Bonds, the amount of the Reimbursement Obligation, if any, payable by the County as of the last day of such month in accordance with each applicable Credit Support Agreement; (iii) to each Qualified Counterparty, the amount of Net Payments, if any, payable by the County as of the last day of such month in accordance with each applicable Qualified Swap relating to the Senior Obligations; and (iv) to the applicable trustee or paying agent for, or owner or payee of, Outstanding Senior Obligations not specified above in this subparagraph (b), the amount, if any, required to be paid during such month to such trustee, paying agent, owner or payee as and to the extent required by the Supplemental Indentures or Issuing Instruments for payment of such Outstanding Senior Obligations. (c) Third: (i) subject to the provisions of the Indenture permitting the deposit of a Reserve Guaranty or Reserve Guaranties in lieu of cash, to the Senior Debt Service Reserve Fund (to be held by 18

29 the Trustee) the amount, if any, required to maintain the Senior Debt Service Reserve Fund at the applicable Senior Debt Service Reserve Requirement; provided that the maximum amount required to be deposited into the Senior Debt Service Reserve Fund in any month shall not exceed one-twelfth (1/12) of the applicable Senior Debt Service Reserve Requirement; (ii) to each Senior Series Debt Service Reserve Fund (to be held by the Trustee), the amount, if any, required to be paid during such month pursuant to the applicable Supplemental Indenture to maintain each Senior Series Debt Service Reserve Fund at the amount required by such Supplemental Indenture; (iii) to the applicable trustee or paying agent for, or owner of, Outstanding Senior Obligations other than Senior Bonds, the amount, if any, required to be paid during such month to such trustee, paying agent or owner pursuant to the Issuing Instruments for such Outstanding Senior Obligations to maintain each debt service reserve for such Outstanding Senior Obligations at the amount required by the applicable Issuing Instrument; and (iv) to each Reserve Guaranty Provider relating to Senior Obligations, the amount, if any, payable by the County as of the last day of such month in accordance with each applicable Reserve Guaranty Agreement. (d) Fourth, to the Rebate Fund (to be held by the County), the amount required to be paid for Senior Obligations pursuant to the Rebate Instructions. (e) Fifth: (i) to the Subordinate Debt Service Fund (to be held by the Trustee), the amount, if any, required so that the balance in said Fund shall equal the Accrued Debt Service on all Outstanding Subordinate Bonds (including the Series 2008 Subordinate Bonds) as of the last day of such month; (ii) to the extent not included in Debt Service on Subordinate Bonds, to each Credit Provider of a Credit Support Instrument relating to the Subordinate Bonds, the amount of the Reimbursement Obligation, if any, payable by the County as of the last day of such month in accordance with each applicable Credit Support Agreement; (iii) to each Qualified Counterparty, the amount of Net Payments, if any, payable by the County as of the last day of such month in accordance with each applicable Qualified Swap relating to the Subordinate Obligations or investments in funds established by the Indenture; (iv) to the applicable trustee or paying agent for, or owner or payee of, Outstanding Subordinate Obligations not specified above in this subparagraph (e), the amount, if any, required to be paid during such month to such trustee, paying agent, owner or payee as and to the extent required by the Supplemental Indentures or Issuing Instruments for payment of such Outstanding Subordinate Obligations; and (v) to each Qualified Counterparty, the balance of the amounts to be paid by the County, if any, as of the last day of such month in accordance with each applicable Qualified Swap relating to Senior Obligations, including any Termination Payments. (f) Sixth: (i) subject to the provisions of the Indenture permitting the deposit of a Reserve Guaranty or Reserve Guaranties in lieu of cash, to the Subordinate Debt Service Reserve Fund (to be held by the Trustee), the amount, if any, required to maintain the Subordinate Debt Service Reserve Fund at the applicable Subordinate Debt Service Reserve Requirement; provided that the maximum amount 19

30 required to be deposited into the Subordinate Debt Service Reserve Fund in any month shall not exceed one-twelfth (1/12) of the applicable Subordinate Debt Service Reserve Requirement (ii) to each Subordinate Series Debt Service Reserve Fund (to be held by the Trustee), the amount, if any, required to be paid during such month pursuant to the applicable Supplemental Indenture to maintain each Subordinate Series Debt Service Reserve Fund at the amount required by such Supplemental Indenture; (iii) to the applicable trustee or paying agent for, or owner of, Outstanding Subordinate Obligations other than Subordinate Bonds, the amount, if any, required to be paid during such month to such trustee, paying agent or owner pursuant to the Issuing Instruments for such Outstanding Subordinate Obligations to maintain each debt service reserve for such Outstanding Subordinate Obligations at the amount required by the applicable Issuing Instrument; and (iv) to each Reserve Guaranty Provider relating to Subordinate Obligations, the amount, if any, payable by the County as of the last day of such month in accordance with each applicable Reserve Guaranty Agreement. (g) Seventh, to the Rebate Fund (to be held by the County), the amount required to be paid for Subordinate Obligations pursuant to the Rebate Instructions. (h) Eighth, to the Operating Reserve Account (to be held by the County) one-twelfth (1/12) of the Operating Reserve Requirement, but only to the extent such deposit is required to make the amount on deposit in the Operating Reserve Account equal to the Operating Reserve Requirement. (i) Ninth, to the Junior Subordinate Fund (to be held by the Trustee), the amount, if any, required to be paid during such month with respect to Junior Subordinate Obligations. (j) Tenth, to the Rebate Fund (to be held by the County), the amount required to be paid for Junior Subordinate Obligations pursuant to the Rebate Instructions. (k) Eleventh, to the Reserve and Contingency Fund (to be held by the County) an amount equal to the greater of (x) one-twelfth (1/12th) of $2,000,000 or (y) the amount, if any, provided for deposit therein during such month pursuant to the then-current Annual Budget, but only to the extent such deposit is required to make the amount on deposit in the Reserve and Contingency Fund equal to the Reserve and Contingency Requirement. Reserve and Contingency Requirement means, as of any date of calculation, an amount equal to $2,000,000 or such greater amount as is specified in the then-current Annual Budget. (l) Twelfth, on the last Business Day of each month after making the deposits and payments required by subsection (a) through subsection (k) above, the County may withdraw from the Revenue Fund and deposit in the Capital Improvement Fund (to be held by the County) the balance, if any, of moneys remaining in the Revenue Fund. Availability of Available PFC Revenues to Pay Series 2008 Subordinate Bonds Debt Service Pursuant to the Indenture, the County has designated the Passenger Facility Charges ( PFCs ) in the amounts in each of the Fiscal Years shown in the following table as Available PFC Revenues, and determined that the Series 2008 Subordinate Bonds will be secured by such Available PFC Revenues: 20

31 Fiscal Year Ending June 30 Passenger Facility Charges 2008 $2,179, ,939, ,821, ,354, ,266, ,180, ,077, ,973, ,889,565 The Indenture provides that the County will not reduce the amount of Available PFC Revenues designated in the Indenture until after June 30, 2016 and the designation of Available PFC Revenues pursuant to the Indenture will be irrevocable through and including June 30, The Indenture further provides that, subject to the preceding sentence, notwithstanding any other provision of the Indenture, the County and the Trustee may amend the provisions of the Indenture specifying the amount of Available PFC Revenues securing the Series 2008 Subordinate Bonds, including to reduce (or eliminate completely) the amount of such Available PFC Revenues with respect to any Fiscal Year, without the consent of any Holder or Owner of any Obligation or any other Person (including any Credit Provider). The Indenture provides that at any time and from time to time the County may elect to use Available PFC Revenues securing the Series 2008 Subordinate Bonds to secure any additional future Obligation. No consent from any Owner of any Obligation (including Owners of Series 2008 Subordinate Bonds) secured by Available PFC Revenues, or from any Credit Provider, is required as a condition to the issuance or incurrence of any future Obligations secured by Available PFC Revenues. The County is not required to increase the amount of Available PFC Revenues upon the issuance or incurrence of any additional Obligations secured by Available PFC Revenues. All Available PFC Revenues will be promptly deposited in the Available PFC Account established pursuant to the Indenture and held by the Trustee. Notwithstanding any other provision of the Indenture, the Available PFC Account and the Available PFC Revenues will secure on a pro rata pari passu basis all Obligations, whenever issued or incurred and whether Senior Obligations, Subordinate Obligations, or Junior Subordinate Obligations, that are specified in an applicable Supplemental Indenture or Issuing Instrument to be secured by the Available PFC Account and the Available PFC Revenues. See SUMMARY OF FINANCIAL OPERATIONS Passenger Facilities Charges for a discussion of certain matters relating to PFC revenues. Senior Debt Service Reserve Fund The Indenture establishes a Senior Debt Service Reserve Fund which is held by the Trustee. If on the Business Day immediately preceding an Interest Payment Date for Participating Senior Bonds (including the Series 2008 Senior Bonds), or any other date on which any principal or interest on the Outstanding Participating Senior Bonds is due, after applying amounts in the Senior Debt Service Fund ratably (based on the amounts due) to the payment of the principal and interest then due with respect to all Outstanding Senior Bonds, the amount in the Senior Debt Service Fund available for payment of the principal and interest then due with respect to all Outstanding Participating Senior Bonds is less than the amount due on such date, the Trustee will apply amounts in the Senior Debt Service Reserve Fund ratably (based on amounts due) to the extent necessary to make good the deficiency for the principal and interest then due with respect to the Outstanding Participating Senior Bonds. The Indenture requires the Senior Debt Service Reserve Fund to be maintained at the Senior Debt Service Reserve Requirement (defined below). Upon issuance of the Series 2008 Senior Bonds, the Senior Debt Service Reserve Requirement will equal $35,562, which will initially be satisfied by the use of a Municipal Bond Debt Service 21

32 Reserve Insurance Policy to be issued by the Insurer. See BOND INSURANCE Municipal Bond Debt Service Reserve Insurance Policies and APPENDIX I FORM OF MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICIES. With respect to the Senior Debt Service Reserve Fund, Senior Debt Service Reserve Requirement means, as of any date of calculation, an amount equal to the least of (a) 10% of the initial offering price to the public of the Participating Senior Bonds as determined under the Code, or (b) the greatest amount of Bond Debt Service for the Participating Senior Bonds in any Fiscal Year during the period commencing with the Fiscal Year in which the determination is being made and terminating with the last Fiscal Year in which any Participating Senior Bond is due, or (c) 125% of the sum of the Bond Debt Service for the Participating Senior Bonds for all Fiscal Years during the period commencing with the Fiscal Year in which such calculation is made (or if appropriate, the first full Fiscal Year following the issuance of any Participating Senior Bonds) and terminating with the last Fiscal Year in which any Bond Debt Service for the Participating Senior Bonds is due, divided by the number of such Fiscal Years, all as computed and determined by the County and specified in writing to the Trustee; provided, however that in determining Bond Debt Service with respect to any Participating Senior Bonds that constitute Variable Rate Obligations, the interest rate on such Participating Senior Bonds for any period as to which such interest rate has not been established shall be assumed to be 110% of the daily average interest rate on such Participating Senior Bonds during the 12 months ending with the month preceding the date of calculation, or such shorter period that such Participating Senior Bonds shall have been Outstanding (or if such Participating Senior Bonds that constitute Variable Rate Obligations have not yet been issued, then the interest rate on such Participating Senior Bonds shall be assumed to be equal to 110% of the average SIFMA Index during the last 12 months ending with the month preceding the date of calculation). The Indenture permits the County to satisfy the Senior Debt Service Reserve Requirement by depositing in the Senior Debt Service Reserve Fund, in lieu of cash, a Reserve Guaranty or Reserve Guaranties in an aggregate amount equal to the difference between the applicable Senior Debt Service Reserve Requirement and the sums, if any, then on deposit in the Senior Debt Service Reserve Fund or being deposited in the Senior Debt Service Reserve Fund concurrently with such Reserve Guaranty or Guaranties. See APPENDIX D SUMMARY OF THE INDENTURE THE MASTER INDENTURE Establishment and Application of Funds - Senior Debt Service Reserve Fund. (As described above, the County has elected to satisfy the Senior Debt Service Reserve Requirement by utilizing a Municipal Bond Debt Service Reserve Insurance Policy to be issued by the Insurer.) As described above, the Indenture provides that the Senior Debt Service Reserve Fund will secure payment of principal of and interest on all Participating Senior Bonds (including the Series 2008 Senior Bonds). In addition to the Series 2008 Senior Bonds, additional Participating Senior Bonds secured, as to payments of principal and interest, by the Senior Debt Service Reserve Fund may be issued from time to time upon compliance with the terms of the Indenture. See Additional Senior Obligations below. The Indenture also permits the County to establish separate Senior Series Debt Service Reserve Funds upon the issuance of additional Senior Bonds that are not Participating Senior Bonds and to establish reserve funds for other Senior Obligations. Such Senior Series Debt Service Reserve Funds and reserve funds for other Senior Obligations will not secure payment of principal, or Redemption Price, of or interest on the Series 2008 Bonds. In addition, the Indenture permits reserve funds to be established for Subordinate Obligations and Junior Subordinate Obligations. Such reserve funds will not secure payment of principal, or Redemption Price, of or interest on the Series 2008 Senior Bonds. The Senior Debt Service Reserve Fund does not secure payment of principal, or Redemption Price, of or interest on the Series 2008 Subordinate Bonds or any other Subordinate Obligation, Junior Subordinate Obligation or Junior Obligation. Subordinate Debt Service Reserve Fund The Indenture establishes a Subordinate Debt Service Reserve Fund which is held by the Trustee. If on the Business Day immediately preceding an Interest Payment Date for Participating Subordinate 22

33 Bonds (including the Series 2008 Subordinate Bonds), or any other date on which any principal or interest on the Outstanding Participating Subordinate Bonds is due, after applying amounts in the Subordinate Debt Service Fund ratably (based on the amounts due) to the payment of the principal and interest then due with respect to all Outstanding Subordinate Bonds, the amount in the Subordinate Debt Service Fund available for payment of the principal and interest then due with respect to all Outstanding Participating Subordinate Bonds is less than the amount due on such date, the Trustee will apply amounts in the Subordinate Debt Service Reserve Fund ratably (based on amounts due) to the extent necessary to make good the deficiency for the principal and interest then due with respect to the Outstanding Participating Subordinate Bonds. The Indenture requires the Subordinate Debt Service Reserve Fund to be maintained at the Subordinate Debt Service Reserve Requirement (defined below). Upon issuance of the Series 2008 Subordinate Bonds, the Subordinate Debt Service Reserve Requirement will equal $8,354, which will initially be satisfied by the use of a Municipal Bond Debt Service Reserve Insurance Policy to be issued by the Insurer. See BOND INSURANCE Municipal Bond Debt Service Reserve Insurance Policies and APPENDIX I FORM OF MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICIES. With respect to the Subordinate Debt Service Reserve Fund, Subordinate Debt Service Reserve Requirement means, as of any date of calculation, an amount equal to the least of (a) 10% of the initial offering price to the public of the Participating Subordinate Bonds as determined under the Code, or (b) the greatest amount of Bond Debt Service for the Participating Subordinate Bonds in any Fiscal Year during the period commencing with the Fiscal Year in which the determination is being made and terminating with the last Fiscal Year in which any Participating Subordinate Bond is due, or (c) 125% of the sum of the Bond Debt Service for the Participating Subordinate Bonds for all Fiscal Years during the period commencing with the Fiscal Year in which such calculation is made (or if appropriate, the first full Fiscal Year following the issuance of any Participating Subordinate Bonds) and terminating with the last Fiscal Year in which any Bond Debt Service for the Participating Subordinate Bonds is due, divided by the number of such Fiscal Years, all as computed and determined by the County and specified in writing to the Trustee; provided, however that in determining Bond Debt Service with respect to any Participating Subordinate Bonds that constitute Variable Rate Obligations, the interest rate on such Participating Subordinate Bonds for any period as to which such interest rate has not been established shall be assumed to be 110% of the daily average interest rate on such Participating Subordinate Bonds during the 12 months ending with the month preceding the date of calculation, or such shorter period that such Participating Subordinate Bonds shall have been Outstanding (or if such Participating Subordinate Bonds that constitute Variable Rate Obligations have not yet been issued, then the interest rate on such Participating Subordinate Bonds shall be assumed to be equal to 110% of the average SIFMA Index during the last 12 months ending with the month preceding the date of calculation). The Indenture permits the County to satisfy the Subordinate Debt Service Reserve Requirement by depositing in the Subordinate Debt Service Reserve Fund, in lieu of cash, a Reserve Guaranty or Reserve Guaranties in an aggregate amount equal to the difference between the applicable Subordinate Debt Service Reserve Requirement and the sums, if any, then on deposit in the Subordinate Debt Service Reserve Fund or being deposited in the Subordinate Debt Service Reserve Fund concurrently with such Reserve Guaranty or Guaranties. See APPENDIX D SUMMARY OF THE INDENTURE THE MASTER INDENTURE Establishment and Application of Funds -Subordinate Debt Service Reserve Fund. (As described above, the County has elected to satisfy the Subordinate Debt Service Reserve Requirement by utilizing a Municipal Bond Debt Service Reserve Insurance Policy to be issued by the Insurer.) As described above, the Indenture provides that the Subordinate Debt Service Reserve Fund will secure payment of principal of and interest on all Participating Subordinate Bonds (including the Series 2008 Subordinate Bonds). In addition to the Series 2008 Subordinate Bonds, additional Participating Subordinate Bonds secured, as to payments of principal and interest, by the Subordinate Debt Service Reserve Fund may be issued from time to time upon compliance with the terms of the Indenture. See Additional Subordinate Obligations below. The Indenture also permits the County to establish separate 23

34 Subordinate Series Debt Service Reserve Funds upon the issuance of additional Subordinate Bonds that are not Participating Subordinate Bonds and to establish reserve funds for other Subordinate Obligations. Such Subordinate Series Debt Service Reserve Funds and reserve funds for other Subordinate Obligations will not secure payment of principal, or Redemption Price, of or interest on the Series 2008 Bonds. In addition, the Indenture permits reserve funds to be established for Senior Obligations and Junior Subordinate Obligations. Such reserve funds will not secure payment of principal, or Redemption Price, of or interest on the Series 2008 Subordinate Bonds. The Subordinate Debt Service Reserve Fund does not secure payment of principal, or Redemption Price, of or interest on the Series 2008 Senior Bonds or any other Senior Obligation, Junior Subordinate Obligation or Junior Obligation. Additional Senior Obligations The Series 2008 Senior Bonds are Senior Obligations under the Indenture. Under the Indenture, the County may, at any time and from time to time, issue any Additional Senior Obligations, provided: (a) an Authorized County Representative or an Airport Consultant has provided to the Trustee a certificate stating that Net Revenues for either the most recent Fiscal Year for which audited financial statements of the Airport System are available or any 12 consecutive months out of the most recent 18 consecutive months immediately preceding the month of issuance of the proposed Additional Senior Obligations were sufficient to satisfy the rate covenant set forth in the Indenture and described herein under Rate Covenant for each of the next five full Fiscal Years following issuance of the Additional Senior Obligations, or each of the next two full Fiscal Years from the issuance of the Additional Senior Obligations during which there is no Capitalized Interest, whichever is later, including the Aggregate Adjusted Annual Debt Service during such Fiscal Years on such proposed Senior Obligations; or (b) an Airport Consultant has provided to the Trustee a certificate stating that, based upon assumptions the Person signing the certificate deems reasonable, projected Net Revenues will be sufficient to satisfy the rate covenant set forth in the Indenture and described herein under Rate Covenant for each of the next five full Fiscal Years following issuance of the Additional Senior Obligations, or each of the next two full Fiscal Years from issuance of the Additional Senior Obligations during which there is no Capitalized Interest, whichever is later, including the Aggregate Adjusted Annual Debt Service during such Fiscal Years on such proposed Senior Obligations. The Indenture provides that, for purposes of (a) and (b) above, the Person signing the certificate required by such clause may assume that, in each relevant Fiscal Year, Accrued Debt Service for Outstanding Obligations will equal Aggregate Adjusted Annual Debt Service for such Fiscal Year. Pursuant to the Indenture, for purposes of (a) above, the County will be allowed to adjust Net Revenues for earnings arising from any increase in the rates, charges and fees for the use of the Airport System which has become effective prior to the issuance of such proposed Additional Senior Obligations but which, during the Fiscal Year or 12-month period utilized by the County for purposes of (a) above, was not in effect for the entire Fiscal Year or 12-month period under consideration, in an amount equal to the amount by which the Net Revenues would have been increased if such increase in rates, charges and fees had been in effect during the whole Fiscal Year or 12-month period under consideration, as determined by an Authorized County Representative. Under the Indenture, for purposes of (b) above, in estimating Net Revenues, the Person signing the certificate required by such clause may take into account (1) Revenues from Capital Improvements reasonably expected to become available during the period for which the estimates are provided, (2) any increase in fees, rates, charges, rentals or other sources of Revenues which has been approved by the Board and will be in effect during the period for which the estimates are provided or (3) any other increases in Revenues which the Person signing the certificate believes to be a reasonable assumption for such period. 24

35 With respect to Operating Expenses of the County, the Person signing the certificate required by the provisions of the Indenture described in (b) above shall use such assumptions as such Person believes to be reasonable, taking into account (1) historical Operating Expenses of the County, (2) Operating Expenses associated with the Capital Improvements to be funded with the proceeds of the Additional Senior Obligations proposed to be issued and any other new Capital Improvements and Airport System facilities and (3) such other factors, including inflation and changing operations or policies of the County, as the Person signing such certificate believes to be appropriate. The Person signing the certificate required by the provisions of the Indenture described in (b) above shall include in such certificate or in a separate accompanying report a description of the assumptions used and the calculations made in determining the estimated Net Revenues and shall also set forth the calculations of Aggregate Adjusted Annual Debt Service, which calculations may be based upon information provided by the County. For purposes of preparing the certificate or certificates described above, the Authorized County Representative or Airport Consultant, as applicable, may rely upon financial statements prepared by the County which have not been subject to audit by an Independent Certified Public Accountant if audited financial statements for the Fiscal Year or period are not available; provided, however, that an Authorized County Representative shall certify as to their accuracy and that such financial statements were prepared substantially in accordance with Generally Accepted Accounting Principles. Neither of the certificates described under (a) or (b) above shall be required if the proceeds of Additional Senior Obligations being issued will be used to pay Costs of completing the Construction of a Capital Improvement for which Senior Obligations have previously been issued and the principal amount of such Additional Senior Obligations being issued for completion purposes does not exceed an amount equal to 10% of the principal amount of the Senior Obligations originally issued for such Capital Improvement as shown in a written certificate of an Authorized County Representative and there is delivered to the Trustee (1) a certificate of an Authorized County Representative or an Airport Consultant stating that the nature and purpose of such Capital Improvement has not materially changed and that the proceeds of such Additional Senior Obligations plus any other moneys in the Construction Fund available to pay the Costs of such Capital Improvement are expected to be sufficient to pay the Costs of competing the Construction of the Capital Improvement, and (2) a certificate of an Authorized County Representative to the effect that (A) all of the proceeds (including investment earnings on amounts in the Construction Fund allocable to such Capital Improvement) of the Senior Obligations issued to finance such Capital Improvement have been or will be used to pay Costs of the Capital Improvement, indicating the amount of such proceeds and investment earnings; and (B) the then estimated Costs of the Construction of the Capital Improvement. Without satisfying the requirements of the Indenture described above under this subheading Additional Senior Obligations, the County may, at any time and from time to time, issue or enter into an Obligation which is a Qualified Swap, the Net Payments under which shall constitute Senior Obligations, provided that at the time of entering into such Swap (1) the Qualified Swap shall relate to a principal amount of Outstanding Senior Obligations or Senior Obligations issued or expected to be issued; (2) the notional amount of the Qualified Swap shall not exceed the principal amount of the related Senior Obligations or Senior Obligations expected to be issued; and (3) the counterparty shall be a Qualified Counterparty. The County may, at any time and from time to time, issue Refunding Senior Obligations provided that either: (1) the requirements of the Indenture, with respect to issuing Additional Senior Obligations generally, described above under this subheading Additional Senior Obligations, are satisfied upon the issuance of such Refunding Senior Obligations and the application of the proceeds thereof; or (2) the Trustee has received a certificate of an Authorized County Representative certifying that the Aggregate Adjusted Annual Debt Service for all Obligations to be Outstanding after the issuance of such Refunding Senior Obligations shall not exceed the Aggregate Adjusted Annual Debt Service for all Obligations Outstanding immediately prior to the issuance of such Refunding Senior Obligations in each Test Year. 25

36 Without satisfying the requirements of the Indenture described above under this subheading Additional Senior Obligations, the County may issue the Series 2008 Senior Bonds. Without satisfying the requirements of the Indenture described above under this subheading Additional Senior Obligations, the County may, at any time and from time to time, enter into Credit Support Agreements or otherwise become obligated for Reimbursement Obligations with respect to Senior Obligations. All Senior Obligations shall be senior in payment and priority to all Subordinate Obligations, Junior Subordinate Obligations, shall be paid with the priority provided in the Indenture, and shall be entitled to all of the benefits provided to Senior Obligations by the terms of the Indenture and any applicable Issuing Instrument. As described above under Released Revenues, upon compliance with the terms of the Indenture, the County may cause a category of income, receipts or other revenues then included in the definition of Revenues to be excluded from such definition for all purposes of the Indenture. The Indenture provides that Debt Service paid from such Released Revenues, or to be paid from any money other than Revenues (including Released Revenues) deposited with the Trustee or another Fiduciary exclusively for such purpose, is excluded from the calculation of Aggregate Adjusted Annual Debt Service under the Indenture and thus, Debt Service paid from such Released Revenues or to be paid from any money other than Revenues (including Released Revenues) deposited with the Trustee or another Fiduciary exclusively for such purpose, is not taken into account with respect to the tests contained in the Indenture and described under this subheading Additional Senior Obligations. See also Rate Covenant below. The Indenture also permits the County, upon the terms described below under Rate Covenant, to specify that certain Obligations will be payable from and secured by Available Revenues. Under the Indenture, if Available Revenues or moneys other than Revenues have been irrevocably committed pursuant to a Supplemental Indenture or Issuing Instrument for the purpose of paying Debt Service on specified Obligations, then the Debt Service to be paid from such amounts is excluded from the calculation of Aggregate Adjusted Annual Debt Service under the Indenture and thus such Debt Service is not taken into account with respect to the tests contained in the Indenture and described under this subheading Additional Senior Obligations. In addition, as described above under Pledge of Trust Estate; Net Revenues, the Indenture permits the County to transfer amounts from the Capital Improvement Fund to the Revenue Fund in which case, the amounts so transferred will be deemed to be Revenues for the purposes of all tests under the Indenture, including the tests described above under this subheading Additional Senior Obligations. Such actual transfers of amounts in the Capital Improvement Fund to the Revenue Fund are not subject to the limitations on Transfers described below under Rate Covenant. The Series 2008 Senior Bonds constitute Senior Obligations pursuant to the Indenture. In connection with the capital improvement plan for the Airport System, the County anticipates the issuance of approximately $293 million of additional Senior Obligations by Fiscal Year See AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM Financing Plan for TMP; Future Financings. Additional Subordinate Obligations The Series 2008 Subordinate Bonds are Subordinate Obligations under the Indenture. Under the Indenture, the County may, at any time and from time to time, issue any Additional Subordinate Obligations, provided: (a) an Authorized County Representative or an Airport Consultant has provided to the Trustee a certificate stating that Net Revenues for either the most recent Fiscal Year for which audited 26

37 financial statements of the Airport System are available or any 12 consecutive months out of the most recent 18 consecutive months immediately preceding the month of issuance of the proposed Additional Subordinate Obligations were sufficient to satisfy the rate covenant set forth in the Indenture and described herein under Rate Covenant for each of the next five full Fiscal Years following issuance of the Additional Subordinate Obligations, or each of the next two full Fiscal Years from the issuance of the Additional Subordinate Obligations during which there is no Capitalized Interest, whichever is later, including the Aggregate Adjusted Annual Debt Service during such Fiscal Years on such proposed Subordinate Obligations; or (b) an Airport Consultant has provided to the Trustee a certificate stating that, based upon assumptions the Person signing the certificate deems reasonable, projected Net Revenues will be sufficient to satisfy the rate covenant set forth in the Indenture and described herein under -Rate Covenant for each of the next five full Fiscal Years following issuance of the Additional Subordinate Obligations, or each of the next two full Fiscal Years from issuance of the Additional Subordinate Obligations during which there is no Capitalized Interest, whichever is later, including the Aggregate Adjusted Annual Debt Service during such Fiscal Years on such proposed Subordinate Obligations. The Indenture provides that, for purposes of (a) and (b) above, the Person signing the certificate required by such clause may assume that, in each relevant Fiscal Year, Accrued Debt Service for Outstanding Obligations will equal Aggregate Adjusted Annual Debt Service for such Fiscal Year. Pursuant to the Indenture, for purposes of (a) above, the County shall be allowed to adjust Net Revenues for earnings arising from any increase in the rates, charges and fees for the use of the Airport System which has become effective prior to the issuance of such proposed Additional Subordinate Obligations but which, during the Fiscal Year or 12-month period utilized by the County for purposes of (a) above, was not in effect for the entire Fiscal Year or 12-month period under consideration, in an amount equal to the amount by which the Net Revenues would have been increased if such increase in rates, charges and fees had been in effect during the whole Fiscal Year or 12-month period under consideration, as determined by an Authorized County Representative. Under the Indenture, for purposes of (b) above, in estimating Net Revenues, the Person signing the certificate required by such clause may take into account (1) Revenues from Capital Improvements reasonably expected to become available during the period for which the estimates are provided, (2) any increase in fees, rates, charges, rentals or other sources of Revenues which has been approved by the Board and will be in effect during the period for which the estimates are provided or (3) any other increases in Revenues which the Person signing the certificate believes to be a reasonable assumption for such period. With respect to Operating Expenses of the County, the Person signing the certificate required by (b) above shall use such assumptions as such Person believes to be reasonable, taking into account (1) historical Operating Expenses of the County, (2) Operating Expenses associated with the Capital Improvements to be funded with the proceeds of the Additional Subordinate Obligations proposed to be issued and any other new Capital Improvements and Airport System facilities and (3) such other factors, including inflation and changing operations or policies of the County, as the Person signing such certificate believes to be appropriate. The Person signing the certificate required by (b) above shall include in such certificate or in a separate accompanying report a description of the assumptions used and the calculations made in determining the estimated Net Revenues and shall also set forth the calculations of Aggregate Adjusted Annual Debt Service, which calculations may be based upon information provided by the County. For purposes of preparing the certificate or certificates described above, the Authorized County Representative or Airport Consultant, as applicable, may rely upon financial statements prepared by the County which have not been subject to audit by an Independent Certified Public Accountant if audited financial statements for the Fiscal Year or period are not available; provided, however, that an Authorized 27

38 County Representative shall certify as to their accuracy and that such financial statements were prepared substantially in accordance with Generally Accepted Accounting Principles. Neither of the certificates described under (a) or (b) above shall be required if the proceeds of Additional Subordinate Obligations being issued will be used to pay Costs of completing the Construction of a Capital Improvement for which Subordinate Obligations have previously been issued and the principal amount of such Additional Subordinate Obligations being issued for completion purposes does not exceed an amount equal to 10% of the principal amount of the Subordinate Obligations originally issued for such Capital Improvement as shown in a written certificate of an Authorized County Representative and there is delivered to the Trustee (1) a certificate of an Authorized County Representative or an Airport Consultant stating that the nature and purpose of such Capital Improvement has not materially changed and that the proceeds of such Additional Subordinate Obligations plus any other moneys in the Construction Fund available to pay the Costs of such Capital Improvement are expected to be sufficient to pay the Costs of competing the Construction of the Capital Improvement, and (2) a certificate of an Authorized County Representative to the effect that (A) all of the proceeds (including investment earnings on amounts in the Construction Fund allocable to such Capital Improvement) of the Subordinate Obligations issued to finance such Capital Improvement have been or will be used to pay Costs of the Capital Improvement, indicating the amount of such proceeds and investment earnings; and (B) the then estimated Costs of the Construction of the Capital Improvement. Without satisfying the requirements of the Indenture described above under this subheading Additional Subordinate Obligations, the County may, at any time and from time to time, issue or enter into an Obligation which is a Qualified Swap, the Net Payments under which shall constitute Subordinate Obligations, provided that at the time of entering into such Swap (i) the Qualified Swap shall relate to a principal amount of Outstanding Subordinate Obligations or Subordinate Obligations issued or expected to be issued; (ii) the notional amount of the Qualified Swap shall not exceed the principal amount of the related Subordinate Obligations or Subordinate Obligations expected to be issued; and (iii) the counterparty shall be a Qualified Counterparty. The County may, at any time and from time to time, issue Refunding Subordinate Obligations provided that either: (1) the requirements of the Indenture, with respect to issuing Additional Subordinate Obligations generally, described above under this subheading Additional Subordinate Obligations are satisfied upon the issuance of such Refunding Subordinate Obligations and the application of the proceeds thereof; or (2) the Trustee has received a certificate of an Authorized County Representative certifying that the Aggregate Adjusted Annual Debt Service for all Obligations to be Outstanding after the issuance of such Refunding Subordinate Obligations shall not exceed the Aggregate Adjusted Annual Debt Service for all Obligations Outstanding immediately prior to the issuance of such Refunding Subordinate Obligations in each Test Year. Without satisfying the requirements of the Indenture described above under this subheading Additional Subordinate Obligations, the County may issue the Series 2008 Subordinate Bonds. Without satisfying the requirements of the Indenture described above under this subheading Additional Subordinate Obligations, the County may, at any time and from time to time, enter into Credit Support Agreements or otherwise become obligated for Reimbursement Obligations with respect to Subordinate Obligations. All Subordinate Obligations shall be junior in payment and priority to all Senior Obligations. Subordinate Obligations shall be paid in the priority provided in the Indenture, and only to the extent that funds are available to make such payments as provided therein after the required payments are made with respect to the Senior Obligations. Any exercise of rights or remedies by any holder, owner, or beneficial owner of a Subordinate Obligation, or the Trustee on behalf of the foregoing, shall be subject in all respects to the limitations with respect thereto set forth in the Indenture. All Subordinate Obligations shall 28

39 be subject to the limitations imposed on Subordinate Obligations, by the terms of the Indenture and any applicable Issuing Instrument. As described above under Released Revenues, upon compliance with the terms of the Indenture, the County may cause a category of income, receipts or other revenues then included in the definition of Revenues to be excluded from such definition for all purposes of the Indenture. The Indenture provides that Debt Service paid from such Released Revenues, or to be paid from any money other than Revenues (including Released Revenues) deposited with the Trustee or another Fiduciary exclusively for such purpose, is excluded from the calculation of Aggregate Adjusted Annual Debt Service under the Indenture and thus, Debt Service paid from such Released Revenues or to be paid from any money other than Revenues (including Released Revenues) deposited with the Trustee or another Fiduciary exclusively for such purpose, is not taken into account with respect to the tests contained in the Indenture and described under this subheading Additional Subordinate Obligations. See also Rate Covenant below. The Indenture also permits the County, upon the terms described below under Rate Covenant, to specify that certain Obligations will be payable from and secured by Available Revenues. Under the Indenture, if Available Revenues or moneys other than Revenues have been irrevocably committed pursuant to a Supplemental Indenture or Issuing Instrument for the purpose of paying Debt Service on specified Obligations, then the Debt Service to be paid from such amounts is excluded from the calculation of Aggregate Adjusted Annual Debt Service under the Indenture and thus such Debt Service is not taken into account with respect to the tests contained in the Indenture and described under this subheading Additional Subordinate Obligations. In addition, as described above under Pledge of Trust Estate; Net Revenues, the Indenture permits the County to transfer amounts from the Capital Improvement Fund to the Revenue Fund in which case, the amounts so transferred will be deemed to be Revenues for the purposes of all tests under the Indenture, including the tests described above under this subheading Additional Senior Obligations. Such actual transfers of amounts in the Capital Improvement Fund to the Revenue Fund are not subject to the limitations on Transfers described below under Rate Covenant. The Series 2008 Subordinate Bonds constitute Subordinate Obligations pursuant to the Indenture. In connection with the capital improvement plan for the Airport System, the County anticipates the issuance of approximately $478 million of additional Subordinate Obligations by Fiscal Year See AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM Financing Plan for TMP; Future Financings. Junior Subordinate Obligations, Junior Obligations and Special Facility Obligations Under the Indenture, the County may, at any time and from time to time, issue Junior Subordinate Obligations, Junior Obligations or Special Facility Obligations upon compliance with the terms of the Indenture. See APPENDIX D SUMMARY OF THE INDENTURE THE MASTER INDENTURE Authorization of Bonds and Obligations - Conditions to Issuance of Junior Subordinate Obligations and Special Facilities and Special Facility Obligations. The Indenture permits the County to issue obligations payable from and secured by the Net Revenues and amounts in the Revenue Fund if such obligations are subordinate in payment and priority to the Junior Subordinate Obligations, the Subordinate Obligations and the Senior Obligations (such obligations constituting Junior Obligations pursuant to the Indenture). See APPENDIX D SUMMARY OF THE INDENTURE THE MASTER INDENTURE Covenants and Obligations of the County- Creation of Prior Liens. The County has previously issued its Variable Rate Demand Special Facilities Airport Revenue Bonds, Series 1998 (The Cessna Aircraft Company Project) (the Cessna Special Facilities Bonds ). The 29

40 Cessna Special Facilities Bonds are secured by contractual payments payable to the County by the owner of the financed facility, and are not secured by or payable from Revenues. The Cessna Special Facilities Bonds are a Special Facility Obligation under the Indenture. Rate Covenant Pursuant to the Indenture the County covenants to fulfill the following requirements: (a) The County will, while any of the Obligations remain Outstanding, establish, fix, prescribe and collect rates, tolls, fees, rentals and charges in connection with the ownership and operation of the Airport System and for services rendered in connection therewith, so that Net Revenues in each Fiscal Year will be at least equal to 100% of the aggregate amount of transfers required to be made by the County pursuant to the provisions of the Indenture described herein in paragraphs (b) through (k) under the subheading Flow of Airport System Revenues above during such Fiscal Year. (b) (i) The County further agrees that it will establish, fix, prescribe and collect rates, tolls, fees, rentals and charges in connection with the ownership and operation of the Airport System and for services rendered in connection therewith, so that for each Fiscal Year the Net Revenues for such Fiscal Year plus any Transfer will be equal to at least 125% of Accrued Debt Service on all Outstanding Senior Obligations for such Fiscal Year. For purposes of the provisions of the Indenture described in this subparagraph (b)(i), the amount of any Transfer taken into account will not exceed 25% of the Accrued Debt Service on the Outstanding Senior Obligations for such Fiscal Year. (ii) The County further agrees that it will establish, fix, prescribe and collect rates, tolls, fees, rentals and charges in connection with the ownership and operation of the Airport System and for services rendered in connection therewith, so that for each Fiscal Year the Net Revenues for such Fiscal Year plus any Transfer will be equal to at least 110% of Accrued Debt Service on all Outstanding Senior Obligations and Subordinate Obligations for such Fiscal Year. For purposes of the provisions of the Indenture described in this subparagraph (b)(ii), the amount of any Transfer taken into account shall not exceed 10% of the Accrued Debt Service on the Outstanding Senior Obligations and Subordinate Obligations for such Fiscal Year. (iii) The County further agrees that it will establish, fix, prescribe and collect rates, tolls, fees, rentals and charges in connection with the ownership and operation of the Airport System and for services rendered in connection therewith, so that for each Fiscal Year the Net Revenues for such Fiscal Year will be equal to at least 100% of Accrued Debt Service on all Outstanding Senior Obligations, Junior Obligations and Junior Subordinate Obligations for such Fiscal Year. (c) The County covenants that if Net Revenues in any Fiscal Year are less than the amount specified by the provisions of the Indenture described in paragraph (a) above, or that if Net Revenues together with any Transfer in any Fiscal Year are less than the amount specified by the provisions of the Indenture described in paragraph (b) above, the County will retain and direct an Airport Consultant to make recommendations as to the revision of the County s business operations and its schedule of rates, tolls, fees, rentals and charges for the use of the Airport System and for services rendered by the County in connection with the Airport System. After receiving such recommendations, the County shall, subject to applicable requirements or restrictions imposed by law, and subject to a good faith determination of the Board that such recommendations, in whole or in part, are in the best interests of the County, take all lawful measures to comply with the recommendations of the Airport Consultant as to revisions of the County s business operations and schedule of rates, tolls, fees, rentals and charges as may be necessary to produce Net Revenues, together with any Transfer (only as applied pursuant to the provisions of the Indenture described in paragraph (b) above), in the amount specified in paragraph (a) or (b) above in the next Fiscal Year. 30

41 In the event that Net Revenues, together with any Transfer (only as applied pursuant to the provisions of the Indenture described in paragraph (b) above), for any Fiscal Year (referred to in this paragraph as Fiscal Year One ) are less than the amount specified by the provisions of the Indenture described in paragraph (a) or (b) above but, prior to or during the next succeeding Fiscal Year (referred to in this paragraph as Fiscal Year Two ), the County has taken all lawful measures to comply with the recommendations of the Airport Consultant as to revisions of the County s business operations and schedule of rates, tolls, fees, rentals and charges as required by the provisions of the Indenture described in paragraph (c) above, such deficiency in Net Revenues for Fiscal Year One shall not constitute an Event of Default under the Indenture. Nevertheless, even if the measures required by the provisions of the Indenture described in paragraph (c) above to revise the schedule of rates, tolls, fees, rentals and charges have been taken by the County, in the event the Net Revenues in Fiscal Year Two (as evidenced by the audited financial statements of the County for such Fiscal Year), together with any Transfer (only as applied pursuant to the provisions of the Indenture described in paragraph (b) above), are less than the amount specified by the provisions of the Indenture described in paragraph (a) or (b) above, such deficiency in Net Revenues for Fiscal Year Two, as the second successive year of deficiencies in Net Revenues, shall, with the applicable notice, constitute an Event of Default under the Indenture. As used in the Indenture, the term Transfer means with respect to a Fiscal Year (a) the amount in the Capital Improvement Fund on the last Business Day of such Fiscal Year plus (b) any amounts withdrawn from the Capital Improvement Fund during such Fiscal Year to pay Operating Expenses and to make any required payments or deposits to pay or secure the payment of Obligations less (c) any amounts credited to the Capital Improvement Fund from the Revenue Fund during such Fiscal Year. As described above under Pledge of Trust Estate; Net Revenues, the Indenture permits the County to transfer amounts from the Capital Improvement Fund to the Revenue Fund in which case the amounts so transferred will be deemed to be Revenues for the purposes of all tests under the Indenture, including the tests described above under this subheading Rate Covenant. Such actual transfers of amounts in the Capital Improvement Fund to the Revenue Fund are not subject to the limitations on Transfers described above under this subheading Rate Covenant. In addition, as described above under Released Revenues, upon compliance with the terms of the Indenture, the County may cause a category of income, receipts or other revenues then included in the definition of Revenues to be excluded from such definition for all purposes of the Indenture. The Indenture provides that Debt Service paid from such Released Revenues, or to be paid from any money other than Revenues (including Released Revenue) deposited with the Trustee or another Fiduciary exclusively for such purpose, is excluded from the calculation of Accrued Debt Service under the Indenture and thus, Debt Service paid from such Released Revenues or to be paid from any money other than Revenues (including Released Revenues) deposited with the Trustee or another Fiduciary exclusively for such purpose, is not taken into account with respect to the tests contained in the Indenture and described under this subheading Rate Covenant. The Indenture also provides that at any time and from time to time, the County and the Trustee, without the consent of the Owner of any Obligation and without the consent of any Credit Provider, may enter into a Supplemental Indenture or Issuing Instrument that (1) specifies the amount of Passenger Facility Charges that shall constitute Available PFC Revenues, the amount of Customer Facility Charges that shall constitute Available CFC Revenues or the amount of Grant Funds that shall constitute Available Grant Revenues during each Fiscal Year specified in such Supplemental Indenture or Issuing Instrument or (2) specifies Obligations that will be secured by Available Revenues. Under the Indenture, Debt Service paid from Available Revenues or moneys other than Revenues, including any investment earnings thereon, and Debt Service to be paid from Available Revenues including investment earnings thereon, deposited with the Trustee or another Fiduciary exclusively for such purpose, is excluded from the calculation of Accrued Debt Service under the Indenture and thus, Debt Service paid from such Available Revenues or moneys other than Revenues and Debt Service to be paid from Available Revenues or moneys other than Revenues deposited with the Trustee or another Fiduciary exclusively for such purpose 31

42 is not taken into account with respect to the tests contained in the Indenture and described above under this subheading Rate Covenant. The covenants of the County set forth in the Indenture and described in this caption are referred to herein as the Rate Covenant. Limitation on Remedies The Indenture provides that, as long as any Senior Obligations remain Outstanding, no Event of Default shall exist or may be declared with respect to any Subordinate Obligations or Junior Subordinate Obligations. In addition, as long as any Subordinate Obligations remain Outstanding, no Event of Default shall exist or may be declared with respect to any Junior Subordinate Obligations. The Indenture also provides that Subordinate Obligations are not subject to acceleration if any Senior Obligations are then Outstanding, and Junior Subordinate Obligations are not subject to acceleration if any Subordinate Obligations or Senior Obligations are then Outstanding. For a description of the various remedies and limitations thereon set forth in the Indenture, see APPENDIX D SUMMARY OF THE INDENTURE THE MASTER INDENTURE Events of Default; Remedies. Debt Service Schedule The following table sets forth the Debt Service Schedule for the Series 2008 Bonds. 32

43 TABLE 1 DEBT SERVICE SCHEDULE Series 2008 Senior Bonds Total Senior Series 2008 Subordinate Bonds Total Subordinate Debt Year Series 2008ABonds Series 2008B Bonds Series 2008C Bonds Debt Service Series 2008D Bonds Series 2008E Bonds Service Ending July 1 Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest Total Debt Service 2008 $2,900,000 $1,313,124 $580,000 $2,773, $106,427 $3,480,000 $4,193,353 $795,000 $309,893 $695,000 $380,017 $1,490,000 $689,909 $9,853, ,980,000 7,762,744 2,030,000 16,619,613 $2,840, ,560 7,850,000 25,020, ,000 1,827,556 2,420,000 2,252,300 2,860,000 4,079,856 39,810, ,095,000 7,643,544 2,070,000 16,518,113 2,990, ,880 8,155,000 24,652,536 1,415,000 1,809,956 2,465,000 2,131,300 3,880,000 3,941,256 40,628, ,170,000 7,570,038 2,080,000 16,430,138 3,145, ,400 8,395,000 24,335,575 2,075,000 1,776,350 2,495,000 2,008,050 4,570,000 3,784,400 41,084, ,245,000 7,482,863 2,100,000 16,341,738 3,305, ,860 8,650,000 23,996,460 2,130,000 1,719,288 2,515,000 1,902,013 4,645,000 3,621,300 40,912, ,345,000 7,385,513 2,105,000 16,252,488 5,450,000 23,638,000 2,195,000 1,655,388 2,535,000 1,795,125 4,730,000 3,450,513 37,268, ,465,000 7,278,473 2,115,000 16,163,025 5,580,000 23,441,498 2,265,000 1,585,148 2,540,000 1,687,388 4,805,000 3,272,535 37,099, ,575,000 7,164,128 2,145,000 16,046,700 5,720,000 23,210,828 2,340,000 1,510,403 2,575,000 1,547,688 4,915,000 3,058,090 36,903, ,705,000 7,039,003 2,185,000 15,928,725 5,890,000 22,967,728 2,425,000 1,428,503 2,630,000 1,406,063 5,055,000 2,834,565 36,747, ,865,000 6,875,873 2,210,000 15,808,550 6,075,000 22,684,423 2,510,000 1,341,203 2,650,000 1,261,413 5,160,000 2,602,615 36,522, ,005,000 6,730,935 2,240,000 15,687,000 6,245,000 22,417,935 2,605,000 1,247,078 2,695,000 1,115,663 5,300,000 2,362,740 36,325, ,360,000 6,551,255 2,270,000 15,563,800 6,630,000 22,115,055 2,705,000 1,145,483 2,735, ,438 5,440,000 2,112,920 36,297, ,525,000 6,376,855 2,290,000 15,433,275 6,815,000 21,810,130 2,815,000 1,037,283 2,755, ,175 5,570,000 1,847,458 36,042, ,465,000 6,150,605 2,315,000 15,301,600 6,780,000 21,452,205 2,930, ,868 2,790, ,763 5,720,000 1,573,630 35,525, ,685,000 5,927,355 2,340,000 15,168,488 7,025,000 21,095,843 3,055, ,343 2,825, ,338 5,880,000 1,288,680 35,289, ,925,000 5,693,105 2,360,000 15,033,938 7,285,000 20,727,043 3,190, ,978 2,855, ,900 6,045, ,878 35,051, ,215,000 5,446,855 2,365,000 14,898,238 7,580,000 20,345,093 3,335, ,488 2,865, ,738 6,200, ,225 34,804, ,490,000 5,186, ,000 14,762,250 10,855,000 19,948,355 3,495, ,488 3,495, ,488 34,653, ,020,000 4,661, ,000 14,741,263 11,410,000 19,402,868 3,670, ,938 3,670, ,938 34,665, ,590,000 4,110,605 13,135,000 14,718,838 16,725,000 18,829,443 35,554, ,755,000 3,933,730 13,890,000 13,963,575 17,645,000 17,897,305 35,542, ,940,000 3,750,293 14,690,000 13,164,900 18,630,000 16,915,193 35,545, ,135,000 3,555,543 15,460,000 12,393,675 19,595,000 15,949,218 35,544, ,345,000 3,351,118 16,265,000 11,582,025 20,610,000 14,933,143 35,543, ,560,000 3,136,268 17,120,000 10,728,113 21,680,000 13,864,380 35,544, ,910,750 22,820,000 9,829,313 22,820,000 12,740,063 35,560, ,910,750 24,020,000 8,631,263 24,020,000 11,542,013 35,562, ,910,750 25,280,000 7,370,213 25,280,000 10,280,963 35,560, ,910,750 26,605,000 6,043,013 26,605,000 8,953,763 35,558, ,910,750 28,005,000 4,646,250 28,005,000 7,557,000 35,562, ,910,750 29,475,000 3,175,988 29,475,000 6,086,738 35,561, ,910,750 31,020,000 1,628,550 31,020,000 4,539,300 35,559, ,400,000 2,910,750 28,400,000 2,910,750 31,310, ,815,000 1,490,750 29,815,000 1,490,750 31,305,750 Totals: $169,575,000 $166,854,279 $314,340,000 $403,348,452 $12,280,000 $1,743,127 $496,195,000 $571,945,858 $46,390,000 $21,831,628 $43,040,000 $20,901,367 $89,430,000 $42,732,994 $1,200,303,852 33

44 BOND INSURANCE Bond Insurance Policy Concurrently with the issuance of the Series 2008 Bonds, Financial Security Assurance Inc. ("Financial Security") will issue its Municipal Bond Insurance Policy (the "Policy") for the Series 2008A Bonds maturing on July 1 of the years 2010 through 2041, inclusive, the Series 2008B Bonds maturing on July 1 of the years 2010 through 2039, inclusive, the Series 2008C Bonds maturing on July 1, 2012, the Series 2008D Bonds maturing on July 1 of the years 2011 through 2026, inclusive, and the Series 2008E Bonds maturing on July 1 of the years 2011 through 2024, inclusive, (collectively, the Insured Bonds ). The Policy guarantees the scheduled payment of principal of and interest on the Insured Bonds when due as set forth in the form of the Policy included as Appendix H to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Municipal Bond Debt Service Reserve Insurance Policies Concurrently with the issuance of the Series 2008 Senior Bonds, Financial Security will issue its Municipal Bond Debt Service Reserve Insurance Policy, which the County will use to satisfy the Senior Debt Service Reserve Requirement. Concurrently with the issuance of the Series 2008 Subordinate Bonds, Financial Security will issue a separate Municipal Bond Debt Service Reserve Insurance Policy, which the County will use to satisfy the Subordinate Debt Service Reserve Requirement. See APPENDIX I FORM OF MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICIES. The Municipal Bond Debt Service Reserve Insurance Policies are not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. Financial Security Assurance Inc. Financial Security is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Financial Security Assurance Holdings Ltd. ("Holdings"). Holdings is an indirect subsidiary of Dexia, S.A., a publicly held Belgian corporation, and of Dexia Credit Local, a direct whollyowned subsidiary of Dexia, S.A. Dexia, S.A., through its bank subsidiaries, is primarily engaged in the business of public finance, banking and asset management in France, Belgium and other European countries. No shareholder of Holdings or Financial Security is liable for the obligations of Financial Security. At December 31, 2007, Financial Security's consolidated policyholders' surplus and contingency reserves were approximately $2,703,119,716 and its total net unearned premium reserve was approximately $2,274,576,959 in accordance with statutory accounting principles. At December 31, 2007, Financial Security's consolidated shareholder s equity was approximately $2,962,301,379 and its total net unearned premium reserve was approximately $1,796,984,819 in accordance with generally accepted accounting principles. The consolidated financial statements of Financial Security included in, or as exhibits to, the annual and quarterly reports filed after December 31, 2007 by Holdings with the Securities and Exchange Commission are hereby incorporated by reference into this Official Statement. All financial statements of Financial Security included in, or as exhibits to, documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this Official Statement and before the termination of the offering of the Insured Bonds shall be deemed incorporated by reference into this Official Statement. Copies of materials incorporated by reference will be provided upon request to 34

45 Financial Security Assurance Inc.: 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). The Policy does not protect investors against changes in market value of the Insured Bonds, which market value may be impaired as a result of changes in prevailing interest rates, changes in applicable ratings or other causes. Financial Security makes no representation regarding the Insured Bonds or the advisability of investing in the Insured Bonds. Financial Security makes no representation regarding the Official Statement, nor has it participated in the preparation thereof, except that Financial Security has provided to the Issuer the information presented under this caption for inclusion in the Official Statement. General THE AIRPORT SYSTEM The Airport System is owned by the County (except for Mather Airport and Executive Airport, which are leased as described herein) and currently consists of the International Airport, Mather Airport, Executive Airport, and Franklin Field. The International Airport is located about 12 miles northwest of downtown Sacramento and is the principal air carrier airport serving the County and a wide region surrounding the County. Mather Airport is located 12 miles east of downtown Sacramento and is a general aviation airport emphasizing civilian cargo operations. Executive Airport is located about 5 miles south of downtown Sacramento, and is a general aviation airport with no scheduled airline service. Franklin Field is located about 15 miles south of downtown Sacramento and is a general aviation airstrip used primarily for training. Sacramento International Airport The International Airport is classified as a medium air traffic hub by the FAA. According to data published by Airports Council International, the International Airport was the nation s 38 th busiest airport in calendar year 2006 in terms of total passengers. In Fiscal Year , a total of 5,307,289 passengers were enplaned at the International Airport, an increase of 3% over the prior Fiscal Year. The International Airport primarily serves origin-destination passengers (i.e., passengers beginning or ending their journeys at the International Airport). In Fiscal Year , the International Airport was the fifth busiest airport in California in terms of total passengers, behind Los Angeles, San Francisco, San Diego and Oakland. In Fiscal Year , the County estimates that origin-destination passengers accounted for approximately 96.5% of passengers using the International Airport. The International Airport is served by 18 scheduled passenger airlines, including 3 low-cost carriers and 2 foreign-flag airlines, which together provided 168 daily non-stop departures from the International Airport as of March 1, The International Airport is also served by Federal Express, a scheduled all-cargo airline. The International Airport occupies approximately 6,000 acres of land and has two 8,600-foot-long parallel runways, 16R-34L and 16L-34R. Runway 16R is equipped with a Category III Instrument Landing System ( CAT III ILS ). CAT III ILS is a ground-based precision instrument approach system which provides properly-equipped aircraft with visual and electronic navigational aids to help a pilot safely land with minimal outside visibility. Terminals A and B provide 13 gates each and the Interim International Arrivals Building provides one gate, for a total of 27 gates. Terminal B, which opened in 1967, is over 40 years old and cannot reasonably or economically be modernized to meet future needs. The 13-gate Terminal A was placed into service in October 1998 and doubled the number of Airport gates. Terminal A currently serves Air Canada Jazz, Delta, Frontier Airlines, Hawaiian, Southwest, and USAirways. Terminal B currently serves Alaska, American, Continental, ExpressJet, Horizon, JetBlue, Mesa Airlines, Mexicana (departures), Northwest, Skywest Airlines and United/United Express. (Aloha Airlines recently filed for bankruptcy protection and ceased operations March 31, In addition, on April 10, 2008, Frontier Airlines filed for bankruptcy protection, stating that it intended to continue normal operations during the reorganization process. See INVESTMENT CONSIDERATIONS - Effect of Airline Bankruptcies. ) All 35

46 27 gates can accommodate B737/A320 aircraft, 3 can accommodate B757 aircraft, and 2 can accommodate widebody aircraft. The Interim International Arrivals Building serves Mexicana arrivals. The Terminal A parking garage opened in 2004 with 6 floors and 5,300 parking spaces. Other Airports Mather Airport. Mather Airport was originally a United States Air Force base. In March 1995, the County executed a 55-year lease with the U.S. Air Force authorizing the use of 2,875 acres of the former Air Force Base as a civilian airport. Mather Airport reopened to aviation uses on May 5, 1995 and is now operated as part of the Airport System, serving general aviation and cargo users. Mather Airport is a reliever airport for the International Airport. Mather Airport has two runways (4R-22L, at 11,300 feet, and 4L-22R, at 6,040 feet), an aircraft parking apron, and various cargo and other buildings. Since 1995, there has been substantial development of cargo facilities at Mather Airport, which is currently served with regularly scheduled service by two all cargo carriers. In Fiscal Year , approximately half of all cargo handled at the Airport System was handled at Mather Airport. Mather Airport offers cargo carriers a longer runway, and more office and warehouse space, while freeing up aircraft ramp space at the International Airport to accommodate passenger airline growth. The County does not intend for Mather Airport to be used for scheduled passenger airline service. Executive Airport. Executive Airport is a designated reliever airport for International Airport and has tie down and hangar facilities to accommodate 500 general aviation aircraft. In Fiscal Year , 121,730 general aviation and 541 military operations were performed at Executive Airport. Executive Airport is leased by the County from the City of Sacramento. The term of the lease is 25 years. The lease contains an evergreen clause, whereby it is automatically extended each year by an additional year (subject to the right of either party to avoid such extension). Franklin Field. Franklin Field is also a general aviation airport and has tie down and hangar facilities to accommodate 12 general aviation aircraft. McClellan Airport. McClellan Airport, about 10 miles northeast of downtown Sacramento, was closed as a military installation in July As of August 2001, the County entered into a long-term lease, and following completion of environmental remediation by the U.S. Air Force, will own the property to be known as McClellan Park. On November 13, 2001, the County entered into a purchase and sale agreement with McClellan Park LLC, a private development consortium, to develop and operate McClellan Airport as a general aviation airport with aircraft sales and maintenance activities. McClellan Airport is not part of the Airport System, and the operation and development of McClellan Airport is not a financial obligation of the Airport System. The County does not intend to include operation of McClellan Airport in the Airport System in the future. Insurance The County maintains an all risk pooled blanket property insurance program with limits in the aggregate amount of $2.291 billion. Flood coverage limits are at $2.291 billion. These coverages apply to all County-owned buildings and personal property, including the Airport System. The all risk coverage carries a $50,000 deductible per occurrence. The flood coverage carries a deductible of 2% of insured value subject to a minimum of $100,000. In addition, sub-limits on the property program include: an earthquake coverage sub-limit of $427.5 million with a deductible of 5% of insured value subject to a minimum of $100,000; a sub-limit of $200 million applies to sabotage and terrorism subject to a $500,000 deductible; and boiler and machinery coverage has a $100 million limit for any one loss subject to a $5,000 deductible. Property coverage is purchased through the California State Association of Counties Excess Insurance Authority ( CSAC-EIA ) Property Program, which provides risk pooling and insurance purchasing for almost all of the counties in the State utilizing various world-wide insurers and reinsurers. 36

47 The County carries a separate $500 million per occurrence airport liability policy on the Airport System which covers general liability, automobile liability and hangarkeepers liability and is subject to a deductible of $25,000 per occurrence. This policy provides liability coverage at the International Airport, Mather Airport, Executive Airport and Franklin Field. The Airport System liability insurance policy is placed through the CSAC-EIA Aviation Program. The County is self-insured for Workers Compensation and carries an Excess Workers Compensation policy placed through the CSAC-EIA with limits of $300 million and Employer s Liability limit of $15 million, both limits are in excess of a $2 million Self- Insured Retention. The CSAC-EIA Property Program utilizes risk-sharing pools and excess insurance policies to provide member coverage. In addition to providing coverage for the County, the insurance policies provided by CSAC-EIA described in the first paragraph also provide coverage for other government entities. In the event of a single covered event which affects the County and other government entities participating in the CSAC-EIA program, the limits set forth above would apply with respect to all of the claims made, and therefore there can be no assurance that insurance proceeds in the amounts described above would actually be available to the County. Capital Improvement Plan The County has developed a multi-year CIP for the Airport System for Fiscal Years that totals approximately $1.4 billion. The CIP is consistent with the International Airport Master Plan, which the County adopted in 2007 as the major planning document with respect to the Airport System. The TMP represents the largest project in the CIP with an estimated cost of $1.27 billion. See AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM. The Airport Consultant s Report contains a summary of the CIP, as well as funding sources, which include a portion of the proceeds of the Series 2008 Bonds, internally generated cash flow, PFCs, state and federal grants, and additional Senior Bonds and Subordinate Bonds. See APPENDIX A REPORT OF THE AIRPORT CONSULTANT for a description of the financing plan for the CIP. Environmental Regulations Operation of the Airport System is subject to various local, state, and federal regulations. The following is a discussion of certain regulatory requirements. CEQA/NEPA. All Airport System development is subject to the requirements for environmental studies and appropriate clearances under the California Environmental Quality Act ( CEQA ) and, where federal funding or other federal actions are involved, to the requirements of the National Environmental Policy Act ( NEPA ). The final environmental impact report ( Final EIR ) for the International Airport Master Plan Update was certified by the Board of Supervisors pursuant to the requirements of CEQA on August 7, 2007, at which time the Board of Supervisors also approved the Master Plan Update which includes the TMP. A lawsuit challenging the adequacy of the Final EIR was subsequently brought by the operator of the hotel at the International Airport which will be demolished as part of the TMP. That litigation has now been settled and dismissed based on an agreement between the County and the hotel operator as to the amount of just compensation to be paid to the hotel operator for its leasehold interest in the hotel. The statute of limitations under CEQA has since expired so any further litigation challenging the legal adequacy of the Final EIR and the Board s approval of the Master Plan Update is barred. The TMP also requires compliance with NEPA because of the existence of federal funding for portions of the TMP. An environmental assessment and Record of Decision with a finding of no significant impact from the TMP was issued by the FAA on April 7,

48 The United States Army Corps of Engineers has determined that the TMP does not require a permit under Section 404 of the Clean Water Act. The Fish and Wildlife Service has issued a Biological Opinion and incidental take permit for the TMP which concludes that it is not likely to result in jeopardy to any threatened or endangered species. Land Use Compatibility Measures. Since the late 1960s, the County has undertaken a series of land use compatibility measures to minimize the effects of aircraft noise on neighborhoods surrounding the Airport System, and to provide an airport approach zone. These measures have included land acquisition, navigation easements, and use of planning and building code measures to increase compatibility with airport operations. Clean Water Act. Under the Clean Water Act and Environmental Protection Agency regulations, the County is required to obtain a non-point source discharge permit. In 1992 the County filed a Notice Of Intent, along with a Storm Water Pollution Prevention Plan, which covers all Airport System facilities, with the State Water Resources Control Board. Under the implementing regulations, the filing of the Notice Of Intent brought the County under the Statewide General Industrial Activities Storm Water Discharge permit. An Annual Report, which is due to the State Water Resources Control Board on July 1 of each year, requires the County to update the Storm Water Pollution Prevention Plan. The County is currently in compliance with this requirement. Wetlands Inquiry. In 2002 it was discovered that the County had been filling in protected wetlands in violation of federal law and removing trees in such wetlands or other areas which may have contained endangered species or constituted habitat for endangered species in violation of federal or state law. The County ceased such practices, implemented measures to prevent future violations and has been working with regulatory agencies to restore and mitigate, where appropriate. As a result of the violations the County agreed, pursuant to negotiated settlement agreements with the United States Fish and Wildlife Service, to undertake certain mitigation and restoration activities. As part of the mitigation requirements, the County agreed to reconstruct the Prichard Lake area to restore the wetlands that were damaged, and agreed to mitigate the Jacobs Slough damage that resulted during inadvertent airport maintenance activities by purchasing land elsewhere in the Natomas Basin and creating the Willey Wetland Preserve. Prichard Lake. No land was acquired for the mitigation requirement. The mitigation consisted of converting the 9.7 acre impact site and an adjacent 42-acre site into a 43-acre managed marsh giant garter snake habitat, which cost approximately $1.5 million. In addition, in connection with the mitigation, the County funded a management and endowment payment of approximately $2 million. The costs cited above for Prichard Lake are exclusive of 2002 fill removal costs at the Prichard Lake site, and costs for consulting, design and related activities. Willey Wetland Preserve. The Airport System and the U.S. Fish and Wildlife Service concurred that acres of giant garter snake habitat had been impacted on Airport System property known as Jacobs Slough. It was further agreed that proximity of Jacobs Slough to the International Airport Operations Area rendered on-site mitigation infeasible. The County therefore agreed to acquire land elsewhere in the Natomas Basin to meet the mitigation requirement. Land acquisition costs were approximately $5.4 million. Construction costs are estimated at approximately $7.6 million. In addition, the County anticipates expenditure of an additional amount of approximately $4.6 million for payment of an initial management fee and perpetual endowment funding for management of this preserve. Background MANAGEMENT OF THE AIRPORT SYSTEM The County s Board of Supervisors oversees the operation of the Airport System. The County was incorporated in 1850 as one of the original 27 counties of the State of California. The County s largest city, Sacramento, is the seat of government for the State of California and also serves as the 38

49 County seat. The County has a charter form of government. The Board of Supervisors is composed of five members elected to serve staggered four-year terms. A County Executive, appointed by the Board of Supervisors, manages the day-to-day business of the County. Administration The Airport System is operated by the County as a self-supporting enterprise and is administered by the Director of Airports. The Director of Airports reports to the County Executive. The finances of the Airport System are reviewed by the County Chief Operations Officer in coordination with the County Department of Finance. The principal officials of the County responsible for the management and operation of the Airport System are: G. Hardy Acree. Mr. Acree is the Director of Airports for the County, responsible for the airports in the Airport System. Mr. Acree has over 25 years of experience in airport administration. A licensed pilot and accredited airport executive, Mr. Acree has a master s degree in business administration from Embry-Riddle Aeronautical University. He oversees 406 County employees of the Airport System and facilities that generate over $2.0 billion in economic impact to the region. Lisa J. Stanton. Ms. Stanton is the Chief Administrative Officer for the Airport System. Ms. Stanton has over 20 years experience in airport administration, military base conversion and airport management consulting. She held consulting positions with three nationally recognized airport consulting firms. Ms. Stanton has a bachelor s degree, with distinction, in Business Administration from San Jose State University. Ms. Stanton oversees the accounting, business services, design and development, human resources, information technology and telecommunication, planning and environment, and properties and business development functions for the Airport System. Management of the Airport System is organized into the Office of the Director of Airports and nine divisions and sections: Planning and Environment, Design and Development, Finance and Administration, Business Services, Operations, Maintenance and Facilities, Special Projects, Information Technology and Telecommunications, and Marketing and Public Relations. The Planning and Environment Section is responsible for Airport System planning, environmental impact reports, and master plan activity. Design and Development is responsible for Airport System design and construction, coordination of capital improvement programs, land acquisition programs, and federal and state grant processing. The Finance and Administration Division is responsible for property management, financial functions, personnel, and payroll. Business Services is responsible for budget, contract administration and Disadvantaged Business Enterprise programs. The Operations Division is responsible for Airport System operations, coordination of ground transportation and public parking services, aircraft rescue fire fighting services and security. The Maintenance and Facilities Division is responsible for building maintenance, custodial services, pavement, grounds and equipment repair and maintenance, and operation of the satellite airports (Mather Airport, Executive Airport, and Franklin Field). The Special Projects Division is responsible for the contract management and oversight of construction and construction-related activities associated with the Terminal Modernization Program. The Information Technology and Telecommunications Division is responsible for the installation and maintenance of the data and communications networks at the Airport System, as well as the installation and maintenance of security access control and monitoring systems, audio alert systems and baggage information display systems. The Marketing and Public Relations Division is responsible for air trade development, marketing and public relations. Labor Relations As of February 2008, the County employed 406 full-time equivalent employees in connection with the Airport System, of which 80 do not belong to a collective bargaining unit. The salaries and 39

50 benefits of these unrepresented employees are reviewed on January 1 of each year in accordance with the County Code. The majority of the employees in connection with the Airport System are represented by one of seven collective bargaining organizations as set forth in the following table. TABLE 2 Collective Bargaining Units (as of February 2008) Employees Represented Bargaining Unit Local United Public Employees, Local 1 28 Sacramento County Supervisors Association 27 Sacramento County Professional Accountants Association 5 Sacramento County Airfield Rescue Fighters Association 43 Engineering Technician and Technical Inspection Association 4 Association of Professional Engineers 3 Source: The County All agreements with the collective bargaining units will expire on June 30, The International Airport has never been closed by a strike, and the County does not anticipate any strikes in the future. In addition to the County employees directly related to the Airport System, employees from the County s Sheriff s Department and General Services Department are assigned to the Airport System. The Sheriff s Department has assigned 45 personnel to provide security check point response, traffic control and landside police response for the Airport System. The General Services Department has assigned 45 personnel to maintain Airport System facilities. The County s general fund is reimbursed from Airport System revenues for these assigned personnel. Background AIRPORT SYSTEM OPERATIONS The International Airport is classified as a medium air traffic hub by the FAA. According to data published by the Airports Council International, the International Airport was the nation s 38th busiest airport in calendar year 2006 in terms of enplaned passengers. In Fiscal Year , 5,307,289 passengers were enplaned at the International Airport, an increase of 3% over the prior Fiscal Year. As of March 1, 2008, the International Airport was served by 18 scheduled airlines, including 3 low-cost carriers and 2 foreign-flag airlines, which together provided 168 daily non-stop passenger flights from the International Airport. The International Airport continues principally to serve origin-destination passengers, with a fairly even distribution between intra-california and interstate travelers. The International Airport is served by one scheduled all-cargo airline. Tables 3 through 5 are summaries of certain Airport System operating statistics for the periods indicated. Table 3 sets forth historical enplanement information for the International Airport for Fiscal Years through

51 TABLE 3 Historical Enplaned Passengers International Airport Fiscal Years Ended June 30 Fiscal Year Total Percent Change From Prior Year ,528, % ,678, ,837, ,093, ,042,585 (1.2) ,314, ,563, ,986, ,150, ,307, (through February) 2008 (through February) 3,417,642 3,483, Source: The County Table 4 sets forth historical Aircraft Landed Weight for Fiscal Years through classified into categories of passenger airlines and all cargo airlines. Total aircraft landed weight increased from approximately 6,394,000 1,000 lb. units in Fiscal Year to approximately 7,682,000 1,000 lb. units in Fiscal Year , for an average annual rate of growth of approximately 5.0%. TABLE 4 Historical Aircraft Landed Weight International and Mather Airports Fiscal Years Ended June 30 (In 1,000 lb. units) Fiscal Year Passenger Carriers All-Cargo Airlines Total Percent Change from Prior Year ,639, ,000 6,394, ,916, ,000 6,681, % ,275, ,000 7,044, ,453, ,000 7,182, ,732, ,000 7,682, (through February) 2008 (through February) 4,457, ,000 5,070,000 4,567, ,000 5,251, Source: The County 41

52 Table 5 shows the airlines market shares of enplaned passengers at the International Airport for Fiscal Years and TABLE 5 Airlines Market Shares of Enplaned Passengers International Airport Fiscal Years and Enplaned passengers Fiscal Year Fiscal Year Percentage Percentage Major Airlines of total Rank of total Rank Southwest Airlines 50.0% % 1 United Airlines Alaska Airlines Delta Air Lines (1) U.S. Airways American Airlines Jet Blue Airlines Continental Airlines Frontier Airlines (2) Hawaiian Airlines Northwest Airlines (1) Aloha Airlines (3) Express Jet Other Total 100.0% 100.0% Totals may not add due to rounding. (1) On April 14, 2008, Delta Air Lines and Northwest Airlines announced a proposed merger. See INVESTMENT CONSIDERATIONS- Uncertainties of the Airline Industry. (2) On April 10, 2008, Frontier Airlines filed for bankruptcy protection, stating that it intended to continue normal operations during the reorganization process. See INVESTMENT CONSIDERATIONS - Effect of Airline Bankruptcies. (3) As described herein in INVESTMENT CONSIDERATIONS - Effect of Airline Bankruptcies, Aloha Airlines recently filed for bankruptcy protection and ceased operations March 31, Source: The County Sources of Airport System Revenues SUMMARY OF FINANCIAL OPERATIONS Revenues include airline rents and fees and non-airline revenues from terminal concessions, space rentals, fuel sales, automobile parking, car rentals, general aviation activity, and other nonoperating sources. In Fiscal Year revenues generated at the International Airport represented more than 90% of overall Airport System revenues. Airline Agreements and Rate Ordinance The passenger and cargo airlines operating at the International Airport and Mather Airport operate pursuant to the Scheduled Airline Operating Agreement and Terminal Building Lease (the Airline Lease ) which became effective July 1, 2000, expired June 30, 2006, and has been continued in month-to-month holdover status since July 1, The Airline Lease is based on a residual rate 42

53 methodology. The County and the airlines serving the International Airport have been negotiating over the past several years to reach a negotiated agreement but have been unable to reach a new agreement. As a result, the County intends to terminate the existing month-to-month Airline Lease, effective April 30, Upon termination of the Airline Lease, the provisions of Chapter of County Code (the Rate Ordinance ) will govern the assignment of space and associated rentals and fees. The airline rates that will be set pursuant to the Rate Ordinance for May and June 2008 are the same as those under the Airline Lease with one exception. Currently, the methodology contained in both the Airline Lease and in the Rate Ordinance requires that the airlines pay 125% of actual principal and interest on outstanding bonds. However, while the Airline Lease credits the 25% debt service coverage to the airlines in the subsequent year, the new rates pursuant to the Rate Ordinance do not, resulting in a higher landing fee rate. In May 2008, County staff expects to submit to the County Board of Supervisors a proposed amendment to the Rate Ordinance that will replace the existing residual rate methodology with a compensatory methodology to become effective July 1, U.S. Department of Transportation policy establishes the guidelines that airports must follow in determining which costs can be included in the airline rate base if a methodology is unilaterally employed by an airport. The County believes that the rates to be established pursuant to the amended Rate Ordinance are consistent with the policy. Upon termination of the Airline Lease on April 30, 2008, the County is required to conduct a final settlement of airline rentals and fees actually collected during the final year of the agreement compared with the requirement based on actual costs and revenues. Any calculated excess collection will be credited to the respective airline s account, while any calculated deficiency will be billed as a one-time charge. The final settlement cannot be calculated until actual results for Fiscal Year are known, but the County expects there will be a one-time credit to the airlines at the end of Fiscal Year , which is reflected in the financial forecasts. Under the new rate setting methodology, which utilizes a compensatory approach, the County will retain all non-airline revenues, net of expenses and debt service associated with non-airline cost centers. As a result, compensatory rates are forecast to be higher and produce more airline revenues than residual rates through the period prior to the completion of the TMP. After the completion of the TMP, forecast compensatory rates are expected to produce airline revenues similar to forecast residual rates. However, the airlines would no longer be required to pay aeronautical charges to ensure that total Revenues are sufficient to meet the requirements of the Rate Covenant set forth in the Indenture. In addition, under the compensatory methodology, the ability of the County to adjust rates charged to airlines as a result of lower than anticipated nonairline revenues is limited. Federal Law Affecting Airport Rates and Charges. In general, federal aviation law requires that airport fees be reasonable and that, in order to receive federal funding (such as PFCs, Airport Improvement Program ( AIP ) grants in aid, Transportation Security Administration ( TSA ) funding, and other federal grants) all airport generated revenues must be expended for the capital or operating costs of the airport, the local airport system or other local facilities owned or operated by the airport owner that are directly and substantially related to air transportation of passengers or property. Pursuant to the requirements of the Federal Aviation Administration Authorization Act of 1994 (the 1994 Aviation Act ), the United States Department of Transportation ( USDOT ) and FAA have promulgated regulations setting forth an expedited hearing process to be followed in determining the reasonableness of airport rates and charges, and have also promulgated a policy statement (the Rates and Charges Policy ) which sets forth the standards that the USDOT uses in determining the reasonableness of the fees charged to airlines and other aeronautical users. On August 1, 1997, the United States Court of Appeals for the District of Columbia Circuit (the U.S. Court of Appeals ) vacated the Rates and Charges Policy in part and remanded it to the USDOT. On October 15, 1997, the U.S. Court of Appeals determined that a portion of the Rates and Charges 43

54 Policy was arbitrary and capricious, including use of any reasonable methodology for valuation of nonairfield assets, and therefore vacated the policy and remanded it to the USDOT. The USDOT has not yet adopted revisions to the Rates and Charges Policy. The costs that will be permitted to be included in determining an airport s rate base and the extent to which such future guidelines may limit the County s flexibility in negotiating new airline agreements or in setting rates and charges for use of the International Airport s airfield and non-airfield facilities cannot be determined at this time. Any new FAA guidelines or any standards promulgated by a court in connection with a dispute could limit the amounts and allocation of costs payable by airlines serving the International Airport. Until the USDOT promulgates a new policy regarding rates and charges, the guiding principle for determining whether rates and charges established for use of airport assets is the requirement of federal law that such charges be reasonable. The County is not aware of any formal dispute involving the International Airport over any existing rates and charges. Under federal law and FAA regulations, FAA approval of the rates charged by the County pursuant to the Rate Ordinance is not required prior to its adoption and implementation. However, airlines have the right to challenge the Rate Ordinance to the extent they believe that such rates are not reasonable or otherwise not in compliance with federal law or applicable FAA regulations. The County would be authorized to collect such rates during the pendency of any challenge; provided, however, that the County would be required to post a bond or letter of credit to secure potential refunds resulting from a determination that the rates were not reasonable or otherwise violated applicable federal law or FAA regulations. The County believes that the rates and charges methodology to be utilized by the County upon adoption of the Rate Ordinance (including the subsequent amendment thereof) and the rates and charges imposed by it upon air carriers, foreign air carriers and other aeronautical users are reasonable and consistent with applicable law. However, there can be no assurance that a complaint will not be brought against the County challenging such methodology and the rates and charges established by the County pursuant to the Rate Ordinance (including as amended) and, if a judgment is rendered against the County, there can be no assurance that rates and charges paid by aeronautical users of the Airport System will not be reduced. A successful challenge to the compensatory rates which limits the ability of the County to charge rates materially below the levels anticipated by the County could have a material adverse impact on the financial condition of the Airport System. See APPENDIX A REPORT OF THE AIRPORT CONSULTANT for a discussion of the Rate Ordinance and related matters. Revenues, Expenses and Changes in Net Assets Table 6 shows Revenues, Expenses and Changes in Nets Assets for Fiscal Year through Fiscal Year , and for the first six months of Fiscal Year and Fiscal Year The results for the Fiscal Year through Fiscal Year contained in Table 6 have been excerpted from the Comprehensive Annual Financial Reports for the Sacramento County Airport System. The information relating to the periods ending December 31, 2007 and December 31, 2006 has been prepared by the County, and has not been audited. The calculation of Revenues and Expenses reflected in Table 6 has not been prepared in accordance with the conventions of the documents pursuant to which the Prior Bonds were issued. See Table 8 for a calculation of historical Revenues and Expenses calculated in accordance with the requirements applicable to the Prior Bonds. 44

55 TABLE 6 Statement of Revenues, Expenses and Changes in Net Assets -Sacramento County Airport System Fiscal Years through , and First Six Months of Fiscal Year and Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year ST Six Months Fiscal Year * 1 ST Six Months Fiscal Year OPERATING REVENUES Concessions $46,383,456 $47,623,267 $54,307,418 $60,367,151 $64,892,106 $31,616,315 $33,243,920 Building rents 14,397,965 13,803,071 14,170,114 16,087,912 16,644,929 8,579,998 8,234,309 Airfield charges 8,341,447 12,353,198 17,107,966 17,779,295 15,680,196 7,880,330 11,145,853 Ground leases 2,768,994 3,110,659 3,607,645 4,403,407 4,723,344 2,149,237 2,425,173 Sale of aviation fuel 3,615,979 2,662,833 1,332,966 1,339, , , ,443 Airport services 184, , , ,536 1,015, , ,265 Other 52,570 39,986 1,386, ,681 39,528 4,839 48,360 TOTAL OPERATING REVENUES $75,744,973 $79,730,527 $92,549,178 $100,980,196 $103,648,596 $51,146,797 $55,706,323 NONOPERATING REVENUES Interest income $4,164,015 $2,888,108 $4,303,953 $6,623,389 $7,915,789 $2,551,068 $2,752,300 PFC revenue 17,621,861 18,498,324 24,454,819 24,511,950 27,182,405 10,446,512 10,293,798 Capital contributions 4,520,415 9,808,493 24,598,339 10,889,564 12,663,761 2,294,442 8,695,167 Intergovernmental revenue 2,831, , , , ,586 83, ,596 Other nonoperating revenue 93, , , ,468 82, ,104 TOTAL NONOPERATING REVENUES $29,231,257 $32,037,180 $54,484,401 $43,097,711 $48,530,648 $15,375,616 $21,944,965 TOTAL REVENUES $104,976,230 $111,767,707 $147,033,579 $144,077,907 $152,179,244 $66,522,413 $77,651,288 OPERATING EXPENSES Salaries and benefits $22,883,432 $25,280,428 $27,313,968 $28,438,857 $29,194,278 $14,282,965 $15,209,503 Services and supplies 36,247,504 38,792,551 37,688,533 41,462,233 46,452,761 18,401,786 23,051,203 Cost of goods sold 626, , ,185 1,081, , , ,960 Depreciation and amortization 15,145,180 15,597,039 16,103,705 20,162,706 21,062,790 10,789,406 11,783,838 Other 1,046,455 1,218, , , , , ,630 TOTAL OPERATING EXPENSES $75,949,215 $81,601,269 $82,930,073 $91,814,508 $98,052,176 $44,122,179 $50,769,134 NONOPERATING EXPENSES Interest expense $11,023,165 $10,315,087 $12,631,716 $10,536,254 $12,057,704 $7,317,477 $7,588,671 Loss (gain) on disposal of assets 1,878 (3,988) (503,692) (993) (84,711) 0 0 Other nonoperating expense 459,336 1,080,045 27,709 0 Amortization of bond issuance cost 171, , , , , , ,131 TOTAL NONOPERATING EXPENSES $11,196,783 $10,482,839 $12,299,764 $11,169,995 $13,325,003 $7,516,691 $7,689,802 TOTAL EXPENSES $87,145,998 $92,084,108 $95,229,837 $102,984,463 $111,377,179 $51,638,870 $58,458,936 CHANGES IN NET ASSETS $17,830,232 $19,683,599 $51,803,742 $41,093,444 $40,802,065 $14,883,543 $19,192,352 * Unaudited. Source: The County 45

56 Operating Revenues Operating revenues are categorized as concessions, building rents, airfield charges, ground leases, sale of aviation fuel, airport services and other. Total operating revenues for the Fiscal Year ended compared to the prior year increased by $2.7 million or 2.6%. The increase was primarily due to gains in concession revenue and building rents. Concessions. Concessions revenue constituted approximately 63% of total operating revenues in Fiscal Year The major sources of concessions revenue include public automobile parking, rental car revenues, food and beverage concessions, merchandise concessions, and other concession revenues. Total concession revenues for Fiscal Year increased $4.5 million, or 7.5% compared to the prior year due primarily to increases in parking (4.8%) and rental car (8.3%) revenues. Public Automobile Parking Revenues. Public automobile parking is the largest source of revenue at the International Airport, accounting for $46.3 million in Fiscal Year , equal to approximately 39.7% of total revenues or approximately 57.3% of nonairline revenues. AMPCO AirPark (AMPCO) currently operates the public parking facilities at International Airport under a parking management agreement executed in December 2005 that expires on December 31, AMPCO took over operations January 1, 2006 from APCOA/Standard Parking (APCOA), which had been the County s parking manager for many years. Pursuant to the AMPCO agreement, AMPCO is responsible for maintaining and operating the existing facilities and collecting parking fees. AMPCO remits all gross parking revenues to the County and is reimbursed for operating expenses and paid a management fee. Rental Car Revenues. Seven rental car companies currently operate at the International Airport under agreements with the County which expire in All rental car companies operate their counters and offices from a common rental car reception building, and rental car customers are transported from the terminal buildings by shuttle bus to the rental car reception building. Under the rental car agreements, the County receives the greater of privilege fees equal to 10% of gross receipts or a minimum annual guarantee, plus rentals for counter space, office space, and service facility ground areas. The County also receives certain cost-recovery fees for the rental car shuttle operation. The County assesses fees and charges on off-airport rental car businesses accessing the International Airport, including an annual permit fee and privilege fees of 10% of annual gross receipts that exceed $150,000 per company. Food and Beverage Concessions. HMSHost has the nonexclusive concession privilege to provide food and beverage services in the terminal facilities, including in-terminal restaurants, cafeterias, snack bars, and cocktail bars. HMSHost operates a mix of branded-food outlets designed to increase food choices and spending by persons using the International Airport. The HMSHost agreement is scheduled to expire on July 31, 2014, and provides for payment to the County of percentages of gross sales or a minimum annual guarantee, whichever is greater. During Fiscal Year , gross sales for Terminal A food/beverage outlets were $15,041,529, providing $2,261,001 in concession revenues to the Airport System. Gross sales for Terminal B food/beverage outlets were $8,076,043, providing $973,541 in concession revenues to the Airport System. Merchandise Revenues. The County has entered into agreements with a number of concessionaires to operate the retail concessions in all terminal building facilities. The merchandise concessions program at the International Airport includes a mix of retail merchandise outlets and national brand name concessionaires designed to increase passenger choices and spending. The retail concession 46

57 agreements provide for the payment to the County of percentages of gross sales or a minimum annual guarantee, whichever is greater. During Fiscal Year , gross sales for Terminal A retail shops were approximately $8,797,178, providing $979,280 in concession revenues to the Airport System, and gross sales for Terminal B retail shops were $3,384,571, providing $412,233 in concession revenues to the Airport System. Other Concession Revenues. Other terminal building concessions revenues of approximately $1,125,000 during Fiscal Year include advertising, public telephone and vending machines. Building Rents. Building rents constituted approximately 16% of total operating revenues in Fiscal Year and include revenues from Terminal Building rentals, aircraft parking position fees, loading bridge use fees, hangar rentals, fixed base operator rentals and fees and rentals from building leased. Revenues derived from building rentals were approximately $16.6 million in Fiscal Year , a 3.5% increase over Fiscal Year revenues. Airfield Charges. Airfield charges constituted approximately 15% of total operating revenues in Fiscal Year and include aircraft tiedown fees, landing fees and commercial operating fees. The largest single source of revenue in this category is landing fees from scheduled and cargo airlines which together represent 98.7% of airfield charges revenue. Revenues derived from airfield charges were approximately $15.7 million in Fiscal Year , an 11.8% decrease from Fiscal Year , resulting from a reduction in the landing fee rate calculated to recover the residual costs of the Airport System. Ground Leases. Ground lease revenue constituted approximately 5% of total operating revenues in Fiscal Year and includes rental payments associated with ground leases at Airport System airports, and revenue from agricultural leases at International Airport. Revenues derived from ground leases were approximately $4.7 million in Fiscal Year , which represented an increase of 7.3% from Fiscal Year Sale of Aviation Fuel. Aviation fuel sales constituted less than 1% of total operating revenues in Fiscal Year Revenues derived from aviation fuel sales were approximately $0.6 million in Fiscal Year , a decrease of 51.2% from Fiscal Year revenues of $1.3 million. This decrease resulted from the discontinuation of commercial aircraft fueling operations by the County. The aircraft fueling activity and associated fuel farm at International Airport are now operated by a consortium of airlines operating at International Airport. Airport Services. Airport services revenues constituted less than 1% of total operating revenues in Fiscal Year and are comprised of payments from the County for services the Airport System provides to McClellan Air Park for airfield operating services, and refuse collection, landscaping, communication and building maintenance service charges. Airport services revenue for Fiscal Year was approximately 1.0 million, an increase of 12.8% from the prior year. Other. Other revenues include miscellaneous taxable and insurance proceeds and totaled approximately $39,528 in Fiscal Year Nonairline Revenues. Non-airline revenues, which include parking, rental car, and terminal concessions revenues constituted approximately 72% of operating revenues in Fiscal Year

58 The following table shows the amount of various nonairline operating revenues for Fiscal Year Table 7 Nonairline Operating Revenues Fiscal Year Parking $46,289,886 Rental car 12,362,535 Terminal concessions 5,752,605 Ground Leases 4,063,263 Other 6,510,596 Total Nonairline Operating Revenues $74,978,885 Source: The County Airline Revenues. Airline revenues, which include terminal building rents and fees and landing fees, are included in the rows entitled Building Rents and Airfield Charges in Table 6 and constituted approximately 36% of total operating revenues in Fiscal Year Airline revenues were approximately $37 million in Fiscal Year Unaudited Results Through December 31, Operating revenues for the six months ended December 2007 compared to the six months ended December 2006 increased by $4.6 million or 8.9%. The increase was primarily due to increased revenues from airfield charges, resulting from a higher landing fee rate and increased landed weight, as well as increases in concessions revenues, reflecting an increased number of passengers and higher per-passenger spending. Excluded Revenues Pursuant to the Indenture, Revenues does not include certain specified income, receipts, earnings and revenues. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS - Pledge of Trust Estate; Net Revenues. Passenger Facility Charges PFCs are fees imposed on enplaned passengers by airport sponsors to generate revenues for airport projects that increase capacity, enhance competition among and between air carriers, enhance safety or security, or mitigate noise impacts. PFCs were established by Title 49 U.S.C , and authorized airport sponsors to collect PFCs in the amount of $1.00 to $3.00 per eligible enplaning originating and connecting passenger. The Aviation Investment and Reform Act (AIR-21) increased the maximum PFC airport sponsors could collect to $4.50 per enplaning passenger. In return for the right to assess PFCs up to $3.00, large and medium hub airports forego up to 50% of their AIP entitlement funds. Large and medium-hub airports (such as the International Airport) that collect a PFC of $4.00 or $4.50 forego 75% of their AIP entitlement funds. In January 1993, the County received approval from the FAA to impose a PFC of $3.00 per eligible enplaned passenger at the International Airport, and has imposed the PFC since April 1, Since 1993, the County has submitted various applications and received approval to use PFC revenues to fund Airport System improvements, including approval to use PFC revenues to pay debt service on the bonds issued to finance Terminal A. The County subsequently received approval to collect a $4.50 PFC, and began collecting at the $4.50 level on February 1,

59 The County has FAA approval in connection with six PFC applications to collect $285.6 million in PFC revenues for project and financing costs associated with the construction of various approved projects. The County has generated approximately $227.1 million in PFC revenues and interest earnings from April 1, 1993 through December 31, The County believes that use of PFC revenues to pay debt service with respect to the Series 2008 Subordinate Bonds, as described in SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS -- Availability of Available PFC Revenues to Pay Series 2008 Subordinate Bonds Debt Service, is in compliance with applicable FAA regulations and does not require further FAA approval. The County has initiated the process to seek to use PFC revenues and extend its collection authority to fund pay-as-you-go project costs and pay debt service in connection with the TMP, initially at the $4.50 PFC level. If and when Congress and the Administration approve a higher level PFC, the County intends to submit an application to increase the PFC level to fund eligible TMP elements. There can be no assurances if and when the PFC increase will be approved. The financial forecasts set forth herein assume that the PFC level would increase to $6.00 and be implemented by the County with FAA approval effective July 1, The financial forecasts also assume that the County will receive authorization in October 2008 to use PFC revenues to pay a portion of the debt service on the Bonds issued to finance the TMP. PFCs generally do not constitute Revenues pursuant to the Indenture and, except as provided in the Indenture (see SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS -- Availability of Available PFC Revenues to Pay Series 2008 Subordinate Bonds Debt Service ), PFCs do not secure the payment of debt service on the Series 2008 Bonds. However, the financial projections set forth in the Airport Consultant s Report anticipate receipt of PFCs in amounts ranging from approximately $26.5 million in Fiscal Year to approximately $34 million in Fiscal Year , and the use of such PFCs to pay the cost of capital projects as well as the payment of a portion of the debt service on Subordinate Obligations to be issued to finance the costs of the TMP, and to pay debt service on the Series 2008 Subordinate Bonds as described in SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS -- Availability of Available PFC Revenues to Pay Series 2008 Subordinate Bonds Debt Service. In the event that PFCs are not available in the amounts and during the times projected in the Airport Consultant s Report, there can be no assurances that such circumstances would not materially adversely affect the financial condition of the Airport System. AIP Grants The FAA also provides funds to airports for capital improvements through the AIP. On February 29, 2008, the County submitted an application to the FAA for an AIP Letter of Intent ( LOI ) from the FAA for certain of the airfield elements of the TMP. In its application, the County identified a need for AIP funds of $125 million over 10 years for Federal Fiscal Years (FFY) 2009 through The County intends to dedicate 100% of its projected AIP entitlement funds for the International Airport to this LOI for the 10-year period of the requested LOI (estimated to total $22.8 million). Therefore, the LOI request is seeking AIP discretionary funds totaling $102.2 million. Operating Expenses Operating expenses for Fiscal Year increased $6.2 million (6.8%), compared to the prior fiscal year. This increase in operating expenses is primarily due to increases in services and supplies, which increased by $5.0 million (12.0%), reflecting increases in security services, legal services, investment services, environmental services, land improvement services and services provided by other County departments. Salaries and benefits increased by $0.8 million (2.7%) reflecting cost of living and equity increases effective July 1, Operating expenses for the six months ended December 2007 compared to the six months ended December 2006 have increased by $6.6 million (15.0%). The increase was due to increases in salaries and 49

60 benefits, services and supplies and depreciation expense. Salaries and benefits increased $0.9 million (6.5%), due to increases associated with cost of living salary adjustments, retirement costs and benefits costs. Services and supplies increased $4.6 million (25.3%), due to increases in charges by other County departments ($1.2 million), consulting services ($1.0 million), building maintenance costs ($0.9 million), shuttle bus costs ($0.9 million), and electricity costs ($0.6 million). Depreciation expense increased $1.0 million (9.2%). Pension and OPEB Liability. Salaries and benefits costs shown in Table 6 include funding of retirement benefits for employees of the Airport System who, as County employees, participate in the Sacramento County Employee Retirement System ( SCERS ). For a variety of reasons, including investment losses and significantly enhanced retirement benefits for County employees, SCERS has experienced significant unfunded liabilities, and retirement costs payable with respect to all County employees, including Airport System employees, has increased significantly in recent years. County required payments to SCERS, with respect to employees of the Airport System, were $2,644,000 in Fiscal Year , $3,201,000 in Fiscal Year , and $3,131,000 in Fiscal Year There can be no assurances that required contributions from the Airport System will not continue to increase. In June 2004, the Governmental Accounting Standards Board (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. GASB 45 generally requires that employers account for and report the annual cost of OPEB and the outstanding obligations and commitment 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 prospectively and do not require governments to fund their OPEB plans. An employer may establish its net OPEB obligation on its balance sheet at zero as of the beginning of the initial year of implementation. GASB 45 also established 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. These disclosure requirements are effective for the County s Fiscal Year ending June 30, The County engaged the services of an actuary to provide an estimate of the cost to the County of continued Health Insurance Subsidy benefits, and has requested proposals for and expects to award a contract in May 2008 for another actuarial study to determine the OPEB liability, as defined by GASB 45, prior to the required GASB 45 implementation date. The County has estimated, on a preliminary basis, that its unfunded OPEB liability is approximately $150 million. (The County estimates that the Airport System s share of such amount would be less than 5%.) The actual unfunded liability to be determined for purposes of GASB 45 will depend on a variety of factors, including in particular the impact of the County s actions described above with respect to discontinuation of certain post-employment health care benefits. There can be no assurances that the actual unfunded OPEB liability will not exceed the County s estimate. Investment of Airport System Funds; County Pool Airport System funds, which constitute monies of the County, are invested in the Sacramento County Pooled Investment Fund (the County Pool ), which is managed by the Director of Finance. The County Pool is governed by the Sacramento County Annual Investment Policy for the Pooled Investment Fund (the Investment Policy ). This policy defines investible funds, authorized instruments, credit quality required, maximum maturities and concentrations, collateral requirements, and provides the approved credit standards, investment objectives and specific constraints of the portfolios managed. Authorized investments are required to match the general categories established by Sections et seq., et seq., and et seq. of the California Government Code; including the specific categories of financial futures and financial options contracts established by California Government Code 50

61 Section See APPENDIX B COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEARS ENDED JUNE 30, 2006 AND 2007 AND UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006 Note 2 to the Basic Financial Statements. Summary of Historical Revenues, Expenses and Debt Service Coverage The following table contains a summary of revenues, operating expenses and debt service coverage. The information in the following table reflects the definitions, conventions and debt service coverage calculation methodology set forth in the documents pursuant to which the Prior Bonds were issued. TABLE 8 Summary of Historical Revenues, Expenses and Debt Service Coverage Sacramento County Airport System Fiscal Years through Historical Estimated (1) Total Operating Revenues $75,744,973 $79,730,527 $ 92,549,178 $100,980,196 $103,648,596 $115,137,994 Certain Non-Operating Revenues (2) 13,510,195 10,593,301 12,220,192 10,486,622 12,961,598 10,262,114 Revenues $89,255,168 $90,323,828 $104,769,370 $111,466,818 $116,610,194 $125,400,108 Operating Expenses (3) (63,338,095) (66,842,925) (67,524,525) (72,668,987) (78,636,521) (104,779,715) (4) Net Revenues $25,917,073 $23,480,903 $37,244,845 $38,797,831 $37,973,673 $20,620,393 Debt Service Requirement (5) $15,062,285 $16,840,105 $16,835,805 $14,721,391 $12,458,165 $15,720,758 (6) Debt Service Coverage 1.72x 1.39x 2.21x 2.63x 3.05x 1.31x (1) Projected, based on actual results through December, (2) Includes certain interest income, PFC revenues used to pay debt service with respect to Prior Bonds which constituted Senior Bonds under the documents pursuant to which the Prior Bonds were issued, and prepaid revenues. (3) Operating Expenses include all Airport System operating costs and certain capital. (4) Operating Expenses in Fiscal Year includes a one-time project cost of $13,230,468, characterized as an Operating Expense, and approximately $7 million of expenses encumbered but not spent in prior Fiscal Years. (5) Represents debt service requirement only with respect to Prior Bonds which constituted Senior Bonds under the documents pursuant to which the Prior Bonds were issued. The debt service with respect to Prior Bonds which constituted Subordinate Bonds under the documents pursuant to which the Prior Bonds were issued is not included in Table 8. (6) Debt service payable with respect to Prior Bonds and Series 2008 Bonds from Net Revenues during Fiscal Year Source: The County. 51

62 AIRPORT CONSULTANT S REPORT The Airport Consultant has been retained on a non-contingent basis to prepare an Airport Consultant s Report for inclusion in this Official Statement as Appendix A. As described in the Airport Consultant s Report, the Airport Consultant has provided various consulting and advisory services to the County in connection with the planning, business, and financial operations of the Airport System. The Airport Consultant s Report provides certain information with respect to the Airport System and the CIP and presents forecasts of Revenues, Operating Expenses, Net Revenues, PFCs, and debt service coverage for the Series 2008 Bonds and the other fund deposit requirements of the Indenture in each year of the forecast period (Fiscal Fiscal Year ), and sets forth the information and assumptions upon which the forecasts and the findings of the Airport Consultant s Report are based. Certain information concerning the Airport System in this Official Statement has been excerpted from the Airport Consultant s Report. Calculation of Forecast Airport System Revenues, Operating Expenses and Debt Service Coverage The exhibits to the Airport Consultant s Report present forecast Revenues, Operating Expenses, and debt service coverage, all calculated in accordance with the Indenture. As described in the Airport Consultant s Report, the forecasts are based on a variety of assumptions as set forth in the Airport Consultant s Report, that were provided by, or reviewed and approved by, the County. In the opinion of the Airport Consultant, the assumptions provide a reasonable basis for the forecasts set forth in the Airport Consultant s Report. Specific assumptions regarding the forecasts of airline traffic are discussed in the section Assumptions Underlying the Airline Traffic Forecasts, Key Factors Affecting Future Traffic, and Enplaned Passenger Forecast, plan of finance and debt service requirements are discussed in the section Plan of Finance, assumptions regarding PFCs are discussed in the section Passenger Facility Charge Program, assumptions regarding operating expenses in the section Operating Expenses; and assumptions regarding airline and nonairline revenues in the section Airport System Revenues of the Airport Consultant s Report. As noted in the Airport Consultant s Report, any forecast is subject to uncertainties. Some of the assumptions used to develop the forecasts will not be realized, and unanticipated events and circumstances could occur. Therefore there are likely to be differences between the forecast and the actual results, and those differences may be material. See APPENDIX A REPORT OF THE AIRPORT CONSULTANT. The following table has been excerpted from the Airport Consultant s Report. The Airport Consultant s Report must be read in its entirety for a description of the information set forth in the table, the underlying assumptions, as well as the various factors taken into account for purposes of preparing the assumptions. 52

63 Table 9 Calculation of Forecast Airport System Revenues, Operating Expenses and Debt Service Coverage Forecast DBO1 DBO Rate Covenant per Section 6.04 (b)(i) Revenues $153,566,074 $161,955,572 $165,238,333 $190,425,086 $210,098,744 $215,948,610 $225,520,004 $232,028,489 Operating Expenses (107,971,779) (97,118,239) (100,364,454) (111,408,687) (123,264,356) (129,356,365) (135,536,126) (141,488,354) Net Revenues $45,594,295 $64,837,333 $64,873,879 $79,016,400 $86,834,388 $86,592,245 $89,983,877 $90,540,136 Transfer 4,358,401 4,773,593 4,806,113 10,092,231 13,692,964 13,694,108 14,507,114 14,506,717 Net Revenues + Transfer $49,952,696 $69,610,926 $69,679,992 $89,108,631 $100,527,352 $100,286,353 $104,490,991 $105,046,853 Accrued Debt Service on Senior Obligations $17,433,606 $19,094,371 $19,224,450 $40,368,924 $54,771,856 $54,776,431 $58,028,456 $58,026,869 DEBT SERVICE COVERAGE (>1.25) DEBT SERVICE COVERAGE w/o Transfer Rate Covenant per Section 6.04 (b)(ii) Net Revenues $45,594,295 $64,837,333 $64,873,879 $79,016,400 $86,834,388 $86,592,245 $89,983,877 $90,540,136 Transfer 1,743,361 1,909,437 1,922,445 4,036,892 5,477,186 5,477,643 5,802,846 5,802,687 Net Revenues + Transfer $47,337,655 $66,746,770 $66,796,324 $83,053,292 $92,311,574 $92,069,888 $95,786,723 $96,342,823 Accrued Debt Service of Senior Obligations $17,433,606 $19,094,371 $19,224,450 $40,368,924 $54,771,856 $54,776,431 $58,028,456 $58,026,869 Debt Service on Subordinate Obligations 24,617,251 42,856,310 43,497,895 43,717,420 43,719,145 43,717,433 43,720,678 43,721,740 LESS: Available PFC Revenues Existing PFC authorizations (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Expected PFC authorizations - LOI Bonds (622,059) (2,717,582) (2,722,692) (2,718,809) (2,715,399) (2,721,392) (2,720,182) (2,720,967) Expected PFC authorizations - PFC Bonds (6,954,960) (24,088,831) (24,088,831) (24,228,831) (24,216,341) (24,219,119) (24,236,361) (24,202,266) LESS: Available Grant Revenues (9,834,093) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) Accrued Debt Service of Sr. & Sub. Obligations $17,433,606 $19,094,371 $19,224,450 $40,368,924 $54,771,856 $54,776,431 $58,028,456 $58,026,869 DEBT SERVICE COVERAGE (>1.10) DEBT SERVICE COVERAGE w/o Transfer Source: Report of the Airport Consultant 53

64 AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM The County has developed a multi-year CIP for the Airport System for Fiscal Years that totals approximately $1.4 billion. The Airport Consultant s Report contains a summary of the CIP, as well as funding sources, which include a portion of the proceeds of the Series 2008 Bonds, internally generated cash flow, PFCs, state and federal grants, and additional Senior Bonds and Subordinate Bonds. See APPENDIX A REPORT OF THE AIRPORT CONSULTANT for a description of the financing plan for the CIP. Table 10 set forth below contains a description of the estimated timing and amounts of Senior Bonds and Subordinate Bonds that the County currently anticipates issuing. The TMP represents the largest project in the CIP with an estimated cost of $1.27 billion. Terminal Modernization Program The primary project in the CIP is the TMP, which accounts for $1.27 billion or 92% of the total CIP. The TMP has been designed to accommodate forecast growth in commercial passenger activity. As more particularly described in the Airport Consultant s Report, one of the major elements of the TMP is a new landside Central Terminal B to replace the existing Terminal B which was originally constructed in the mid-1960s. The new Central Terminal B is currently in the design phase and is conceived as a landside terminal connected to a 19-gate airside concourse building by an automated people mover system. Central Terminal B will be served by a dual level roadway system and a second automobile parking garage. A hotel with approximately rooms is planned to be constructed as part of Central Terminal B. The TMP also includes construction of a centralized receiving warehouse, landscaping and demolition of existing facilities. The TMP also includes the replacement of the 14 gates at Terminal B and the International Arrivals Building with 19 gates, and the modification of Terminal A to provide 2 additional gates, for a total of 34 gates in the initial build-out. TMP Construction The County anticipates that there will be three Dates of Beneficial Occupancy ( DBO ) for the Central Terminal B. The first will be when the initial 16 gates are open for operations (expected to occur in late 2011) and the second will be when all 19 gates are open (expected to occur in early 2012). The third anticipated DBO will be for the Central Terminal B Parking Garage and associated support facilities, which cannot be constructed until the existing Terminal B is demolished, is March, The various components of the TMP will be procured utilizing design-build and design-bid-build delivery methods or traditional equipment contracts procured directly by the County. The County believes these methods will allow the County the ability to expedite the more complex terminal and airside construction, reducing cost and schedule, while providing the more traditional contracting method for the smaller ancillary facilities. The major TMP components are: Landside Terminal Design-Build Contract, with an estimated cost of $362 million Airside Concourse Design-Build Contract, with an estimated cost of $319 million Ancillary Projects Contracts with an estimated cost of $48 million Airport Procured Contracts, with an estimated cost of $98 million Garage B Contract, with an estimated cost of $152 million. In addition to these components, the TMP cost estimate includes approximately $194 million in soft costs, including design and project management, and $97 million for contingencies ($15 million of 54

65 which was used to pay a settlement in connection with litigation relating to the termination of the existing hotel operating arrangements). Each of the major TMP components and delivery methods is summarized below: Landside Terminal Design-Build Contract. The design build contract for this portion of the TMP is valued at approximately $362 million. The County issued a request for bids with respect to this contract in January, 2008, received bids in early April, 2008, and anticipates awarding the contract in May, Construction of this element of the TMP is expected to commence in August, 2008, and construction completion is anticipated to occur in November, This contract includes all portions of the TMP necessary to complete a fully functional landside terminal, including: Terminal Building The terminal building is comprised of a 4-story facility plus a basement encompassing approximately 375,000 square feet. Pedestrian Bridges To access the terminal from existing Garage A and future Garage B, two pedestrian skybridges will be constructed over the terminal roadway. Terminal Roadways New vehicular roadways will be constructed to support the Central Terminal B. A two-level structured roadway will loop the terminal providing access on both the east and west faces of the facility. Site Improvements/Utilities All landside utilities and miscellaneous site improvements will be constructed to support the landside terminal. Modifications to existing surface parking will be made to support the operations of the existing Terminal B. In addition, this contract will include construction of an in-terminal hotel to be constructed on levels 5 through 10 of Terminal B, housing approximately 150 to 185 guest rooms. The facility will replace the existing airport hotel and provide a greater level of customer service to traveling passengers. The County anticipates that costs of the hotel portion of this agreement (which the County estimates to be approximately $35 million of the overall $362 million estimated cost of this component of the TMP) will be funded from sources other than Senior Obligations, Subordinate Obligations, or other financing payable from Net Revenues, or from available funds of the Airport System, and funding of the costs related to the hotel have not been included in the Calculation of Forecast Airport System Revenues, Operating Expenses and Debt Service Coverage contained in Table 9. In the event that the County is unable to identify such other sources for funding of the costs of the hotel, the County may elect not to proceed with the construction of the hotel component of the TMP. This construction contract, which includes the hotel, permits the County to remove the hotel component of the contract. Airside Concourse Design-Build Contract. The design-build contract for this portion of the TMP is valued at approximately $319 million. The County issued a request for bids with respect to this contract in January, 2008, received bids in early April, 2008, and anticipates awarding the contract in May, Construction of this element of the TMP is expected to commence in August, 2008, and construction completion is anticipated to occur in November, This contract includes all portions of the TMP necessary to complete a fully functional airside concourse, including: Airside Concourse The concourse building is comprised of a 2-story facility encompassing approximately 300,000 square feet. The concourse will house all of the aircraft gate operations including passenger hold lounges, concessions and a large passenger security checkpoint on Level 2. Level 1 will include building support, airline support area, APM maintenance, and the new international arrivals facility. 55

66 Automated People Mover Access between the terminal and airside will be provided via an automated people mover ( APM ) system on an above grade guideway structure. The APM system will be procured under a separate contract by the County. Aircraft Apron A new concrete aircraft apron will be constructed to support the aircraft movement around the airside concourse. Site Improvement/Utilities All landside utilities and miscellaneous site improvements will be constructed to support the airside concourse. Cross-field Taxiway A new cross-field taxiway will be constructed north of existing Taxiway A to increase the terminal platform area. Ancillary Projects Contracts. To complete the TMP, various ancillary projects are planned to support or enhance airport operations. The contracts for this element of the TMP are valued at approximately $48 million and will be let at various intervals throughout the duration of the TMP. The County began issuing requests for bids with respect to these contracts beginning in December, 2007, will continue to issue bids through June, 2010, and anticipates awarding the contracts from March, 2008 to September, Construction of these elements of the TMP is expected to commence in May, 2008 and continue through October, 2011, and construction completion is anticipated to occur between December, 2008 and February, These contracts include renovation/addition to existing facilities as well as new construction, including: Terminal A Modifications This includes the addition of a new baggage screening and make-up facility. A renovation to the ticket hall and upgrades to the existing gate hold lounges will be completed as part of this work. The County expects to issue a request for bids in December, 2008 with a two-phased construction period from February, 2009 to September, Temporary Project Management Office To effectively manage the construction of the TMP, a temporary project management office will be constructed on the west side of the International Airport. The County issued a request for bids in December, 2007 with a construction period from April, 2008 to December, Remote Central Receiving Facility A new remote central receiving facility is planned as a central receiving point for all goods entering the International Airport. The County expects to issue a request for bids in April, 2008 with a construction period from August, 2008 to June, Public Safety Building Once the Central Terminal B is complete, Airport System Administrative functions will be vacated from the existing Administration Building. This existing facility will be converted into a Public Safety Building housing the Sheriff s Department and other security related functions. The County expects to issue a request for bids in June 2011 with a construction period from November, 2011 to February, Passenger Remote Parking To meet the passenger parking demands, a new remote surface parking lot will be constructed near the general aviation ramp. This parking will be utilized to accommodate holiday and overflow parking needs. The lot will be constructed in two phases and ultimately provide approximately 3,600 spaces. The County expects to issue a request for bids in April, 2008 with a construction period from July, 2008 to November, Airport Procured Contracts. The contracts to be procured directly by the County (as opposed to being procured as part of the contracts described above) are valued at approximately $98 million. The contracts will be let at various intervals throughout the duration of the TMP. The County began issuing bids with respect to these contracts in January, 2008 and expects to continue issuing bids through April 56

67 2009 and anticipates awarding the contracts between June, 2008 and July, Construction of these elements of the TMP is expected to commence in June 2008, and construction completion is anticipated to occur in September, These contracts include various systems necessary to support the International Airport and airline operations, including: Automated People Mover The APM System is composed of a dual shuttle train system that will provide passenger access between the terminal and airside facilities. This system will be either a self-propelled or cable pulled system capable of transporting approximately 3,300 passengers per hour. The County issued a request for bids in January, 2008, received bids in early April, 2008, and expects to award a contract in May, Construction is expected to commence June, 2008 with completion in October, Baggage Handling System A baggage handling system will transport baggage from the ticket hall down two levels to the screening matrix in the terminal basement. Once cleared, the baggage handling system will sort baggage to the individual airline make-up areas. The screening equipment will be provided by the Transportation Security Administration. The County expects to issue a request for bids in April, 2009 with a construction period from July, 2009 to September Vertical Transportation Systems To maintain consistency of product type, the facility elevators and escalators will be procured under a single contract and assigned to individual contractors. This method will allow a single manufacturer for these systems and provide the Airport System with a single maintenance contract. The County expects to issue a request for bids in August, 2008 with a construction period from June, 2009 to January, Jetbridges The jetbridges attached to the airside concourse allow passenger access from the aircraft to the concourse. A total of 19 bridges will be required for the TMP. The County expects to issue a request for bids in January, 2009 with a construction period from March, 2009 to November, Garage B Contract. The primary component of this contract is the Garage B and support facilities. This contract is valued at approximately $152 million and includes renovation/addition to existing facilities as well as new construction, including: Garage B To provide parking facilities to meet the anticipated demand, a new Garage B will be constructed to the west of the Central Terminal B on the site of the existing Terminal B. The structure will provide approximately 5,500 parking spaces on 6 structured levels. Support Facilities To support the Garage B, a revenue control plaza, access control systems and entry/exit roadways will be constructed. Cost Estimation Methodology. Project costs and the phasing of these costs were estimated by the County s consultants. The design team is composed of over twenty different firms specializing in architecture, structural, mechanical, electrical, civil, and other similar engineering disciplines. The County has engaged the services of Corgan Associates, Inc. to be the Architect/Engineer of Record in association with Fentress Architects and to prepare drawings and specifications for the TMP. Corgan Associates, Inc. was established in 1938 and is a national architecture firm which specializes in the planning and design of airport terminal facilities. The firm s first airport project was completed in the 1950 s, and the firm has since been involved in projects ranging from terminal additions to multi-million dollar terminal programs. Recent projects include International Terminal D at DFW International Airport the North Terminal Development at Miami International Airport and Terminal E at Houston Intercontinental Airport. Project cost estimates include allowances for engineering fees, design fees, design and construction administration costs, other soft costs, contingencies, and escalation for inflation. Costs for the TMP were estimated after a well-defined level of architectural and engineering layouts, systems, and outline 57

68 specifications had been developed. The costs are based on the 30% design drawing level. Two independent professional cost estimating firms were engaged to develop detailed cost estimates of the TMP and the County requested that estimates be reconciled by the two firms. The source of the unit costs are based on recently constructed projects and discussions with vendors based on current market conditions. Cost estimates for the TMP include allowances for cost escalation based on an inflation factor of 7% per year through the midpoint of construction based on 2007 dollars. The available TMP programwide contingency allowance is approximately $82 million. Construction Risks. The Architect/Engineer of Record for the TMP identified a number of challenges that must be overcome to complete the TMP. The primary cause of these challenges revolves around the need to perform construction activities on an active airport. If airport and airline operations are impacted, there can be no assurances that significant financial losses will not occur. To mitigate this potential, the County has planned for many construction activities to occur in phases or during off-hours of operations to ensure on-going operations are maintained. Particular challenges specific to the TMP include the following: Because of the location of the Airside Concourse, aircraft access to the existing Terminal B will be affected, requiring modification of existing facilities, relocation of aircraft parking positions and the movement of jetbridges to maintain operations during construction. In addition, due to the existing Terminal B on-going operations, contractor access to the Airside Concourse construction site will be severely limited from the landside. As such, the contractor job compound and staging area will be established on the airfield side of the International Airport. To access the construction site, the contractor must cross an active taxiway. This has the potential to impact operations, security and safety. This will require the construction of paved haul routes, installation of security gates and posting of security guards, and the use of escorts to safely cross the active taxiway. TMP construction will adversely affect the number of passenger parking spaces, access and surface parking. In order to minimize impacts, new entry/exit access routes will be constructed and temporary revenue control booths installed. To provide access from the landside terminal to the airside, an underground tug tunnel must be constructed. The routing of the tunnel bisects the existing major terminal roadway which must remain operational until the new facilities are operational. As a result, the tunnel will be constructed in two phases allowing a portion of the existing roadway to remain operational at all times. In addition, in connection with the TMP, the County has entered into and will enter into agreements for construction. Such contracts are and will be subject to adjustment for a variety of circumstances, including higher than anticipated costs of labor and materials or subcontractor bids, changes in scope, unforeseen site conditions and force majuere events. The estimated costs of, and the projected schedule for, the TMP are subject to a number of uncertainties. The ability of the County to complete the TMP may be adversely affected by various factors. See INVESTMENT CONSIDERATIONS Cost of Capital Improvement Program. Additional Projects In addition to the TMP project elements, the CIP includes approximately $105 million in additional projects for the Airport System airports, including International Airport, Executive Airport, Franklin Field, and Mather Airport. The County intends to undertake the remainder of the future CIP projects as warranted by demand considerations and to the extent the County believes the projects are financially viable. The County expects to finance these CIP projects primarily with AIP grants and internally generated funds. The County does not expect to fund any of these projects with Obligations at 58

69 this time. Many of the projects eligible for federal grants will only be undertaken if federal funds are received. Financing Plan for TMP; Future Financings As described in the Airport Consultant s Report, the County anticipates that funding for the TMP will be provided through internally generated cash flow, PFCs, Airport Improvement Program grants-inaid, federal grants, Transportation Security Administration funding, and Senior Bonds and Subordinate Bonds and other moneys. There can be no assurances that such sources will be available in the amounts and at the times contemplated by the County. In the event one or more sources of expected funding are not available, there can be no assurances that such circumstances will not significantly delay the completion of the TMP and materially adversely affect the Airport System. The following table sets forth the County s planned issuance of additional Senior Bonds and Subordinate Bonds to finance the TMP. The issuance of any additional bonds will be subject to the requirements set forth in the Indenture. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Additional Senior Obligations and Additional Subordinate Obligations. Table 10 Planned Issuance of Additional Bonds (Dollars in millions) Senior Bonds Subordinate Bonds Total December 2008 $ 77.4 $277.9 $355.3 July July Total $293.0 $477.7 $770.7 INVESTMENT CONSIDERATIONS The following information should be considered by prospective investors, in addition to the other matters set forth in this Official Statement in evaluating the Series 2008 Bonds. However, it does not purport to be a comprehensive or exhaustive discussion of risks or other considerations which may be relevant to an investment in the Series 2008 Bonds. In addition, the order in which the following information is presented is not intended to reflect the relative importance of any such considerations. There can be no assurance that other risk factors not discussed herein will not become material in the future. Rate Covenant Not a Guarantee; Failure to Meet Projections The ability of the County to pay the principal of and interest on the Series 2008 Bonds depends on the ability of the County to generate Net Revenues in the levels required by the Indenture. Although, as more particularly described herein, the County expects that sufficient revenues will be generated through the imposition and collection of the fees, rents charges and other Revenues described herein, there is no assurance that such imposition of fees, rents charges or other Revenues will result in the generation of Net Revenues in the amounts required by the Indenture. As a result, the County covenant does not constitute a guarantee that sufficient Net Revenues will be available to make debt service payments on the Series 2008 Bonds. The County can provide no assurances that operation of the Rate Covenant set forth in the Indenture will not be limited by the requirement of federal law that all aeronautical rates and charges be reasonable. If the Rate Covenant set forth in the Indenture would require the County to increase airline rates and charges in order to provide sufficient funds to make payments on the Series 2008 Bonds, but the 59

70 increased airline rates or charges would not be reasonable, then the County will not be able to increase such rates or charges and would be required to increase non-airline rates and charges or take other actions to meet the Rate Covenant. Under such circumstances there could be delays or reductions in payments on the Series 2008 Bonds. See --Federal Law Affecting Airport Rates and Charges. In addition, the financial forecasts contained in the Airport Consultant s Report are based on a number of assumptions. Changes in circumstances could have a material adverse impact on the ability of the County to pay the principal of and interest on the Series 2008 Bonds. Information Concerning the Airlines Revenues may be affected by the ability of the airlines serving the Airport System, individually or collectively, to meet their obligations to pay rates, rentals, fees and charges. Certain of the airlines (or their respective parent corporations) are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith file reports and other information with the SEC. Certain information, including financial information, concerning such airlines (or their respective parent corporations) is disclosed in reports and statements filed with the SEC. Such reports and statements can be inspected and copies obtained at prescribed rates at the SEC s principal offices at 100 F Street, N.E., Washington, D.C , and should he available for inspection and copying at the SEC s regional offices located at 233 Broadway, New York, New York 10279, and 500 W. Madison Street, Suite 1400, Chicago, Illinois The public may obtain information on the hours of operation of the Public Reference Room by calling the SEC at SEC The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically the SEC. Some of the airlines are required to file periodic reports of financial and operating statistics with the USDOT. Such reports can be inspected at the Office of Aviation Information Management, Data Requirements and Public Reports Division, Research and Special Programs Administration, USDOT, 400 Seventh Street, S. W., Washington, D.C , and copies of such reports can he obtained from the USDOT at prescribed rates. Airlines owned by foreign governments or foreign corporations operating airlines (unless such foreign airlines have American Depository Receipts registered on a national exchange) are not required to file information with the SEC. Airlines owned by foreign governments or foreign corporations file limited information only with the USDOT. The County has no responsibility for the completeness or accuracy of information available from the USDOT or SEC, including, but not limited to, updates of information on the SEC s Internet site or links to other Internet sites accessed through the SEC s site. The County has not reviewed or verified any of the information contained in such reports filed with the SEC and makes no representation as to the accuracy, completeness or fairness of any such reports or other information made available to the public by the airlines or their respective parent corporations. Effect of Airline Bankruptcies A bankruptcy of an airline operating at the Airport System could result in delays or reductions in payments on the Series 2008 Bonds. In the last several years, US Airways, United Airlines, Delta Air Lines and Northwest Airlines have emerged from bankruptcy. Bankruptcies of other airlines could occur. The bankruptcy of an airline with significant operations at the Airport System could have a material adverse effect on operations of the Airport System, Revenues, and the cost to the other airlines operating at the Airport System. On March 20, 2008, Aloha Airlines filed for bankruptcy protection and has announced that it is going to cease operations. Aloha Airlines operations accounted for less than 1.3% of enplanements at the International Airport in Fiscal Year The County does not believe that the Aloha Airlines 60

71 bankruptcy filing and cessation of operations will have a material adverse impact of the financial condition of the Airport System. In addition, on April 10, 2008, Frontier Airlines filed for bankruptcy protection, stating that it intended to continue normal operations during the reorganization process. Frontier Airlines operations accounted for approximately 2.3% of enplanements at the International Airport in Fiscal Year The County does not believe that the Frontier Airlines bankruptcy filing will have a material adverse impact of the financial condition of the Airport System. In the event of an airline bankruptcy, the automatic stay provisions of the Bankruptcy Code could prevent (unless approval of the bankruptcy court was obtained) any action to collect any amount owing by the airline to the County or any action to enforce any obligation of the airline to the County. With the authorization of the bankruptcy court, the airline may be able to repudiate some or all of its agreements with the County and stop performing its obligations (including payment obligations) under such agreements. Such a repudiation could also excuse the other parties to such agreements from performing any of their obligations. The airline may be able, without the consent and over the objection of the County, the Trustee, and the holders of the Series 2008 Bonds, to alter the terms, including the payment terms, of its agreements with the County, as long as the bankruptcy court determines that the alterations are fair and equitable. In addition, with the authorization of the bankruptcy court, the airline may be able to assign its rights and obligations under any of its agreements with the County to another entity, despite any contractual provisions prohibiting such an assignment. The Trustee and the holders of the Series 2008 Bonds may be required to return to the airline as preferential transfers any money that was used to make payments on the Bonds and that was received by the County or the Trustee from the airline during the 90 days immediately preceding the filing of the bankruptcy petition. Claims by the County under any lease with the airline may be subject to limitations. An airline is likely to be in possession of PFCs at the time it goes into bankruptcy. While there are provisions in the law requiring airlines to treat PFCs as trust funds, the application of these provisions in a bankruptcy case is not clear. The airline may not be required to turn over to the County or the Trustee any PFCs in its possession at the time it goes into bankruptcy. Even while the airline is in bankruptcy, it may not be required to turn over PFCs that are collected prior to the time that the County or the Trustee demands the turnover of the PFCs. Even after a demand is made, it is possible that the airline would not be required to turn over subsequently-collected PFCs. There may be delays in payments on the Series 2008 Bonds while the court considers any of these issues. There may be other possible effects of a bankruptcy of an airline that could result in delays or reductions in payments on the Series 2008 Bonds. Regardless of any specific adverse determinations in an airline bankruptcy proceeding, the fact of an airline bankruptcy proceeding could have an adverse effect on the liquidity and value of the Series 2008 Bonds. Effect of Concessionaire Bankruptcies A bankruptcy of any significant concessionaire at the International Airport could also result in delays or reductions in payments on the Series 2008 Bonds, for reasons similar to those discussed above with respect to airline bankruptcies. Regardless of any specific adverse determinations in a concessionaire bankruptcy proceeding, the fact of such a bankruptcy proceeding could have an adverse effect on the liquidity and value of the Series 2008 Bonds. Effect of County Bankruptcy The County is able to file for bankruptcy under Chapter 9 of the United States Bankruptcy Code. A bankruptcy of the County could result in delays or reductions in payments on the Series 2008 Bonds. 61

72 Should the County become the debtor in a bankruptcy case, the holders of the Series 2008 Bonds will not have a lien on Revenues received by the County or the Trustee after the commencement of the bankruptcy case unless such revenues constitute special revenues within the meaning of the Bankruptcy Code. Special revenues are defined to include receipts from the ownership, operation, or disposition of projects or systems that are primarily used to provide transportation services, as well as other revenues or receipts derived from particular functions of the debtor. While the County believes that the Revenues should be treated as special revenues, no assurance can be given that a court would not find otherwise. If Revenues are not special revenues, there could be delays or reductions in payments on the Series 2008 Bonds. Even if a court determines that Revenues are special revenues, the County will be able to use such revenues to pay operation and maintenance costs of the Airport System, notwithstanding any provision of the Indenture or any other agreement to the contrary. There may be other possible effects of a bankruptcy of the County that could result in delays or reductions in payments on the Series 2008 Bonds. Regardless of any specific adverse determinations in a County bankruptcy proceeding, the fact of a County bankruptcy proceeding could have an adverse effect on the liquidity and value of the Series 2008 Bonds. Uncertainties of the Airline Industry There are numerous factors which affect air traffic generally and air traffic at the Airport System more specifically. Demand for air travel is influenced by factors such as population, levels of disposable income, the nature, level and concentration of industrial and commercial activity in the service area, and the price of air travel. The price of air travel is, in turn, affected by the number of airlines serving a particular airport and a particular destination, the financial condition, cost structure and hubbing strategies of the airlines serving an airport, the willingness of competing airlines to enter into an airport market, the cost of operating at an airport, the price of fuel, and any operating constraints (due to capacity, environmental concerns or other related factors) limiting the frequency or timing of airport traffic within the national system or at a particular airport, such as the National Air Traffic Control System. In Fiscal Year , Southwest Airlines accounted for approximately 49% of the total enplaned passengers at the International Airport. Where an airport has a significant market share accounted for by a single airline, there is also risk associated with the potential for that airline to reduce or discontinue service. However, in the case of Southwest Airlines at the International Airport, this risk is mitigated by the following factors: (i) Southwest Airlines does not operate a connecting hub at the International Airport, and the passengers served are primarily origin-destination passengers; (ii) the development of service by Southwest Airlines has demonstrated the level of locally-generated passenger demand that could be served by other airlines at the International Airport if Southwest Airlines were to reduce service; and (iii) Southwest Airlines has a proven record, with very few exceptions, of maintaining and increasing service at the airports it serves. However, beginning in the second half of Fiscal Year , several airlines, including Southwest, expect to reduce the number of seats offered to the International Airport. The industry is cyclical and subject to intense competition and variable demand. Traffic volumes are responsive to economic circumstances and seasonal patterns. Other factors, such as fuel and regulatory costs, can also have a significant impact on the industry. As a result, financial performance can fluctuate dramatically from one reporting period to the next. Fuel is a significant cost component of airline operations and continues to be an important and uncertain determinate of an air carrier s operating economics. Historically, aviation fuel prices have been particularly sensitive to worldwide political instability. Economic expansion in emerging markets also contributes to higher aviation fuel prices. Significant and prolonged increases in the cost of aviation fuel 62

73 have had and are likely to continue to have an adverse impact on the air transportation industry by increasing airline operating costs, hampering airline recovery plans and reducing airline profitability. Since the economic deregulation of the airline industry in 1978, the industry has undergone significant changes including a number of airline mergers, acquisitions, bankruptcies and closures. In addition, the financial results of the airline industry have been subject to substantial volatility since deregulation. The financial strength and stability of airlines serving the International Airport are key determinants of future airline traffic. The financial results of the airline industry have been subject to substantial volatility since deregulation, and many carriers have not been profitable, particularly after the events of September 11, 2001, pandemics, the war in Iraq, recessions, availability and increases in aviation fuel prices. Additional bankruptcy filings, mergers, consolidations and other major restructuring by airlines are possible. In addition, individual airline decisions regarding level of service, particularly hubbing activity, at the International Airport will affect total enplanements. No assurance can be given as to the levels of aviation activity which will be achieved at the International Airport. On April 14, 2008, Delta Air Lines and Northwest Airlines announced an agreement to merge. In Fiscal Year , the two airlines accounted for approximately 8.2% of total enplaned passengers at the International Airport. There can be no assurances that the merger (which is subject to approval by regulators and shareholders) will not result in a reduction in overall service from the levels provided by the carriers prior to the merger. There is no assurance that the International Airport, despite a demonstrated level of airline service and operations, will continue to maintain such levels in the future. The continued presence of the airlines serving the International Airport, and the levels at which that service will be provided, are a function of a variety of factors. Future airline traffic at the International Airport will be affected by, among other things, the growth or decline in the population and the economy of the International Airport service region and by national and international economic conditions, federal regulatory actions, airline service, air fare levels and the operation of the air traffic control system. The County makes no representation whatsoever with respect to the continued viability of any of the carriers serving the International Airport. Competition The other major airports that compete with the Airport System for passengers and cargo traffic are San Francisco International Airport, Oakland International Airport and Norman Y. Mineta San Jose International Airport. While the County expects the International Airport to continue to be the major air traffic center for the Sacramento area, based on passenger preferences stemming from the Airport System s location and service, there can be no assurance that such passenger preferences will continue and that passengers will not choose to fly from competing airports. Federal Law Affecting Airport Rates and Charges In general, federal aviation law requires that airport fees charged to airlines and other aeronautical users be reasonable and that in order to receive federal grant funding, all airport generated revenues must be expended for the capital or operating costs of the airport, the local airport system, or other local facilities owned or operated by the airport owner that are directly and substantially related to air transportation of passengers or property. Pursuant to the requirements of the 1994 Aviation Act the USDOT and FAA have promulgated regulations setting forth an expedited hearing process to be followed in determining the reasonableness of the fees charged to airlines and other aeronautical users. The County is not aware of any formal dispute involving the International Airport over any existing rates and charges. The County believes the rates and charges it imposes upon air carriers, foreign air carriers and other aeronautical users, and the rates and charges methodology utilized for the Rate 63

74 Ordinance (both existing and as proposed), are reasonable and consistent with federal law and applicable FAA regulations. However, there can be no assurances that one or more airlines will not challenge the compensatory rates established by the County with respect to the Rate Ordinance in connection with its adoption of the Rate Ordinance and subsequent amendment in the future or, if such a challenge were to be brought, that it would not be successful. A successful challenge to the compensatory rates set forth in the Rate Ordinance as amended could limit the ability of the County to charge the airlines and other aeronautical rates required by the provisions of the Indenture and would require the County to increase rates and fees charged to non-aeronautical users, which could have a material adverse impact on the financial condition of the Airport System. The County can provide no assurances that that the operation of the Rate Covenant set forth in the Indenture will not be limited by the requirement of federal law that all aeronautical rates and charges be reasonable. If the Rate Covenant set forth in the Indenture would require the County to increase aeronautical rates and charges in order to provide sufficient funds to make payments on the Series 2008 Bonds, but the increased rates or charges would not be reasonable, then the County will not be able to increase such rates or charges and would require the County to increase rates and charges to nonaeronautical users (such as automobile parking, rental cars, terminal concessions, and other nonairline tenants). Under such circumstances there could be delays or reductions in payments on the Series 2008 Bonds. Additional Obligations Can Be Issued Without Bondholder Consent Under the Indenture the County is permitted to issue additional obligations without obtaining any consent from any holder of existing Series 2008 Bonds. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Additional Senior Obligations, -Additional Subordinate Obligations and - Junior Subordinate Obligations, Junior Obligations and Special Facility Obligations. Such newly issued obligations may be junior to, or on a parity with the Series 2008 Senior Bonds or senior to, junior to, or on a parity with the Series 2008 Subordinate Bonds, as long as the requirements of the Indenture are satisfied. Any such additional obligations may be secured by the Trust Estate and thus an increased amount of debt will be outstanding, but the amount of collateral for those obligations will not be increased. Certain of the conditions for the issuance of additional obligations relate to financial projections regarding the future operations of the Airport System. The County can provide no assurance that such projections will be achieved. If such projections are not achieved, there may be insufficient Revenues to make the required payments on all of the Series 2008 Bonds, unless airport rates and charges are increased. The County, however, may be unable to increase airport rates and charges as a result of federal law that requires all airport rates and charges to be reasonable. See INVESTMENT CONSIDERATIONS - Federal Law Affecting Airport Rates and Charges. Under such circumstances, there could be delays or reductions in payments on the Series 2008 Bonds. Collateral Can Be Released to the County Under the Indenture the County is permitted to direct the Trustee to release portions of the Trust Estate to the County, free and clear of the lien of the Indenture, without obtaining any consent from any holder of the Series 2008 Bonds, as long as certain conditions are satisfied. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Released Revenues. Certain of the conditions for the release of collateral relate to financial projections regarding the future operations of the Airport System. The County can provide no assurance that such projections will be achieved. If such projections are not achieved, there may be insufficient Revenues remaining in the Trust Estate to make the required payments on the Series 2008 Bonds, unless airport rates and charges are increased. The County, however, may be unable to increase airport rates and charges as a result of federal law that requires all airport rates and charges to be reasonable. See INVESTMENT CONSIDERATIONS - 64

75 Federal Law Affecting Airport Rates and Charges. Under such circumstances, there could be delays or reductions in payments on the Series 2008 Bonds. Subordinate Debt Service Reserve Fund Does Not Secure Senior Bonds Senior Bonds are not secured by the Subordinate Debt Service Reserve Fund, and thus holders of Senior Bonds have no right to be paid from amounts in the Subordinate Debt Service Reserve Fund, even if the Senior Bonds are in default. As a result, should there be a shortfall in Revenues, it is possible that payments will be made on the Subordinate Bonds from the Subordinate Debt Service Reserve Fund, even though the Senior Bonds have not received all required payments. See SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2008 BONDS Subordinate Debt Service Reserve Fund. Cost of Capital Improvement Program As described herein, the County is undertaking a significant capital improvement program with respect to the Airport System. The County has entered into and will enter into agreements for the construction of such capital improvements. See AIRPORT SYSTEM CAPITAL IMPROVEMENT PROGRAM TMP Construction. The County anticipates that such contracts will be subject to adjustment for a variety of circumstances, including higher than anticipated costs of labor and materials or subcontractor bids, changes in scope, unforeseen site conditions and force majuere events. The estimated costs of, and the projected schedule for, the CIP are subject to a number of uncertainties. The ability of the County to complete the CIP may be adversely affected by various factors including: (1) estimating errors, (2) design and engineering errors, (3) changes to the scope of the projects, including changes to federal security regulations, (4) delays in contract awards, (5) material and/or labor shortages, (6) unforeseen site conditions, (7) adverse weather conditions and other force majuere events, (8) contractor defaults, (9) labor disputes, (10) unanticipated levels of inflation and (11) environmental issues. No assurance can be made that the existing projects in the CIP, including the TMP, will not cost more than the current budget for these projects. Any schedule delays or cost increases could result in the need to issue additional indebtedness and may result in increased costs per enplaned passenger to the airlines, thereby making the International Airport less economically competitive. There can be no assurances that significant increases in costs over the amounts projected by the County will not materially adversely affect the financial condition or operations of the Airport System. Unavailability of, or Delay in, Anticipated Funding Sources As described herein, the County anticipates that funding for the TMP will be provided through a portion of the proceeds of the Series 2008 Bonds, internally generated cash flow, PFCs, federal grants, additional Senior Bonds and Subordinate Bonds and other sources. See APPENDIX A REPORT OF THE AIRPORT CONSULTANT for a description of the financing plan for the CIP. In the event that any of such sources are unavailable for any reason, including unavailability of internally generated cash flow; reduction in the amount of PFC or federal grants available to the Airport System; the inability of the County to issue or sell additional Senior Bonds or Subordinate Bonds in the amounts, at the times, and at the interest rates anticipated in the financing plan; or any other reason, the completion of the TMP could be substantially delayed financing costs could be higher than projected. There can be no assurances that such circumstances will not materially adversely affect the financial condition or operations of the Airport System. Report of the Airport Consultant The Airport Consultant s Report included as Appendix A to this Official Statement contains certain assumptions and forecasts. The Airport Consultant s Report should be read in its entirety for a discussion of historical and forecast results of the County and the assumptions and rationale underlying the forecasts. As noted in the Airport Consultant s Report, any forecast is subject to uncertainties. There 65

76 will usually be differences between actual and forecast results because not all events and circumstances occur as expected, and those differences may be material. Accordingly, the projections contained in the Airport Consultant s Report or that may be contained in any future certificate of the County or a consultant are not necessarily indicative of future performance, and neither the Airport Consultant nor the County assumes any responsibility for the failure to meet such projections. In addition, certain assumptions with respect to future business and financing decisions of the County are subject to change. No representation is made or intended, nor should any representation be inferred, with respect to the likely existence of any particular future set of facts or circumstances, and prospective purchasers of the Series 2008 Bonds are cautioned not to place undue reliance upon the Airport Consultant s Report or upon any projections or requirements for projections. If actual results are less favorable than the results projected or if the assumptions used in preparing such projections prove to be incorrect, the amount of Net Revenues and PFCs may be materially less than expected and consequently, the ability of the County to make timely payment of the principal of and interest on the Series 2008 Bonds may be materially adversely affected. Neither the County s independent auditors, nor any other independent accountants have compiled, examined or performed any procedures with respect to the Net Revenues forecast, nor have they expressed any opinion or any form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the Net Revenues forecast, nor have they expressed any opinion or any form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the Net Revenue forecast. Impact of Potential Floods During the severe winter storms in the Sacramento area in 1986, 1997 and 2006, the American River and Sacramento River levee systems carried a record volume of water due to heavy rainfall of long duration. Although these storms caused some flooding in certain areas, the major levee systems that protect properties in the Sacramento area from disaster withstood the record water flows. However, as described below, certain levee systems in the area, including those protecting the International Airport, have been determined to provide significantly less protection against flooding than previously thought. In June 2006, the United States Army Corps of Engineers (the Corps ) stated that, primarily because of underseepage, levees in the Natomas Basin area of the County (which includes the International Airport) were no longer certifiable for a 100 year flood event (i.e., a flood event that has a 1% chance of occurrence in any year). In January 2008, the Corps completed additional analysis and concluded that it could not certify the Natomas Basin levee system for a 33 year flood event (i.e., a flood event that has a 3% chance of occurrence in any year). As a result, future development starting after December 2008 in the Natomas Basin will be severely limited until the deficiencies in the levee system are corrected. Mandatory flood insurance requirements do not apply to the International Airport. Federal and state agencies are currently taking various actions to remedy the deficiencies in the system of levees providing protection to the Natomas Basin. The Sacramento Area Flood Control Agency ( SAFCA ), the local agency responsible for the construction of levee improvements, has publicly stated that 100 year protection can be restored by the end of However, there can be no assurance that the levee improvements will be completed by the date anticipated by SAFCA. Flooding of the Sacramento area could result in significant damage to the International Airport or to a shutdown of International Airport operations which could materially adversely affect the financial condition or operations of the Airport System and the ability of the County to generate Net Revenues in the amounts required by the Indenture. 66

77 Impact of Potential Earthquakes Generally, seismic activity occurs on a regular basis within the State. Periodically, the magnitude of a single seismic event can cause significant ground shaking and potential damage to property located at or near the center of such seismic activity. A serious earthquake could result in damage within the County and to roads, bridges, and other property, including the International Airport. Damage to the International Airport could include pavement displacement (which could, in the worst case, necessitate the closing of one or more runways for extended periods of time), distortions of pavement grades, breaks in utility, loss of water supply, drainage and sewage lines, displacement or collapse of buildings, rupture of gas and fuel lines, and collapse of levees adjacent to the International Airport with consequential flooding. The facilities of the Airport System were each designed to the seismic standards existing at the later of the time of original construction or renovation. However, there can be no assurances that damage resulting from an earthquake will not materially adversely affect the financial condition or operations of the Airport System or the ability of the County to generate Net Revenues in the amounts required by the Indenture. Possible Recognition of Taxable Gain or Loss upon Defeasance of the Series 2008C Bonds Defeasance of any Series 2008C Bond may result in a reissuance thereof, in which event a holder will recognize taxable gain or loss equal to the difference between the amount realized from the sale, exchange or retirement (less any accrued qualified stated interest which will be taxable as such) and the holder s adjusted tax basis in the Series 2008C Bond. LITIGATION There is no litigation now pending against the County or, to the knowledge of its respective officers, threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery of the Series 2008 Bonds or in any way contesting or affecting the validity of the Series 2008 Bonds or any proceedings of the County taken with respect to the issuance or sale thereof, or the pledge or application of any moneys or security provided for the payment of the Series 2008 Bonds or the use of the Series 2008 Bond proceeds. There are a number of litigation matters pending against the County for incidents at the Airport System. These claims and suits are of a nature usually incident to the operation of the Airport System and, in the aggregate, in the opinion of the management of the Airport System, based upon the advice of the County Counsel, will not have a material adverse effect on the Net Revenues of the Airport System or financial condition or operations of the Airport System. It should be noted that a significant portion of the claims relating to personal injuries and property damage are covered by a comprehensive insurance program maintained by the County for the Airport System. VERIFICATION OF MATHEMATICAL COMPUTATIONS Upon issuance of the Series 2008 Bonds, Causey, Demgen & Moore Inc., independent certified public accountants, will deliver a report stating that the firm has verified the mathematical accuracy of certain computations relating to the adequacy of the Federal Securities to be acquired under the respective Escrow Agreements, stating that the Federal Securities are such that if interest thereon and principal thereof are paid as such interest and principal become due, the proceeds from the collection of such interest and principal, together with the amounts deposited pursuant to the respective Escrow Agreements, will be sufficient to pay the principal of, and premium, if any, and interest on, the Prior Bonds on their respective maturity and redemption dates. 67

78 RATINGS Moody s Investors Service ( Moody s ) and Standard & Poor s Ratings Services, a Division of The McGraw Hill Companies ( S&P ) have assigned ratings of Aaa, and AAA, respectively, for the Insured Bonds, with the understanding that, upon delivery of the Insured Bonds, the Policy will be issued by the Insurer. The Series 2008 Senior Bonds which are Insured Bonds have been assigned underlying ratings of A1 and A+, respectively, by Moody s and S&P, and the Series 2008 Subordinate Bonds which are Insured Bonds have been assigned underlying ratings of A2 and A, respectively, by Moody s and S&P. The Series 2008 Senior Bonds which are not Insured Bonds have been assigned ratings of A1 and A+, respectively, by Moody s and S&P, and the Series 2008 Subordinate Bonds which are not Insured Bonds have been assigned ratings of A2 and A, respectively, by Moody s and S&P. Certain information was supplied by the County to such rating agencies to be considered in evaluating the Series 2008 Bonds. The ratings reflect only the views of the rating agencies and any explanation of the significance of such ratings may be obtained only from such rating agencies as follows: Moody s Investors Service, 7 World Trade Center, 250 Greenwich Street, New York, New York and Standard & Poor s Ratings Group, 55 Water Street, New York, New York There is no assurance that the ratings will remain in effect for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agencies, or any of them, if, in their respective judgment, circumstances so warrant. Any downward revision or withdrawal of any rating may have an adverse effect on the market price of the Series 2008 Bonds. TAX MATTERS Series 2008A Bonds, Series 2008B Bonds, Series 2008D Bonds and Series 2008E Bonds In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the County ( Bond Counsel ), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2008A Bonds, Series 2008B Bonds, Series 2008D Bonds and Series 2008E Bonds (collectively, the Tax-Exempt Bonds ) is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the Code ), except that no opinion is expressed as to the status of interest on any Series 2008B Bond or Series 2008E Bond for any period that such Series 2008B Bond or Series 2008E Bond is held by a substantial user of the facilities financed or refinanced by the Series 2008B Bonds or Series 2008E Bonds or by a related person within the meaning of Section 147(a) of the Code. In the further opinion of Bond Counsel interest on the Series 2008A Bonds and the Series 2008D 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 observes, however, that interest on the Series 2008B Bonds and the Series 2008E Bonds is a specific preference item for purposes of the federal individual and corporate alternative minimum taxes. Bond Counsel is also of the opinion that interest on the Tax-Exempt Bonds is exempt from present State of California personal income taxes. Complete copies of the proposed forms of opinions of Bond Counsel are set forth in Appendix G. To the extent the issue price of any maturity of the Tax-Exempt Bonds is less than the amount to be paid at maturity of such Tax-Exempt Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Tax-Exempt 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 Tax-Exempt 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 Tax-Exempt Bonds is the first price at which a substantial amount of such maturity of the Tax-Exempt 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 Tax-Exempt Bonds accrues daily over the term to maturity of 68

79 such Tax-Exempt Bonds on the basis of a constant interest rate compounded semiannually (with straightline interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Tax-Exempt Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Tax-Exempt Bonds. Beneficial owners of the Tax- Exempt Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Tax-Exempt Bonds with original issue discount, including the treatment of beneficial owners who do not purchase such Tax-Exempt Bonds in the original offering to the public at the first price at which a substantial amount of such Tax-Exempt Bonds is sold to the public. Tax-Exempt Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium Bonds ) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received and a beneficial owner s basis in a Premium Bond will be reduced by the amount of amortizable bond premium properly allocable to such beneficial owner. Beneficial owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Tax-Exempt Bonds. The County has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Tax-Exempt 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 Tax-Exempt Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Tax-Exempt 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 Tax-Exempt Bonds may adversely affect the value of, or the tax status of interest on, the Tax-Exempt 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 Tax-Exempt 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 interest on the Tax-Exempt Bonds may otherwise affect a beneficial owner s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the beneficial owner or the beneficial owner s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Tax-Exempt Bonds to be subject, directly or indirectly, 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. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. On November 5, 2007, the United States Supreme Court heard an appeal in the case of Kentucky v. Davis, in which a Kentucky state court had ruled that the United States Constitution prohibited the state from providing a tax exemption for interest on bonds issued by Kentucky and its political subdivisions but taxing interest on obligations issued by other states and their political subdivisions. California law is 69

80 similar to Kentucky in taxing interest on out-of-state bonds. A ruling by the Supreme Court against the Kentucky law would not change the exemption from California state income taxes of the interest on the Tax-Exempt Bonds, but the value of the Tax-Exempt Bonds may be adversely affected by changes in the demand for California-origin bonds. There can be no assurance as to the outcome of the Davis case, the potential impact on the market price or marketability of the Tax-Exempt Bonds which may result from a decision, or the likelihood of any future action by Congress on this subject. 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 Tax-Exempt 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 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 County has covenanted, however, to comply with the requirements of the Code. Bond Counsel s engagement with respect to the Tax-Exempt Bonds ends with the issuance of the Tax-Exempt Bonds and, unless separately engaged, Bond Counsel is not obligated to defend the County or the beneficial owners regarding the tax-exempt status of the Tax-Exempt Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than 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 County legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Tax-Exempt 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 Tax- Exempt Bonds and may cause the County or the beneficial owners to incur significant expense. Series 2008C Bonds In the opinion of Bond Counsel, interest on the Series 2008C Bonds is exempt from present State of California personal income taxes. Interest on the Series 2008C Bonds is not excluded from gross income for federal income tax purposes under Section 103 of the Code. Bond Counsel expresses no opinion regarding any federal or other state tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Series 2008C Bonds. Complete copies of the proposed forms of opinions of Bond Counsel are set forth in Appendix G. The following is a summary of certain of the United States federal income tax consequences of the ownership of the Series 2008C Bonds as of the date hereof. Each prospective investor should consult with its own tax advisor regarding the application of United States federal income tax laws, as well as any state, local, foreign or other tax laws, to its particular situation. This summary is based on the Code, as well as Treasury Regulations and administrative and judicial rulings and practice. Legislative, judicial and administrative changes may occur, possibly with retroactive effect, that could alter or modify the continued validity of the statements and conclusions set forth herein. This summary is intended as a general explanatory discussion of the consequences of holding the Series 2008C Bonds generally and does not purport to furnish information in the level of detail or with the investor s specific tax circumstances that would be provided by an investor s own tax advisor. For example, it generally is addressed only to original purchasers of the Series 2008C Bonds that are U.S. holders (as defined below), deals only with Series 2008C Bonds held as capital assets within the meaning of Section 1221 of the Code and does not address tax consequences to holders that may be relevant to investors subject to special rules, such as individuals, trusts, estates, tax-exempt investors, foreign investors, cash method taxpayers, dealers in securities, currencies or commodities, banks, thrifts, insurance companies, electing large partnerships, mutual funds, regulated investment companies, real estate investment trusts, FASITs, S corporations, persons that hold Series 2008C Bonds as part of a 70

81 straddle, hedge, integrated or conversion transaction, and persons whose functional currency is not the U.S. dollar. In addition, this summary does not address alternative minimum tax issues or the indirect consequences to a holder of an equity interest in a holder of Series 2008C Bonds. As used herein, a U.S. holder is a U.S. person that is a beneficial owner of a Series 2008C Bond. A non-u.s. investor is a holder (or beneficial owner) of a Series 2008C Bond that is not a U.S. person. For these purposes, a U.S. person is a citizen or resident of the United States, a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof (except, in the case of a partnership, to the extent otherwise provided in Treasury Regulations), an estate the income of which is subject to United States federal income taxation regardless of its source or a trust if (i) a United States court is able to exercise primary supervision over the trust s administration and (ii) one or more United States persons have the authority to control all of the trust s substantial decisions. Tax Status of the Series 2008C Bonds. The Series 2008C Bonds will be treated, for federal income tax purposes, as a debt instrument. Accordingly, interest will be included in the income of the holder as it is paid (or, if the holder is an accrual method taxpayer, as it is accrued) as interest. Holders of the Series 2008C Bonds that allocate a basis in the Series 2008C Bonds that is greater than the principal amount of the Series 2008C Bonds should consult their own tax advisors with respect to whether or not they should elect to amortize such premium under section 171 of the Code. If a holder purchases the Series 2008C Bonds for an amount that is less than the principal amount of the Series 2008C Bonds, and such difference is not considered to be de minimis, then such discount will represent market discount that ultimately will constitute ordinary income (and not capital gain). Further, absent an election to accrue market discount currently, upon a sale or exchange of a Series 2008C Bond, a portion of any gain will be ordinary income to the extent it represents the amount of any such market discount that was accrued through the date of sale. In addition, absent an election to accrue market discount currently, the portion of any interest expense incurred or continued to carry a market discount bond that does not exceed the accrued market discount for any taxable year, will be deferred. Although the Series 2008C Bonds are expected to trade flat, that is, without a specific allocation to accrued interest, for federal income tax purposes, a portion of the amount realized on sale attributed to the Series 2008C Bonds will be treated as accrued interest and thus will be taxed as ordinary income to the seller (and will not be subject to tax in the hands of the buyer). Original Issue Discount. The Series 2008C Bonds may be issued with original issue discount ( OID ). Accordingly, a holder of a Series 2008C Bond would be required to include OID in gross income as it accrues under a constant yield method, based on the original yield to maturity of the Series 2008C Bond. Thus, the holders of such Series 2008C Bonds would be required to include OID in income as it accrues, prior to the receipt of cash attributable to such income. U.S. holders, however, would be entitled to claim a loss upon maturity or other disposition of such Series 2008C Bonds with respect to interest amounts accrued and included in gross income for which cash is not received. Such a loss generally would be a capital loss. A holder of a Series 2008C Bond that purchases a Series 2008C Bond for less than its adjusted issue price (generally its accreted value) will have purchased such Series 2008C Bond with market discount. If such difference is not considered to be de minimis, then such discount ultimately will constitute ordinary income (and not capital gain). Further, absent an election to accrue market discount currently, upon a sale or exchange of a Series 2008C Bond, a portion of any gain will be ordinary income to the extent it represents the amount of any such market discount that was accrued through the date of sale. In addition, absent an election to accrue market discount currently, the portion of any interest expense incurred or continued to carry a market discount bond that does not exceed the accrued market discount for any taxable year will be deferred. A holder of a Series 2008C Bond that has an allocated basis in the Series 2008C Bond that is greater than its adjusted issue price (generally its accreted value), but that is less than or equal to its principal amount, will be considered to have purchased the Series 2008C Bond with acquisition premium. The amount of OID that such holder of a Series 2008C 71

82 Bond must include in gross income with respect to such Series 2008C Bonds will be reduced in proportion that such excess bears to the OID remaining to be accrued as of the acquisition of the Series 2008C Bond. A holder of a Series 2008C Bond may have a basis in its pro rata share of the Series 2008C Bonds that is greater than the principal amount of such Series 2008C Bonds. Holders of Series 2008C Bonds should consult their own tax advisors with respect to whether or not they should elect to amortize such premium, if any, with respect to such Series 2008C Bonds under section 171 of the Code. Sale and Exchange of Series 2008C Bonds. Upon a sale or exchange of a Series 2008C Bond, a holder generally will recognize gain or loss on the Series 2008C Bonds equal to the difference between the amount realized on the sale and its adjusted tax basis in such Series 2008C Bond. Such gain or loss generally will be capital gain (although any gain attributable to accrued market discount of the Series 2008C Bond not yet taken into income will be ordinary). The adjusted basis of the holder in a Series 2008C Bond will (in general) equal its original purchase price increased by any OID (other than OID reduced due to acquisition premium) and decreased by any principal payments received on the Series 2008C Bond. In general, if the Series 2008C Bond is held for longer than one year, any gain or loss would be long term capital gain or loss, and capital losses are subject to certain limitations. See also, INVESTMENT CONSIDERATIONS Possible Recognition of Taxable Gain or Loss upon Defeasance of the Series 2008C Bonds regarding reissuance of the Series 2008C Bonds upon defeasance. Foreign Investors. Distributions on the Series 2008C Bonds to a non-u.s. holder that has no connection with the United States other than holding its Series 2008C Bond generally will be made free of withholding tax, as long as that the holder has complied with certain tax identification and certification requirements. Circular 230. Investors are urged to obtain independent tax advice based upon their particular circumstances. The tax discussion above was not intended or written to be used, and cannot be used, for the purposes of avoiding taxpayer penalties. The advice was written to support the promotion or marketing of the Series 2008C Bonds. Kentucky v. Davis. On November 5, 2007, the United States Supreme Court heard an appeal in the case of Kentucky v. Davis, in which a Kentucky state court had ruled that the United States Constitution prohibited the state from providing a tax exemption for interest on bonds issued by Kentucky and its political subdivisions but taxing interest on obligations issued by other states and their political subdivisions. California law is similar to Kentucky in taxing interest on out-of-state bonds. A ruling by the Supreme Court against the Kentucky law would not change the exemption from California state income taxes of the interest on the Series 2008C Bonds, but the value of the Series 2008C Bonds may be adversely affected by changes in the demand for California-origin bonds. There can be no assurance as to the outcome of the Davis case, the potential impact on the market price or marketability of the Series 2008C Bonds which may result from a decision, or the likelihood of any future action by Congress on this subject. LEGAL MATTERS The validity of the Series 2008 Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the County. Complete copies of the proposed forms of Bond Counsel opinions are contained in Appendix G. Certain matters will be passed upon on behalf of the County by the Sacramento County Counsel, and by Stradling Yocca Carlson & Rauth, A Professional Corporation, its Disclosure Counsel, and on behalf of the Underwriters by their counsel, Lofton & Jennings, San Francisco, California. Bond Counsel has not undertaken any responsibility for the accuracy, completeness or fairness of this Official Statement. All of the fees of Bond Counsel with regard to the issuance of the Series 2008 Bonds are contingent upon the issuance and delivery of the Series 2008 Bonds. 72

83 CONTINUING DISCLOSURE The County has covenanted for the benefit of owners of the Series 2008 Bonds to provide certain financial information and operating data relating to the County and the Airport System by not later than 210 days after the end of the County s Fiscal Year in each year, commencing with Fiscal Year ending June 30, 2008 (the Annual Report ) and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report will be filed by the County with each Nationally Recognized Municipal Securities Information Repository. The notices of material events will be filed by the County, with the Municipal Securities Rulemaking Board and any State Repository. These covenants have been made in order to assist the Underwriters in complying with Securities Exchange Commission Rule 15c2-12(b)(5) (the Rule ). The specific nature of the information to be contained in the Annual Report or the notices of material events by the County to provide certain information is summarized in APPENDIX F FORM OF CONTINUING DISCLOSURE CERTIFICATE. The County has not failed in the last five years to comply in all material respects with such requirements. FINANCIAL ADVISOR First Southwest Company is employed as Financial Advisor to the County in connection with the issuance of the Series 2008 Bonds. The Financial Advisor s fee for services rendered with respect to the sale of the Series 2008 Bonds is contingent upon the issuance and delivery of the Series 2008 Bonds. First Southwest Company, in its capacity as Financial Advisor, does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Series 2008 Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. The Financial Advisor to the County has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the County and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information. UNDERWRITING Morgan Stanley & Co. Incorporated, as representative of the Underwriters set forth on the cover page hereof (the Underwriters ), has agreed, subject to certain conditions, to purchase the Series 2008 Bonds at a price of $583,676, (which is equal to the aggregate principal amount of the Series 2008 Bonds of $585,625,000.00, plus net original issue premium of $1,219,362.50, and less an underwriters discount of $3,167,980.75). The purchase contract relating to the Series 2008 Bonds provides that the Underwriters will purchase all the Series 2008 Bonds if any are purchased. The Series 2008 Bonds may be offered and sold by the Underwriters to certain dealers and others at prices lower than such public offering price, and such public offering price may be changed, from time to time, by the Underwriters. 73

84 FINANCIAL STATEMENTS The audited financial statements of the Airport System set forth in Appendix B in the Comprehensive Annual Financial Report for Fiscal Years Ended June 30, 2006 and 2007 have been examined by Macias Gini & O Connell LLP, independent certified public accountants, for the periods indicated and to the extent set forth in their report thereon and should be read in their entirety. Macias Gini & O Connell LLP have not updated audited financial statements. The audited financial statements prepared by the County each Fiscal Year are provided to the Fiscal Agent within 210 days after the end of each such year in accordance with the Indenture. Also set forth in Appendix B is certain unaudited financial information for the six months ended December 31, 2007 and 2006, as prepared by the County. Such unaudited financial information was prepared by the County, and has not been audited or otherwise reviewed by the County s independent certified public accountant. MISCELLANEOUS The foregoing summaries or descriptions of provisions in the Indenture and Airline Agreement, and all references to other materials not purporting to be quotations in full, are only brief outlines of certain provisions thereof and do not constitute complete statements of such documents or provisions. Reference is thereby made to the complete documents relating to such matters for further information. Copies of the Indenture and the Airline Agreement are available from the office of the County Counsel. Any statement made in this Official Statement indicated to involve matters of opinion or estimates are represented as opinions or estimates in good faith. No assurance can be given, however, that the facts will materialize as so opined or estimated. This Official Statement has been duly authorized and approved by the County and duly executed and delivered on its behalf by the officials signing below. COUNTY OF SACRAMENTO By: /s/navdeep S. Gill Chief Operations Officer By: /s/g. Hardy Acree Director of Airports 74

85 APPENDIX A REPORT OF THE AIRPORT CONSULTANT

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87 Appendix A REPORT OF THE AIRPORT CONSULTANT on the proposed issuance of SACRAMENTO COUNTY AIRPORT SYSTEM REVENUE BONDS, SERIES 2008 Prepared for Sacramento County Airport System, Sacramento, California Prepared by Jacobs Consultancy San Francisco, California April 4, 2008

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89 April 4, 2008 Mr. Navdeep S. Gill Chief Operations Officer County of Sacramento 700 H Street, Room 7650 Sacramento, California Mr. G. Hardy Acree Director of Airports County of Sacramento Sacramento County Airport System Sacramento International Airport 6900 Airport Boulevard Sacramento, California Re: Report of the Airport Consultant, County of Sacramento Airport System Senior Revenue Bonds Series 2008A, 2008B, 2008C, and Airport System Subordinate and PFC Revenue Refunding Bonds Series 2008D and 2008E Dear Mr. Gill and Mr. Acree: We are pleased to submit this Report of the Airport Consultant (Report) on certain aspects of the proposed issuance of the County of Sacramento Airport System Senior Revenue Bonds, Series 2008A (non-amt), Series 2008B (AMT), and Series 2008C (taxable), referred to collectively in this Report as the 2008 Bonds; and Airport System Subordinate and PFC Revenue Refunding Bonds, Series 2008D (non-amt) and Series 2008E (AMT), referred to collectively in this Report as the 2008 Subordinate Bonds, by the County of Sacramento, California (the County). This letter and the accompanying attachment and exhibits constitute our Report. The Report presents our forecast of passengers enplaning at Sacramento International Airport (SMF) and evaluates the ability of the County Airport System to generate Net Revenues* sufficient to satisfy the requirements of the Rate Covenant (defined below) under the Master Indenture of Trust, and the First and Second Supplemental Indentures of Trust (collectively, the Indenture) between the County and The Bank of New York *Capitalized terms in this Report and not otherwise defined have the meanings given to such terms as defined in the Indenture.

90 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 Trust Company, N.A., as Trustee, for the forecast period FY 2008 through FY 2016.* The Report takes into account not only the 2008 Bonds and the 2008 Subordinate Bonds, but also the future issuance of additional Bonds or other Obligations estimated to be required to allow completion of the County s Terminal Modernization Program (defined below). Proceeds of the 2008 Bonds will be used to (1) refund and defease all outstanding senior revenue bonds -- the 1992B Bonds, 1998A Bonds, 2002A Bonds, 2002B Bonds, and the non-pfc eligible portion of the 2006A Bonds, (2) pay a portion of the costs of the Terminal Modernization Program, (3) fund the Senior Debt Service Reserve Fund, (4) fund capitalized interest for a portion of the 2008 Bonds, (5) fund a portion of the swap termination payment, and (6) pay the costs of issuance of the 2008 Bonds. Proceeds of the 2008 Subordinate Bonds will be used to (1) refund and defease, together with other lawfully available moneys, all outstanding subordinate PFC revenue bonds the 1996C Bonds** and 1998B Bonds and the PFC eligible portion of the 2006A Bonds, (2) fund the Subordinate Debt Service Reserve Fund, (3) fund a portion of the swap termination payment, and (4) pay the costs of issuance of the 2008 Subordinate Bonds. County Airport System The County owns and, through a County department known as the Sacramento County Airport System (SCAS), operates the Airport System. The Airport System consists of SMF, Mather Airport, Executive Airport, and Franklin Field. SMF is the principal commercial airport serving passenger demand in the seven-county Sacramento air service region, and also accommodates cargo and general aviation activity. Mather Airport, located on the site of a former Air Force Base, was established as a civilian cargo and general aviation airport in Executive Airport and Franklin Field are general aviation airports. Mather Airport and Executive Airport are designated reliever airports for SMF under the Federal Aviation Administration s (FAA) National Plan of Integrated Airport Systems (NPIAS). *The County s Fiscal Year (FY) ends June 30. The forecast period for the Additional Bonds Test in the Indenture is five full Fiscal Years following issuance of the Additional Senior Obligations, or each of the next two full Fiscal Years from the issuance of Additional Senior Obligations during which there is no Capitalized Interest, whichever is later. The Terminal Modernization Program is expected to be completed in FY 2014, therefore the forecast period extends through FY An Additional Bonds Test certificate is not required for this initial series of Bonds. **The 1996C PFC subordinate bonds will be defeased with unspent cash balances in the Bond funds. A-2

91 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 Airport System Capital Improvement Program SCAS prepares a rolling multi-year Capital Improvement Plan (CIP) each year in the course of preparing its annual budget for the Airport System. The preliminary FY CIP identifies approximately $1.4 billion in potential future capital projects. The largest element of the CIP is the Terminal Modernization Program (TMP), which extends to FY 2014, is estimated to cost approximately $1.27 billion, and is expected to be funded from Senior Obligations (including a portion of the 2008 Bonds), Subordinate Obligations backed by Passenger Facility Charges (PFCs) and federal grants, pay-asyou-go PFCs, Transportation Security Administration (TSA) grants, other funding for the hotel, and internally generated funds. The TMP has been under consideration by SCAS since it was recommended in the 2004 Airport Master Plan. In the Airport Master Plan, SCAS concluded that it would be necessary to expand the Airport s passenger terminal facilities to accommodate forecast growth in commercial passenger activity. One of the major elements of the TMP is a new landside Central Terminal B to replace the landside facilities in the existing Terminal B which was originally constructed in the mid-1960s. The Central Terminal B will be connected via an automated people mover to the 19-gate airside Concourse B. Central Terminal B will be served by a dual level roadway system and a new automobile parking garage. A hotel with approximately 150 to 185 rooms is planned to be constructed as part of Central Terminal B.* The TMP also includes construction of remote public parking, a centralized receiving warehouse, landscaping and demolition of existing facilities, and modification of Terminal A for additional airline tenants and gates. The County has identified two discrete phases and associated dates of beneficial occupancy (DBOs) for the TMP. Phase one is expected to open in late 2011 with the completion of the new terminal facilities, associated roadways, and airfield improvements (halfway through FY 2012), and phase two, the parking garage, is scheduled to open in March 2014 (in the third quarter of FY 2014). In addition to the TMP project elements, the County Airport System s CIP includes approximately $105 million in additional projects for the Airport System airports, including SMF, Executive Airport, Franklin Field, and Mather Airport. The County intends to undertake the remainder of the future CIP projects as warranted by demand considerations and to the extent the County believes the projects are financially viable. The County expects to finance these CIP projects primarily with Airport Improvement Program (AIP) grants and internally generated funds. The County does not expect to fund any of these projects with Bonds or other Obligations. Many of the projects eligible for federal grants will only be undertaken if federal funds are received. *It was assumed that the cost of the hotel would be financed through non-scas funds and neither the revenues nor the expenses (operating and debt service) would be an obligation of the County Airport System. A-3

92 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 The CIP represents to the County s best knowledge and belief at this time, all of the significant capital improvements expected to be undertaken through FY Cost estimates were provided by the County and its consultants and include allowances for design, construction management, contingencies, and escalation. The forecast period extends to FY 2016 and the County believes an allowance of $20 million per year in County Airport System funding (from the Capital Improvement Fund) is an adequate estimate for future expenditures in FY 2014 through FY The County reassesses its capital needs at least annually and will modify the CIP as necessary to accommodate traffic activity, security needs, and other factors, which could result in increases or decreases to the CIP, or extend the timing to complete certain projects. The costs and potential revenues related to all future capital improvements, including the TMP, are reflected in the accompanying financial forecasts. Passenger Facility Charges PFCs are fees imposed on enplaned passengers by airport sponsors to generate revenues for eligible airport projects that increase capacity, enhance competition among and between air carriers, enhance safety or security, or mitigate noise impacts. PFCs were established by Title 49 U.S.C , and authorized airport sponsors to collect PFCs in the amount of $1.00, $2.00, or $3.00 per eligible enplaning originating and connecting passenger. The Aviation Investment and Reform Act (AIR-21) increased the maximum PFC airport sponsors could collect to $4.50 per enplaning passenger. In return for the right to assess PFCs up to $3.00, large and medium hub airports forego up to 50% of their AIP entitlement funds. Large and medium-hub airports (such as SMF) that collect a PFC of $4.00 or $4.50 forego 75% of their AIP entitlement funds. In January 1993, the County received approval from the FAA to impose a PFC of $3 per eligible enplaned passenger at SMF, and has imposed the PFC since April 1, Since 1993, the County has submitted various applications and received approval to use PFC revenues to fund SMF improvements, including approval to use PFC revenues to pay debt service on a portion of the bonds issued to finance Terminal A. Concurrent with submitting PFC Application #7 in late 2001, the County received approval to increase the PFC level from $3.00 to $4.50 based on the amount of PFCeligible costs in both PFC Application #7 and in prior PFC approvals that meet specific FAA requirements for a $4.50 PFC, and began collecting at the $4.50 level on February 1, The County has initiated the process to seek FAA approval for PFC Application #8 to impose and use PFC revenues on a pay-as-you-go and leverage basis in connection with the TMP, initially at the current maximum PFC level of $4.50 per enplaned passenger. FAA approval is expected by October Should a higher PFC level be legislated by A-4

93 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 Congress and the Administration, the County intends to submit an application to increase the PFC level for the TMP elements. The House version of the proposed fouryear FAA reauthorization provides for an increase in the PFC level to $7.00 while the Senate version has no increase. The Administration s proposal provided for an increase to $6.00. It is widely expected that the PFC level will increase, but the timing of the increase is uncertain. In the accompanying financial forecasts, it was assumed that the PFC level would increase to $6.00 and be implemented by the County with FAA approval effective July 1, Existing PFC-use approval is also reflected in the financial forecasts presented in this report; in particular, the authorization to use PFC revenues to pay a portion of the debt service on the outstanding Series 1996C, Series 1998B, and a portion of the Series 2006A Revenue Bonds, which will be refinanced with the 2008 Subordinate Bonds.* Under the Second Supplemental Indenture, the County has irrevocably committed to apply certain amounts of PFCs to pay debt service on the 2008 Subordinate Bonds related to existing PFC collection authority through FY The total irrevocable commitment of PFC Revenues expected to be made by the County under future supplemental indentures is based on the projected level of annual PFC collections and interest earnings thereon. The amount of PFC-eligible costs and associated debt service for the TMP is forecast to be higher than PFC collections and interest earnings. Airport Improvement Program Letter of Intent On February 29, 2008, the County submitted an application to the FAA for an AIP Letter of Intent (LOI) for certain costs of the airfield elements of the TMP. The FAA is expected to act on the LOI application by October In its application, the County identified a need for AIP funds of $125 million over 10 years for Federal Fiscal Years (FFY) 2009 through The County intends to dedicate 100% of its projected AIP entitlement funds for SMF to this LOI for the 10-year period of the requested LOI. In the financial forecasts, it was assumed that the County would only receive approximately $80 million in an LOI because it is possible that if the County is permitted to charge a PFC at a level greater than $4.50, the County would be required to forego all future AIP entitlement grants Bonds and 2008 Subordinate Bonds A key objective in approaching a substantial, multi-year capital program like the CIP is to design a plan of finance that maximizes flexibility while attaining the lowest cost financing. To that end, the County intends to modernize its financing documents as a way to preserve flexibility for its future borrowing program. This will require the *The 1996C PFC subordinate bonds will be defeased with unspent cash balances in the Bond funds. A-5

94 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 County to defease all outstanding senior and subordinate lien airport revenue bonds and issue airport revenue bonds under a new set of bond documents. The current financing plan anticipates the defeasance of approximately $250 million in outstanding airport revenue bond principal, including $3.525 million of the 1996C Bonds which will not be refinanced, but instead defeased with unspent cash balances in the Bond funds, consisting of six series as follows: Proposed Series 2008 Refunding Bonds Outstanding Bonds to be Refunded Series Principal Series Principal 2008A $ 117,340, B, 1998A and 2002A $ 112,485, B 39,910,000 Non-PFC Portion of 2006A 34,690, C 13,530, B 13,125, D 47,710, B PFC 44,230, E 48,820,000 PFC Eligible 2006A 41,635,000 $ 267,310,000 $ 246,165,000 Source: First Southwest Company. Note: $3.525 million outstanding principal of the 1996C Bonds will be defeased using unspent cash balances in the Bond funds. The principal amounts for the proposed 2008 refunding bonds are preliminary and subject to change, and do not include amounts for the TMP. In addition, the County will soon need to encumber funds and enter into contracts for major elements of the TMP. Therefore, the 2008 Bonds also provide funds for construction of the TMP in the approximate amount of $273 million to finance certain elements of the TMP, as described further in the attachment. Future Bonds In addition to the 2008 Bonds, the County expects to issue Additional Senior Bonds in December 2008, July 2009, and July 2011 (totaling approximately $293 million) and Additional Subordinate Bonds in December 2008 and July 2009 (totaling approximately $478 million) to complete the financing of the TMP, which may include commercial paper to fund a portion of the costs on an interim basis. The specific form, amount, and timing of debt to complete the financing of the TMP have not been determined at this time. Although the County is considering various financing options, including the issuance of variable rate bonds, fixed rate bonds, and commercial paper, First Southwest Company, the County s financial advisor, has assumed for financial modeling purposes that (1) all TMP Bonds would be fixed rate, (2) all Bonds will be amortized over a period of 30 years from expected project completion, except the LOI bonds, which have a term of 10 years consistent with the expected LOI term, (3) future non-amt Senior Bonds would have an all-in rate of 6.11%, (4) future AMT Senior Bonds would have all-in rates of 6.30% to 6.37%, (5) future non-amt Subordinate Bonds would have all-in rates of 4.12% to 5.92%, and (6) future AMT Subordinate Bonds would have all-in rates of 5.23% to 6.46%. A-6

95 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 Indenture of Trust The 2008 Bonds constitute Senior Obligations and are being issued pursuant to a new Master Indenture, dated as of May 1, 2008, between the County and The Bank of New York Trust Company, N.A., as Trustee, as supplemented. As defined in the Indenture, Senior Obligations are special, limited obligations of the County payable solely from the Trust Estate with Net Revenues (Revenues less Operating Expenses) of the Airport System being the primary source. The general fund of the County is not pledged to the payment of the 2008 Bonds. The 2008 Subordinate Bonds constitute Subordinate Obligations pursuant to the Indenture, secured by the Trust Estate and payable from Net Revenues on a priority subordinate to the Senior Obligations. Principal and interest on the 2008 Subordinate Bonds is additionally payable from certain PFC Revenues, pursuant to PFC applications #4, 5, and 6 that were approved by the FAA. Certain amounts of PFCs from these applications are irrevocably committed until FY 2016 in the Second Supplemental Indenture related to the 2008 Subordinate Bonds. Revenues are generally defined as all income, receipts, earnings and revenues received by or accrued to the County from the ownership or operation of the Airport System, as determined in accordance with generally accepted accounting principles, excluding, except to the extent deposited in the Revenue Fund, (1) Passenger Facility Charges, (2) Customer Facility Charges (CFCs),* (3) gifts, grants and other funds which are restricted by their terms to purposes inconsistent with the payment of Operating Expenses or payment of Obligations, (4) any gain from the sale, exchange or other disposition of capital assets of the Airport System, (5) Special Facility Revenue, and (6) certain insurance proceeds. For purposes of meeting any of the tests prescribed by the Indenture, any transfers from the Capital Improvement Fund to the Revenue Fund shall be deemed to be Revenues. As discussed below, the financial forecasts do not include any transfers from the Capital Improvement Fund to the Revenue Fund except for a final settlement of FY 2007 and FY 2008 airline payments in FY Operating Expenses of the Airport System are generally defined as the reasonable and necessary costs and expenses of operating, maintaining and administering the Airport System, determined in accordance with Generally Accepted Accounting Principles, excluding (a) amortization of intangibles or other bookkeeping entries of a similar nature; (b) amortization and depreciation of Airport System facilities and assets; (c) charges for the payment of principal, Redemption Price, Purchase Price, interest or other payments on any Obligations; (d) any items chargeable to a capital account; (e) any loss from the sale, exchange or other disposition of capital assets of the Airport System; (f) any unrealized losses on securities held for investment by or on behalf of the County for the Airport System; (g) any losses resulting from changes in valuation of any *Customer facility charges are paid by rental car customers. The County currently does not charge a CFC. A-7

96 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 Swap; (h) any unrealized losses from the write-down, reappraisal or revaluation of assets including investments for other than temporary declines in book value; (i) any extraordinary losses; (j) any loss resulting from extinguishment of indebtedness; and (k) the costs and expenses of operating, maintaining and administering any Special Facility. Under the definition of Aggregate Adjusted Annual Debt Service (used in the Additional Bonds Test), principal and interest to be paid from Available Revenues or moneys other than Revenues, including any investment earnings, that have been irrevocably committed pursuant to a Supplemental Indenture are disregarded and not included in the calculation. Available Revenues consist of Available CFC Revenues, Available Grant Revenues, and Available PFC Revenues. The County has irrevocably committed certain amounts of Available PFC Revenues set forth in the Second Supplemental Indenture, which applies to the debt service on the 2008 Subordinate Bonds issued to refund certain existing bonds originally issued to fund PFC projects approved by the FAA. The County intends to specify further Available PFC Revenues for future Airport System Subordinate Obligations to fund eligible TMP costs, subject to future FAA approval, including potentially at a PFC level above the current $4.50 charge. In addition, the County intends to designate LOI grants as Available Grant Revenues if and when the LOI is approved by the FAA. For the purposes of this Report, the forecast of Available PFC Revenues and Available Grant Revenues that the County expects to irrevocably commit for a certain period in Supplemental Indentures relating to future series of Subordinate Obligations, are excluded from the calculation of Aggregate Adjusted Annual Debt Service when establishing compliance with the Additional Bonds Test. The County has established an Available PFC Account as a repository for certain committed PFC revenues. In the Second Supplemental Indenture, the County intends to irrevocably commit, to the extent received, specific amounts of PFC Revenues in each of FY 2008 through FY 2016 to the payment of principal and interest due on the 2008 Subordinate Bonds. The committed PFC Revenues are to be transferred by the County from the Available PFC Account to the Subordinate Debt Service Fund. Rate Covenant In Section 6.04 of the Indenture (referred to as the Rate Covenant), the County covenants to establish, fix, prescribe and collect rates, tolls, fees, rentals and charges so that Net Revenues in each Fiscal Year will be at least equal to the amount necessary in that Fiscal Year (a) Accrued Debt Service on all Outstanding Senior Obligations, (b) to make required deposits to any Senior Debt Service Reserve Fund under the Master Indenture or any Supplemental Indenture, (c) to pay any rebate required for Senior Obligations, (d) to pay Accrued Debt Service on all Outstanding Subordinate Obligations, (e) to make required deposits to any A-8

97 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 Subordinate Debt Service Reserve Fund, (f) to pay any rebate required for Subordinate Obligations, (g) to make deposits to the Operating Reserve Account to meet the Operating Reserve Requirement, (h) to pay debt service on Junior Subordinate Obligations, and (i) to pay any rebate required for Junior Subordinate Obligations. Net Revenues for such Fiscal Year plus any Transfer* will be equal to at least 125% of Accrued Debt Service on all Outstanding Senior Obligations for such Fiscal Year and at least 110% of Accrued Debt Service on all Outstanding Senior Obligations and Subordinate Obligations for such Fiscal Year and at least 100% of Accrued Debt Service on all Outstanding Senior Obligations, Subordinate Obligations, and Junior Subordinate Obligations for such Fiscal Year. Airline Agreements and Rate Ordinance The passenger and cargo airlines operating at SMF and Mather Airport operate under the terms of the Scheduled Airline Operating Agreement and Terminal Building Lease (Airline Lease). The Airline Lease became effective July 1, 2000, expired June 30, 2006, and has continued in month-to-month holdover status since July 1, The County has worked over the past several years to reach a negotiated agreement with the airlines serving the airports but has been unable to reach a new agreement. The negotiations were aimed at continuing to calculate airline rentals and fees using an Airport System residual rate methodology. As a result, the County intends to terminate the existing month-to-month Airline Lease effective May 1, Upon termination of the Airline Lease, the provisions of Chapter *For purposes of the Rate Covenant, the amount of any Transfer taken into account shall not exceed 25% of the Accrued Debt Service on the Outstanding Senior Obligations or 10% of the Accrued Debt Service on the Outstanding Senior Obligations and Subordinate Obligations for such Fiscal Year. A Transfer is defined to mean (a) the amount in the Capital Improvement Fund on the last Business Day of such Fiscal Year plus (b) any amounts withdrawn from the Capital Improvement Fund during such Fiscal Year to pay Operating Expenses and to make any required payments or deposits to pay or secure the payment of Obligations less (c) any amounts credited to the Capital Improvement Fund from the Revenue Fund during such Fiscal Year. The Indenture also allows physical transfers of amounts from the Capital Improvement Fund to the Revenue Fund and any other amounts deposited to the Revenue Fund to be included in Revenues; however, the financial forecast does not include any such deposits except for the final airline settlement in FY A-9

98 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, of County Code will govern the assignment of space and associated rentals and fees for the Airport System (the Rate Ordinance). The airline rates that will be set pursuant to the ordinance for May and June 2008, are the same as those under the Airline Lease with one exception. The methodology contained in both the Airline Lease and in the Rate Ordinance requires that the airlines pay 125% of actual principal and interest on outstanding bonds. However, while the Airline Lease credits the 25% debt service coverage to the airlines in the subsequent year, the new rates pursuant to Chapter do not resulting in a higher landing fee rate. County staff expects to return to the County Board of Supervisors in May 2008 with a proposed amendment to the Rate Ordinance that will replace the current residual rate methodology with a compensatory methodology to become effective July 1, The U.S. Department of Transportation s Policy Regarding the Establishment of Airport Rates and Charges (the Policy) establishes the guidelines that airports must follow in determining which costs can be included in the airline rate base if a rate methodology is unilaterally employed by an airport. The County believes that the methodology utilized in the Rate Ordinance for the establishment of compensatory rates is reasonable and consistent with federal law and applicable FAA regulations. However, there can be no assurances that one or more airlines will not challenge the compensatory rates established by the County or, if such a challenge were to be brought, that it would not be successful. A successful challenge to the compensatory rates could limit the ability of the county to charge rates assumed and could have a material adverse impact on the financial condition of the Airport System. Upon termination of the Airline Lease, the County is required to conduct a final settlement of airline rentals and fees actually collected during the final year of the Airline Lease compared with the requirement based on actual costs and revenues. Any calculated excess collection will be credited to the respective airline s account, while any calculated deficiency will be billed as a one-time charge. The final settlement cannot be calculated until actual results for FY 2008 are known, but SCAS staff expects there will be a one-time credit at the end of FY 2009, which is reflected in the financial forecasts. Scope of Report The Report was undertaken to estimate the ability of the Airport System to meet the requirements of the Rate Covenant in each year through FY In conducting our study, we analyzed: Future airline traffic demand at SMF and Mather Airport, giving consideration to the demographic and economic characteristics of the airport service region; historical trends in airline traffic; recent airline service developments and airfares; and other key factors that may affect future airline traffic. A-10

99 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 The status and estimated costs of the TMP and the preliminary FY CIP for the Airport System. Estimated sources and uses of funds and associated annual Debt Service requirements of the 2008 Bonds, 2008 Subordinate Bonds, and future obligations to complete the financing of the TMP. Historical and estimated future PFC Revenues and the use of certain PFC Revenues to pay the annual Debt Service requirements of the 2008 Subordinate Bonds and future Additional Subordinate Obligations. The County s intended use of PFC revenue during the forecast period under the terms of the Master Indenture, the Second Supplemental Indenture, and expected future supplemental indentures. Historical relationships among revenues, expenses, and airline traffic for the Airport System. The facilities expected to be provided, as included in the CIP, and other operational considerations affecting Airport System revenues and expenses. Audited financial results for the Airport System for FY 2007, SCAS current estimate of Revenues and Operating Expenses for FY 2008, and the preliminary budget for FY The existing Airline Lease and Rate Ordinance and the associated calculation and adjustment of airline rentals, fees, and charges as well as the proposed new compensatory Rate Ordinance. Other contractual agreements relating to the use and lease of the Airport such as the operation of public automobile parking and other concession and service privileges; and the leasing of buildings and grounds. We have relied upon the County and the TMP design team for estimates of project costs and construction schedules for the TMP; upon the County for estimates of project costs, funding sources, and construction schedules for the rest of the CIP; upon the County s outside counsel for interpretation of the proposed new compensatory rate ordinance; and upon the County s Financial Advisor for the plan of debt finance and estimated debt service requirements for the 2008 Bonds, 2008 Subordinate Bonds, and future bonds to finance the TMP. Bay Area Economics, a real estate economics firm headquartered in the San Francisco Bay Area with an office in Davis, California, prepared the economic and demographic analysis in the Report. A-11

100 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 We also identified key factors upon which the future financial results of the Airport System may depend and formulated assumptions about those factors. On the basis of those assumptions, we assembled the financial forecasts presented in the accompanying exhibits provided at the end of this Report. Forecast Debt Service Coverage As shown in Exhibit G and H at the end of this Report, and the table below, Revenues are forecast to be sufficient to pay Operating Expenses and to meet the other funding requirements of the Indenture, including Accrued Debt Service on Senior Obligations and Subordinate Obligations. The following table summarizes forecasts of Net Revenues, Accrued Debt Service on Senior Obligations and Subordinate Obligations, and debt service coverage, taking into consideration the estimated debt service on the 2008 Bonds, the 2008 Subordinate Bonds, and future obligations the County may issue through FY 2012 to finance a portion of the costs of the TMP. DEBT SERVICE COVERAGE CALCULATION INCLUDING THE FUTURE BONDS (in thousands, except coverage) Forecast DBO 1 DBO Rate Covenant per Section 6.04 (b)(i) Revenues $ 153,566,074 $ 161,955,572 $ 165,238,333 $ 190,425,086 $ 210,098,744 $ 215,948,610 $ 225,520,004 $ 232,028,489 Operating Expenses (107,971,779) (97,118,239) (100,364,454) (111,408,687) (123,264,356) (129,356,365) (135,536,126) (141,488,354) Net Revenues $ 45,594,295 $ 64,837,333 $ 64,873,879 $ 79,016,400 $ 86,834,388 $ 86,592,245 $ 89,983,877 $ 90,540,136 Transfer 4,358,401 4,773,593 4,806,113 10,092,231 13,692,964 13,694,108 14,507,114 14,506,717 Net Revenues + Transfer $ 49,952,696 $ 69,610,926 $ 69,679,992 $ 89,108,631 $ 100,527,352 $ 100,286,353 $ 104,490,991 $ 105,046,853 Accrued Debt Service on Senior Obligations $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 40,368,924 $ 54,771,856 $ 54,776,431 $ 58,028,456 $ 58,026,869 DEBT SERVICE COVERAGE (>1.25) DEBT SERVICE COVERAGE w/o Transfer Rate Covenant per Section 6.04 (b)(ii) Net Revenues $ 45,594,295 $ 64,837,333 $ 64,873,879 $ 79,016,400 $ 86,834,388 $ 86,592,245 $ 89,983,877 $ 90,540,136 Transfer 1,743,361 1,909,437 1,922,445 4,036,892 5,477,186 5,477,643 5,802,846 5,802,687 Net Revenues + Transfer $ 47,337,655 $ 66,746,770 $ 66,796,324 $ 83,053,292 $ 92,311,574 $ 92,069,888 $ 95,786,723 $ 96,342,823 Accrued Debt Service of Senior Obligations $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 40,368,924 $ 54,771,856 $ 54,776,431 $ 58,028,456 $ 58,026,869 Debt Service on Subordinate Obligations 24,617,251 42,856,310 43,497,895 43,717,420 43,719,145 43,717,433 43,720,678 43,721,740 LESS: Available PFC Revenues Existing PFC authorizations (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Expected PFC authorizations - LOI Bonds (622,059) (2,717,582) (2,722,692) (2,718,809) (2,715,399) (2,721,392) (2,720,182) (2,720,967) Expected PFC authorizations - PFC Bonds (6,954,960) (24,088,831) (24,088,831) (24,228,831) (24,216,341) (24,219,119) (24,236,361) (24,202,266) LESS: Available Grant Revenues (9,834,093) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) Accrued Debt Service of Sr. & Sub. Obligations $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 40,368,924 $ 54,771,856 $ 54,776,431 $ 58,028,456 $ 58,026,869 DEBT SERVICE COVERAGE (>1.10) DEBT SERVICE COVERAGE w/o Transfer Note: Includes Debt Service Requirements on the 2008 Bonds, 2008 Subordinate Bonds, and future Bonds that the County may issue during the forecast period. The calculation of Accrued Debt Service excludes principal and interest to be paid from Available PFC Revenues and Available Grant Revenues. Exhibit C presents annual PFC revenue collection and the application of PFC revenues. The calculation of debt service coverage through FY 2016 forecasts compliance with the Rate Covenant in each year of the forecast period. A-12

101 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 Forecast Airline Payments Per Enplaned Passenger As shown in Exhibit F-3 at the end of this Report, the airline payments per enplaned passenger for SMF is forecast to increase from $5.16 in FY 2005 to a high of $14.55 in FY In the case of SMF, the airline payments include the costs of equipment sometimes owned and operated by the airlines such as loading bridges and baggage systems.* The forecast airline payment per enplaned passenger is at the high end of costs forecast at other comparable medium-hub airports where major expansion and improvement projects have recently been completed or planned. In the final analysis, the reasonableness of airline rates and charges is a judgment that will be made by the individual airlines in deciding what level of service to provide in light of the demand in the Sacramento market. Assumptions The forecasts are based on information and assumptions that were provided by or reviewed with and agreed to by Airport System management. The forecasts reflect Airport System management s expected course of action during the forecast period and, in Airport System management s judgment, present fairly the expected financial results of the Airport System. Those key factors and assumptions that are significant to the forecasts are set forth in the attachment, Background, Assumptions, and Rationale for the Financial Forecasts. The attachment should be read in its entirety for an understanding of the forecasts and the underlying assumptions. In our opinion, the underlying assumptions provide a reasonable basis for the forecasts. However, any forecast is subject to uncertainties. Inevitably, some assumptions will not be realized and unanticipated events and circumstances may occur. Therefore, there will be differences between the forecast and actual results, and those differences may be material. Neither Jacobs Consultancy nor any person acting on our behalf makes any warranty, expressed or implied, with respect to the information, assumptions, forecasts, opinions, or conclusions disclosed in the Report. We have no responsibility to update this report to reflect events and circumstances occurring after the date of the Report. *Airline costs per enplaned passenger (CPE) is a standard, though imperfect, measure across airports of the landing fees and terminal rents paid by airlines, expressed in relation to enplaned passengers. There is a wide range in CPE at individual airports primarily reflecting where each airport is in its development cycle, the ratemaking methodology employed, who financed the facilities (the airport or the airline), and traffic trends. While most public-use airport facilities have been financed by airport operators, the airlines have financed some exclusive use terminal facilities. To the extent these costs are financed directly by the airlines (usually through tax-exempt special facility bonds issued by the airport on behalf of the airline), they are not reflected in the airport s CPE. A-13

102 Mr. Navdeep S. Gill and Mr. G. Hardy Acree April 4, 2008 Risk Factors Risk factors that will affect the achievement of the forecasts include: 1. The number of passengers using SMF might be lower than forecast as a result of reduced airline service, higher airfares, and depressed demand. Fewer passengers would have an adverse effect on traffic-related revenue such as PFC revenues, parking revenue, rental car revenue, and in-terminal concession revenue. 2. The cost of the TMP could be higher than assumed and the schedule for completion could be delayed. 3. There will no longer be an airline agreement that requires the airlines to pay charges sufficient to meet the Rate Covenant. Under the Airline Lease, the Signatory Airlines assumed the risk of revenue shortfalls in the Airport System. As a result of a potential negotiation of a new agreement or a legal challenge to the reasonableness of the rates, the actual methodology used by the County in the future may differ from the proposed methodology used to produce these forecasts. These differences in methodology could result in future Net Revenues being materially less than forecast. 4. Bond interest and financing costs could be higher than assumed possibly requiring the issuance of additional obligations. 5. The County may not be successful in securing a Letter of Intent from the FAA for the TMP. 6. The PFC level might not be increased from its current level of $4.50 to the $6.00 level assumed in our forecast base case. Certain of these uncertainties are addressed in the section of the Report entitled Sensitivity Analysis. * * * * * We appreciate the opportunity to serve as the County s Airport Consultant in connection with this proposed financing. Respectfully submitted, JACOBS CONSULTANCY A-14

103 Attachment BACKGROUND, ASSUMPTIONS, AND RATIONALE FOR THE FINANCIAL FORECASTS Sacramento County Airport System, Sacramento, California A-15

104 [THIS PAGE INTENTIONALLY LEFT BLANK] A-16

105 CONTENTS Page The Airport System... A-23 Sacramento International Airport... A-23 Mather Airport... A-26 Executive Airport and Franklin Field... A-26 McClellan Airport (Not Part of the Airport System)1... A-26 The Airport Service Region... A-27 Economic Base for Airline Traffic... A-29 Population Growth... A-30 Education... A-31 Per Capita and Household Income... A-33 Employment and Unemployment Trends... A-33 Local Jobs by Industry Sector... A-35 Major Employers by Industry Sector... A-36 State Government Employment... A-37 Employment Growth Trends by Industry... A-38 Additional Economic indicators... A-40 Housing Construction... A-41 Limitations to Growth... A-42 Assumptions Underlying the Airline Traffic Forecasts... A-45 Airport Roles and Rankings... A-46 Role in California Airport System... A-47 Role in Southwest s System... A-48 Historical Airline Traffic... A-49 Overview... A-49 Airport Passenger Characteristics... A-50 Airline Service... A-50 Domestic Service... A-51 International Service... A-56 Recent Service Announcements... A-56 Passenger Traffic by Airline... A-57 Domestic O&D Passenger Trends... A-60 Airline Fares... A-61 Bay Area Airport Competition... A-64 Competing Airfares and Service... A-66 Key Factors Affecting Future Traffic... A-69 General Economic and Market Conditions... A-69 Aviation Security... A-70 U.S. Airline Industry Financial Condition... A-71 Southwest Airlines... A-71 Airline Competition and Airfares... A-72 Airline Industry Consolidation and Alliances... A-73 A-17

106 CONTENTS (continued) Page Key Factors Affecting Future Traffic (continued) Oil and Aviation Fuel Prices... A-73 Capacity of the National Air Traffic Control System... A-74 Capacity of Sacramento International Airport... A-74 Environmental Concerns... A-74 Enplaned Passenger Forecast... A-75 Air Cargo Trends... A-77 Landed Weight... A-80 Framework For Airport System Financial Operations... A-82 Master Indenture of Trust... A-82 Rate Covenant... A-84 Airline Agreements and Rate Ordinance... A-85 Future Airport System Capital Improvements... A-90 Terminal Modernization Program... A-90 Balance of FY 2009 FY 2013 CIP... A-97 Outstanding Bonds... A-98 Plan of Finance... A Bonds and 2008 Subordinate Bonds... A-99 Future Financing... A-100 Passenger Facility Charge Program... A-101 PFC Approvals... A-101 Proposed New Application #8 and Amendments... A-103 PFC Framework... A-104 Debt Service Requirements... A Bonds... A Subordinate Bonds... A-105 Operating Expenses... A-105 Airport System Revenues... A-107 Airline Revenues... A-107 Nonairline Revenues... A-108 Application of Airport System Revenues... A-115 Debt Service Coverage... A-116 Sensitivity Analysis... A-116 A-18

107 TABLES Page 1 Facilities Profile... A-24 2 Population Trends... A-31 3 Educational Attainment... A-32 4 Income Trends... A-33 5 Annual Non-Farm Employment... A-34 6 Non-Farm Employment by Major Industry Sector... A-36 7 Employment Forecasts by Industry Sector... A-39 8 Residential Building Permits Issued by Sacramento Area Jurisdictions. A-41 9 Top Commercial Service Airports In California... A Top Airports in Southwest s System... A Daily Scheduled Domestic Passenger Service... A Scheduled Domestic Seats, by Destination... A Scheduled International Service, by Destination... A Scheduled Departing Seats, by Carrier... A Carriers Operating Scheduled Passenger Service... A Carrier Shares of Enplaned Passengers... A Top 20 Domestic O&D City Markets... A Projected Population in Bay Area Airport Catchment Areas... A Departing Seats by City Market And Carrier Type, and Average Fares in Sacramento s Top 20 Domestic O&D Passenger Markets... A Enplaned Passenger Trends and Forecast... A Carrier Shares of Total Cargo Tonnage... A Carrier Shares of Total Cargo Tonnage... A-80 A-19

108 TABLES (continued) Page 23 Forecast of Flight Departures and Landed Weight... A Summary of FY Capital Improvement Program... A Airline Terminal Locations and Terminal Gates... A Outstanding Airport System Revenue Bonds... A Outstanding Airport System Pfc and Subordinate Bonds... A Assumptions for the 2008 Bonds... A TMP Financing... A Existing PFC Approvals... A Nonairline Revenues... A Terminal Building Revenues, FY A Public Parking Rates... A Estimated Public Parking Spaces... A-113 A-20

109 FIGURES Page 1 Existing Terminal Area Layout Sacramento International Airport... A-25 2 Airport Service Region... A-28 3 Change in Total Non-Farm Employment... A-34 4 Annual Unemployment Rates... A-35 5 Total Enplaned Passengers... A-49 6 Scheduled Departing Seats, by Carrier Group... A-51 7 U.S. Airports Served by Daily Scheduled Round Trip Flights... A-53 8 Scheduled Domestic Departing Seats, by Region... A-55 9 Enplaned Passengers, Southwest vs. all Other Airlines... A Index of Outbound Domestic Origin-Destination Passengers... A Domestic O&D Passengers and Average Fare Paid... A Outbound Domestic Origin-Destination Passengers, by Region... A Annual Hours of Highway Delay Per Traveler... A Comparison of Average Domestic One-Way Airfares, by Distance Band... A Enplaned Passenger Forecasts... A Total Air Cargo Tonnage... A Terminal Modernization Program... A-93 A-21

110 EXHIBITS Page A Project Costs and Sources of Funding... A-119 B Sources and Uses of Funds.... A-120 C Passenger Facility Charges Revenues... A-121 D Debt Service Requirements... A-122 E Operating Expenses... A-123 F Revenues A-124 F-1 Terminal Rental Revenues... A-125 F-2 Landing Fee Revenues... A-126 F-3 Airline Cost per Enplaned Passenger..... A-127 G Application of Revenues... A-128 H Debt Service Coverage and Rate Covenant... A-129 H-1 Scenario Analysis: Base Case with $4.50 PFC.... A-130 H-2 Scenario Analysis: Low Traffic with $6.00 PFC... A-131 H-3 Scenario Analysis: Low Traffic with $4.50 PFC... A-132 A-22

111 THE AIRPORT SYSTEM The Sacramento County Airport System (Airport System) consists of Sacramento International Airport (SMF), Mather Airport, Executive Airport, and Franklin Field. SMF is the principal air carrier airport serving the County of Sacramento and a wide region surrounding the County, and is located about 12 miles northwest of downtown Sacramento. Mather Airport, a former United States Air Force Base, is located 12 miles east of downtown Sacramento and serves cargo airlines and general aviation. Executive Airport, located about 5 miles south of downtown Sacramento, is a general aviation airport with no scheduled airline service. Franklin Field, located about 15 miles south of downtown Sacramento, is a general aviation airport used primarily for training. The Airport System is owned by the County, operated by a County department known as the Sacramento County Airport System (SCAS), operated as a selfsufficient enterprise, and administered by the Director of Airports. The Director of Airports reports to the County Executive, who, in turn, reports to the County Board of Supervisors. The five members of the County Board of Supervisors oversee the operation of SCAS. Sacramento International Airport Sacramento International Airport is classified as a medium air traffic hub by the Federal Aviation Administration (FAA).* According to data published by Airports Council International, SMF was the nation s 38 th busiest airport in terms of total passengers in In Fiscal Year (FY) 2007, 5,307,289 passengers were enplaned on commercial flights at SMF.** As of March 2008, SMF is served by 18 scheduled passenger airlines, including 3 low-cost carriers (LCCs) and 2 foreign-flag airlines, which together provide 168 daily scheduled aircraft departures from SMF (see Table 15 for a list of airlines). SMF is also served by two scheduled all-cargo airlines. SMF occupies approximately 6,000 acres of land and has two 8,600-foot-long parallel runways, 16R-34L and 16L-34R. Runway 16R is equipped with a Category III Instrument Landing System (CAT III ILS). Figure 1 shows the layout of the terminals, parking facilities, and roadways at SMF, and Table 1 provides a summary of the facilities. *A medium hub, as defined by the FAA, is a community that accounts for at least 0.25%, but less than 1%, of total annual passengers enplaned in the United States. **The County s Fiscal Year ends June 30. A-23

112 Table 1 FACILITIES PROFILE Sacramento International Airport (as of March 2008) Runways 16R-34L (north/south) CAT III ILS equipped 16L-34R (north/south) 8,600 feet 8,600 feet Terminals Contact Gates* Squarefeet Terminal A ,931 Interim International Arrivals Building 1 14,399 Terminal B , ,581 Public parking spaces Spaces Hourly Terminal A Garage 882 Hourly Terminal B Surface 1,373 Daily Terminal A Garage 4,417 Daily Terminal A Overflow 2,815 Daily Terminal B Surface 2,827 Economy Parking 7,635 19,949 Source: Sacramento County Airport System records. Terminals A and B provide 13 contact gates each and the Interim International Arrivals Building (IIAB) provides 1 contact gate, for a total of 27 gates. Terminal B, which opened in 1967, is over 40 years old and cannot reasonably or economically be modernized to meet future needs. The 13-gate Terminal A was placed into service in October 1998 and doubled the number of Airport gates. Terminal A currently serves Air Canada, Delta, Hawaiian, Southwest, and US Airways. Terminal B serves Alaska, Aloha, American, Continental, ExpressJet, Horizon, JetBlue, Mexicana (departures), Northwest, and United/United Express. All 27 contact gates can accommodate B737/A320 aircraft, 3 can accommodate B757 aircraft, and 2 can accommodate widebody aircraft. The Interim International Arrivals Building serves Mexicana arrivals. The Terminal Modernization Program (as defined later) is planned to replace the 14 gates at Terminal B and the IIAB with 19 contact gates, and to modify Terminal A to provide 2 additional gates, for a total of 34 gates in the initial build-out. *A contact gate is a gate that is equipped with a loading bridge. A-24

113 FIGURE 1 EXISTING TERMINAL AREA LAYOUT -- SACRAMENTO INTERNATIONAL AIRPORT Source: Sacramento County Airport System. A-25

114 The Terminal A garage opened in 2004 with 5 floors and 4,350 parking spaces. The new Terminal B will be constructed on the site of the Terminal B surface parking. Therefore, new economy parking will be constructed in advance of construction. Mather Airport In 1988, the United States Department of Defense announced that it would close Mather Air Force Base. In March 1995, the County executed a 55-year lease with the U.S. Air Force authorizing the use of 2,875 acres of the former Mather Air Force Base as a civilian airport. The County assigned this lease to SCAS in May 1995, and Mather Airport is now operated as part of the Airport System, serving cargo and general aviation users. Mather occupies approximately 2,875 acres of land, has two parallel runways (11,300-foot-long 4R-22L and 6,040-foot-long 4L-22R), an aircraft parking apron, and various cargo buildings and other structures. Since 1995, there has been substantial development of cargo facilities at Mather Airport, which is currently served by two all-cargo carriers. In FY 2007, a total of 155 million pounds of air cargo were enplaned and deplaned at Mather Airport (compared to 158 million pounds at SMF). Compared to SMF, Mather Airport offers cargo carriers a longer runway and greater availability of office and warehouse space, while freeing up aircraft ramp space at SMF to accommodate increasing service by the passenger airlines. SCAS does not intend Mather Airport to be used for scheduled passenger airline service. Mather Airport is a designated reliever airport for SMF under the FAA s National Plan of Integrated Airport Systems (NPIAS). Executive Airport and Franklin Field Executive Airport is also a designated reliever airport for SMF under the FAA s NPIAS and has tiedown and hangar facilities to accommodate 500 general aviation aircraft. Executive occupies 540 acres of land. In FY 2007, 121,730 general aviation and 541 military operations were performed at Executive Airport. Franklin Field, used primarily for training, has tiedown and hangar facilities to accommodate 12 based general aviation aircraft and occupies 496 acres of land. McClellan Airport (Not Part of the Airport System) McClellan Airport, located about 10 miles northeast of downtown Sacramento, was closed as a military installation in July Effective August 2001, the County entered into a long-term lease for the property and, following completion of environmental remediation by the U.S. Air Force, will own the property. The County entered into an agreement with McClellan Park LLC, a private development A-26

115 consortium, to develop and operate McClellan Airport as a general aviation airport with aircraft sales and maintenance activities. McClellan Airport is not operated as part of the Airport System, and operation and development of McClellan Airport is not a financial obligation of SCAS. The County does not intend to include operation of McClellan Airport in the Airport System in the future. Further, the County has stated that it does not intend to permit the use of McClellan Airport to accommodate commercial airline service. Therefore, it was assumed for this analysis that the future re-use of McClellan Airport would have no effect on the forecast Net Revenues of the Airport System. THE AIRPORT SERVICE REGION Sacramento is the capital of California and the hub of government and commerce within the inland Northern California region between the San Francisco Bay Area to the west and the Sierra Nevada mountain range to the east. SMF is approximately 12 miles northwest of downtown Sacramento, adjacent to Interstate 5, which is the major north/south artery that spans the entire length of California, Oregon, and Washington. SMF is also just two freeway exits from Interstate 80, the main highway connecting the San Francisco Bay Area (Bay Area) with the Sacramento and Reno/Tahoe regions, and ultimately Chicago and New York. As shown on Figure 2, the primary Sacramento air service area (referred to as the Sacramento Area) consists of the following seven counties: Sacramento, El Dorado, Placer, San Joaquin, Sutter, Yolo, and Yuba. The seven counties are closely linked by a shared economy and infrastructure. In addition, for nearly all residents of and visitors to the Sacramento Area, SMF is significantly closer, both in terms of geographical distance and drive time, than competing airports in the Bay Area and the Reno/Tahoe area, especially considering traffic congestion to Bay Area airports and mountain driving conditions to Reno. San Joaquin County is considered part of the SMF service region because its growing economy is closely linked with that of the other Sacramento Area counties. Furthermore, most San Joaquin County residents and the vast majority of businesses are located in the northern two-thirds of the county (the Stockton and Lodi areas). For residents and businesses in that area, SMF is closer and much more accessible by freeway than the alternative: driving farther on often-congested highways to access one of the Bay Area airports. Even residents of southern San Joaquin County, near Tracy, for example, experience significantly shorter drive times to SMF than to Bay Area airports because of roadway congestion. A-27

116 A-28

117 Based on similar factors, Solano County was excluded from the definition of the Sacramento Area. While the Solano County boundary is less than 20 miles west of downtown Sacramento, the northern and eastern portions of the county are relatively sparsely populated. More Solano County residents live in the Vallejo, Benicia, and Fairfield areas, commute to Bay Area jobs, and have shorter drives to a Bay Area airport than to SMF. While the seven-county Sacramento Area represents the source of most Airport passengers (and the core of the Sacramento region s economy), SMF also draws passengers from a rapidly growing 11-county outlying area. For the purposes of this Report, these counties (Amador, Butte, Calaveras, Colusa, Glenn, Napa, Nevada, Shasta, Solano, Stanislaus, and Tehama) are referred to as the secondary air service area. These 11 counties are not as integrated economically and socially with the counties included in the Sacramento Area. Residents of the northern part of the secondary air service area, including the cities of Redding and Chico, would have to drive directly past SMF to reach the nextclosest major airport (in Oakland). For residents of other areas, such as Napa County, SMF is further than Bay Area airports, but it can be a more convenient option. The identification of counties in the Sacramento Area and secondary air service area is supported by Airport catchment area studies conducted for the Sacramento County Airport System by Sabre Airline Solutions in 2005 and GRA, Inc., in The GRA report identifies a line of indifference, which is the point where potential customers are indifferent about driving to SMF or to the closest alternative airport.* While the line of indifference concept is a useful tool for understanding the extent of the secondary air service area, in the analysis conducted for this report, the entire specific counties (similar to the Sabre study) were included so that economic and demographic data could be consistently and reliably obtained and analyzed. The analysis that follows focuses on the economic and demographic characteristics of the Sacramento Area. The secondary air service area is discussed briefly, but only in terms of population growth. ECONOMIC BASE FOR AIRLINE TRAFFIC Passenger traffic at SMF is affected by the region s economic profile. For example, the amount and type of commerce in the region may affect the level of business travel to and from SMF, or the amount of per capita personal income in the region *The line of indifference represents the imaginary distance in any direction from SMF at which point a person wishing to travel by aircraft would prefer another airport over SMF (cost and itinerary being equal) or vice versa. It is a tool used to measure the extent of the area from which an airport draws its customers. A-29

118 may affect the level of discretionary travel from SMF. The area s diverse and fundamentally strong economic profile provides the basis for demand for air passenger and cargo service. The Sacramento Area is well known for demographic characteristics that are representative of California as a whole, including racial and ethnic diversity and relatively high household incomes compared to the national average. The Sacramento Area has also experienced robust growth, in part, because of a high quality of life and relative affordability in comparison to California s coastal metropolitan areas. Population Growth The Sacramento Area has grown considerably in recent years, and is likely to continue to do so in the future, as its economy continues to diversify from its historical roots in agriculture and State government. The size of the existing population base and the population growth rate are key factors influencing demand for airline travel. As shown in Table 2, between 1990 and 2000, the Sacramento Area grew from just more than 2 million residents to 2.5 million. This average annual growth of 1.8% exceeded that of the State (1.3%) and the nation (1.2%). After 2000, the Sacramento Area experienced even more robust growth, averaging 2.5% per year through California s population increased an average of 1.6% per year over this period, while growth slowed nationwide to an average of 1.1% per year. In 2007, the Sacramento Area had a population of nearly 3 million residents. The California Department of Finance projects continued population growth of 1.7% per year, on average, for the Sacramento Area, which exceeds the projected rates of growth for the State (1.2%) and the United States (1.0%) as a whole. After 2010, the California Department of Finance projects population growth in the Sacramento Area to average 1.8% per year. This projection translates to approximately 760,000 new Sacramento Area residents between 2007 and This 26% increase in population can be expected to generate additional demand for airline service at SMF. The secondary air service area was home to an estimated 1.8 million people in 2007, after growing an average of 1.5% per year since The California Department of Finance projects that the population will grow slightly faster over the next two decades, adding 460,000 residents by This 26% growth in population is significant in that these residents may increasingly find that SMF is a more convenient option than other airports for domestic travel. A-30

119 Table 2 POPULATION TRENDS ( , in thousands) Sacramento Area 2,084 2,500 2,968 3,119 3,733 Secondary Air Service Area 1,382 1,601 1,780 1,876 2,239 California 29,760 33,872 37,771 39,136 44,136 United States 248, , , , ,360 Average Annual Growth Sacramento Area 1.8% 2.5% 1.7% 1.8% Secondary Air Service Area 1.5% 1.5% 1.8% 1.8% California 1.3% 1.6% 1.2% 1.2% United States 1.2% 1.1% 1.0% 1.0% Notes: Sacramento Area includes Sacramento, Placer, El Dorado, Sutter, Yolo, Yuba, and San Joaquin counties. Secondary Air Service Area includes Amador, Butte, Calaveras, Colusa, Glenn, Napa, Nevada, Shasta, Solano, Stanislaus, and Tehama counties. Sources: 1990 & 2000 U.S. Census; 2007 estimates & future projections for California jurisdictions from California Department of Finance; U.S. current and future projections from 2007 Data Pamphlets for the United States, Woods & Poole Economics; Bay Area Economics, Education The Sacramento Area is home to several major institutions of higher learning. The research and training conducted at these institutions contribute to an educated and highly skilled workforce. In 2007, a larger proportion of Sacramento Area residents held at least a high school diploma (nearly 82%) than in either the State or the nation, as shown in Table 3. The share of college-educated residents in the Sacramento Area was comparable to the Statewide share and higher than the national share. A well-educated labor force is attractive for businesses relocating to, or starting up, in a particular location and is a key ingredient in a dynamic local economy that is adaptable to the changing global economy. This factor is the key in the Sacramento Area economy s continued diversification from its original base in agriculture and government. More generally, higher educational attainment leads to higher household incomes, increased affluence, greater overall economic prosperity, and likely higher propensity for airline travel. A-31

120 Table 3 EDUCATIONAL ATTAINMENT (2007) Sacramento Area California United States Population 25 Years and Older 1,860,280 23,531, ,405,313 No High School Diploma 18.4% 23.4% 19.4% High School Graduate (incl. equivalency) 22.8% 20.2% 28.4% Some College, No Degree 26.3% 23.0% 21.2% Post-Secondary Degree 32.5% 33.3% 31.0% Associate s Degree 8.6% 7.1% 6.4% Bachelor s Degree 15.9% 16.9% 15.7% Master s Degree or Doctorate 7.9% 9.3% 8.9% Total 100.0% 100.0% 100.0% Note: Totals may not sum due to rounding. Sources: U.S. Bureau of the Census; Claritas; Bay Area Economics, Sacramento Area institutions of higher education include the University of California at Davis (UC Davis) and California State University at Sacramento (which together enroll nearly 60,000 students in more than 200 programs), as well as the University of the Pacific, a 4-year liberal arts college in Stockton, which also offers a satellite law school in the City of Sacramento. UC Davis is consistently recognized as one of the nation s top public universities. The university s teaching hospital, located in Sacramento, has been rated among the nation s best. The university ranks among the top 12 public institutions in terms of research grants from the National Institutes of Health and the National Science Foundation, and offers widely recognized programs in various agricultural fields, medicine and veterinary medicine, public health, environmental sciences, management, and law. In 2007, more than 65,700 students enrolled in undergraduate, graduate, and professional degree programs at schools in the Sacramento Area, while thousands more pursued associate degrees and technical courses through area community colleges and training organizations. The presence of these institutions of higher learning contributes to the Sacramento Area s high levels of educational attainment and generates airline travel demand through academic meetings and conferences, visiting professorships, study-abroad programs, and individual student and faculty travel. The number and quality of college graduates produced locally are also a major attraction to start-up and relocating or expanding businesses and contribute to a strong local economy. The intellectual capital and capacity to innovate young, well-educated, and creative professionals are often regarded as significant catalysts for economic growth. A-32

121 Per Capita and Household Income Sacramento Area households are relatively affluent, and the per capita and household incomes are forecast to grow faster than the State and national averages from 2007 through 2012, as shown in Table 4. High incomes and income growth correlate closely with demand for airline travel. As the following table illustrates, per capita income in the Sacramento Area is similar to that in the United States as a whole, but median household incomes in 2007 were roughly 8% higher in the Sacramento Area than in the nation but slightly lower than the State average. Table 4 INCOME TRENDS Sacramento Area California United States Per Capita Income: 2007 Estimate $25,059 $26,250 $25, Forecast $28,093 $28,827 $28,234 AAG % 1.9% 2.1% Median Household Income: 2007 Estimate $53,495 $55,837 $49, Forecast $59,247 $61,131 $54,110 AAG % 1.8% 1.9% Note: AAG = Average annual growth. Sources: Claritas; Bay Area Economics, Employment and Unemployment Trends The Sacramento Area has experienced relatively strong job growth over the past decade, as demonstrated in Table 5. Total non-farm employment increased from 903,000 jobs to 1.16 million jobs between 1997 and Figure 3 compares the annual change in employment in the Sacramento area to that of California and the nation. Growth in the Sacramento Area outpaced state-wide and national trends, and remained positive during the tech-bust downturn after Since 1990, the Sacramento Area has suffered an annual net loss of jobs only once, when total nonfarm employment declined by 1.0 percent from 1991 to A-33

122 Table 5 ANNUAL NON-FARM EMPLOYMENT ( , in thousands) Area Sacramento Area ,020 1,048 1,064 1,081 1,098 1,126 1,150 1,164 California 13,130 13,596 13,992 14,488 14,602 14,458 14,393 14,533 14,801 15,060 15,163 United States 122, , , , , , , , , , ,623 Sources: State of California Employment Development Department, Labor Market Information Division; U.S. Department of Commerce, Bureau of Labor Statistics; Bay Area Economics, Note: Data is not seasonally adjusted. Figure 3 CHANGE IN TOTAL NON-FARM EMPLOYMENT % 5.0% Sacramento Area California United States 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% % Sources: State of California Employment Development Department, Labor Market Information Division; U.S. Department of Commerce, Bureau of Labor Statistics; Bay Area Economics, Note: Data is not seasonally adjusted. A-34

123 The rate of unemployment in the Sacramento Area generally tracks closely to the Statewide pattern, as Figure 4 illustrates, but is typically higher than the national rate. In 2007, unemployment in the Sacramento Area averaged 6.1%, up from 5.4% in Figure 4 ANNUAL UNEMPLOYMENT RATES % Unemployed Sacramento Area California United States Notes: Sources: Unemployment rates presented in this table are not seasonally adjusted. December 2007 data were not yet available. State of California Employment Development Department, Labor Market Information Division; U.S. Department of Commerce, Bureau of Labor Statistics. Employment in sectors such as agriculture and construction is seasonal in nature; these sectors account for a large portion of jobs in California, and especially in the Sacramento Area (see further discussion below). Thus, unemployment rates alone are not a perfect indicator of the health of the local economy, but overall trends can provide a strong indication from the standpoint of economic opportunities for local residents. Local Jobs by Industry Sector As Sacramento is the seat of government for the largest state in the nation, employment in the Sacramento Area has historically been strongly associated with government-related jobs. However, the economy in the Sacramento Area is more A-35

124 diverse today as described below. Government employment accounted for fewer than 1 out of 4 non-farm jobs in 2007, versus roughly one out of six non-farm jobs in California and the United States, as shown in Table 6. Other major industry sectors in the Sacramento Area include retail and wholesale trade, health and education services, business services, hospitality, and construction. Table 6 NON-FARM EMPLOYMENT BY MAJOR INDUSTRY SECTOR Annual Average, 2007 Major Industry Sector Sacramento Area California United States Total Non-Farm Employment 1,164,000 15,258, ,974,000 Government 24.7% 16.3% 16.1% Retail and Wholesale Trade 15.1% 15.7% 15.5% Professional and Business Services 11.3% 14.9% 13.0% Health and Education Services 10.9% 10.9% 13.3% Leisure and Hospitality 9.3% 10.2% 9.8% Construction 7.4% 6.1% 5.5% Financial Activities 6.4% 6.1% 6.1% Manufacturing 6.3% 9.8% 10.2% Transportation and Utilities 3.4% 3.3% 3.7% Other Services 3.2% 3.4% 4.0% Information 2.0% 3.1% 2.2% Natural Resources/Mining 0.1% 0.2% 0.5% Total 100.0% 100.0% 100.0% Notes: Information sector consists of publishing, motion pictures, and telecommunications. Data excludes the self-employed. Columns may not add to totals shown because of rounding. Sources: State of California Employment Development Department; U.S. Department of Commerce, Bureau of Labor Statistics. Major Employers by Industry Sector Although it accounted for a relatively small share (6.3%) of non-farm employment in the Sacramento Area in 2007, the importance of the manufacturing sector has changed over time. During the tech boom of the 1990s, Silicon Valley companies such as Intel and Hewlett-Packard established manufacturing plants in the Sacramento Area to take advantage of the large and capable labor force along with cheaper land, seismic stability, and less congestion than the Bay Area, without sacrificing accessibility to the supply chain, markets, etc. The recession years and A-36

125 information technology sector restructuring from 2001 to 2004 dampened growth in the manufacturing sector, but the same factors that made the Sacramento Area attractive in the 1990s are still valid. In 2007, Intel still employed almost 7,000 at its Folsom semiconductor plant, and Hewlett-Packard employed another 3,800 at its Roseville manufacturing and research and development facility. In all, 11 of the 25 largest manufacturers in the Sacramento Area (including the top 4) in 2007 were involved in high-technology industries, representing nearly 18,000 jobs. The high-technology manufacturing sector typically generates demand for air freight services, and the Sacramento Area has grown as a logistics and distribution center. Sacramento is situated at the crossroads of Interstates 5 and 80, is on the Union Pacific Railroad s main line, and has its own deep-water (30 feet) port facility. More than 50 defense contractors operated facilities in the Sacramento Area in 2005, holding contracts for various services totaling well over $2.3 billion. Twenty-nine locally based banks and credit unions managed $14.3 billion in assets in 2007, with the Golden 1 Credit Union alone managing more than $6.1 billion. Of the many local hospitals, clinics, and health care providers, four employed more than 5,000 people in 2007, including Mercy Health/Catholic Healthcare West (5,100), UC Davis Health (6,400), Kaiser Permanente (9,300), and Sutter Health (10,400). Much as SMF serves as a regional hub for air transportation within the Sacramento Area and the secondary air service area, specialized health care professionals and facilities in the Sacramento Area provide services to people throughout Northern California. Employment in the health services sector is likely to increase significantly over time as the population ages and demand for health care increases, reflecting national trends. State Government Employment The importance of State government functions to the Sacramento Area economy is undoubtedly great, but a review of employment distributions by industry glosses over the variation within, and secondary impacts of, government sector employment in the Area. Of the 288,000 government jobs in the Sacramento Area in 2007 (see Table 5), only 40% of those (or about 115,000) were State of California jobs, with the remainder being county, municipal, and federal jobs. Of those workers employed by the State, about 28,000 worked for the major State universities in Sacramento and Davis; therefore, only about 30% of all government jobs in the Sacramento Area can be classified as State-level public administration positions. Even this group represents a broad range of employment functions, from legislative staff and policy analysts to environmental or transportation specialists, corrections personnel, and administrators of the State of California s two largest pension plans, Cal-PERS and Cal-STRS, which are among the largest institutional investors in the nation. A-37

126 Employment Growth Trends by Industry To a certain extent, the economies of the Sacramento Area and the San Francisco Bay Area are naturally linked. The regions adjoin one another, and they share commuters, a number of major employers, and key infrastructure, such as highways, railroads, and aqueducts. However, the economies of the two areas have distinct qualities. Recent job growth trends illustrate this point. The Sacramento Area s 1.9% average annual employment growth since 2000 rank it among the top 10 metropolitan areas for its size in the nation. By contrast, from 2000 to 2006, the Bay Area averaged a 1% loss of jobs annually and, in Silicon Valley itself, the yearly average job loss was 2.6%. By the end of 2007, all of the jobs lost in the Bay Area during the technology bust had still not been replaced.* The California Employment Development Department (EDD) forecasts that Sacramento Area employment will grow by 175,000 net jobs between 2007 and 2014, as shown in Table 7. This represents a growth rate of 2.0% per year, on average, far outpacing employment growth Statewide, which EDD forecasts will average roughly 0.6% annual growth over the same period. The greatest gains in terms of total jobs are expected to be achieved in the government sector, which is forecast to add 44,000 jobs between 2007 and 2014, as the State s steady growth results in increased demand for public services. Between 2007 and 2014, EDD expects professional and business services employment to grow by 21,000 jobs, leisure and hospitality to grow by 18,000 jobs, and health and education services to grow by 16,000 jobs. Although EDD forecasts that the information sector will add only 5,000 jobs during this period, this increase represents an annual growth rate of 2.6%, making it the fastest-growing sector in the Sacramento Area. On the other hand, EDD forecasts that agriculture will lose 3,000 jobs (a 1.3% average decrease per year), largely reflecting the effects of the Sacramento Area s growth, as farm land is taken out of production and developed in residential or commercial uses, and increasing mechanization drives down labor requirements for remaining farm operations. Not all Sacramento Area residents work in the Sacramento Area, however. In 2000, the U.S. Department of Commerce, Bureau of the Census estimated that more than 21,000 Sacramento Area residents commuted to Bay Area jobs. These workers were attracted to more affordable Sacramento Area housing by soaring prices in the Bay Area. Although more recent data are not available, the Sacramento Area Council of Governments (SACOG) indicated that the number of commuters following this pattern tends to increase as the price gap between Bay Area and Sacramento Area *Global Insight, Inc., U.S. Metro Economies: Employment and the Workforce, prepared for the U.S. Conference of Mayors and the Council for the New American City, June A-38

127 housing grows, as occurred in 2006 and 2007 (see Housing and the Mortgage Market Conditions discussion later). Table 7 EMPLOYMENT FORECASTS BY INDUSTRY SECTOR Sacramento Area Jobs (In Thousands) Average Annual Growth Sector Total Non-Farm Employment 1,020 1,164 1, % 2.0% 2.0% Professional & Business Services % 2.1% 1.5% Health & Education Services % 1.6% 2.8% Other Services % 1.3% 1.3% Retail & Wholesale Trade % 1.9% 2.0% Transportation & Utilities % 2.4% 1.8% Government % 2.1% 1.8% Manufacturing % 1.2% -0.1% Leisure & Hospitality % 2.2% 2.6% Financial Activities % 1.9% 2.3% Natural Resources/Mining % -4.0% -3.1% Construction % 3.0% 3.3% Information % 2.6% 1.6% Total Farm Employment % -1.1% -1.2% Sources: State of California Employment Development Department; BAE, Governments (SACOG) indicated that the number of commuters following this pattern tends to increase as the price gap between Bay Area and Sacramento Area housing grows, as occurred in 2006 and 2007 (see Housing and the Mortgage Market Conditions discussion later). These commuter and employment trends tend to fluctuate with housing prices. One study by The Gregory Group, cited by SACOG, indicates that Bay Area workers buying Sacramento Area homes (often first-time buyers) typically continue working in the Bay Area for 2 or 3 years after their purchase. Once their finances stabilize, and they tire of the long commute, many of these workers find employment in the Sacramento Area. A-39

128 Additional Economic indicators Overall Economic Growth. The Gross Metropolitan Product (GMP) for the Sacramento Area, a measure of the regional economy, totaled nearly $106 billion in 2005, as compared with a $407 billion GMP for the Bay Area according to the U.S. Bureau of Economic Analysis for Between 2001 and 2005, the Sacramento Area GMP grew an average of 8% annually, while the economy of the Bay Area (and much of the nation) struggled to recover from the technology bust.* Technology Development. While the development of information technology (IT) and biotechnology firms in the Sacramento Area is minor compared to developments in Silicon Valley and the larger Bay Area, many Sacramento Area firms are active in both of these major growth sectors. From 2003 through 2007, venture capital firms invested more than $260 million in 48 Sacramento Area start-ups. Semiconductor, software, telecommunications, and other IT companies accounted for 47% of this investment, while biotechnology and medical device developers accounted for 28%.** In addition to research activities at UC Davis and other area institutions, 17 Sacramento Area private firms received 52 patents in 2006.*** Quality of Life. The Sacramento Area offers its residents a number of compelling reasons to stay. A relatively stable and strong economy, combined with significantly lower housing costs (see discussion below) and congestion compared with the Bay Area and Southern California, attract significant numbers of families and first-time homebuyers. World-class cultural and recreational attractions in San Francisco, the Napa Valley vineyards, and the Sierra/Yosemite/Lake Tahoe regions are all within a day-trip distance. In addition, area residents have ready access to major universities and civic centers, entertainment such as the Sacramento Kings National Basketball Association (NBA) franchise and a minor league baseball team, as well as the less-famous, but high quality, wineries in Amador and Yolo counties and numerous municipal parklands, including the American River Parkway. Amenities such as these help the community attract and retain a large, well-educated, highly skilled workforce. While none of these attractions ranks among the top draws in California, the Sacramento Area attracts some vacationers (about 3 million out-of-state leisure *U.S. Department of Commerce, Bureau of Economic Analysis, Regional Economic Accounts and International Monetary Fund, World Economic Outlook Database, October **PricewaterhouseCoopers / National Venture Capital Association, MoneyTree Report. ***Sacramento Business Journal Book of Lists, A-40

129 visitors in 2005), and millions of visitors each year for business, conference, and convention reasons.* Housing Construction The housing market in recent years produced a significant surge in new residential construction in the Sacramento Area. Table 8 demonstrates the surge in building permits issued by Sacramento Area jurisdictions from the pre-boom years to the years of greatest activity (2001 through 2005). The average number of single-family dwellings permitted per year increased 65%, and multifamily-unit dwelling permits increased 45%. Table 8 RESIDENTIAL BUILDING PERMITS ISSUED BY SACRAMENTO AREA JURISDICTIONS Number of Units Annual Average Annual Average Structure Type Single Family 14,993 24,601 13,486 9,969 Multifamily 3,072 4,396 3,392 1,442 All Units 18,065 28,998 16,878 11,411 Sources: State of the Cities Data Systems, U.S. Department of Housing and Urban Development; BAE, During 2006 and 2007, as home prices fell and problems with recent real estate speculation and aggressive lending practices became apparent (see Housing and the Mortgage Market Conditions discussion in the section below), the number of permits requested by Area builders decreased by almost two-thirds. As a relatively modest proportion (7.4%) of the Sacramento Area s workforce was employed in construction in 2007, there is some concern regarding the trickle-down effects of construction layoffs on the local economy. More than 6,000 construction jobs were lost in the Sacramento Area over the past 2 years as the building boom slowed, and more losses are expected. Construction employment tends to be both seasonal and cyclical, however, and losses in this sector should not greatly affect other industries beyond the immediate future. *California Travel and Tourism Commission, California Fast Facts: Statewide and Regional Tourism Facts and Figures, Fall A-41

130 Limitations to Growth Several factors could have a negative effect on the Sacramento Area s growth potential in the near future. Floodplain concerns are related to environmental and land use policy at the local and State levels. A second factor, the far-reaching economic and financial impacts associated with the collapse of the subprime mortgage market and the general slowing of the U.S. economy, has attracted considerable national media attention in recent months. While each of these factors must be accounted for, it is unlikely that any of them will significantly hinder the Sacramento Area s growth potential in the medium- and long-term futures. Flood Control. During the severe winter storms in the Sacramento Area in 1986, 1997, and 2006, the American and Sacramento River levee systems carried a record volume of water due to heavy rainfall of long duration. Although these storms caused some flooding in certain areas, the major levee systems that protect properties in the Sacramento Area from disaster withstood the record water flows. However, as described below, certain levee systems in the area, including those protecting SMF, have been determined to provide significantly less protection against flooding than previously thought. In June 2006, the United States Army Corps of Engineers (Corps) stated that, primarily because of underseepage, levees in the Natomas Basin area of the County (which includes SMF) were no longer certifiable for a 100 year flood event (i.e., a flood event that has a 1% chance of occurrence in any year). In January 2008, the Corps completed additional analysis and concluded that it could not certify the Natomas Basin levee system for a 33 year flood event (i.e., a flood event that has a 3% chance of occurrence in any year). As a result, future development starting after December 2008 in the Natomas Basin will be severely limited until the deficiencies in the levee system are corrected. Mandatory flood insurance requirements do not apply to SMF. Federal and state agencies are currently taking various actions to remedy the deficiencies in the system of levees providing protection to the Natomas Basin. In public statements, the Sacramento Area Flood Control Agency ( SAFCA ), the local agency responsible for the construction of levee improvements, has publicly stated that 100 year protection can be restored by the end of However, there can be no assurance that the levee improvements will be completed by the date anticipated by SAFCA. Flooding of the Sacramento Area could result in significant damage to SMF or to a shutdown in airport operations which could materially adversely affect the financial condition of the Airport System and the ability of the County to generate Net Revenues in the amounts required by the Indenture. Federal, State, and local agencies have established goals and developed plans to restore 100-year protection in Natomas and ultimately provide 200-year protection A-42

131 throughout the County. The Sacramento Area Flood Control Agency (SAFCA), a joint exercise of powers agency created by the City of Sacramento, County of Sacramento, County of Sutter, American River Flood Control District and Reclamation District 1000, is the local agency that will work with local communities and agencies to implement the plans. Housing and the Mortgage Market Conditions. By early 2007, the significant home price appreciation affecting most metropolitan areas in the country had stalled and, by the summer, foreclosure rates began to climb in many markets. A combination of real estate speculation by investors particularly newcomers and especially in the condominium market overbuilding, questionable lending practices on subprime mortgages (to borrowers with poor credit or modest incomes relative to purchase price), and a lack of understanding by homebuyers of the risks associated with adjustable-rate and interest-only mortgages has led to high levels of loan defaults, the insolvency of some lenders, and turmoil in financial markets. The effects of rapidly escalating foreclosure rates on subprime loans are cause for concern. By the end of 2008, as adjustable-rate mortgages issued 2 or 3 years ago are reset, as many as 2% of Sacramento Area homeowners may have been involved in foreclosure proceedings, although not all of those residents will lose their homes. Fast-growing suburban areas have suffered higher foreclosure rates, with more than 5% of households in outlying Sacramento County and the Stockton area involved in foreclosure proceedings by late February, 2008.* Two groups in particular have been affected: first-time homebuyers with modest incomes who accepted the risk of subprime loans, and small-scale speculators who gambled on prices continuing upward in new subdivisions. Over the next 2 years, because lenders have curtailed the lending practices largely responsible for the recent turmoil, and as Sacramento Area housing price appreciation resumes, foreclosure rates are likely to return to more normal levels. The greatest drop-off in home prices and new home starts and sales in the Sacramento Area has been in outlying new developments, where speculation was common. Even prices of existing homes dropped, with the California Association of Realtors (CAR) reporting that the median sale price in the Sacramento Area fell 15%, from $394,000 to $332,000, between August 2005 and August However, this sale price compares favorably with a median of roughly $160,000 in The CAR does not expect housing prices to drop much further. Most current homeowners have little reason to sell in this market, and a lower volume of sales typically causes prices to remain relatively stable. Also, the price correction for toorapid appreciation in the Sacramento Area has largely already occurred. Prices peaked in the Area in August 2005, according to CAR. In the Bay Area, prices *RealtyTrac; California, Nevada Lead Nation in Foreclosure Rates, Sacramento Business Journal, March 13, A-43

132 peaked in mid-2007, widening the price gap between Bay Area and Sacramento Area homes to a record high of roughly $500,000 for existing homes in the third quarter of 2007, according to the National Association of Realtors. Excess housing supply in the Sacramento Area, caused by overbuilding and foreclosures, will likely be offset somewhat by increased demand from new residents commuting to Bay Area jobs. In 2005, The Gregory Group estimated that as many as 20% to 30% of new homes for sale in the Sacramento Area were sold to people commuting to Bay Area jobs. Although fear of a recession has raised concerns, negative impacts on the Sacramento Area economy are not likely to be long-lasting. With a large and stable base of jobs in government, health care, education, and related services, the Sacramento Area economy provides relatively secure employment for most of its residents compared with some of the nation s hardest-hit housing markets, which rely more heavily on manufacturing and tourism. The impacts of the mortgage market conditions on the broader economy are not known at this time. However, the December 2007 forecast issued by the UCLA Anderson School of Business stated that only the construction and manufacturing sectors are likely to lose jobs over the next 2 years in California, but these losses would not be large enough to trigger a recession. According to the forecast, growth in the financial sector would be sluggish, but positive nonetheless. The March 2008 Anderson Forecast reiterated this analysis, that despite dire predictions, the manufacturing, construction, and real estate sectors had already shed most or nearly all of the jobs they would lose in the near future, and that job growth would be sluggish but positive in 2008, even in the hard-hit Sacramento Area. The Beige Book report released by the Federal Reserve Bank observed net growth in manufacturing in the Twelfth District (San Francisco, which includes Sacramento) in January and February, 2008, driven by gains in aerospace, semiconductor, and food product manufacturing.* The Sacramento Regional Research Institute noted modest (0.5%) employment growth in the region during January and February. Indicators of near-future economic health are mixed. In February 2008, Governor Schwarzenegger ordered a hiring freeze on State jobs, citing California s $16 billion deficit. While this seriously undercuts job growth potential in the Sacramento Area, no layoffs are projected as of yet. Furthermore, the current deficit stands at just 40% of the $40 billion shortfall the State faced in 2001 and 2002, during the height of the tech bust. ** At that time, growth in state employment in the region was sluggish, *Summary of Commentary on Current Economic Conditions by Federal Reserve District, March 5, ** Job Growth Could be a Victim of State Budget, Housing Woes, Sacramento Business Journal, February 29, A-44

133 but continually positive, and later rebounded to lead all sectors in jobs added over the following five years. Analysts differ over the job growth prospects for the Sacramento Area in the near future, with projections for net growth in 2008 ranging from 0.3% to 1.7%. The general consensus seems to be that the number of local jobs will not grow as quickly as the labor force in 2008.* During periods such as this, a number of younger workers typically return to colleges and universities for advanced degrees. With the number of large, high-quality institutions in the Sacramento Area and nearby Bay Area, this scenario seems likely to ease some of the pressure on the region s job market, though evidence may not be available until these schools release their fall enrollment figures. One point of agreement among most of these sources is that by early 2009, the home mortgage and financial markets should adjust and stabilize, and job growth in the Sacramento Area and California should have returned to normal levels, if not rapid expansion.** ASSUMPTIONS UNDERLYING THE AIRLINE TRAFFIC FORECASTS For purposes of developing the airline traffic forecasts included in this report, the following assumptions about future economic conditions were made: Over the forecast period, the U.S. economy will expand, on average, at a moderate rate of growth and income will keep pace with monetary inflation. However, it was assumed that the U.S. economy would have flat or negative growth in Periodic contractions of the economy will depress the willingness and ability of individuals to travel by aircraft. No major failure of the North Natomas levees, which protect SMF and the surrounding area, will occur and the levees will be retrofitted and upgraded over the next several years. Flood risk and associated development limitations, as applicable under federal and State laws and applied by the various regulating agencies, will not significantly hinder growth and development in the North Natomas basin or Sacramento Area over the forecast period once new levy improvements are completed. *Sacramento Regional Research Institute, February, 2008; Sacramento Forecast Project, California State University, Sacramento, January 31, **Global Insight, Inc., The Mortgage Crisis: Economic and Fiscal Implications, prepared for the U.S. Conference of Mayors and the Council for the New American City, November 26, A-45

134 Continued long-term job growth, combined with a constrained quantity of developable land, in the Bay Area will continue to prompt many Bay Area workers to commute from less expensive housing markets, including the Sacramento Area. Other events, such as natural disasters, industrial accidents, war, and terrorism, will occasionally depress both the willingness and ability of individuals to travel by aircraft, but, to the extent that such events occur during the forecast period, they will have no material or lasting effect on the demand for airline travel at SMF. AIRPORT ROLES AND RANKINGS Ranked by enplaned passengers, SMF is the 5th busiest in California and it ranks 11th among airports served by Southwest Airlines. Passengers using SMF are primarily domestic origin-destination (O&D) passengers, beginning and ending their trips at SMF. Connecting passengers and international travelers account for relatively small shares of total traffic at SMF. In FY 2007, 96.5% of the passengers enplaned at SMF were O&D passengers. The remaining passengers were connecting passengers. For airports with a large O&D base such as SMF, the economic health of the underlying service area ultimately drives the prospect for long term passenger and cargo growth. Conversely, an airport used heavily for connecting traffic depends less on the economics of the airport service region. Therefore, airports with significant levels of transfer traffic tend to be more vulnerable to traffic volatility because the choice of connecting facility is not made by the passenger, but dictated by an airline s route decisions and its financial viability. A-46

135 Role in California Airport System As mentioned above and shown in Table 9, SMF is the 5th busiest commercial service airport in California and the 3rd busiest in Northern California in terms of enplaned passengers, after San Francisco International Airport (SFO) and Oakland International Airport (OAK). In 2007, SMF surpassed San Jose as the fifth largest airport in the State. In the 12 months ended June 30, 2007, SMF enplaned 75% of the number of passengers enplaned as its nearest competitor, OAK, which is located 75 miles to the southwest in the more populous San Francisco Bay Area. Table 9 TOP COMMERCIAL SERVICE AIRPORTS IN CALIFORNIA (Fiscal Years ended June 30, 2007) Enplaned Passengers Domestic Origin- Rank Airport Destination Other (a) Total International Total 1 Los Angeles 15,619,080 5,954,131 21,573,211 8,054,583 29,627,794 2 San Francisco 8,395,160 4,035,881 12,431,041 4,137,623 16,568,664 3 San Diego 7,869, ,144 8,673, ,719 8,831,873 4 Oakland 6,561, ,122 7,023,152 87,129 7,110,281 5 Sacramento 4,863, ,770 5,237,210 60,049 5,297,259 6 San Jose 4,765, ,017 5,148, ,464 5,249,821 7 Orange County 4,689, ,313 4,912,343 1,579 4,913,922 8 Ontario 3,197, ,048 3,318,658 58,594 3,377,252 9 Burbank 2,831,490 50,374 2,881, ,882, Long Beach 1,311,510 60,355 1,371, ,371,874 All Other California Airports 2,563, ,716 2,770,526 79,054 2,849,580 Total---All California Airports 62,666,510 12,674,871 75,341,381 12,739,153 88,080,534 (a) Includes passengers connecting from one domestic flight to another, passengers connecting from an international flight to a domestic flight, passengers who boarded domestic flights to other U.S. gateway airports where they connected with flights to their international destinations, and passengers enplaning on non-scheduled (i.e. charter) flights. Source: DOT, Schedule T100. A-47

136 Role in Southwest s System Southwest Airlines began service at SMF in June 1991 and, in FY 2007, accounted for about half of all enplaned passengers. As shown in Table 10, in terms of enplaned passengers, SMF ranked 11th among the 63 airports served by Southwest in the 12 months ended June 30, In March 2008, Southwest offered approximately 78 daily flights at SMF to 11 destinations and in FY 2007 accounted for 50% of total enplaned passengers at SMF. Table 10 TOP AIRPORTS IN SOUTHWEST S SYSTEM (Fiscal Years ended June 30, 2007) Rank Airport Location Enplaned Passengers Domestic O&D Connecting Total 1 Las Vegas 6,052,020 1,659,602 7,711,622 2 Chicago (Midway) 4,586,690 2,140,519 6,727,209 3 Phoenix 4,466,640 1,773,283 6,239,923 4 Baltimore 3,845,860 1,534,352 5,380,212 5 Oakland 4,093, ,647 4,378,347 6 Houston (Hobby) 2,593,100 1,016,812 3,609,912 7 Orlando 3,114, ,224 3,487,454 8 Los Angeles (LAX) 3,270, ,279 3,483,649 9 Dallas (Love Field) 2,551, ,772 3,394, San Diego 2,987, ,116 3,106, Sacramento 2,526, ,744 2,650, Tampa 2,177, ,589 2,469, Nashville 1,896, ,884 2,435, San Jose 2,081, ,543 2,242, Kansas City 1,677, ,559 2,003,409 All Other 38,034,610 1,437,275 39,471,885 Total 85,955,540 12,837,200 98,792,740 Source: DOT, Schedule T100. A-48

137 HISTORICAL AIRLINE TRAFFIC Overview Figure 5 presents a chart of total passengers enplaned at SMF from FY 1991 through FY The number of enplaned passengers increased nearly 39% in FY 1992, the first full year of Southwest service at SMF. Between FY 1992 and FY 2007, the number of passengers enplaned at SMF increased, on average, 5.1% per year. While growth rates fluctuated in the intervening years, the number decreased in only one year, FY 2002 (1.2%), reflecting the effect of the terrorist attacks on September 11, By comparison, domestic passengers for the U.S. as a whole declined 12.4% in FY 2002 according to data reported by the Air Transport Association. This pattern of growth reflects a growing population and economic base, strong and stable local demand for airline travel, and the stimulative effect of low fares. Partly because many of SMF s largest air travel markets have already been stimulated by low fares, the rate of traffic growth has slowed recently. Nevertheless, over the past 2 Fiscal Years, the number of enplaned passengers at SMF increased an average of 3.2% per year, which exceeded nationwide passenger increases. Figure 5 TOTAL ENPLANED PASSENGERS Sacramento International Airport (Fiscal Years ended June 30) Enplaned Passengers (in thousands) 6,000 5,000 4,000 3,000 2,000 1,000 Southwest begins service Economic Recession Sept. 11 Terrorist Attacks Source: DOT, Air Passenger Origin-Destination Survey, reconciled to Schedules T100 and 298C T1; Sacramento County Airport System. A-49

138 For the first 8 months of FY 2008 (July through February), enplaned passengers were 1.9% higher than the same period in FY Airport Passenger Characteristics In addition to a high percentage of O&D passengers, other key strengths of SMF include a significant business travel component and a growing base of international passengers. A passenger survey conducted by SCAS in July 2007 revealed that business travelers to and from the Sacramento Area accounted for 38% of all passengers using SMF. The remaining 62% were passengers traveling for personal reasons. Sacramento Area residents accounted for 39% of travelers using SMF, while the remainder consisted of residents of Northern California (15%), Southern California (12%), elsewhere in the United States (32%), and foreign visitors (2%). International O&D passengers can be divided into two categories: (1) those passengers who board international flights at SMF and (2) travelers bound for international destinations who board domestic flights at SMF (and are therefore counted as domestic passengers) and exit the country via other U.S. gateway airports. While these two passenger categories together accounted for less than 5% of total enplaned passengers at SMF in FY 2007, they increased at a combined annual rate of nearly 14%, on average, between FY 1997 and FY AIRLINE SERVICE Over the past 10 Fiscal Years, airline seat capacity offered at SMF increased 33%, from 5.5 million scheduled departing seats in FY 1997 to 7.3 million in FY 2007, as shown on Figure 6. This increase was almost entirely attributable to an increase in the number of departing seats offered by LCCs. The group of LCCs serving SMF consists primarily of Southwest Airlines, with JetBlue Airways and Frontier Airlines accounting for a much smaller portion of that service. In FY 2007, nearly 6 of every 10 (58%) scheduled seats departing SMF were on an LCC, up from 49% in FY A-50

139 Departing Seats (in thousands) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Figure 6 SCHEDULED DEPARTING SEATS, BY CARRIER GROUP Sacramento International Airport (Fiscal Years ended June 30) LCC Network & Other Source: Official Airline Guide. Domestic Service Domestic airline service at SMF has changed markedly since FY Table 11 presents a comparison of scheduled airline service at SMF in March 2008 with service offered at SMF 10 years, 5 years, and 1 year ago. Airline service at SMF increased between March 1998 and March 2008 in terms of both the number of daily flights and seats and the number of cities served nonstop. The significant increase over the past year in the number of cities served nonstop (from 22 to 31) was due entirely to the addition of regional jet service to 11 cities, mostly by ExpressJet Airlines. Beginning June 3, 2008, US Airways will begin new nonstop service to SMF from its two largest hubs in Charlotte and Philadelphia. From 1998 to 2008, service on short-haul routes remained relatively constant while service on medium- and long-haul routes increased in terms of the number of daily departing flights and seats and the number of cities served nonstop. Comparing March 2007 with March 2008 however, service increases on medium-haul routes were offset by cutbacks in seats offered on both short- and long-haul routes. As a result, SMF experienced a slight decline in total departing seats, similar to the nationwide trend. A-51

140 Table 11 DAILY SCHEDULED DOMESTIC PASSENGER SERVICE Sacramento International Airport (the month of March) Change NUMBER OF CITIES SERVED NONSTOP By Aircraft Type: Total Jet Mainline Jet Regional Jet Turboprop By Stage Length: Short-haul (<600 mi.) Medium-short haul ( mi.) Medium-long haul ( mi.) Long-haul (>1800 mi.) AVERAGE DAILY DEPARTING FLIGHTS By Aircraft Type: Total Jet Mainline Jet Regional Jet Turboprop By Stage Length: Short-haul (<600 mi.) Medium-short haul ( mi.) Medium-long haul ( mi.) Long-haul (>1800 mi.) AVERAGE DAILY SCHEDULED SEATS 14,232 15,894 19,067 18,523 +1,663 +3, By Aircraft Type: Total Jet 13,439 15,661 18,579 18,240 +2,222 +2, Mainline Jet 13,439 14,709 17,727 16,324 +1,271 +3,018-1,403 Regional Jet , ,064 Turboprop By Stage Length: Short-haul (<600 mi.) 9,792 9,721 11,790 11, , Medium-short haul ( mi.) 2,618 3,354 3,736 4, Medium-long haul ( mi.) 1,639 2,189 2,251 2, Long-haul (>1800 mi.) , Note: Figures may not sum to totals due to rounding. Source: Official Airline Guide. Figure 7 shows the cities served from SMF by scheduled daily nonstop or one-stop same-plane jet flights in March A-52

141 SEA GEG PDX BOS A-53 CEC ACV SMF SFO BFL SBA BUR ONT LAX LGB PSP SNA SAN CALIFORNIA LAS BOI SLC PHX TUS WEST DEN ABQ ELP WEST COS MSP MCI TUL OKC DFW STL ORD MDW DTW EAST BNA ATL PIT PHL* IAD CLT* JFK HNL OGG** AUS SAT HOU IAH MCO FLL HAWAII SMF623 F-0001 * Nonstop service will begin June 3, ** Aloha Airlines ceased all systemwide operations on April 1, 2008, including its flight from SMF to OGG effective April 1, 2008, after filing for bankruptcy. LEGEND Daily scheduled nonstop service Daily scheduled one-stop same-plane service Figure 7 U.S. AIRPORTS SERVED BY DAILY SCHEDULED ROUND TRIP FLIGHTS Sacramento International Airport March 2008 Source: Official Airline Guides, Inc.

142 Table 12 SCHEDULED DOMESTIC SEATS, BY DESTINATION Sacramento International Airport (March of years noted) City Market (a) Departing Seats Change Airport Seats Percent Los Angeles 149, ,680 25, % Los Angeles 46,423 50,509 4, Ontario 47,028 44,997-2, Bob Hope (Burbank) 37,556 39,168 1, John Wayne (Orange County) 18,404 30,856 12, Long Beach - 9,150 9,150 n.a. San Diego 46,840 52,404 5, Phoenix 45,388 45, Las Vegas 36,673 43,893 7, Portland 30,209 37,919 7, Seattle-Tacoma 32,278 36,925 4, Denver 26,312 32,230 5, Chicago (c) 16,176 21,838 5, Dallas/Fort Worth (b) 21,000 17,360-3, Salt Lake City 18,596 14,722-3, Houston (d) 9,553 14,519 4, Atlanta 11,346 9,699-1, Minneapolis/St. Paul 9,176 9, Honolulu 8,184 8, Spokane - 7,190 7,190 n.a. San Francisco (e) 11,780 5,730-6, New York (f) - 4,650 4,650 n.a. Kansas City 3,968 4, Boise 4,588 3, Kahului - 3,844 3,844 n.a. Wash. DC/Baltimore (g) - 3,720 3,720 n.a. Albuquerque - 3,100 3,100 n.a. Tucson - 3,100 3,100 n.a. Santa Barbara - 3,100 3,100 n.a. Colorado Springs - 2,900 2,900 n.a. Palm Springs 1,550 2, Eureka/Arcata 1,710 1, San Antonio - 1,550 1,550 n.a. Oklahoma City - 1,550 1,550 n.a. Tulsa - 1,550 1,550 n.a. Bakersfield - 1,550 1,550 n.a. St. Louis 7, , Total 642, , , % Note: n.a.= not applicable. (a) Cities served by nonstop flights from Sacramento. (b) Market includes Dallas/Fort Worth International Airport and Love Field. (c) Market includes O'Hare and Midway international airports. (d) Market includes William P. Hobby Airport and Bush Intercontinental Airport/Houston. (e) Market includes San Francisco, Mineta San Jose, and Oakland international airports. (f) Market includes John F. Kennedy International, LaGuardia, and Newark Liberty International airports. (g) Market includes Washington Dulles International, Reagan Washington National, and Baltimore/Washington International Thurgood Marshall airports. Source: Official Airline Guides, Inc., Official Airline Guide. A-54

143 Domestic seat capacity at SMF is highly concentrated on intra-california and other western U.S. routes. Nearly one-third of all scheduled domestic seats departing from SMF were bound for one of the Los Angeles area airports or for San Diego in both March 2003 and March These two city markets, along with Phoenix, Las Vegas, Portland, and Seattle-Tacoma, collectively account for more than half of all scheduled domestic departing seats at SMF. More than 90% of scheduled domestic departing seats at SMF in March 2008 are bound for California and other western U.S. destinations. Seats destined for the eastern United States and Hawaii account for the remainder. As shown on Figure 8, departing seats to Hawaii and the eastern United States accounted for the largest percentage increases, but departing seats to western U.S. cities increased more significantly in absolute terms. Figure 8 SCHEDULED DOMESTIC DEPARTING SEATS, BY REGION Sacramento International Airport (March of years noted) Departing Seats (in thousands) % 14.2% 45.0% 47.0% Hawaii East California Other West Notes: For a definition of East and West see Figure 6. Percentages shown represent percent change from 2003 to Source: Official Airline Guide. A-55

144 International Service Until Mexicana de Aviacion initiated service at SMF in July 2002, SMF had no international service. In March 2008, international service at SMF consisted of two daily flights to Mexico and one daily flight to Canada, as shown in Table 13. In March 2007, Frontier began offering nonstop service 3 days a week from Sacramento to Los Cabos, and on December 15, 2007, began Sacramento-Puerto Vallarta service 4 days a week. Frontier discontinued service to both Los Cabos and Puerto Vallarta from Sacramento on January 7, Air Canada Jazz began nonstop service to Vancouver in July Table 13 SCHEDULED INTERNATIONAL SERVICE, BY DESTINATION Sacramento International Airport (March of years noted) Destination Country Departing Flights Departing Seats Destination (a) Flights ,850 9,228 10,150 Mexico ,850 9,228 8,550 Guadalajara ,850 4,160 4,500 Los Cabos ,318 2,280 Morelia Leon/Guanajuato Canada ,600 Vancouver ,600 (a) Destinations served by nonstop flights. Source: Official Airline Guide. Recent Service Announcements Significantlyhigherfuelpriceshaveexacerbatedfinancialpressuresonairlines,even forthelccs.intheirquestforprofitability,theairlineshavebeenmakingselective capacitycutsthroughouttheirroutesystems.asaresult,beginninginthesecond halfoffy2008,severalairlinesexpecttoreducethenumberofseatsofferedtosmf. AnindicationoftheneartermeffectofservicecutsonoverallseatcapacityatSMF canbegleanedfromflightschedulesfiledbycarrierswithofficialairlineguidein March2008.AsshownonTable14,theseatingcapacityatSMFisprojectedtobe flatinthejanuarymarchperiodin2008andtodecline3.3%intheapriljuneperiod in2008relativetothesamemonthsin2007.giventhiscapacityreductionandthe potentialforaneconomicslowdownorrecession,webelievethatthegrowthin trafficwillmoderateinfy2008andfy2009asitdidduringthe2001recession. A-56

145 Table 14 SCHEDULED DEPARTING SEATS, BY CARRIER Sacramento International Airport (Fiscal Years ended June 30) FY2007 by Quarter FY2008 by Quarter Fiscal Years Jul-Sep'06 Oct-Dec'06 Jan-Mar'07 Apr-Jun'07 Jul-Sep'07 Oct-Dec'07 Jan-Mar'08 Apr-Jun'08 FY2007 FY2008 % Change Southwest 967, , , , , , , ,360 3,875,054 3,919, % United 203, , , , , , , , , , % Alaska 151, , , , , , , , , , % Delta 96,841 95,436 96, , , ,180 84,531 94, , , % USAirways 116, , , ,702 98,904 93,718 94, , , , % American 64,400 64,260 62,860 63,700 63,840 62,580 51,940 53, , , % ExpressJet ,750 60,900 63,950 62,500 62,400 42, , % Continental 40,302 40,958 41,094 41,011 42,536 42,301 43,424 42, , , % JetBlue 64,950 54,900 54,000 45,600 41,400 41,100 40,800 40, , , % Frontier 48,238 45,644 37,406 43,628 49,762 41,900 34,472 45, , , % Northwest 34,928 28,744 26,144 30,316 31,376 28,128 27,200 30, , , % Hawaiian 24,288 29,832 37,488 37,752 31,416 24,288 24,024 24, , , % Mexicana 22,180 20,880 21,800 20,760 22,620 23,610 24,000 24,090 85,620 94, % Aloha 30,876 30,876 29,884 29,016 29,140 26,412 21,576 12, ,652 89, % Air Canada ,550 9,200 6,000 4,550 7,600 1,550 27,350 Sun Country ,866,557 1,820,083 1,759,942 1,878,925 1,938,626 1,854,101 1,760,773 1,816,500 7,325,507 7,370,000 Percent change 3.9% 1.9% 0.0% -3.3% 0.6% Source: Official Airline Guide, accessed March 3, PASSENGER TRAFFIC BY AIRLINE As of March 2008, the 18 passenger airlines listed in Table 15 provide scheduled service at SMF, offering 168 daily nonstop flights to 36 cities. Table 15 CARRIERS OPERATING SCHEDULED PASSENGER SERVICE Sacramento International Airport (March 2008) Network and Regional Alaska Airlines American Airlines Continental Airlines Delta Air Lines ExpressJet Airlines ExpressJet Airlines (Delta Connection) Horizon Air (Alaska) Mesa Airlines (US Airways Express) Northwest Airlines SkyWest Airlines (Delta Connection) SkyWest Airlines (United Express) United Airlines US Airways Low-Cost Carriers Frontier Airlines JetBlue Airways Southwest Airlines Foreign-Flag Air Canada Jazz Mexicana de Aviacion Other Carriers Aloha Airlines Hawaiian Airlines Source: Official Airline Guide. A-57

146 Southwest Airlines accounted for about 49.0% of total enplaned passengers at SMF in the first 6 months of FY 2008, followed by United Airlines with 10.5%. Table 16 shows the airline market shares of enplaned passengers at SMF for Fiscal Years 1997, 2002, 2006, and 2007, and the 6 months ended December 31 of 2006 and Southwest has accounted for about half of the passengers enplaned at SMF each year since FY 1997, as can be seen on Figure 9. Southwest s share increased from 46.4% in FY 1997 to a peak of 52.3% in FY Since then, Southwest s growth has moderated relative to the other airlines serving SMF, and its share of enplaned passengers declined to 50% in FY Between FY 1997 and FY 2007, the number of enplaned passengers at SMF increased 64.5%. More than half (56.8%) of this increase was attributable to an increase in the number of enplaned passengers on Southwest. An additional 28.7% of the increase was attributable to the initiation of service at SMF by JetBlue Airways, Continental Airlines, Frontier Airlines, and Hawaiian Airlines JetBlue and Frontier are LCCs. On March 20, 2008, Aloha Airlines filed for Chapter 11 bankruptcy and on April 1, 2008, ceased systemwide operations. Figure 9 ENPLANED PASSENGERS, SOUTHWEST VS. ALL OTHER AIRLINES Sacramento International Airport (Fiscal Years ended June 30) Enplaned Passengers (in thousands) 6,000 5,000 4,000 3,000 2,000 1,000 0 Southwest All Other Airlines Source: Sacramento County Airport System. A-58

147 Table 16 CARRIER SHARES OF ENPLANED PASSENGERS Sacramento International Airport (Fiscal Years ended June 30, unless otherwise noted; in descending order by FY 2007) Sector 6 Months Ended Dec. Published Carrier 31 Operator Total 3,476,147 4,042,585 5,150,229 5,307,289 2,657,097 2,729,475 Domestic 3,476,147 4,042,585 5,089,023 5,246,380 2,626,411 2,683,871 Southwest 1,611,274 2,088,170 2,574,971 2,650,594 1,305,509 1,336,200 United 659, , , , , ,431 United 546, , , , , ,584 SkyWest - 131, , ,777 75,495 70,847 United Express 113, Air Wisconsin - 33, Alaska 245, , , , , ,338 Alaska 179, , , , , ,335 Horizon 66,736 86, , ,737 58,653 75,003 Delta 306, , , , , ,403 Delta 264, , , , , ,650 SkyWest 41,713 24,565 30,277 43,419 21,359 23,409 ASA ,881 16,902 4,963 - ExpressJet ,147-26,344 US Airways 308, , , , , ,848 America West 291, , , (a) US Airways , , ,197 Trans States 17, Mesa ,616 13,195 7,908 6,651 American 252, , , , , ,754 American 183, , , , , ,754 TWA (b) 68,580 40, JetBlue , ,597 78,880 62,613 Continental - 81, , ,193 73,107 76,871 Frontier - 21, , ,084 68,190 69,087 Hawaiian - 5,389 87, ,522 46,290 48,757 Northwest 85, , , ,311 58,495 53,875 Aloha ,720 66,577 32,819 31,645 ExpressJet ,921-75,049 Other 6,748 2,750 3, International ,206 60,909 30,686 45,604 Mexicana ,206 56,288 30,686 30,625 Frontier ,249-4,108 Air Canada ,372-10,871 Carrier Share of Total: Domestic 100.0% 100.0% 98.8% 98.9% 98.8% 98.3% Southwest United Alaska Delta US Airways American JetBlue Continental Frontier Hawaiian Northwest Aloha ExpressJet Other International 0.0% 0.0% 1.2% 1.1% 1.2% 1.7% Mexicana Frontier Air Canada Note: Columns may not add to totals shown because of rounding. America West is shown here as an affiliate of US Airways for all years shown, although the merger with US Airways occurred in October TWA is shown here as an affiliate of American Airlines, although American did not start reporting TWA passengers with its own until December Source: Sacramento County Airport System. A-59

148 DOMESTIC O&D PASSENGER TRENDS More than 90% of enplaned passengers at SMF are domestic O&D passengers. The trend in domestic O&D passengers at SMF closely resembled national and Statewide patterns of growth through FY 2000, as shown on Figure 10. By FY 2002, however, the growth patterns had diverged markedly, following the 2001 economic recession and the September 11, 2001, terrorist attacks. While domestic O&D traffic declined 13.1% in California and 11.7% in the nation in FY 2002, it declined only 2.1% at SMF. Domestic O&D traffic in California and the nation did not recover until FY 2005, whereas the number of domestic O&D passengers at SMF recovered by FY 2003 and then averaged 7.1% annual growth in FY 2004 and FY In FY 2006 and FY 2007, the rate of growth in the numbers of domestic O&D passengers at SMF moderated, but remained above national and Statewide trends. In FY 2007, the rate of growth at SMF was twice that of the nation and 2.5 times that of the State. Figure 10 INDEX OF OUTBOUND DOMESTIC ORIGIN-DESTINATION PASSENGERS Sacramento International Airport, All California Airports, and All U.S. Airports (Fiscal Years ended June 30) SMF California U.S. Index: 1997= Source: DOT, Air Passenger Origin-Destination Survey, reconciled to Schedules T100 and 298C T1. A-60

149 Airline Fares Domestic O&D passengers and average domestic airfares at SMF from FY 1997 to FY 2007 are presented on Figure 11. The average nominal domestic one-way airfare at SMF increased approximately $25 over this period. However, after correcting for inflation, the average fare was virtually unchanged. The number of domestic O&D passengers increased nearly 46% during this period, reflecting increases in flights, destinations, and the number of airlines serving SMF, and a population that grew faster than the national average. In FY 2006, however, an 11.6% increase in average domestic airfares at SMF was accompanied by slowing growth in the number of passengers (2.3%). Figure 11 DOMESTIC O&D PASSENGERS AND AVERAGE FARE PAID Sacramento International Airport (Fiscal Years ended June 30) 6.0 Dom. O&D Passengers Average One-Way Fare $ Outbound O&D Passengers (in millions) $ $ $75.00 $50.00 $25.00 Average One-Way Fare Paid 0.0 $ Note: Average one-way fares shown are net of all taxes, fees, and PFCs. Source: DOT, Air Passenger Origin-Destination Survey, reconciled to Schedules T100 and 298C T1. Patterns of domestic O&D traffic growth at SMF have varied by region of destination, as shown on Figure 12. Although SMF serves approximately the same number of passengers bound for California cities as those destined for cities in the rest of the western United States, growth in domestic O&D traffic on the California routes (1.9% per year, on average) lagged growth in traffic on the other western U.S. routes (3.7% per year) over the past 10 years. Growth in domestic O&D traffic to the eastern United States was greater than to the other large markets, increasing an average of 6.5% per year. O&D passenger traffic to Hawaii, the region accounting for the smallest share of those shown, increased from a negligible level to 3.4% of all A-61

150 domestic O&D traffic at SMF over the 10-year period, following the introduction of service by Hawaiian Airlines (FY 2002) and Aloha Airlines (FY 2003). Figure 12 OUTBOUND DOMESTIC ORIGIN-DESTINATION PASSENGERS, BY REGION Sacramento International Airport (Fiscal Years ended June 30) Domestic O&D Passengers (in millions) 2.0 East Hawaii Intra-California Other West Source: U.S. DOT, Air Passenger Origin-Destination Survey, reconciled to Schedules T100 and 298C T1 Notes: "East" includes airports east of the Mississippi River. "West" includes airports west of the Mississippi River other than those in California and Hawaii. Excludes passengers bound for Puerto Rico, the U.S. Virgin Islands, and islands of the U.S. Pacific Trust. Trends in numbers of O&D passengers in SMF s top 20 domestic O&D markets since FY 1997 are shown in Table 17. The Los Angeles market, which accounted for 26.6% of all domestic O&D passengers at SMF in FY 2007, is triple the size of the secondranked San Diego market (8.4% of total). Passenger traffic in the Los Angeles market increased 8.8% between FY 2006 and FY 2007, largely because of the initiation of JetBlue service to Long Beach. All of SMF s top six domestic O&D markets are served by Southwest Airlines and are less than 650 miles in haul distance from Sacramento; these markets collectively accounted for 54.3% of all domestic O&D passengers at SMF in FY These six markets accounted for 61.5% of SMF s domestic O&D passengers in FY 1997, however, indicating a gradual diversification of traffic at SMF and a reduced reliance on the high-volume, short-haul destination markets. Of SMF s top 20 domestic O&D markets, 10 are served nonstop by more than one airline; two (Los Angeles and Salt Lake City) are served by three or more airlines. A-62

151 Competition is more evident in the top 10 markets, with only two served nonstop by a single airline (San Diego by Southwest, New York by JetBlue). Table 17 TOP 20 DOMESTIC O&D CITY MARKETS Sacramento International Airport (Fiscal Years ended June 30; passengers in thousands; ranked on 2007) % Airlines Chg. Offering Outbound Domestic AAG Prev. Yr. City Market Nonstop Nonstop O&D Passengers Rank (a) Airport Mileage Service (b) Los Angeles 382 1,082 1,063 1,190 1, % 4.0% 8.8% Los Angeles DL,UA,WN Ontario WN Bob Hope (Burbank) WN John Wayne (Orange County) AQ,WN Long Beach B n.c n.c San Diego 480 WN Las Vegas 397 US,WN Seattle-Tacoma 605 AS,WN Portland 479 AS,WN Phoenix 647 US,WN Denver 910 F9,UA Chicago (c) 1,786 UA,WN Wash. DC/Baltimore (d) 2,378 UA,WN New York (e) 2,512 B Dallas/Fort Worth (f) 1,437 AA Salt Lake City 532 DL,UA,WN Honolulu 2,462 HA Houston (g) 1,617 CO Orlando 2, Atlanta 2,092 DL Kahului 2,404 AQ Minneapolis/St. Paul 1,518 NW Spokane 649 AS,XE Kansas City 1,442 WN Total---Top 20 Markets 2,607 2,908 3,582 3, % 5.0% 3.4% All Other Markets ,159 1, Total---All Markets 3,337 3,813 4,740 4, % 5.0% 2.6% Note: AAG=Average annual growth rate; columns may not sum to totals due to rounding; n.c.=not calculated. (a) Top 20 city markets ranked on FY (b) As of March Airline legend: AA=American, AQ=Aloha, AS=Alaska, B6=JetBlue, CO=Continental, DL=Delta, F9=Frontier, HA=Hawaiian, NW=Northwest, UA=United, US=US Airways, WN=Southwest, XE=ExpressJet. (c) Market includes O'Hare and Midway airports. (d) Market includes Dulles, Reagan, and Baltimore airports. (e) Market includes Kennedy, LaGuardia, and Newark airports. (f) Market includes Dallas/Ft. Worth Airport and Love Field. (g) Market includes Hobby and Bush airports. Source: DOT, Air Passenger Origin-Destination Survey, reconciled to Schedules T100 and 298C T1; Official Airline Guide. A-63

152 BAY AREA AIRPORT COMPETITION The availability of airline service both at SMF and at proximate airports gives customers a choice, which is the basis for regional competition among airports. Customers generally evaluate their airport options in terms of trade-offs among airline service (schedule, frequency, en route stops and connections, total travel time, schedule reliability, aircraft type, etc.), airfares (including frequent flier benefits), and the cost and convenience of ground access at the respective airports. Thus, regional competition affects O&D passenger traffic, whether on domestic or international itineraries. According to a May 2005 catchment area analysis conducted by Sabre Airline Solutions, SMF captured 78.2% of its primary market passengers and 71.2% of a larger 17-county secondary market. The remaining passengers originating in or destined for the Sacramento Area were considered leakage to other, competing airports. Sabre indentified the following four airports as being the primary beneficiaries of Sacramento-area passenger leakage, in descending order: Oakland International Airport, San Francisco International Airport, and, to a much lesser extent, Mineta San Jose International Airport (SJC) and Reno-Tahoe International Airport (RNO). OAK is 95 road-miles from SMF. The other three competing airports, SFO, SJC, and RNO, are 105, 120, and 145 road-miles from SMF, respectively, and drive times to these airports typically exceed 1.5 to 2 hours. While it appears unlikely that SFO, OAK, or SJC would be able to provide expanded runway capacity in the intermediate term, significant surplus runway capacity is available at SMF. It appears that a significant amount of the Bay Area demand can be effectively served at Sacramento International Airport. In addition, SMF is able to accommodate flights diverted from OAK, SFO, and SJC in low visibility conditions in the Bay Area. When selecting an airport to fly to/from, consumers will take account of the quality of air service, air fares, other expenditures such as parking and total expected travel time, including scheduled block times, access time, and expected delays. Although air service choices are better from OAK and SFO than from SMF, in the future this service differential is likely to be narrowed both because the Sacramento area is growing faster than the Bay Area and because SMF can accommodate growth in operations needed to fill in the airport s service pattern. As the service pattern at SMF improves in the near to medium term, SMF should capture some of the leakage. In the longer term, there is good reason to believe that SMF will increase the size of its catchment area and will begin to compete directly for some traffic, especially with OAK. Certain other factors serve to limit leakage from SMF. Prominent among these factors is the increasing roadway congestion between the Sacramento Area and the A-64

153 Bay Area. This congestion adds to the time and cost of commuting to a competing airport, making service from SMF more attractive by comparison. Furthermore, the inland population growth of the Bay Area places more potential travelers closer to SMF. An analysis of the population within 2 hours drive time to any of the four Bay Area airports conducted by GRA, Inc. shows that SMF serves the largest population (please see Figure 2 and Table 18). This finding is based on an estimate of how long it would take customers in each Census tract in the Bay Area to travel during peak travel times to any of the four major commercial service airports OAK, SFO, SJC and SMF. Table 18 PROJECTED POPULATION IN BAY AREA AIRPORT CATCHMENT AREAS (millions) SMF SFO OAK SJC Source: GRA, Inc. based on California Department of Finance, Demographic Research Unit, Population Projections. Figure 2 shows the line of indifference for SMF, that is, where consumers are indifferent between driving to SMF and the closest alternative airport. As shown on Figure 13, highway congestion is getting relatively worse in the OAK/SFO catchment area. This in turn will increase ground access time to OAK and SFO for those travelers beginning or ending their trip to the east of the Bay Area. Therefore, it is likely that SMF will become more attractive to travelers to and from the Bay Area. As air service continues to improve at SMF, it is expected that customers will find SMF a viable alternative to more-congested Bay Area airports and associated roadways. The incremental infrastructure proposed by SCAS will allow SMF to accommodate added traffic from the Bay Area. Certain other factors work against SMF s ability to retain all passengers originating in or destined for its catchment area. Foremost among these factors is the draw of the mature gateway hub at SFO for internationally bound travelers. A-65

154 Figure 13 ANNUAL HOURS OF HIGHWAY DELAY PER TRAVELER Hours Per Year y = x R 2 = y = x R 2 = Year SFO/OAK SMF Linear (SMF) Linear (SFO/OAK) Source: GRA, Inc. from Federal Highway Administration Measure of Highway Mobility. Competing Airfares and Service The relationship between average domestic one-way airfares paid at SMF and those paid at the three Bay Area airports from FY 2000 through FY 2007 is illustrated on Figure 14. Among the four airports, passengers using SMF paid the lowest average airfares to destinations less than 600 miles away in FY 2007 even marginally lower than at second-ranked OAK. Since FY 2000, airfares paid at SMF, OAK, and SJC have been relatively competitive in short-haul markets, while airfares paid at SFO have been higher. In each of the other three distance categories in FY 2007 medium-short haul, medium-long haul, and long haul passengers at SMF paid the second-lowest fares, on average, among the four airports, after OAK. While the fare gap between SMF and OAK has remained relatively constant in the medium-short haul distance category, it has widened since FY 2003 in the medium-long haul and long-haul distance categories. A-66

155 Figure 14 COMPARISON OF AVERAGE DOMESTIC ONE-WAY AIRFARES, BY DISTANCE BAND Sacramento International Airport and Bay Area Airports (Fiscal Years ended June 30) $130 Short-Haul Flights (Less than 600 miles) $150 Medium-Short Haul Flights (600-1,199 miles) Average One-Way Fare $120 SMF OAK $110 SFO SJC $100 $90 $80 $70 $ Fiscal Year Average One-Way Fare $140 $130 $120 $110 SMF OAK $100 SFO SJC $ Fiscal Year $280 Medium-Long Haul Flights (1,200-1,799 miles) $300 Long-Haul Flights (1,800+ miles) Average One-Way Fare $260 $240 $220 $200 $180 SMF OAK SFO SJC Average One-Way Fare $280 $260 $240 $220 $200 $180 SMF OAK SFO SJC $160 $160 $140 $ Fiscal Year Fiscal Year Source: U.S. DOT, Air Passenger Origin-Destination Survey, reconciled to Schedules T-100 and 298C T-1. A-67

156 Table 19 DEPARTING SEATS BY CITY MARKET AND CARRIER TYPE, AND AVERAGE FARES IN SACRAMENTO S TOP 20 DOMESTIC O&D PASSENGER MARKETS Sacramento and Oakland International Airports (seats for second week in March, 2008; fares for Fiscal Years ended June 30, 2007) Scheduled Departing Seats City Market Sacramento Oakland Average One-Way Fare Rank Airport Network LCC Other Total Network LCC Other Total SMF OAK Difference 1 Los Angeles 2,910 37, ,322 2,750 56,650 4,372 63,772 $75.01 $ $1.29 Los Angeles 2,910 8,847-11,757 2,750 17,345-20, Ontario - 10,581-10,581-10,628-10, Burbank - 9,590-9,590-15,207-15, Orange County - 6, ,444-8,220 4,372 12, Long Beach - 1,950-1,950-5,250-5, San Diego - 12,456-12,456-16,746-16, Las Vegas 2,800 7,505-10, , , Seattle - 4,369 4,158 8,527-7,094 6,380 13, Portland - 6,075 2,730 8,805-5,480 3,486 8, Phoenix 4,268 6,212-10,480 4,426 6,576-11, Denver 4,752 2,604-7,356 3,750 4,521-8, Chicago 3,152 1,918-5,070 1,680 5,458-7, O'Hare 3, ,152 1, , Midway - 1,918-1,918-5,458-5, Wash. D.C./Baltimore ,100-2, Dulles ,100-2, National Baltimore New York - 1,050-1,050-3,150-3, Kennedy - 1,050-1,050-3,150-3, LaGuardia Newark Dallas/Ft. Worth 3, ,920 2, , Dallas/ Ft. Worth 3, ,920 2, , Love Field Salt Lake City 3, ,331 1,770 4,341-6, Honolulu - - 1,848 1,848-2, , Houston 3, ,274 3,231 1,691-4, Bush 3, ,274 3, , Hobby ,691-1, Orlando Atlanta 2, ,196 1, , Kahului (Maui) , , Minneapolis/St. Paul 2, , Spokane - - 1,630 1,630-1,918-1, Kansas City ,781-1, Top 20 City Markets 33,491 80,692 12, ,285 22, ,150 16, ,189 $ $ $3.00 Other Domestic Markets 1,650-5,550 7,200-13,227 1,014 14, DOMESTIC TOTAL 35,141 80,692 17, ,485 22, ,377 17, ,430 $ $ $8.78 Notes: Sacramento's top 20 domestic O&D passenger markets ranked for 12 months ended June 30, Average one-way fares shown are net of all taxes, fees, and PFCs. Sources: Official Airline Guide; DOT, Air Passenger Origin-Destination Survey, reconciled to Schedules T100 and 298C T1. Because OAK is the primary beneficiary of leakage from the Sacramento Area, and because airfares paid there are, on average, the most competitive with those offered at SMF, a market-by-market comparison of service and airfares for the two airports is provided in Table 19. In summary, airlines at SMF offer the most competitive service, and fares paid at SMF are most competitive relative to those paid at OAK, in A-68

157 the highest-volume domestic markets. Service and fares are less competitive in SMF s lower-volume city markets. In SMF s top seven domestic O&D markets, the average fares paid at the two airports were comparable, with fares at SMF lower in four markets and within $5 of the average fare paid at OAK in the other three markets. These seven city markets accounted for 57% of all domestic O&D passengers at SMF in FY Each of the seven top city markets is served by LCCs, both at SMF and at OAK. In 6 of the remaining top 13 city markets (Chicago, Washington/Baltimore, Salt Lake City, Honolulu, Houston, and Kahului), average fares paid at SMF were materially higher than at OAK. All of these destinations but Salt Lake City represent long-haul markets, and nonstop LCC service was offered to each destination from OAK compared to only one (Chicago) from SMF. In the lowest-volume other domestic markets, no LCC service was provided from SMF whereas LCCs provided the majority of departing seats from OAK to those markets. KEY FACTORS AFFECTING FUTURE TRAFFIC In addition to the economy and demographics of the Sacramento Area, as discussed earlier, key factors that will affect future airline traffic at SMF include: General economic and market conditions Aviation security U.S. airline industry financial condition Southwest Airlines Airline competition and airfares Airline industry consolidation and alliances Oil and aviation fuel prices Capacity of the national air traffic control system Capacity of SMF Environmental concerns General Economic and Market Conditions The demand for airline travel is cyclical and seasonal. It is affected by actual or potential changes in international, national, regional, and local economic conditions, including economic output, levels of disposable income, inflation, interest rates, exchange rates, and other factors. Demand is also affected by changes in consumer preferences, perceptions, spending patterns, and demographic trends. Extraordinary events such as war, terrorism, natural disasters, bad weather, and outbreaks of disease can also affect airline travel demand. Historically, the negative effects of such events have been transitory, dissipating within a relatively short time. The 1981 air traffic controllers strike, the 1991 Gulf War, and the severe A-69

158 acute respiratory syndrome (SARS) epidemic are generally regarded as transitory. The negative effects of some events may be persistent, either dissipating over a relatively long period of time or potentially resulting in a structural change in demand. The effects of the terrorist attacks on September 11, 2001, were more persistent, but relatively mild and short-lived at SMF. The factors affecting market conditions are outside the control of the airlines and airport operators and, because of their volatility, can produce rapid, unexpected, and material changes in airline travel demand. Sustained future increases in domestic and international passenger traffic will depend on stable and peaceful conditions and economic growth. The U.S. economy slowed in 2007, following a surge in global energy prices, some contraction of consumer purchasing power, a correction in the housing market, and problems in the home mortgage and consumer credit markets. In 2008, continued slow GDP growth is expected, amid reduced consumer spending and business investment. Thereafter, economic growth is expected to accelerate toward long-term growth rates. Aviation Security Since the terrorist attacks on September 11, 2001, the U.S. government has mandated security measures to guard against attacks and to alleviate concerns about the safety of commercial airline travel. The measures include, among others, increased limits on carry-on baggage, more intensive screening of passengers and baggage, and more stringent reviews of traveler documentation. These measures, sometimes in combination with inadequate security staffing, have resulted in longer wait times for travelers. Tighter security and tougher visa and entry requirements have contributed significantly to a 17% decline in overseas travel to the United States, which is perceived as unfriendly to foreign visitors, according to a 2007 study by the Travel Industry Association. These measures, as well as fears of terrorism, may have a long-term effect on airline travel demand by deterring some travel, by diverting some airline travel to surface travel modes, and by diverting overseas travelers to other destinations. Travel substitutes, such as video and Internet conferencing, are increasingly cost-effective. Moreover, alternative air transportation services are also improving. Travelers can also use air taxis, air charters, corporate jets, fractionally owned aircraft, and eventually very light jets as alternatives to commercial airline travel. Sustained future increases in domestic and international passenger traffic will depend on consumer confidence in the safety of commercial aviation without the higher costs and inconvenience associated with increased security measures. A-70

159 The 9/11 Commission Report acknowledged that major vulnerabilities existed in air cargo security. A risk-based management system has evolved to identify shipments that pose a risk, and various security measures are now applied at different points along the supply chain. The air cargo industry has vigorously opposed the physical inspection of all air cargo, arguing that the 100% solution would not be cost-effective and would have significant adverse effects on the industry and on the economy. U.S. Airline Industry Financial Condition Since 2001, the U.S. airline industry has undergone fundamental changes driven by (1) increasing fare competition from LCCs, (2) pricing transparency of the Internet, which further intensified price competition within the industry, (3) a decline in highyield business travel and increased willingness of such passengers to use LCC services, and (4) escalating fuel costs driven by prices for crude oil and by oil refining costs. These challenges, in combination with a weak economy after the economic boom of the late 1990s, the terrorist attacks of September 11, 2001, and the SARS epidemic, created a circumstance that was sometimes described as the perfect storm. In the weakened airline revenue environment following 2001, the legacy airlines in particular were subject to extreme downward pressures on their profitability. Several US Airways, United, Delta, and Northwest were unable to reduce costs and enhance productivity quickly enough to avoid bankruptcy. All have now emerged from bankruptcy into a new and challenging competitive environment. Southwest Airlines Southwest Airlines continues to be profitable, but is experiencing increasing financial pressure as its longstanding fuel hedging agreements expire and other costs increase. In January 2008, Southwest reported that 2007 represented the airline s 35th consecutive year of profitability. Even so, CEO Gary Kelly commented: Although we were well prepared, 2007 was much more difficult than anticipated due to rising energy prices throughout the year and softer demand for domestic air travel. Given higher energy costs and signs of domestic economic weakness, we took the necessary steps to slow our planned aircraft fleet growth. In June, we reduced our planned growth for fourth quarter 2007 and for In December, we further reduced our 2008 planned growth, pruning our flight schedule for May This pruning in May 2008 will take place at many airports in Southwest s system, including SMF. Southwest announced that it will trim capacity from SMF to Los Angeles International, Ontario International, San Diego International, and Bob Hope (Burbank) airports four Southern California airports to which Southwest offers A-71

160 roughly 10 daily departures each from SMF. The airline intends to cut a single daily flight to each destination, which would amount to a 2.2% reduction in seats offered by Southwest at SMF. Airline Competition and Airfares Airfares have an important effect on passenger demand, particularly for relatively short trips where the automobile and other travel modes are alternatives and for price-sensitive discretionary travel, although automobile travel can be more expensive than flying in some short-haul markets. Airfares are influenced by labor, fuel, and other airline operating costs; debt burden; passenger demand; capacity and yield management; market presence; strategic plans; competitive factors; and taxes, fees, and other charges assessed by governmental and airport agencies. Increases in passenger traffic at SMF depend on the continued availability of competitive airfares and service. Airfare levels are significantly related to the revenue environment, that is, the competitive structure of the industry and service and fare competition in individual markets served from a given airport. Airlines, given the fare sensitivity of customers, typically respond to the lower fares of a competitor. While competition determines how low an airline must actually price its fares to attract passengers, costs determine how low an airline can price its fares and still make a profit. Thus, if fare reductions are not offset by increases in revenue from additional passengers and possibly from improved operating efficiencies, then operating results will suffer, and service in such markets may be reduced. In this context, airport charges can be relevant. Industry over-capacity, the ability of customers to book flights easily via the Internet, and competition, among other factors, drove a reduction in average airfares nationwide between 2000 and In 2005, according to the Air Transport Association, the average domestic yield for the major U.S. airlines was 11.7 cents per passenger-mile, compared with 14.5 cents in In 2006, the average domestic yield increased to 12.8 cents per passenger mile, as airlines reduced capacity and were able to sustain fare increases. In the first 10 months of 2007, the average domestic yield remained the same as in Industry analysts have questioned the sustainability of the historical revenue model of the legacy network airlines, which involved charging uneconomically low discount fares to some travelers and high walk-up fares to others. The network airlines have introduced simplified fare structures in recent years designed to rationalize this model. Widespread adoption of such rationalized fare structures, along with controls on airline seat capacity, are seen as keys to the industry s ability to sustain and increase profitability. A-72

161 Airline Industry Consolidation and Alliances Airline mergers are difficult to effect. The impediments of strong unions, strong operational cultures, and strong regulatory (anti-trust) oversight can be difficult to overcome. Historically, the benefits of airline mergers cost-cutting opportunities and revenue synergies from a larger route system have often not been realized. The LCCs, particularly Southwest Airlines, are not considered to be likely merger candidates. The U.S. legacy airlines, on the other hand, are considered more apt to merge. US Airways (which merged with America West Airlines in September 2005) made an unsuccessful hostile bid to acquire Delta in November This bid was rebuffed by Delta s unsecured creditors. In February 2008, Delta was reported to be in discussion with Northwest regarding merger possibilities although this merger is now on hold. While the potential outcome of this particular scenario remains unknown, many airline analysts believe that the U.S. airline industry will undergo further consolidation to rationalize capacity and improve pricing power. Oil and Aviation Fuel Prices Oil prices influence economic conditions, airline travel demand, and airline financial results. Crude oil prices ranged around $20 per barrel during most of the 1990s, falling into the $10 range for a short time in Oil prices increased to the $30 per barrel range during the second half of 2003 and continued to rise during 2004 and 2005, increasing to a high of $77 per barrel in July After abating somewhat, the price of crude oil increased to $100 per barrel in December Although oil prices decreased to about $91 per barrel in late January 2008, the outlook is for continued volatility and relatively high prices in the foreseeable future. Oil futures prices on the New York Mercantile Exchange remain above $90 per barrel through 2016.* Two factors that significantly influence the price of oil are increasing world demand and the reduced value of the U.S. dollar relative to other currencies. The demand for oil in China and India, currently the two fastest growing world economies, for example, is expected to double by 2025 according to U.S. Energy Information Agency estimates. The declining value of the U.S. dollar also stimulates increases in the price of oil. On the world market, oil is priced in U.S. dollars; as the value of the U.S. dollar declines against other currencies, oil producers increase their price for oil in U.S. dollars to offset the decline. The price of aviation fuel, currently the largest item of airline expense, is directly related to the price of oil and the cost of refining. Escalating fuel prices have significantly contributed to the financial challenges faced by the airline industry since Depending on the revenue environment, airlines may not be able to pass *New York Mercantile Exchange website, accessed January 29, A-73

162 on higher fuel costs through increased fares. Similarly, the potential benefits of lower fuel prices may be offset by increased fare competition and lower revenues. Capacity of the National Air Traffic Control System Demands on the U.S. air traffic control system have, in the past, caused delays and operational restrictions that affected airline schedules and passenger traffic. Even as disagreements regarding the funding of improvements to the system continue, the FAA is gradually automating and enhancing the computer, radar, and communications equipment of the air traffic control system and enhancing the use of runways through improved air navigation aids. Aircraft delays declined after 2001 as a result of the reduction in aircraft operations. However, as airline traffic exceeds 2001 levels, as it did notably in summer 2007, flight delays and system congestion are again increasing. Capacity of Sacramento International Airport In addition to any future constraints that may be imposed by the national air traffic control system, future growth in airline traffic at SMF will depend on the capacity at SMF itself. SMF has ample airfield capacity and the Terminal Modernization Program is designed to address future terminal capacity needs through Environmental Concerns By early 2008, the airline industry was facing increasing pressure to address and mitigate the environmental impact of carbon emissions from both aircraft and ground support equipment. The measures the industry may take, voluntary or legislated, are not yet known and, therefore, any estimate of an effect on future airline traffic would be speculative at this time. Such measures could have a negative effect on the financial condition of the airline industry. A-74

163 ENPLANED PASSENGER FORECAST The enplaned passenger forecast shown on Figure 15 and presented in Table 20 indicates an average 2.8% per year increase in the number of passengers between FY 2007 and FY 2016, which is the same growth rate forecast by the FAA in March 2008 for all U.S. domestic passengers during the same period. Load factors at SMF are expected to increase in FY 2008 and FY 2009, reflecting the recent decrease in scheduled seats offered by the passenger airlines, as discussed earlier. As a result of the potential for an economic recession in 2008 and for consolidation in the airline industry, we also prepared a low and high passenger forecast. The FAA, in its annual Terminal Area Forecast (TAF) released in December 2007, forecasts growth in the number of enplaned passengers at SMF to average 3.5% per year from Federal Fiscal Year (FFY) 2008 through FFY 2016.* Figure 15 Enplaned Passengers (in millions) ENPLANED PASSENGER FORECASTS Sacramento International Airport (Fiscal Years ended June 30) ACTUAL FORECAST Actual Base TAF Low High Sources: Actual--Sacramento County Airport System; TAF FAA (updated in December 18, 2007, as adjusted for County fiscal years); Forecast--Jacobs Consultancy. *The federal fiscal year ends September 30. A-75

164 Table 20 ENPLANED PASSENGER TRENDS AND FORECAST Sacramento International Airport (Fiscal Years ended June 30) Base Forecast Total Low Forecast High Forecast Fiscal Domestic Domestic Total Enplaned Percent Enplaned Percent Enplaned Percent Year O&D Connecting Domestic International Passengers Change Passengers Change Passengers Change ,503,368 2,503, ,611,452 2,611, % ,742,684 2,742, % ,226,905 3,226, % ,432,631 3,432, % ,373, ,095 3,476,147 3,476, % ,432,683 95,830 3,528,513 3,528, % ,580,360 97,765 3,678,125 3,678, % ,728, ,825 3,837,471 3,837, % ,981, ,745 4,093,049 4,093, % ,932, ,555 4,042,585 4,042, % ,155, ,190 4,289,879 24,394 4,314, % ,402, ,345 4,540,570 23,037 4,563, % ,796, ,085 4,940,554 45,617 4,986, % ,915, ,465 5,089,023 61,206 5,150, % 2007A 5,063, ,245 5,246,380 60,909 5,307, % 2008F 5,103, ,500 5,284,200 82,000 5,366, % 5,307, % 5,366, % ,150, ,400 5,332, ,000 5,432, % 5,210, % 5,436, % ,245, ,700 5,430, ,000 5,545, % 5,280, % 5,634, % ,403, ,200 5,593, ,000 5,722, % 5,440, % 5,864, % ,578, ,400 5,775, ,000 5,917, % 5,630, % 6,102, % ,765, ,000 5,968, ,000 6,123, % 5,825, % 6,348, % ,958, ,800 6,168, ,000 6,335, % 6,025, % 6,603, % ,160, ,900 6,377, ,000 6,556, % 6,235, % 6,868, % ,368, ,200 6,593, ,000 6,783, % 6,450, % 7,141, % Average Annual Growth Historical: % 1.4% 3.1% n.a. 3.1% n.a n.a n.a. 5.1 Forecast: % 1.4% 1.9% 18.4% 2.2% 1.2% 2.8% Sources: Historical--Sacramento County Airport System; Forecast--Jacobs Consultancy. A-76

165 The assumptions underlying the traffic forecast include: Demographic and Economic Factors. As described earlier, we assume that resident and visitor demand in the Sacramento Area will achieve sustained economic growth. Rate of Traffic Growth. We assume that the future rate of traffic growth at SMF will resemble national trends in the coming years as forecast by the FAA. Low-Cost Carriers. We assume that growth of LCC activity will continue at SMF, led by the continued service expansion by Southwest Airlines as augmented by Frontier, JetBlue, and others, including ExpressJet. Airline Consolidation and Bankruptcy. Because SMF serves almost exclusively O&D traffic, it will continue to be well served regardless of the outcomes for the various carriers that are currently struggling financially. Airfares. Competition among airlines serving SMF will ensure the continued availability of competitive airfares comparable to those now available notwithstanding aviation fuel and other operating costs. Airline Payments per Enplaned Passenger. Increased airline payments for facilities at SMF will not materially affect the airlines willingness and ability to provide competitively priced service at SMF. International Service. We assume that existing international service will continue at SMF and will expand over time. Extraordinary Events. There will be no major disruption of airline service or airline travel behavior as a result of international hostilities or terrorist acts or threats. Airfield and Terminal Capacity. Additional airfield and passenger terminal capacity will be developed generally in accordance with the schedule discussed in the later section Future Airport System Capital Improvements. AIR CARGO TRENDS Figure 16 shows historical trends in air cargo tonnage handled at SMF and at Mather Airport. The development of Mather as a cargo airport contributed to regional growth in air cargo tonnage in the late 1990s. In FY 2000 and FY 2001, Kitty Hawk Aircargo had a contract with the U.S. Postal Service (USPS) to carry U.S. mail, accounting for most of the cargo increase at Mather in those years. At the end of FY 2001, the USPS awarded a new U.S. mail contract to FedEx, resulting in cessation A-77

166 of Kitty Hawk s operations at Mather and contributing to a decline in cargo tonnage at Mather in FY Five years later, total cargo tonnage handled at the two airports was only 3.5% higher than that handled in FY In the first half of FY 2008, however, total cargo tonnage at the two airports was up 16.9% over the first half of FY 2007, led by a 21.7% increase at SMF. Figure 16 TOTAL AIR CARGO TONNAGE Sacramento International and Mather Airports (Fiscal Years ended June 30, unless otherwise noted) Air Cargo Tonnage (in thousands) SMF 2007 Mather FYTD2007 FYTD2008 Notes: Sum of enplaned and deplaned freight and mail. FYTD = Fiscal-Year-to-date, July through December. Source: Sacramento County Airport System. The possibility of the sale of DHL/Airborne, which operates out of Mather, to FedEx, which operates at SMF, was recently reported. DHL s owner, Deutsche Post, is considering a turnaround plan that includes selling its air cargo subsidiary. If it were to acquire DHL, FedEx would likely consolidate its local business at one of these two airports. Table 21 shows the carrier shares of total cargo tonnage at SMF in FY 1997, FY 2002, FY 2006, and FY In FY 2007, the all-cargo airlines handled 90.6% of SMF s cargo tonnage, up from 65.0% 10 years earlier. FedEx accounted for the majority of cargo handled by the all-cargo airlines. The passenger airlines accounted for the remaining 9.4% of cargo tonnage handled at SMF in FY A-78

167 Table 21 CARRIER SHARES OF TOTAL CARGO TONNAGE Sacramento International Airport (Fiscal Years ended June 30) Carrier Type Carrier Cargo Share Cargo Share Cargo Share Cargo Share Total 71, % 75, % 76, % 79, % All-Cargo 46, % 57, % 62, % 72, % FedEx 32, , , , West Air Industries 2, , , , UPS 8, DHL 2, , All Other Passenger 24, % 17, % 13, % 7, % Southwest 5, , , , Hawaiian , , US Airways (a) 2, , , , American (b) 3, , Continental Delta 3, , , Alaska United 6, , , All Other 1, , Note: Sum of enplaned and deplaned freight and mail. (a) Includes America West for all years shown. (b) Includes TWA. Source: Sacramento County Airport System. Table 22 shows the carrier shares of total cargo tonnage at Mather Airport for FY 1997, FY 2002, FY 2006, and FY In FY 2007, UPS accounted for almost twothirds of Mather s cargo tonnage, while the remaining cargo was handled by DHL/Airborne. A-79

168 Table 22 CARRIER SHARES OF TOTAL CARGO TONNAGE Mather Airport (Fiscal Years ended June 30) Carrier Cargo Share Cargo Share Cargo Share Cargo Share Total 38, % 77, % 64, % 77, % UPS , , , DHL/Airborne 9, , , , Emery 23, , Kitty Hawk - - 8, Polar Air - - 3, Zantop 5, Other Carriers , Note: Sum of enplaned and deplaned freight and mail. Source: Sacramento County Airport System. LANDED WEIGHT In FY 2007, 7.7 billion pounds of aircraft landed weight were reported by airlines operating at Sacramento International and Mather Airports. Passenger carriers accounted for 88% (6.3 billion pounds) of the total; all-cargo carriers accounted for the remainder (see Table 23). From FY 2003 to FY 2007, landed weight increased at 4.7% per year on average. Landed weight reported by passenger carriers increased 4.5% per year, while allcargo airline landed weight increased 5.9% per year. We forecast total aircraft landed weight to increase from 7.7 billion pounds in FY 2007 to 9.4 billion pounds in FY 2016, representing an increase averaging 2.3% per year. Passenger carrier landed weight is forecast to increase 2.4% per year through FY 2016, compared to forecast enplanement increases averaging 2.8% per year over the same period. All-cargo carrier landed weight is forecast to increase a more moderate 1.3% per year. We project passenger carrier landed weight to decline 1.5% in FY 2008, coincident with the expected FY 2008 capacity pullbacks described earlier. We then forecast passenger carrier landed weight to be flat in FY 2009, increase gradually in FY 2010, and FY 2011 (by 1.8% and 3.0% respectively), and then to rebound in FY 2012, growing at 3.5% per year, on average, through FY A-80

169 Table 23 FORECAST OF FLIGHT DEPARTURES AND LANDED WEIGHT Sacramento International and Mather Airports (Fiscal Years ended June 30; landed weight in millions of pounds) Flight Departures Landed Weight Fiscal Passenger All-Cargo Total All Passenger All-Cargo Total All Year Carriers Carriers (a) Carriers Carriers Carriers (a) Carriers ,624 9,828 60,452 5, , ,447 9,716 61,163 5, , ,094 9,015 62,109 6, , ,176 8,354 63,530 6, , A 57,675 8,825 66,500 6, , F 62,600 9,240 71,840 6,717 1,048 7, ,800 9,265 71,065 6,688 1,051 7, ,400 9,290 71,690 6,811 1,054 7, ,700 9,315 73,015 7,012 1,057 8, ,300 9,340 74,640 7,248 1,060 8, ,000 9,365 76,365 7,499 1,062 8, ,800 9,390 78,190 7,764 1,065 8, ,600 9,415 80,015 8,033 1,068 9, ,500 9,440 81,940 8,316 1,071 9,387 Average Annual Growth Historical: % -2.7% 2.4% 4.5% 5.9% 4.7% Forecast: % 1.1% 2.3% 1.5% 2.2% 1.6% Note: Excludes all GA activity ("training"); A=Actual; F=Forecast. (a) Includes all-cargo activity at Mather. Sources: Historical--Sacramento County Airport System; Forecast--Jacobs Consultancy. A-81

170 FRAMEWORK FOR AIRPORT SYSTEM FINANCIAL OPERATIONS The County accounts for the financial operations of the Airport System as a selfsufficient enterprise. Audited financial statements for the Airport System are prepared according to generally accepted accounting principles for governmental entities. The forecast period for the Additional Bonds Test in the Indenture is five full Fiscal Years following issuance of the Additional Obligations, or each of the next two full Fiscal Years from the issuance of Additional Obligations during which there is no Capitalized Interest, whichever is later. The Terminal Modernization Program is expected to be completed in FY Therefore, the forecast period for this Report extends through FY Compliance with the Additional Bonds Test is not required for the 2008 Bonds and 2008 Subordinate bonds. Master Indenture of Trust The 2008 Bonds constitute Senior Obligations and are being issued pursuant to a new Master Indenture of Trust, dated as of May 1, 2008, between the County and The Bank of New York Trust Company, N.A., as Trustee, as supplemented. As defined in the Indenture, Senior Obligations are special, limited obligations of the County payable solely from the Trust Estate with Net Revenues (Revenues less Operating Expenses) of the Airport System being the primary source. The general fund of the County is not pledged to the payment of the 2008 Bonds. The 2008 Subordinate Bonds constitute Subordinate Obligations pursuant to the Indenture, secured by the Trust Estate and payable from Net Revenues on a priority subordinate to the Senior Obligations. Principal and interest on the 2008 Subordinate Bonds is additionally payable from certain PFC Revenues, pursuant to PFC applications #4, #5, and #6 that were approved by the FAA. Certain amounts of PFCs from these applications are irrevocably committed until FY 2016 in the Second Supplemental Indenture related to the 2008 Subordinate Bonds.. Revenues are generally defined as all income, receipts, earnings and revenues received by or accrued to the County from the ownership or operation of the Airport System, as determined in accordance with generally accepted accounting principles, excluding, except to the extent deposited in the Revenue Fund, (1) Passenger Facility Charges, (2) Customer Facility Charges (CFCs),* (3) gifts, grants and other funds which are restricted by their terms to purposes inconsistent with the payment of Operating Expenses or payment of Obligations, (4) any gain from the sale, exchange or other disposition of capital assets of the Airport System, (5) Special Facility Revenue, and (6) certain insurance proceeds. For purposes of meeting any *Customer facility charges are paid by rental car customers. The County currently does not charge a CFC. A-82

171 of the tests prescribed by the Indenture, any transfers from the Capital Improvement Fund to the Revenue Fund shall be deemed to be Revenues. As discussed below, the financial forecasts do not include any transfers from the Capital Improvement Fund to the Revenue Fund except for a final settlement of FY 2007 and FY 2008 airline payments in FY Operating Expenses of the Airport System are generally defined as the reasonable and necessary costs and expenses of operating, maintaining and administering the Airport System, determined in accordance with Generally Accepted Accounting Principles, excluding (a) amortization of intangibles or other bookkeeping entries of a similar nature; (b) amortization and depreciation of Airport System facilities and assets; (c) charges for the payment of principal, Redemption Price, Purchase Price, interest or other payments on any Obligations; (d) any items chargeable to a capital account; (e) any loss from the sale, exchange or other disposition of capital assets of the Airport System; (f) any unrealized losses on securities held for investment by or on behalf of the County; (g) any losses resulting from changes in valuation of any Swap; (h) any unrealized losses from the write-down, reappraisal or revaluation of assets including investments for other than temporary declines in book value; (i) any extraordinary losses; (k) any loss resulting from extinguishment of indebtedness; and (l) the costs and expenses of operating, maintaining and administering any Special Facility. Under the definition of Aggregate Adjusted Annual Debt Service (used in the Additional Bonds Test), principal and interest to be paid from Available Revenues or moneys other than Revenues, including any investment earnings, that have been irrevocably committed pursuant to a Supplemental Indenture are disregarded and not included in the calculation. Available Revenues consist of Available CFC Revenues, Available Grant Revenues, and Available PFC Revenues. The County has irrevocably committed certain amount of Available PFC Revenues set forth in the Second Supplemental Indenture, which applies to the debt service on the Subordinate Obligations (2008 Subordinate Bonds) issued to refund certain existing bonds originally issued to fund PFC projects approved by the FAA. The County intends to specify further Available PFC Revenues for future Airport System Subordinate Obligations to fund eligible TMP costs, subject to future FAA approval, including potentially at a PFC level above the current $4.50 charge. In addition, the County intends to designate LOI grants as Available Grant Revenues if and when the LOI is approved by the FAA. For the purposes of this Report, the forecast of Available PFC Revenues and Available Grant Revenues that the County expects to irrevocably commit for a certain period in Supplemental Indentures relating to future series of Subordinate Obligations, are excluded from the calculation of Aggregate Adjusted Annual Debt Service when establishing compliance with the Additional Bonds Test. The County has established an Available PFC Account as a repository for certain committed PFC revenues. In the Second Supplemental Indenture, the County intends to irrevocably commit, to the extent received, specific amounts of PFC A-83

172 Revenues in each of FY 2008 through FY 2016 to the payment of principal and/or interest due on the 2008 Subordinate Bonds. The committed PFC Revenues are to be transferred by the County from the Available PFC Account to the Subordinate Debt Service Fund. The Indenture also prescribes the application of Revenues to the funds and accounts established under the Indenture, as described in the later section Application of Airport System Revenues. Rate Covenant In Section 6.04 of the Indenture (referred to as the Rate Covenant), the County covenants to establish, fix, prescribe and collect rates, tolls, fees, rentals and charges so that Net Revenues in each Fiscal Year will be at least equal to the amount necessary in that Fiscal Year (a) to pay Accrued Debt Service on all Outstanding Senior Obligations, (b) to make required deposits to any Debt Service Reserve Fund under the Master Indenture or any Supplemental Indenture, (c) to pay any rebate required for Senior Obligations, (d) to pay Accrued Debt Service on all Outstanding Subordinate Obligations, (e) to make required deposits to any Subordinate Debt Service Reserve Fund, (f) to pay any rebate required for Subordinate Obligations, and (g) to make deposits to the Operating Reserve Account to meet the Operating Reserve Requirement, (h) to pay debt service on Junior Subordinate Obligations, and (i) to pay any rebate required for Junior Subordinate Obligations. A-84

173 Net Revenues for such Fiscal Year plus any Transfer* will be equal to at least 125% of Accrued Debt Service on all Outstanding Senior Obligations for such Fiscal Year and at least 110% of Accrued Debt Service on all Outstanding Senior Obligations and Subordinate Obligations for such Fiscal Year and at least 100% of Accrued Debt Service on all Outstanding Senior Obligations, Subordinate Obligations, and Junior Subordinate Obligations for such Fiscal Year. Airline Agreements and Rate Ordinance The passenger and cargo airlines operating at SMF and Mather Airport operate pursuant to the Scheduled Airline Operating Agreement and Terminal Building Lease (Airline Lease) which became effective July 1, 2000, expired June 30, 2006, and has been continued in month-to-month holdover status since July 1, The County has worked over the past several years to reach a negotiated agreement with the airlines serving the airports but has been unable to reach an agreement that meets the needs and best interests of the County with regard to, among other matters, the scope and cost of the TMP, airline rentals and fees required to ensure full recovery of Airport System capital and operating costs, the maintenance of adequate reserves, and the appropriate division of financial risk between the airlines and the County. The negotiations were aimed at continuing to calculate airline rentals and fees using an Airport System residual rate methodology. As a result, the County intends to terminate the existing month-to-month Airline Lease effective May 1, Upon termination of the Airline Lease, the provisions of Chapter of County Code will govern the assignment of space and associated rentals and fees for the Airport System (the Rate Ordinance). The airline rates that *For purposes of the Rate Covenant, the amount of any Transfer taken into account shall not exceed 25% of the Accrued Debt Service on the Outstanding Senior Obligations or 10% of the Accrued Debt Service on the Outstanding Senior Obligations and Subordinate Obligations for such Fiscal Year. A Transfer is defined to mean (a) the amount in the Capital Improvement Fund on the last Business Day of such Fiscal Year plus (b) any amounts withdrawn from the Capital Improvement Fund during such Fiscal Year to pay Operating Expenses and to make any required payments or deposits to pay or secure the payment of Obligations less (c) any amounts credited to the Capital Improvement Fund from the Revenue Fund during such Fiscal Year. TheIndenturealsoallowsphysical transfersofamountsfromthecapitalimprovementfundtotherevenuefundand anyotheramountsdepositedtotherevenuefundtobeincludedinrevenues; however,thefinancialforecastdoesnotincludeanysuchdepositsexceptforthe finalairlinesettlementinfy2009. A-85

174 will be set pursuant to the ordinance for May and June 2008, are the same as those under the Airline Lease with one exception. The methodology contained in both the Airline Lease and in the Rate Ordinance requires that the airlines pay 125% of actual principal and interest on outstanding bonds. However, while the Airline Lease credits the 25% debt service coverage to the airlines in the subsequent year, the new rates pursuant to Chapter do not resulting in a higher landing fee rate. County staff expects to return to the County Board of Supervisors in May 2008 with a proposed amendment to the Rate Ordinance that will replace the current residual rate methodology with a compensatory methodology to become effective July 1, The U.S. Department of Transportation s Policy Regarding the Establishment of Airport Rates and Charges (the Policy) establishes the guidelines that airports must follow in determining which costs can be included in the airline rate base if a rate methodology is unilaterally employed by an airport. The County believes that the methodology utilized in the Rate Ordinance for the establishment of compensatory rates is reasonable and consistent with federal law and applicable FAA regulations. However, there can be no assurances that one or more airlines will not challenge the compensatory rates established by the County or, if such a challenge were to be brought, that it would not be successful. A successful challenge to the compensatory rates could limit the ability of the county to charge rates assumed and could have a material adverse impact on the financial condition of the Airport System. Under the new compensatory methodology, the County will retain all non-airline revenues, net of expenses and debt service associated with non-airline cost centers. As a result, compensatory rates are forecast to be higher and produce more airline revenues than residual rates through the pre-dbo period. After DBO, compensatory rates are expected to produce airline revenues similar to residual rates. However, the airlines would no longer be required to pay landing fee rates to ensure that total Revenues are sufficient to meet the requirements of the Rate Covenant. Upon termination of the Airline Lease, the County is required to conduct a final settlement of airline rentals and fees actually collected during the final year of the Airline Lease compared with the requirement based on actual costs and revenues. Any calculated excess collection will be credited to the respective airline s account, while any calculated deficiency will be billed as a one-time charge. The final settlement cannot be calculated until actual results for FY 2008 are known, but SCAS staff expects there will be a one-time credit at the end of FY 2009, which is reflected in the financial forecasts. The new Rate Ordinance is expected to provide a basis for calculating, charging, and collecting airline Landing Fees, Terminal Building rents, Aircraft Parking Fees, Loading Bridge Use Fees, and other fees. The County has established multiple cost centers to track revenues and expenses that are used in the calculation of airline and nonairline rates and charges. The A-86

175 County accounts for all operating revenues, and for direct operating expenses, on the basis of these cost centers. In addition, the County incurs certain expenses, which are allocated to the cost centers based on the estimated usage by cost center. The County uses a time tracking system for personnel expenses and direct labor to facilitate this allocation. The new Rate Ordinance is expected to establish the following direct Airport System Cost Centers to be used in the calculation of airline rates and charges: Airfield Area The airfield at SMF, including runways, taxiways, approach and runway protection zones, safety areas, infield areas, landing and navigational aids, service roads, fencing, buffer areas, and land areas at the Airport required by or related to aircraft operations (landings, takeoffs, and taxiing). Terminal Building The passenger terminal buildings, associated concourses, associated curbside entrance areas, and adjoining landscaped areas, together with the future Automated People Mover at SMF. Apron Area Areas at SMF dedicated to parking, servicing, and ground handling of aircraft at the passenger terminal buildings. Cargo Apron Areas at SMF dedicated to parking of cargo aircrafts. Loading Bridges Loading bridges serving aircraft at the Terminal Building, which are all owned by the County. Parking The public vehicle parking garage, surface lots (daily and economy), and other automobile parking areas; employee parking lots; a taxicab service area; and associated access ramps at SMF. Rental Car Rental car service facilities, ready/return areas, and storage facilities at SMF, including the shuttle operations. Other Buildings and Areas All other facilities that are not included in the other direct cost centers at SMF, including air cargo buildings and aprons, areas occupied by the FAA, the fuel storage facility, the remote central receiving facility, and general aviation hangars, buildings, and aprons. Reliever Airports Mather Airport and Executive Airport, both of which have been designated reliever airports for SMF under the FAA s National Plan of Integrated Airport Systems (NPIAS). Franklin Field The general aviation airport owned by the County. The County allocates certain indirect maintenance and operation expenses to the cost centers, including County administration, aircraft rescue and fire fighting (ARFF), facilities maintenance, County Sheriff law enforcement, security, emergency A-87

176 services, public roadways, and airport operations on the basis of direct labor costing systems and other metrics based on use. Under the new Rate Ordinance, the County intends to calculate landing fee rates according to a cost center residual methodology to recover all Airfield Area costs at SMF and the Reliever Airport deficits net of Airfield revenues generated from users other than the scheduled passenger and cargo airlines. The Airfield Requirement consists of allocable: 1. Total direct and indirect Operating Expenses 2. Equipment and capital outlays 3. Accrued Debt Service and the associated coverage requirement 4. Direct and indirect annual amortization of any Capital Improvements placed in service by the County prior to the beginning of the adjustment year that were financed by the County from its own resources. The annual amortization is computed net of amounts funded with the proceeds of Bonds, PFCs, and grants-in-aid and is based on the economic life for the capital item at an interest rate equal to the average Bond Buyer Revenue Bond Index. 5. Required Airport System Bond Fund deposits, including the debt service reserve funds and Operating Reserve Requirement 6. Assessments, judgments, or charges (net of insurance proceeds) to become payable by the County 7. The deficit of the Reliever Airports after taking into account allocable revenues, operating expenses, debt service and coverage. The Airfield Requirement will then be credited with Airfield revenues other than scheduled passenger and cargo airline landing fee revenues at SMF and scheduled cargo airline landing fees at Mather Airport to yield a Net Airfield Requirement. The Net Airfield Requirement will be divided by the landed weight of the scheduled passenger and cargo airlines of the Airport System to determine the landing fee rate. Airline space rental rates in Terminals A and B are expected to be established under a commercial compensatory ratemaking methodology where rental rates will be calculated to recover the average cost of each square foot of Rentable Space in the Terminal Building cost center. (Rentable Space is the total amount of space, in square feet, available for rent in the Terminal Building, including to airlines, concessions, and other rent-paying tenants.) The Terminal Building Requirement is expected to be computed by summing the same costs identified above for the Airfield Requirement (excluding the Reliever Airports), but allocable to the Terminal Building. From this amount, the rentals from unenclosed airline space and A-88

177 operating grants from the federal government are deducted to yield a Net Terminal Building Requirement. An average rental rate will be calculated by dividing the Net Terminal Building Requirement by the total Rentable Space. The County intends to allow the airlines to use designated areas in the Terminal Building on an exclusive, preferential, common, or joint use basis under 30-day space permits as follows: 1. Exclusive use space a) Ticket counters b) Offices c) Outbound baggage d) Baggage service offices e) Unenclosed 2. Preferential use space a) Holdrooms 3. Common use space a) Holdrooms 4. Joint use space a) Baggage claim b) Inbound baggage c) Passenger security screening Rents for exclusive and preferential use space will be assessed on the basis of the amount of space assigned. Rents for all Joint Use Space in the Terminal Building will continue to be prorated among all airlines based on enplaned passengers. A common use gate fee will be assessed for airlines using County gates and facilities on a per turn basis. Aircraft Parking Fees and Loading Bridge Fees will be calculated according to a compensatory methodology where the allocable costs will be divided by the total number of parking positions and loading bridges, respectively, to yield the rate per position and per bridge per year. For the purposes of this Report, it was assumed that the new Rate Ordinance will be in effect from FY 2009 through FY A-89

178 FUTURE AIRPORT SYSTEM CAPITAL IMPROVEMENTS The County has developed a preliminary rolling multi-year capital improvement program (CIP) for the Airport for FY 2009-FY 2013 that totals approximately $1.4 billion as summarized in Table 24. The Terminal Modernization Program (TMP) represents the largest project in the CIP with an estimated cost of $1.27 billion. The CIP represents to the County s best knowledge and belief at this time, all of the significant capital improvements expected to be undertaken through FY Cost estimates were provided by the County and its consultants and include allowances for design, construction management, contingencies, and escalation. The forecast period extends to FY 2016 and the County believes an allowance of $20 million per year in County Airport System funding (from the Capital Improvement Fund) is an adequate estimate for future expenditures in FY 2014 through FY Table 24 also shows expected sources of funding for the CIP, which are preliminary. The County intends to fund the costs of the CIP through a combination of internally generated cash flow, PFCs, Airport Improvement Program (AIP) grants-in-aid, State grants, Transportation Security Administration (TSA) funding, other funding sources, and Bonds (PFC-backed and non-pfc-backed) issued under the Indenture. The County reassesses its capital needs at least annually and will modify the CIP as necessary to accommodate traffic activity, security needs, and other factors, which could result in increases or decreases to the CIP, or extend the timing to complete certain projects. Terminal Modernization Program The primary project in the CIP is the TMP, which accounts for $1.27 billion or 92% of the total CIP. As shown in Exhibit A, the County intends to fund the TMP with a portion of the 2008 Bonds, future Senior Obligations, future Subordinate Obligations backed by PFCs and AIP grants, pay-as-you-go PFC revenues, AIP grants, TSA grants, internally generated funds (from the Capital Improvement Fund), and other funds for the hotel. The AIP grants are expected to come from a Letter of Intent (LOI) grant from the FAA for the airfield projects of the TMP, including the crossfield taxiway, new aircraft parking apron, RON pad, and associated utility and drainage improvements. A-90

179 Table 24 SUMMARY OF FY CAPITAL IMPROVEMENT PROGRAM Sacramento County Airport System (in thousands) AIP Bonds Project Entitlement LOI Other Disc. State GARB PFC PFC PAYG SCAS Other Total SMF Terminal Modernization Program Terminal Facilities - Airside $ 2,097 $ 77,375 $ - $ - $ 260,587 $ 62,128 $ 20,883 $ - $ 6,000 $ 429,070 Terminal Facilities - Landside , ,662 80,000-51, ,241 Special Systems ,794 47, ,004 Enable Projects , ,779 Ancillary Projects , , ,427 TMP Total $ 2,097 $ 77,375 $ - $ - $ 512,271 $ 370,000 $ 100,883 $ 150,000 $ 57,895 $ 1,270,521 Ongoing 2008 Projects ,000-7,000 Airfield , ,453-26,175 Loading Bridges Other Buildings and Areas ,183-28,183 Parking and Roadway ,704-8,704 Terminal ,090-2,090 SMF Total $ 2,097 $ 77,375 $ 11,722 $ - $ 512,271 $ 370,000 $ 100,883 $ 211,131 $ 57,895 $ 1,343,374 OTHER AIRPORTS Executive Airport - - 4, ,374 Franklin Field - - 1, ,028 Mather Airport , ,096-26,280 SCAS Total $ 2,097 $ 77,375 $ 30,987 $ 304 $ 512,271 $ 370,000 $ 100,883 $ 224,244 $ 57,895 $ 1,376,056 TMP 2,097 77, , , , ,000 57,895 1,270,521 Non-TMP , , ,535 Sources: --TMP Design Team for the Terminal Modernization Program, Sacramento County Airport System for all other projects. A-91

180 The TMP has been under consideration by SCAS since it was recommended in the 2004 Airport Master Plan. In the Airport Master Plan, SCAS concluded that it would be necessary to expand SMF s passenger terminal facilities to accommodate forecast growth in commercial passenger activity. The future facility needs that were identified through the Master Plan went through a programming effort as described in the TMP Project Definition Manual. Through the programming effort, a facility program was identified that represented the target building size required for the terminal facilities to accommodate the projected demand. Concurrently, the existing facilities were evaluated based on size, operational capacity, functionality, and the possibility of modernizing them to meet current industry standards and passenger level-ofservice standards. It was determined that Terminal A would remain a viable facility, but Terminal B could not reasonably or cost effectively be modified to meet future demand. The Sacramento International Airport Terminal Modernization Project Environmental Assessment (EA) was completed in February The EA analyzed the environmental impacts of the TMP and several alternatives. Based on the findings of the EA, the FAA is expected to issue a Finding of No Significant Impact (FONSI) for the proposed project in mid-april In addition, all Airport System development is subject to the requirements for environmental studies and appropriate clearances under the California Environmental Quality Act (CEQA). On July 17, 2007, the County Board of Supervisors tentatively certified the Final EIR as adequate and complete; referred to staff for preparation of Findings of Fact and Statement of Overriding Considerations to return to the Board for final approval. On August 7, 2007, the County Board of Supervisors adopted the Findings of Fact and Statement of Overriding Considerations, approved the Sacramento International Airport Master Plan, adopted the Mitigation Monitoring and Reporting Program, and certified the Environmental Impact Report (EIR). The TMP is included on the existing approved Airport Layout Plan that was approved by the FAA on plans dated October 4, As shown on Figure 17, one of the major elements of the TMP is a new landside Central Terminal B to replace the landside facilities in the existing Terminal B which was originally constructed in the mid-1960s. The Central Terminal B will be connected via an automated people mover to the 19-gate airside Concourse B. Central Terminal B will be served by a dual level roadway system and a new automobile parking garage. A hotel with approximately 150 to 185 rooms is planned to be constructed as part of Central Terminal B. The TMP also includes construction of a centralized receiving warehouse, landscaping, and demolition of existing facilities. A-92

181 Figure 17 TERMINAL MODERNIZATION PROGRAM Sacramento International Airport Source: Corgan Associates, Inc. (TMP Design Consultant for SCAS). The primary elements of the TMP include: New cross-field taxiway for east west aircraft movement New apron paving with dual taxi lane access to 19 gates Central landside terminal with approximately 406,000 square feet developed on three above ground levels with a basement, including the facility s central utility plant Airside gate facility on two levels with 19 narrow-body gates and approximately 316,000 enclosed square feet Automated People Mover (APM) shuttle linking the terminal and concourse A-93

182 Airline baggage make-up located in the terminal basement with an inline Explosive Detection System (EDS) baggage screening and tug/tunnel operation to the aircraft Two-level roadway system providing access to the east and west sides of the terminal New 5,535 stall parking garage with pedestrian bridges linking to the terminal Economy surface parking lot with 3,600 parking spaces Remote central receiving facility In-terminal hotel to replace the existing Airport Host Hotel* Modifications to Terminal A to accommodate additional airline tenants and additional gates Table 25 shows the current and expected assignment of airlines by terminal and the number of gates. The County anticipates certain airlines will relocate from Terminal A to new Terminal B after the TMP is complete as shown. The TMP is planned to replace the 14 gates at Terminal B and the IIAB and with 19 contact gates, and to modify Terminal A to provide 2 additional gates, for a total of 34 gates in the initial build-out. All 27 existing contact gates can accommodate B737/A320 aircraft, 3 can accommodate B757 aircraft, and 2 can accommodate widebody aircraft. New Concourse B is planned to accommodate 5 widebody aircraft. *It is assumed that the cost of the hotel would be financed through non-scas funds and neither the revenues nor the expenses (operating and debt service) would be an obligation of the County Airport System. In the event that the County is unable to identify such other sources for the funding of the costs of the hotel, the County may elect to not proceed with the construction of the hotel component of the TMP. The construction contract which includes the hotel permits the County to remove the hotel component of the contract. A-94

183 Table 25 Airline Terminal Locations and Terminal Gates Sacramento International Airport AIRLINES Terminal A Terminal B Current Facilities TMP 2012 Air Canada Delta Hawaiian Southwest US Airways Alaska/Horizon Aloha American Continental ExpressJet JetBlue Mexicana (departures) Northwest United/United Express Alaska/Horizon American Continental ExpressJet JetBlue United/United Express Air Canada Delta Frontier Hawaiian Mexicana Northwest Southwest US Airways GATES Terminal A Terminal B IAB 1 -- Total Source: Sacramento County Airport System. The County has identified two discrete phases and associated dates of beneficial occupancy (DBOs) for the TMP. Phase one is expected to open in late 2011 with the completion of the new terminal facilities, associated roadways, and airfield improvements (midway through FY 2012), and phase two, the parking garage, is scheduled to open in March 2014 (in the third quarter of FY 2014). Of all the alternatives studied for terminal expansion, the TMP concept provides the greatest passenger level of service, requires the least amount of phasing and passenger disruption, requires the shortest construction duration, and can be constructed for the lowest initial cost accounting for escalation. In addition, the TMP concept provides the best potential for incremental future terminal expansion. The landside terminal is expandable to accommodate ticketing and baggage claim as gates are added and future growth can be accommodated by converting Terminal A into an airside-only facility linked by an additional APM. Upon completion of the initial phase of the TMP, the design team estimates that SMF will have sufficient facilities to support a design capacity of 12 million annual A-95

184 passengers (enplaning and deplaning) and a stress capacity of 14 to 16 million annual passengers. The design team is composed of over twenty different firms specializing in architecture, structural, mechanical, electrical, civil, and other similar engineering disciplines. SCAS has engaged the services of Corgan Associates, Inc. (Design Consultant) in association with Fentress Architects to be the Architect/Engineer of Record and to prepare drawings and specifications for the TMP. Project costs and the phasing of these costs were estimated by the TMP design team. Project cost estimates include allowances for engineering fees, design fees, design and construction administration costs, other soft costs, contingencies (to cover unknown conditions), and escalation for inflation. Costs for the TMP were estimated after a well-defined level of architectural and engineering layouts, systems, and outline specifications had been developed. The costs are based on the 30% design drawing level. An estimated project schedule and detailed phasing plans were developed to ensure that sufficient time was allotted for all of the construction activities and a mid-point of construction could be defined. An independent cost estimator was employed by Carter + Burgess, the program manager, as a double check to insure the judgment of the estimate. Upon completion of both estimates, a reconciliation process was completed. This effort involved analyzing quantities and unit prices, checking assumptions and then a dialogue between the estimators and design team to reach a consensus of the intent and final cost. Upon agreement, the estimates were reconciled to establish the current budget. The cost of construction is based on estimated direct cost as of November 2007 and includes an average of 20% to 22% contractor overhead and profit. Due to the unknown escalation of material and labor cost, a 7% escalation factor has been applied to the mid-point of construction of each component. TMP construction costs are estimated to be $989.6 million, soft costs $194.5 million, and the program-wide contingency allowance approximately $86 million, which equates to approximately 8% of construction costs. The various components of the TMP will be procured utilizing design-build, and design-bid-build delivery methods or owner procured contracts. These methods will allow SCAS the ability to fast-track the more complex terminal and airside construction, reducing cost and schedule, while providing the more traditional contracting method for the smaller ancillary facilities. Potential bidders have been pre-qualified. There were bid separately design-build contracts for each of the landside and airside components. The design-bid-build contracts will include Terminal A modifications, temporary project management office, remote central receiving facility, public safety building, remote public parking, and the parking garage. The owner procured contracts will include the APM, baggage handling system, vertical circulation systems, and jet bridges. The County expects to award the first design-build contract in May A-96

185 The Design Consultant will design the TMP facilities and issue drawings and specifications on a fast track multi-package basis. Once the design-build contractor(s) (DBCs) are selected, they will coordinate with the Integrated Program Management Group and the Design Consultant to perform detailed constructability, value engineering, design reviews on all drawing and specification packages, and prepare the delegated design components as required. The DBCs will then construct the authorized package assuming full responsibility to coordinate each package with all previous and subsequent packages of work under the DBCs. The design team will be responsible for completing, sealing, and signing the design documents. The DBCs will be responsible for completing all submittal, shop drawings, and coordination drawings necessary to construct the work. Balance of FY 2009 FY 2013 CIP In addition to the TMP project elements, the County Airport System s CIP includes approximately $105 million in additional projects for the Airport System airports, including SMF, Executive Airport, Franklin Field, and Mather Airport. The County intends to undertake the remainder of the future CIP projects as warranted by demand considerations and to the extent the County believes the projects are financially viable. The County expects to finance these CIP projects primarily with AIP grants and internally generated funds. The County does not expect to fund any of these projects with Bonds or other Obligations. Many of the projects eligible for federal grants will only be undertaken if federal funds are received. The costs and potential revenues related to all future capital improvements, including TMP, are reflected in the accompanying financial forecasts. A-97

186 OUTSTANDING BONDS Table 27 presents the amount of principal outstanding on the Airport System Revenue Bonds as of May 1, Table 27 OUTSTANDING AIRPORT SYSTEM REVENUE BONDS Outstanding Airport System Revenue Bonds Outstanding principal Final maturity date Series 1992B $ 6,290,000 July 1, 2024 Series 1998A 37,795,000 July 1, 2026 Series 2002A 68,400,000 July 1, 2032 Series 2002B 13,125,000 July 1, 2020 Series 2006A* 34,655,000 July 1, 2024 $160,265,000 These Bonds will be refunded with the 2008 Bonds. Table 28 presents the amount of principal outstanding on the PFC and Subordinated Bonds and PFC-eligible Airport System Revenue Bonds as of May 1, Table 28 OUTSTANDING AIRPORT SYSTEM PFC AND SUBORDINATE BONDS Outstanding Airport System PFC and Subordinate Bonds Outstanding principal Final maturity date Series 1996C $ 3,525,000 July 1, 2010 Series 1998B 44,230,000 July 1, 2026 Series 2006A* 41,670,000 July 1, 2024 $89,425,000 *The PFC-eligible portion of the 2006A Bonds will be refunded with the 2008 Subordinate Bonds. A-98

187 The 1998B Bonds and the PFC eligible portion of the 2006A Bonds will be refunded with the 2008 Subordinate Bonds. The 1996C PFC subordinate bonds will be defeased with unspent cash balances in the Bond funds. PLAN OF FINANCE As shown in Exhibit A, the County intends to fund the TMP with a portion of the 2008 Bonds, future Senior Obligations, future Subordinate Obligations backed by PFCs and grants, pay-as-you-go PFC revenues, AIP grants, TSA grants, internally generated funds (from the Capital Improvement Fund), and other funds for the hotel. The funding plan was developed based on assumption that the PFC collection level will be increased from the existing $4.50 per eligible enplaned passenger to $6.00 as of July 1, A sensitivity analysis without a PFC level increase is provided in the section below entitled Sensitivity Analysis. The County has submitted an application for a Letter of Intent (LOI) to the FAA to fund certain costs of the airfield elements of the TMP. The FAA is expected to act on the LOI application by October It is assumed that the LOI will be distributed over 10 years in equal annual amounts and that the entitlement portion of the LOI will be eliminated if and when PFC level is increased to a level greater than $4.50 per enplaned passenger, and this foregone amount will be funded with PFC revenues on a pay-as-you-go basis. The County intends to issue Subordinate Obligations to provide interim financing for LOI-supported capital costs and to specify Available PFC Revenues to pay the associated interest expense, which is not eligible for AIP funding Bonds and 2008 Subordinate Bonds The estimated sources and uses of funds and the estimated debt service requirements related to the Series 2008 Bonds were provided by First Southwest Company, the County s Financial Advisor, on the basis of certain data and information provided by the County on the cost and timing of the TMP project elements. Proceeds of the 2008 Bonds will be used to (1) refund and defease all outstanding senior revenue bonds -- the 1992B Bonds, 1998A Bonds, 2002A Bonds, 2002B Bonds, and the non-pfc eligible portion of the 2006A Bonds, (2) pay a portion of the costs of the Terminal Modernization Program, (3) fund the Senior Debt Service Reserve Fund, (4) fund capitalized interest for a portion of the 2008 Bonds, (5) fund a portion of the swap termination payment, and (6) pay the costs of issuance of the 2008 Bonds. Proceeds of the 2008 Subordinate Bonds will be used to (1) refund and defease, together with other lawfully available moneys, all outstanding subordinate PFC A-99

188 revenue bonds the 1996C Bonds, * 1998B Bonds, and the PFC eligible portion of the 2006A Bonds, (2) fund the Subordinate Debt Service Reserve Fund, (3) fund a portion of the swap termination payment, and (4) pay the costs of issuance of the 2008 Subordinate Bonds. The forecast debt service requirements of the 2008 Bonds were prepared using the assumptions summarized in Table A Senior Non- AMT Table 29 ASSUMPTIONS FOR THE 2008 BONDS 2008C Senior Taxable 2008D Sub. Non- AMT 2008B Senior AMT 2008E Sub. AMT Par amount: $179,320,000 $352,695,000 $13,530,000 $47,710,000 $48,820,000 All-in TIC 5.61% 6.20% 4.15% 5.02% 5.75% Average annual debt service: $11,495,618 $24,280,311 $3,720,906 $4,271,872 $4,631,986 Source: First Southwest Company. Future Financing Exhibit A shows the sources of future financings for each of the future bond issues anticipated to finance the TMP. First Southwest Company provided the estimated sources and uses of funds and debt service requirements on the basis of certain data and information provided by the County and the TMP design team on the cost and timing of the TMP project elements. In addition to the 2008 Bonds, the County expects to issue Additional Senior Bonds and Additional Subordinate Bonds. The following table shows the approximate par amounts and timing of all TMP Bonds (including a portion of the 2008 Bonds) as estimated by First Southwest Company. *The 1996C PFC subordinate bonds will be defeased with unspent cash balances in the Bond funds. A-100

189 Table 30 TMP FINANCING (in millions) Senior Bonds Subordinate Bonds Total May 2008 $374.8 $-- $374.8 December July July Total $667.8 $477.7 $1,145.5 Source: First Southwest Company. The specific form, amount, and timing of debt to complete the financing of the TMP have not been determined at this time. Although the County is considering various financing options, including the issuance of variable rate bonds, fixed rate bonds, and commercial paper, First Southwest Company, the County s financial advisor, has assumed for financial modeling purposes that (1) all TMP Bonds would be fixed rate, (2) all Bonds will be amortized over a period of 30 years from expected project completion, except the LOI bonds, which have a term of 10 years consistent with the expected LOI term, (3) future non-amt Senior Bonds would have an all-in rate of 6.11%, (4) future AMT Senior Bonds would have all-in rates of 6.30% to 6.37%, (5) future non-amt Subordinate Bonds would have all-in rates of 4.12% to 5.92%, and (6) future AMT Subordinate Bonds would have all-in rates of 5.23% to 6.46%. In addition, it was assumed that all Debt Service Reserve Requirements would be bond funded. PASSENGER FACILITY CHARGE PROGRAM The County s PFC program is administered in accordance with applicable PFC regulations under Federal Aviation Regulations (FAR) Part 158. PFC Approvals PFCs are fees imposed on enplaned passengers by airport sponsors to generate revenues for eligible airport projects that increase capacity, enhance competition among and between air carriers, enhance safety or security, or mitigate noise impacts. PFCs were established by Title 49 U.S.C , which authorized airport sponsors to collect PFCs in the amount of $1.00, $2,00, or $3.00 per eligible enplaning originating and connecting passenger. The Aviation Investment and Reform Act (AIR-21) increased the maximum PFC airport sponsors could collect to $4.50 per enplaning passenger. In return for the right to assess PFCs up to $3.00, large and medium hub airports forego up to 50% of their AIP entitlement A-101

190 funds. Large and medium-hub airports (such as SMF) that collect a PFC of $4.00 or $4.50 forego 75% of their AIP entitlement funds. In January 1993, the County received approval from the FAA to impose a PFC of $3 per eligible enplaned passenger at SMF, and has imposed the PFC since April 1, Since 1993, the County has submitted various applications and received approval to use PFC revenues to fund SMF improvements, including approval to use PFC revenues to pay debt service on a portion of the bonds issued to finance Terminal A. The County started collecting its first PFCs in April 1993 for the existing terminal rehabilitation, airfield and apron pavement improvements, and certain other eligible projects. In December 1995, the FAA approved the County s second application (PFC #2) for further terminal rehabilitation, airfield improvements, and other eligible projects. In early 1996, the County submitted an application for PFC #3 to include the financing costs of projects in PFC #2. This application was subsequently withdrawn. The County received additional approvals in April 1996 for PFC #4 and PFC #5 to impose and use PFC revenues to pay construction and financing costs for certain projects related to Terminal A including roadway, apron, utility, flood control, and terminal improvements. In accordance with these approvals, the County financed the projects included in PFC #4 and #5 with proceeds of the Series 1996 C & D Subordinated Bonds (the Series 1996D Bonds were refunded in 1998 with proceeds of the Series 1998B Subordinated Bonds) and is now using PFC revenues to pay the associated debt service. In March 2000, the County received approval for PFC #6 to impose and use up to $115.7 million in PFC revenues to pay eligible construction and financing costs for the Terminal A project (completed in September 1998). The County had previously financed the Terminal A project with the proceeds of Series 1992 and 1996 Bonds (which were eventually refunded with proceeds of the Series 2002 and 2006 Revenue Bonds), and is now using PFC revenues to pay the debt service associated with the approved PFC amount. In late 2001, the County submitted PFC application #7 to fund $11.5 million project costs for terminal apron, international facilities, and other airfield projects at the $4.50 PFC level. Concurrent with submitting PFC Application #7, the County applied to begin collecting a $4.50 PFC based on the amount of PFCeligible costs in both PFC Application #7 and in prior PFC approvals that meet specific FAA requirements for a $4.50 PFC. The County received approval to collect a $4.50 PFC, and began collecting at the $4.50 level on February 1, As reflected in Table 31, the County has FAA approval in connection with six PFC applications to collect $285.6 million in PFC revenues for project and financing costs associated with the construction of various approved projects. A-102

191 The County has collected approximately $227 million in PFC revenues and interest through December 31, The County s PFC approvals are summarized as follows: Table 31 EXISTING PFC APPROVALS County of Sacramento, Department of Airports Approved PFC amounts ($millions) Pay-as-you- PFC and Subordinated Bonds go amount Bond proceeds Financing costs (a) Total Application #1 $ $ 25.5 Application # Application # Application # Application # Application # Application # $42.7 $104.1 $138.9 $285.6 (a) Includes bond interest, capitalized interest, debt service reserve fund deposits, and other costs of issuance. Proposed New Application #8 and Amendments The County will refund the 1998B PFC Bonds as well as the PFC eligible portion of the Series 2006 Bonds with the proceeds of the 2008 Subordinate Bonds. As a result, the County has initiated the process to amend PFC applications #1, 2, 4, 5, 6, and 7 to reflect the refunding as well as actual capital expenditures for pay-asyou-go projects, and to close out applications #1, 2, and 7. Concurrently, the County has initiated the process to seek FAA approval for PFC application #8 to impose and use PFC revenues on a pay-as-you-go and leverage basis in connection with the TMP, initially at the $4.50 PFC level. FAA approval is expected by October Should a higher PFC level be legislated by Congress and the Administration, the County intends to submit an application to increase the PFC level for the TMP elements. The House version of the proposed four-year FAA reauthorization provides for an increase in the PFC level to $7.00 while the Senate version has no increase. The Administration s proposal provided for an increase to $6.00. It is widely expected that the PFC level will increase, but the timing of the increase is uncertain. In the accompanying A-103

192 financial forecasts, it was assumed that the PFC level would increase to $6.00 and be implemented by the County with FAA approval effective July 1, In PFC application #8 (initially at the $4.50 level), the County is seeking approval to impose and use PFCs to pay debt service on Subordinate Obligations backed with Available PFC Revenues for the TMP, including the interim financing cost for the LOI, and for $110 million pay-as-you-go costs. Total impose and use authority is expected to increase to $876 million with collection authority that began in 1993 and is projected to expire in Existing PFC-use approval and expected approval from PFC application #8 are reflected in the financial forecasts presented in this Report. Under the Second Supplemental Indenture, the County has irrevocably committed to apply certain amounts of PFCs to pay debt service on the 2008 Subordinate Bonds related to existing PFC collection authority through FY The total irrevocable commitment of PFC Revenues expected to be made by the County under future supplemental indentures is based on the projected level of annual PFC collections and interest earnings thereon.. PFC Framework Under the Indenture, Revenues exclude PFC Revenues unless deposited in the Revenue Fund. Under the definition of Accrued Debt Service, principal and interest paid from Available PFC Revenues is disregarded and not included in the calculation (principally, the Rate Covenant calculation). Under the definition of Aggregate Adjusted Annual Debt Service, if Available PFC Revenues are irrevocably committed pursuant to a supplemental indenture, then the principal and interest to be paid from such amounts is disregarded and not included in the calculation (principally, the Additional Bonds Test calculation). The County has specified the amount of Available PFC Revenues in the Second Supplemental Indenture, which applies to the 2008 Subordinate Bonds under applications already approved by the FAA. The County intends to designate further Available PFC Revenues for future Subordinate Obligations, subject to FAA approval. Exhibit C presents historical and forecast PFC collections, interest earnings, and the application of PFCs to pay debt service and eligible project costs. A-104

193 DEBT SERVICE REQUIREMENTS 2008 Bonds Exhibit D shows historical and forecast Accrued Debt Service on the County s existing Senior bonds, the 2008 Bonds, and future Bonds to finance the TMP for FY 2005 through FY 2016, net of any actual or planned capitalized interest payments as provided by First Southwest Company. Accrued Debt Service for outstanding Senior Bonds is estimated to increase from $16.8 million in FY 2005 to $58.0 million in FY Subordinate Bonds Exhibit D also presents historical and forecast Accrued Debt Service on the County s existing subordinate and PFC bonds, the 2008 Subordinate Bonds, and future Subordinate Bonds for FY 2005 through FY The County s existing and expected designation of Available PFC Revenues and Available Grant Revenues are also reflected. Debt service requirements shown in Exhibit D are net of any actual or planned capitalized interest payments. Annual Debt Service, before offset by Available PFC Revenues and Available Grant Revenues, is estimated to increase from $4.0 million in FY 2005 to $43.7 million in FY OPERATING EXPENSES Exhibit E presents historical, budgeted, and forecast Operating Expenses of the Airport System by type of expense and by cost center for FY 2005 through FY Expenses for FY 2005 through FY 2007 were obtained from the County Airport System Comprehensive Annual Financial Report for FY 2007 and have been reconciled by the County to the audited financial statements. Estimated expenses for FY 2008 are based on unaudited actual expenses through December 31, 2007, and the County s estimates for FY Expenses for FY 2009 are based on the County s requested FY 2009 budget. Forecast Operating Expenses are based on actual data for FY 2005 through FY 2007; the estimated FY 2008 results; the FY 2009 requested budget; assumed increases in the unit costs of labor, services, utilities, and supplies as a result of price inflation; and additional costs associated with future capital projects. In particular, it was assumed that: The unit costs of labor and services will increase an average of approximately 5% per year to reflect the rate of inflation during the forecast period A-105

194 The unit costs of supplies and materials will increase an average of approximately 4% per year during the forecast period Incremental additional expenses for future capital projects include: $1.7 million annual expenses for shuttle service to the new economy parking lots starting January 1, 2009 $10.3 million annual expenses for new expanded Terminal B starting January 1, 2012 (the projected date of beneficial occupancy) Plus an additional $1.2 million per year expenses to operate the Automated People Mover Plus an additional $0.8 million per year expenses to operate the Terminal B Explosive Detection System (EDS) $0.5 million per year expenses to operate the Terminal A baggage makeup system starting July 1, 2012 $0.5 million per year expenses to operate the new Terminal B parking garage starting January 1, 2015 (the projected garage DBO) Up to $1.5 million per year in expenses for other miscellaneous projects, including landscaping, roadway, apron, loading bridges, and others at the time each project is expected to be complete As shown in Exhibit E, there are one-time extraordinary expenses that are considered operating expenses under GAAP, but will be capitalized for purposes of calculating airline rates and charges in FY The one-time operating expenses in FY 2009 total approximately $16.7 million for a wastewater connection installation fee and sewer construction. Operating Expenses are forecast to increase from $78.6 million in FY 2007 to $141.5 million in FY A-106

195 AIRPORT SYSTEM REVENUES Exhibit F presents historical and forecast Revenues by type of revenue and by cost center for FY 2005 through FY Data for FY 2005 through FY 2007 were obtained from the County Airport System Comprehensive Annual Financial Report for FY 2007 and have been reconciled by the County to the audited financial statements. Revenues estimated for FY 2008 were based on the County s unaudited financial records through December 31, 2007 and the County s estimates for FY Forecast FY 2009 Revenues were based on the County Airport System FY 2009 requested budget. Individual components of Revenues were forecast on the basis of actual financial results for FY 2005 through FY 2007, estimated results for FY 2008, the FY 2009 requested budget, allowances for inflation as appropriate, and the provisions of leases and agreements between the County and the various tenants and users of the Airports. Revenues from sources related to passenger and aircraft traffic, such as concession revenues, are forecast to increase as a function of forecast passenger traffic as described in the Airline Traffic Analysis section of this attachment. The assumptions underlying the increases in individual components of Revenues are described in the following sections. Airline Revenues In FY 2007, airline revenues represented 24.5% of Revenues of the Airport System. As noted earlier, effective July 1, 2008, airline terminal rentals will be determined in accordance with a commercial compensatory ratemaking approach and landing fees in accordance with a cost center residual methodology to recover all Airfield area costs (including Reliever Airport deficits) net of Airfield revenues generated from users other than the scheduled passenger and cargo airlines. The County intends to adopt the FY 2009 rates in May Exhibit F-1 shows the forecast calculation of airline terminal rental rates. As noted earlier, the new terminal and associated facilities (DBO #1) of the TMP are expected to open in late It was assumed that the new space and associated debt service and operating expenses would be in operation for six months of FY New Terminal B is being developed as a common use terminal where the County will own and operate all common use equipment related to handling flights and passengers. This equipment will include ticket check-in counters, baggage handling, flight, baggage and display systems, gate management equipment, passenger loading bridges, and pre-conditioned air and 400 hertz power systems. The County intends to establish airline equipment charges to recover its cost to maintain and operate this equipment and systems. A-107

196 Exhibit F-2 shows the forecast calculation of airline landing fee rates. The Airfield Requirement is reduced by nonairline Airfield revenues to yield the Net Airfield Requirement which is divided by scheduled passenger and cargo airline landed weight to determine the landing fee rate per thousand pound unit. Exhibit F-3 shows historical and forecast airline payments per enplaned passenger for SMF from FY 2005 through FY As shown, the cost per enplaned passenger is forecast to increase from $5.16 in FY 2007 to a high of $14.55 in FY In the case of SMF, the airline payments include the costs of equipment sometimes owned and operated by the airlines such as loading bridges and baggage systems.* The forecast airline payment per enplaned passenger is at the high end of costs forecast at other comparable medium-hub airports where major expansion and improvement projects have recently been completed or planned. In the final analysis, the reasonableness of airline rates and charges is a judgment that will be made by the individual airlines in deciding what level of service to provide in light of the demand in the Sacramento market. Nonairline Revenues Major sources of nonairline revenues include terminal building concessions, public automobile parking, automobile rentals, and other revenues, to a lesser extent. Forecasts of nonairline revenues are based on the provisions of existing agreements and allowances for inflation, forecast increases in enplaned passengers, and other factors. Table 32 shows various nonairline revenues (dollar amounts and amounts per enplaned passenger) for FY *Airline costs per enplaned passenger (CPE) is a standard, though imperfect, measure across airports of the landing fees and terminal rents paid by airlines, expressed in relation to enplaned passengers There is a wide range in CPE at individual airports primarily reflecting where each airport is in its development cycle, the ratemaking methodology employed, who financed the facilities (the airport or the airline), and traffic trends. While most public-use airport facilities have been financed by airport operators, the airlines have financed some exclusive use terminal facilities. To the extent these costs are financed directly by the airlines (usually through tax-exempt special facility bonds issued by the airport on behalf of the airline), they are not reflected in the airport s CPE. A-108

197 Table 32 NONAIRLINE REVENUES Sacramento County Airport System FY 2007 Per enplaned passenger Parking $46,289,886 $ 8.72 Rental car 12,362, Terminal concessions 5,752, Others 11,288, Interest income 5,661, Total nonairline revenues $81,355,354 $15.33 Source: Sacramento County Airport System. Nonairline Airfield Area Revenues. Nonairline Airfield revenues consist of commercial fees, and training flight and unscheduled airline landing fees. Terminal Building Concession Revenues. The primary sources of terminal building concession revenues are food and beverage concessions, merchandise concessions, and other terminal building concessions. Table 28 shows the total revenue and revenue per enplaned passenger for each category of terminal building concession for FY Table 33 TERMINAL BUILDING REVENUES, FY 2007 Sacramento International Airport Revenues to County Per enplaned passenger Percent of total Food and beverage $3,089,045 $ % Merchandise 1,582, Advertising 602, Telephones 271, Other 206, Total $5,752,605 $ % Source: Sacramento County Airport System. A-109

198 To spur concession sales, a street pricing policy is in place to keep both food and merchandise prices at SMF comparable to those at similar stores and restaurants in the Sacramento area. Food and Beverage Revenues. HMSHost has a nonexclusive concession privilege to provide food and beverage services in the terminal facilities, including in-terminal restaurants, cafeterias, snack bars, and cocktail bars. HMSHost operates a mix of branded-food outlets designed to increase food choices and spending by persons using SMF. The HMSHost agreement was extended in 2007, and is now scheduled to expire on July 31, 2014, and the County has two one-year options to extend the agreement. The agreement provides for payment to the County of percentages of gross sales or a minimum annual guarantee, whichever is greater. Space in Terminal A was designed to maximize concession services offered to airport customers while maximizing revenue to the Airport System. Terminal A includes approximately 13,000 square feet of space for food/beverage concepts that includes a food court with a wide range of food choices including Burger King, California Pizza Kitchen, Capitol Brewing Company, Cinnabon, La Salsa, Manchu Wok, Starbuck s Coffee, and TCBY Treats. Java City and Home Turf Bar are situated at other locations throughout the terminal. During FY 2007, gross sales for Terminal A food/beverage outlets were $15,041,529, providing $2,261,001 in concession revenues to the Airport System. Gross sales for Terminal B food/beverage outlets were $8,076,043, providing $973,541 in concession revenues to the Airport System. Food and beverage revenues received by the County are forecast to increase in connection with the assumed increase in per-passenger spending, the forecast increase in enplaned passengers, expected inflation at the prevailing percentages of gross revenues, and improved facility and terminal layout after completion of new Terminal B, from an estimated $3.1 million in FY 2007 to $4.8 million in FY Merchandise Revenues. The County has executed agreements with various concessionaires to provide retail, news, sundry, and gift services at SMF. The County s concession program for Terminal A and the existing terminals includes a mix of retail merchandise outlets and national brand-name concessionaires designed to increase passenger choices and spending. Terminal A includes approximately 15,000 square feet of space for retail, including a mall-like retail center that contains a PGA Tour golf shop, Nelson s Books and News, KidZoo, Details women s accessories, Capital Marketplace gifts and souvenirs, Hometown Favorites, InMotion, and Vino Volo, and the recent additions of Forever Silver by Erwin Pearl, butter LONDON, and Massage Bar. A-110

199 During FY 2007 gross sales for Terminal A retail shops were $8,797,178, providing $979,280 in concession revenues to the Airport System. During FY 2007, gross sales for Terminal B1 and B2 retail shops were $3,384,571, providing $412,233 in concession revenues to the Airport System. Merchandise revenues received by the County are forecast to increase in connection with the assumed increase in per-passenger spending, the forecast increases in enplaned passengers, inflation, and improved facilities and terminal layout after completion of new Terminal B. Other Concession Revenues. Other Terminal Building revenues include advertising, public telephones, and vending machines. The revenues from these concessions are forecast on the basis of recent trends in revenues per enplaned passenger and the terms of the various agreements. Public Automobile Parking Revenues. Public automobile parking is the largest source of revenue at the Airport, accounting for $46.3 million in FY 2007, equal to approximately 39.5% of Revenues. AMPCO AirPark (AMPCO) currently operates the public parking facilities at SMF under a parking management agreement executed in December 2005 that expires on December 31, AMPCO took over operations January 1, 2006 from APCOA/Standard Parking (APCOA), which had been the County s parking manager for many years. The County has the option to extend the AMPCO agreement for one additional five year term. Pursuant to the AMPCO agreement, AMPCO is responsible for maintaining and operating the existing facilities and collecting parking fees. AMPCO remits all gross parking revenues to the County and is reimbursed for operating expenses and paid a management fee. It has been assumed that any extension of the current AMPCO agreement, or negotiation of a new agreement, for the period after 2010, would result in parking revenues received by the County that are equal to or greater than those received under the current AMPCO agreement, adjusted for the operation of new parking facilities. Existing Parking Facilities. Table 33 presents a summary of existing public parking facilities and parking rates at the Airport (as of March 1, 2008). A-111

200 Table 34 PUBLIC PARKING RATES Sacramento International Airport (As of March 1, 2008) Facility Spaces Parkingrates DailyMax Hourly TerminalAGarage 882 First30minutesfree;$2perhour $26 TerminalBSurface 1,373 First30minutesfree;$2perhour $24 Daily TerminalAGarage 4,417 $2perhour $12 TerminalAOverflow 2,815 $2perhour $10 TerminalBSurface 2,827 $2perhour $10 EconomyParking 7,635 $1perhour $7 19,949 Source:SacramentoCountyAirportSystem. Existing parking facilities include (1) a six story parking garage in front of Terminal A, including 882 spaces on the first floor for hourly parking and 4,417 spaces on levels two to six for daily parking, (2) hourly surface parking lots located directly in front of Terminal B, (3) daily surface parking lots adjacent to the hourly lots in front of Terminal B, (4) an overflow lot behind the Terminal A garage, and (5) a remote surface parking lot located east of the rental car terminal on Aviation Drive. Future Parking Facilities. Table 34 shows the estimated number of public parking spaces at SMF and projected rate increases during the forecast period. The County expects to close 873 terminal B surface hourly parking and 995 Terminal B surface daily parking spaces at the end of FY 2008 to accommodate construction related to the new Terminal B. The County is also constructing a new economy surface parking lot at the southwest corner of SMF, the first phase of which is expected to be complete in FY A further 1,132 parking spaces in the existing Terminal B daily surface lot will be closed in FY A-112

201 Table 35 ESTIMATED PUBLIC PARKING SPACES Sacramento International Airport Existing (March2008) FY2009 FY2013 (afterdbo#1) FY2015 (afterdbo#2) SPACES Hourly TerminalAGarage TerminalBSurface 1, TerminalBGarage 905 Daily TerminalAGarage 4,417 4,417 4,417 4,417 TerminalAOverflow 2,815 2,815 2,815 2,815 TerminalBSurface 2,827 1, TerminalBGarage 4,530 EconomyParking 7,635 7,635 11,935 11,935 GrandTotal 19,949 18,081 20,749 26,084 MAX.DAILYRATES Hourly TerminalAGarage $26.00 $29.00 $31.00 $33.00 TerminalBSurface TerminalBGarage Daily TerminalAGarage TerminalAOverflow TerminalBSurface TerminalBGarage EconomyParking Source: Sacramento County Airport System. A new 5,535 space parking garage is expected to open on January 1, 2015 adjacent to the new Terminal B. It is anticipated that 100 spaces will be reserved as hotel parking and the rest will be split into 905 hourly parking spaces and 4,530 daily parking spaces. Forecast Parking Revenues. In connection with the ongoing Airport Master Plan and other studies related specifically to parking, the County has had prepared various independent projections of parking demand and rates. These studies have taken into account the historical trend in parking demand at SMF, forecast growth in passenger traffic at SMF, comparative parking rates at other airports, and anticipated trends in the use of short-term and long-term parking facilities at SMF. A-113

202 On the basis of these studies, the County has adopted a plan to increase parking rates consistent with the anticipated demand and to reflect the value of the available parking facilities. The County expects to increase parking rates on (1) July 1, 2008, (2) January 1, 2012 with the opening of new Terminal B, and (3) July 1, 2014 with the opening of the garage, as reflected in the parking revenue forecast on Exhibit E. On April 1, 2008, the Board of supervisors approved the July 1, 2008 rate increase. As mentioned earlier, parking revenues are the largest single line-item of Airport System revenues. Future parking rate increases are subject to approval by the County Board of Supervisors. In the event that future parking rate increases are not approved consistent with the assumptions described herein, it is likely that parking revenues, and therefore total revenues, would be less than forecast. Rental Car Revenues. Seven rental car companies (Alamo, Avis, Budget, Dollar, Enterprise, Hertz, and National) currently operate at the Airport under agreements with the County which extend to All rental car companies operate their counters and offices from a common rental car reception building, and rental car customers are transported by shuttle bus to the rental car reception building. Under the rental car agreements, the County receives the greater of privilege fees equal to 10% of gross receipts or a minimum annual guarantee, plus rentals for counter space, office space, and service facility ground areas. The County also receives certain cost-recovery fees for the rental car shuttle operation. In addition, the County assesses fees and charges on off-airport rental car businesses accessing SMF, including an annual permit fee and privilege fees of 10% of annual gross receipts that exceed $150,000 per company. Currently, the County has not imposed a customer facility charge (CFC) on rental car patrons. A number of airports have CFCs in place to help pay for the costs of rental car facilities and services such as consolidated busing. The County is not contemplating imposing a CFC in the near future. Revenues from rental car concession privilege fees are forecast to increase in relation to the forecast trends in passenger traffic at SMF and inflation; revenues from cost-recovery shuttle operation fees are forecast to increase with inflation. Other Area Revenues. Other area revenues consist principally of building and ground rentals. The forecasts of rentals paid for hangars, other buildings, cargo facilities, ground leases from rental cars, corporate hangars, and other ground leases are based on assumed inflation, provisions of existing agreements, and SCAS policies. The current on-airport hotel operated by Host Hotels and Resorts, will close in July. This property was acquired by the County to clear the site for TMP construction and generated approximately $250,000 per year in revenue to SCAS. It was assumed that the proposed new hotel, which is part of A-114

203 the TMP, would be financed outside of the SCAS enterprise and therefore would not be a revenue source or expense of the Airport System. Interest Income. Interest income under the Indenture excludes interest earnings from the Construction Fund and PFC Revenues. Interest income totaled $5.7 million in FY 2007 and is expected to increase with higher balances in the Debt Service Reserve Fund, Operating Reserve Account, and Revenue Fund. Reliever and General Aviation Airports. The revenues associated with activity at the reliever and general aviation airports (Mather Airport, Executive Airport and Franklin Field) are included in the revenue categories described above. The financial impact of these three airports, considering revenues and expenses, on the overall Airport System financial result is estimated to be relatively small. APPLICATION OF AIRPORT SYSTEM REVENUES Section 5.04 of the Indenture requires that all Revenues be applied in the following order of priority: 1. Operating Expenses. Pay the current Operating Expenses of the Airport System. 2. Senior Obligations. Transfer to the Senior Debt Service Fund, the amount, if any, required so that the balance in said Fund shall equal the Accrued Debt Service on all Outstanding Senior Bonds as of the last day of such month, and meet requirements of other Senior Obligations. 3. Senior Debt Service Reserve Requirements. Transfer to Senior Debt Service Reserve Fund and meet requirements of other senior debt service reserve or Reserve Guaranty Agreements. 4. Rebate Fund. Transfer the amount required to be paid for Senior Obligations pursuant to the Rebate Instructions. 5. Subordinate Obligations. Transfer to the Subordinate Debt Service Fund, the amount, if any, required so that the balance in said Fund shall equal the Accrued Debt Service on all Outstanding Subordinate Obligations as of the last day of such month, and meet requirements of other Subordinate Obligations. 6. Subordinate Debt Service Reserve Requirements. Transfer to the Subordinate Debt Service Reserve Fund and meet requirements of other subordinate debt service reserve or Reserve Guaranty Agreements. 7. Rebate Fund. Transfer the amount required to be paid for Subordinate Obligations pursuant to the Rebate Instructions. A-115

204 8. Operating Reserve Account. Deposit to Operating Reserve Account the amount required under the Operating Reserve Requirement (equal to 25% of the amount included in the then current Annual Budget for Operating Expenses). 9. Junior Subordinate Fund. Meet the requirements of Junior Subordinate Obligations including debt service reserve requirements. 10. Rebate Fund. Transfer the amount required to be paid for Junior Subordinate Obligations pursuant to the Rebate Instructions. 11. Reserve and Contingency Fund. Deposit 1/12 (one-twelfth) of $2,000,000 monthly or any other amount specified in Annual Budget. 12. Capital Improvement Fund. Deposit all remaining funds to the Capital Improvement Fund and use for any lawful purpose. Exhibit G presents the forecast application of Airport System Revenues for FY 2009 through FY 2016, which satisfies the first requirement under the Rate Covenant. The forecast Operating Reserve Requirement represents the additional amount required each Fiscal Year to maintain a balance in this fund equal to three months of budgeted Operating Expenses. After all deposits required by the Indenture and Rate Ordinance are made, all moneys remaining are deposited in the Capital Improvement Fund for any lawful purpose. DEBT SERVICE COVERAGE Exhibit H presents Net Revenues and Debt Service coverage for Senior Obligations and Subordinate Obligations for FY 2009 through FY Net Revenues plus the Transfer is forecast to be at least 125% of Accrued Debt Service of Senior Obligations and at least 110% of Accrued Debt Service of both Senior Obligations and Subordinate Obligations in each of the Fiscal Years 2009 through Thus, the Rate Covenant of the Indenture is forecast to be met in each Fiscal Year of the forecast period. SENSITIVITY ANALYSIS The sensitivity of the financial forecast was tested under three stress scenarios: (1) at $4.50 PFC collection level through FY 2016, (2) a low traffic growth scenario reducing enplaned passengers, and (3) a combination of (1) and (2). Exhibit H-1 summarizes forecast financial results for FY 2009 through FY 2016 as presented in Exhibits A through G and discussed in the preceding sections but under the $4.50 PFC scenario for the entire forecast period. Revenues and A-116

205 expenses were estimated assuming the base forecasts of enplaned passengers presented in Table 20 and aircraft landed weight presented in Table 23 in the earlier sections Enplaned Passenger Forecast and Landed Weight. The $4.50 PFC scenario will reduce PFC collections by 25% annually, or $8.5 million in FY However, the County may not need to forgo entitlement grants under the $4.50 PFC scenario, which is forecast to partially offset the lower PFC revenues. Exhibit H-2 summarizes projected FY 2009 through FY 2016 financial results for which the estimated revenues and expenses reflect the low passenger forecasts of enplaned passengers and aircraft landed weight presented in Tables 20 and 23. For the financial results associated with the low passenger forecasts, the entire Capital Improvement Plan was assumed to be implemented on the same schedule assumed for the baseline forecasts, notwithstanding the reduction in passenger beginning in FY Under the low traffic scenario, FY 2013 enplaned passengers are forecast to total 6.1 million as compared with 5.8 million under base case, or a 4.8% reduction. Exhibit H-3 summarizes projected financial results under the low passenger forecasts at a $4.50 PFC level for the entire forecast period. Under the sensitivity tests: Senior Bond debt service coverage ratios are projected to be lower than those for the base results, but to exceed 155% with the Transfer (versus the 125% requirement of the Rate Covenant). Debt service coverage ratios on Senior and Subordinate Bonds are projected to be lower than those for the base results due to more debt financing, but to exceed 140% with the Transfer (versus the 110% requirement of the Rate Covenant). Airline costs per enplaned passenger are projected to increase relative to those for the base forecast. A-117

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207 A-119 Exhibit A Project Costs and Sources of Funding Terminal Modernization Program Sacramento County Airport System (in thousands) Senior Subordinate Bonds PFC Hotel Project Costs /1 Bonds LOI PFC PAYG CIF TSA Financing TERMINAL FACILITIES - AIRSIDE Airside Site Prep $ 22,699 $ 10,214 $ 12,484 $ - $ - $ - $ - $ - Airside Modifications 7,036 7, Airside Site to Grade Prep 91,566 50,843 40, Airside Early Procurement 40,493 40, Airside Building Shell & Apron Imp. 164, ,714 26,265-20,883-6,000 - Airside Systems 7,434 7, Airside Interior Finish Out 88,754 26,626-62, Airside Demolitions 6,227 6, TERMINAL FACILITIES - LANDSIDE Landside Site Preparation 50,477 15,143-35, Landside Site-to-Grade Preparation 25,819 6,897-16, ,829 Landside Early Procurement 57,877 17,363-40, Landside Term B and Hotel Building 63,000 14,814-34, ,618 Landside Roadways and Prep 101, ,066 80, Terminal B Building Finish 161,555 48, , Landside Hotel Finish 35, ,448 SPECIAL SYSTEMS Automatic People Mover 38, , Loading Bridges and Baggage Handling 72,487 63,794-8, ENABLING PROJECTS - PMO Office 5,135 5, Civil - Paving & Stuctures 19,643 19, ANCILLARY FACILITIES Existing Building Renovations Remote Central Receiving Facility 11,298 11, Public Safety Building 4,622 4, Parking Garage for Terminal B 194,507 44, , $ 1,270,521 $ 512,271 $ 79,472 $ 370,000 $ 100,883 $ 150,000 $ 6,000 $ 51,895 Sources: Sacramento County Airport System and Jacobs Consultancy. Note: 1. Total project cost includes construction cost, design and program management cost as well as $86 million program contingency.

208 Exhibit B Sources and Uses of Funds Terminal Modernization Program Sacramento County Airport System (in thousands) Senior Bonds Subordinate Bonds Total May 2008 Future LOI PFC Other Sources Sources of Funds Par Amount of Bonds $ 1,145,525 $ 374,765 $ 293,055 $ 81,105 $ 396,600 Reoffering Premium 5,469 1, ,016 1,508 Bond Construction Fund Interest Income 35,441 3,544 15,188 2,597 14,112 PFC PAYG 100, ,883 TSA 6, ,000 Internal Cash 150, ,000 Third-party Financing 51, ,895 Total Sources of Funds $ 1,495,213 $ 379,482 $ 309,016 $ 85,718 $ 412,220 $ 308,778 A-120 Use of Funds Project Costs $ 1,270,521 $ 273,360 $ 238,910 $ 79,472 $ 370,000 $ 308,778 Original Issue Discount 25,640 7,738 7,061-10,842 Total Underwriter's Discount (0.500%) 5,728 1,874 1, ,983 Costs of Issuance 1, Deposit to Debt Service Reserve Fund 81,847 29,513 17,708 5,730 28,896 Deposit to Capitalized Interest Fund 109,774 66,702 43, Rounding Total Uses of Funds $ 1,495,213 $ 379,482 $ 309,016 $ 85,718 $ 412,220 $ 308,778 Source: First Southwest Company.

209 Exhibit C Passenger Facility Charge Revenues Sacramento County Airport System (for the Fiscal Year ending June 30) A-121 This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Actual Estimate Forecast DBO 1 DBO PFC collections Enplaned Passengers 4,986,171 5,150,229 5,307,289 5,366,200 5,432,300 5,545,300 5,722,200 5,917,200 6,123,200 6,335,200 6,556,200 6,783,000 Percent of PFC Eligible Passengers 96.4% 93.9% 91.1% 93.0% 93.0% 93.0% 93.0% 93.0% 93.0% 93.0% 93.0% 93.0% PFC Eligible Enplaned Passengers 4,807,084 4,835,361 4,833,967 4,990,566 5,052,039 5,157,129 5,321,646 5,502,996 5,694,576 5,891,736 6,097,266 6,308,190 PFC Level $ 4.50 $ 4.50 $ 4.50 $ 4.50 $ 4.50 $ 6.00 $ 6.00 $ 6.00 $ 6.00 $ 6.00 $ 6.00 $ 6.00 less: PFC Airline Collection Fee (0.11) (0.11) (0.11) (0.11) (0.11) (0.11) (0.11) (0.11) (0.11) (0.11) (0.11) (0.11) Net PFC Level $ 4.39 $ 4.39 $ 4.39 $ 4.39 $ 4.39 $ 5.89 $ 5.89 $ 5.89 $ 5.89 $ 5.89 $ 5.89 $ 5.89 PFC Collections [not including int. ] $ 21,103,097 $ 21,227,234 $ 21,221,113 $ 21,908,585 $ 22,178,451 $ 30,375,490 $ 31,344,495 $ 32,412,646 $ 33,541,053 $ 34,702,325 $ 35,912,897 $ 37,155,239 Cumulative PFC Collections $ 164,308,584 $ 188,536,485 $ 214,522,874 $ 236,431,458 $ 258,609,910 $ 288,985,399 $ 320,329,894 $ 352,742,541 $ 386,283,593 $ 420,985,919 $ 456,898,815 $ 494,054,054 PFC Cashflow PFC Fund Beginning Balance 56,763,147 $ 69,158,646 $ 84,590,094 $ 103,608,332 $ 119,450,263 $ 125,974,380 $ 66,200,299 $ 30,164,620 $ 21,898,852 $ 19,871,879 $ 18,978,982 $ 19,287,627 Deposits: PFC Collections $ 21,103,097 $ 21,227,234 $ 21,221,113 $ 21,908,585 $ 22,178,451 $ 30,375,490 $ 31,344,495 $ 32,412,646 $ 33,541,053 $ 34,702,325 $ 35,912,897 $ 37,155,239 Excess Fund from 1996C Bonds 4,608,175 Interest Earnings 1,343,172 3,000,667 4,765,276 3,228,331 2,429,947 1,902, , , , , , ,463 Total Annual PFC Revenues $ 22,446,269 $ 24,227,901 $ 25,986,389 $ 29,745,091 $ 24,608,398 $ 32,278,209 $ 32,298,603 $ 32,928,126 $ 33,954,624 $ 35,086,987 $ 36,291,774 $ 37,552,702 Annual use of PFC revenue Pay-as-you-go Existing $ (1,833,245) $ (756,289) $ (530,137) $ (2,698) Future (2,860,590) (3,301,123) (56,933,529) (32,573,936) (5,214,022) CP Interest Expenses Debt Service Existing PFC Bonds (4,011,616) (3,952,096) (3,947,515) (4,652,474) (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Terminal A Debt Service (4,205,909) (4,088,068) (2,490,499) (6,387,398) Future LOI Bonds for TMP (622,059) (2,717,582) (2,722,692) (2,718,809) (2,715,399) (2,721,392) (2,720,182) (2,720,967) Future PFC Bonds for TMP (6,954,960) (24,088,831) (24,088,831) (24,228,831) (24,216,341) (24,219,119) (24,236,361) (24,202,266) Total annual use of PFC revenues $ (10,050,770) $ (8,796,453) $ (6,968,151) $ (13,903,161) $ (18,084,281) $ (92,052,291) $ (68,334,282) $ (41,193,894) $ (35,981,597) $ (35,979,884) $ (35,983,129) $ (35,984,192) PFC Ending Balance $ 69,158,646 $ 84,590,094 $ 103,608,332 $ 119,450,263 $ 125,974,380 $ 66,200,299 $ 30,164,620 $ 21,898,852 $ 19,871,879 $ 18,978,982 $ 19,287,627 $ 20,856,137 Sources: Historical data - Sacramento County Airport System; forecast - Jacobs Consultancy.

210 A-122 Exhibit D Debt Service Requirements Sacramento County Airport System (for the Fiscal Year ending June 30) Actual Estimate Forecast DBO 1 DBO Senior Bonds Series 1992A $ 361,675 $ 361,675 $ 361,675 $ 180,838 Series 1996 A&B 7,278,913 3,771, Series 1998A 2,888,749 2,891,439 2,886,539 1,442,092 Series 2002A 4,848,569 4,847,019 4,844,269 2,422,659 Series 2002B 1,457,900 1,456,000 1,458, ,250 Series 2006A - 385,480 6,379,395 5,434, Proposed Series 2008A 4,274,316 9,709,648 10,835,415 11,038,338 11,901,788 12,772,625 12,784,100 12,776,125 12,779,225 Proposed Series 2008B 1,148,938 4,004,281 4,539,019 4,465,031 17,610,963 26,471,944 26,470,156 26,465,781 26,488,031 Proposed Series 2008C 85,779 3,719,677 3,719,938 3,721,082 3,722, Future Bonds for TMP ,133,244 15,527,288 15,522,175 18,786,550 18,759,613 Accrued Debt Service on Senior Bonds $ 16,835,805 $ 13,712,692 $ 15,930,378 $ 15,720,758 $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 40,368,924 $ 54,771,856 $ 54,776,431 $ 58,028,456 $ 58,026,869 Subordinate Bonds Series 1996C $ 1,623,955 $ 1,624,560 $ 1,620,440 $ 810,733 $ - $ - $ - $ - $ - $ - $ - $ - Series 1998B 2,327,661 2,327,536 2,327,076 1,163, Proposed Series 2008D - 1,260,177 2,597,190 3,692,190 4,413,608 4,408,295 4,412,900 4,411,620 4,409,455 4,416,138 Proposed Series 2008E - 1,418,429 4,608,949 4,620,159 4,535,216 4,623,936 4,636,956 4,627,754 4,617,131 4,644,821 Future PFC Bonds for LOI ,456,152 10,455,130 10,460,240 10,456,358 10,452,948 10,458,940 10,457,730 10,458,515 Future PFC Bonds for CIP ,954,960 24,088,831 24,088,831 24,228,831 24,216,341 24,219,119 24,236,361 24,202,266 Annual Debt Service on Subordinate Bonds $ 3,951,616 $ 3,952,096 $ 3,947,516 $ 4,652,474 $ 24,617,251 $ 42,856,310 $ 43,497,895 $ 43,717,420 $ 43,719,145 $ 43,717,433 $ 43,720,678 $ 43,721,740 Less Available PFC Revenues irrevocably committed Existing PFC authorizations (3,951,616) (3,952,096) (3,947,516) (4,652,474) (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Expected PFC authorizations - LOI Bonds - - (622,059) (2,717,582) (2,722,692) (2,718,809) (2,715,399) (2,721,392) (2,720,182) (2,720,967) Expected PFC authorizations - PFC Bonds (6,954,960) (24,088,831) (24,088,831) (24,228,831) (24,216,341) (24,219,119) (24,236,361) (24,202,266) Less Available Grant Revenues to be irrevocably committed (9,834,093) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) Accrued Debt Service on Subordinate Bonds /1 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Total Bonds Annual Debt Service $ 20,787,421 $ 17,664,788 $ 19,877,894 $ 20,373,232 $ 42,050,856 $ 61,950,681 $ 62,722,345 $ 84,086,344 $ 98,491,001 $ 98,493,864 $ 101,749,134 $ 101,748,609 Accrued Debt Service 16,835,805 13,712,692 15,930,378 15,720,758 17,433,606 19,094,371 19,224,450 40,368,924 54,771,856 54,776,431 58,028,456 58,026,869 Sources: Historical data - Sacramento County Airport System; forecast - First Southwest Company. Note: 1. In the prior Bond Resolution, debt service eligible for PFC revenues are deposited into the Revenue Fund instead of offsetting debt service.

211 A-123 Exhibit E Operating Expenses Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Actual Estimate Forecast DBO 1 DBO By Major Object Category Salaries and Benefits $ 27,313,968 $ 28,897,193 $ 30,274,323 $ 32,278,020 $ 35,998,585 $ 37,798,514 $ 39,688,440 $ 41,672,862 $ 43,756,505 $ 45,944,330 $ 48,241,547 $ 50,653,624 Supplies and Services 38,602,719 42,382,604 46,827,235 55,487,204 54,376,318 56,551,371 58,813,426 61,165,963 63,612,601 66,157,105 68,803,389 71,555,525 Other Charges 909, , , , , , , ,991 1,031,670 1,072,937 1,115,854 1,160,489 Subtotal $ 66,826,369 $ 71,949,959 $ 77,870,718 $ 88,602,484 $ 91,256,779 $ 95,267,036 $ 99,455,703 $ 103,830,815 $ 108,400,776 $ 113,174,372 $ 118,160,791 $ 123,369,638 M&O Projects / ,230,468 16,715,000 1,000, Equipment ($200,000 & under) 1,035, , ,637 1,116, Projects ($200,000 & under) 786,580 27,974 64,166 1,830, Less expenses funded with bond proceeds & PFCs (160,094) Base Operating Expenses $ 68,488,304 $ 72,668,987 $ 78,636,521 $ 104,779,715 $ 107,971,779 $ 96,267,036 $ 99,455,703 $ 103,830,815 $ 108,400,776 $ 113,174,372 $ 118,160,791 $ 123,369,638 Incremental Operating Expenses Salaries and Benefits $ - $ - $ 2,089,048 $ 4,387,000 $ 4,606,350 $ 4,836,668 $ 5,078,501 Supplies and Services 851, ,751 5,488,824 10,476,579 11,575,642 12,538,668 13,040,215 Other Charges Incremental Operating Expenses $ 851,203 $ 908,751 $ 7,577,872 $ 14,863,579 $ 16,181,993 $ 17,375,336 $ 18,118,716 Total Operating Expenses Salaries and Benefits $ 27,313,968 $ 28,897,193 $ 30,274,323 $ 32,278,020 $ 35,998,585 $ 37,798,514 $ 39,688,440 $ 43,761,910 $ 48,143,506 $ 50,550,681 $ 53,078,215 $ 55,732,126 Supplies and Services 38,602,719 42,382,604 46,827,235 55,487,204 54,376,318 57,402,574 59,722,177 66,654,786 74,089,180 77,732,747 81,342,057 84,595,739 Other Charges 909, , , , , , , ,991 1,031,670 1,072,937 1,115,854 1,160,489 Subtotal $ 66,826,369 $ 71,949,959 $ 77,870,718 $ 88,602,484 $ 91,256,779 $ 96,118,239 $ 100,364,454 $ 111,408,687 $ 123,264,356 $ 129,356,365 $ 135,536,126 $ 141,488,354 M&O Projects 13,230,468 16,715,000 1,000,000 Equipment ($200,000 & under) 1,035, , ,637 1,116,146 Projects ($200,000 & under) 786,580 27,974 64,166 1,830,617 Less expenses funded with bond proceeds & PFCs (160,094) Total Operating Expenses $ 68,488,304 $ 72,668,987 $ 78,636,521 $ 104,779,715 $ 107,971,779 $ 97,118,239 $ 100,364,454 $ 111,408,687 $ 123,264,356 $ 129,356,365 $ 135,536,126 $ 141,488,354 By Cost Center Airfield $ 13,732,725 $ 17,786,258 $ 16,178,353 $ 16,889,307 $ 17,631,889 $ 18,479,526 $ 19,292,587 $ 20,291,863 $ 21,184,990 $ 22,117,914 Apron 1,588,053 2,199,592 2,528,767 2,639,893 2,755,963 2,977,199 3,107,835 3,244,274 3,386,776 3,535,615 Cargo Apron 136, , , , , , , , , ,821 Loading Bridges 608,731 1,015,467 1,162,812 1,213,911 1,267,284 1,557,715 1,625,334 1,695,923 1,769,614 1,846,545 Terminal Building 23,751,677 26,833,682 28,137,092 29,373,569 30,665,056 38,207,117 46,846,484 49,049,128 51,198,816 53,443,878 Rental Cars 3,028,791 3,309,728 3,618,891 3,777,922 3,944,029 4,117,529 4,298,756 4,488,058 4,685,800 4,892,363 Other Building and Areas 12,424,941 26,968,860 28,441,475 13,241,792 12,780,035 13,342,236 13,929,475 14,542,881 15,183,634 15,852,970 Parking 14,631,491 15,255,335 17,185,455 18,791,868 19,614,725 20,474,055 21,371,496 22,688,757 24,182,830 25,240,992 Reliever Airports 8,500,384 10,906,097 10,191,594 10,639,461 11,130,753 11,653,307 12,165,980 12,701,487 13,260,857 13,845,168 Franklin Field 233, , , , , , , , , ,089 Total Operating Expenses $ 78,636,521 $ 104,779,715 $ 107,971,779 $ 97,118,239 $ 100,364,454 $ 111,408,687 $ 123,264,356 $ 129,356,365 $ 135,536,126 $ 141,488,354 Sources: Historical data - Sacramento County Airport System; forecast - Jacobs Consultancy. Notes: 1. FY2008 estimated expenses included Willey Preserve construction and endowment. FY2009 expenses include sewer construction and county sanitation connection fee. 2. Under the new Master Indenture effective FY2009, Operating Expenses do not include equipment purchases and project expenses.

212 A-124 Exhibit F Revenues Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Actual Estimate Forecast DBO 1 DBO Airline Revenues Terminal Rentals $ 8,683,987 $ 10,024,141 $ 11,124,001 $ 11,822,000 $ 26,509,013 $ 27,820,722 $ 28,588,394 $ 38,599,760 $ 44,132,182 $ 44,102,498 $ 44,917,525 $ 45,834,484 Parking Position Fee 1,322,237 1,474,170 1,478, ,000 3,261,855 3,336,616 3,480,286 7,252,240 10,072,076 10,208,871 10,352,741 10,499,531 Loading Bridge Use Fee 628,401 1,465, ,473 1,683,900 2,031,431 1,968,440 2,008,085 3,781,591 4,815,239 4,982,519 5,056,122 5,136,713 Landing Fee 16,861,922 17,250,215 15,477,726 21,442,782 20,025,906 28,437,734 31,421,063 32,988,215 34,325,766 36,168,940 37,051,858 38,170,896 Total Airline Revenue $ 27,496,547 $ 30,213,665 $ 28,719,840 $ 35,548,682 $ 51,828,206 $ 61,563,512 $ 65,497,828 $ 82,621,806 $ 93,345,263 $ 95,462,828 $ 97,378,246 $ 99,641,625 Nonairline Revenue Airfield Area $ 1,719,281 $ 2,017,301 $ 1,214,405 $ 1,584,100 $ 1,663,305 $ 1,727,379 $ 1,795,007 $ 1,865,715 $ 1,939,314 $ 2,015,762 $ 2,095,326 $ 2,178,126 Terminal Building Food/beverage 2,189,725 2,406,073 3,089,045 2,952,900 3,100,545 3,228,342 3,397,955 3,724,575 4,124,039 4,352,159 4,594,062 4,848,045 Merchandise 1,449,397 1,322,578 1,582,411 1,705,113 1,790,369 1,892,189 1,991,603 2,183,040 2,417,173 2,550,879 2,692,662 2,841,526 Other Terminal rents 878, ,449 1,081,149 1,410,113 1,618,114 1,684,135 1,771,544 1,867,345 1,969,701 2,077,291 2,191,302 2,310,932 Total Terminal Building 4,517,968 4,726,100 5,752,605 6,068,126 6,509,028 6,804,666 7,161,102 7,774,960 8,510,913 8,980,329 9,478,025 10,000,503 Parking 40,150,858 44,157,330 46,289,886 48,235,000 59,086,077 60,220,803 61,087,221 66,336,610 72,724,889 75,114,266 81,072,140 83,865,029 Other Areas Auto rentals 7,804,787 9,305,538 10,221,977 10,864,427 11,407,648 11,644,944 12,016,428 12,425,922 12,858,515 13,303,708 13,767,800 14,244,073 Auto rental shuttle bus fees 1,875,359 2,107,742 2,140,558 1,999,700 3,115,275 3,252,175 3,395,165 3,544,521 3,700,528 3,863,486 4,033,710 4,211,527 Other rentals/miscellaneous 7,197,841 7,635,551 8,254,247 10,158,930 8,515,383 8,598,641 8,690,241 8,784,711 8,881,209 8,979,143 9,078,880 9,180,044 Total Other Areas 16,877,987 19,048,831 20,616,782 23,023,057 23,038,306 23,495,760 24,101,835 24,755,154 25,440,252 26,146,337 26,880,390 27,635,643 Other Revenues 3,417,521 2,089,528 2,013, , , , , , , , , ,735 Subtotal $ 66,683,615 $ 72,039,090 $ 75,887,077 $ 79,589,312 $ 90,678,451 $ 92,630,343 $ 94,526,900 $ 101,114,174 $ 108,997,101 $ 112,638,428 $ 119,907,617 $ 124,061,036 GAAP Adjustment (750,816) (311,655) (193,642) Non-airline Operating Revenues $ 65,932,799 $ 71,727,435 $ 75,693,435 $ 79,589,312 $ 90,678,451 $ 92,630,343 $ 94,526,900 $ 101,114,174 $ 108,997,101 $ 112,638,428 $ 119,907,617 $ 124,061,036 Total Operating Revenues $ 93,429,346 $ 101,941,100 $ 104,413,275 $ 115,137,994 $ 142,506,657 $ 154,193,854 $ 160,024,727 $ 183,735,981 $ 202,342,364 $ 208,101,256 $ 217,285,862 $ 223,702,661 Interest Income 2,626,114 3,479,254 5,661,918 3,279,890 4,123,398 5,048,333 5,213,606 6,689,106 7,756,380 7,847,354 8,234,141 8,325,829 Transfers for Terminal A Debt Service 4,088,068 2,490,499 3,401,555 2,999, Final Airline Settlement ,660, Operating Reserve Account Release ,713, Prepaid Revenues 3,765,571 4,286,732 3,758,128 3,982,594 3,275, Revenues $ 103,909,099 $ 112,197,585 $ 117,234,877 $ 125,400,108 $ 153,566,074 $ 161,955,572 $ 165,238,333 $ 190,425,086 $ 210,098,744 $ 215,948,610 $ 225,520,004 $ 232,028,489 Airline Revenues as % of Total 26.5% 26.9% 24.5% 28.3% 33.7% 38.0% 39.6% 43.4% 44.4% 44.2% 43.2% 42.9% Sources: Historical data - Sacramento County Airport System; forecast - Jacobs Consultancy.

213 A-125 Exhibit F-1 Terminal Rental Revenues Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast DBO 1 DBO Terminal Building Requirement Operating Expenses $ 28,137,092 $ 29,373,569 $ 30,665,056 $ 38,207,117 $ 46,846,484 $ 49,049,128 $ 51,198,816 $ 53,443,878 Capital Outlays 824, , , , , , , ,352 Senior Bonds Accrued Debt Service 3,476,541 3,807,026 3,793,776 19,623,368 30,617,095 30,612,991 30,610,297 30,605,675 Senior Bonds Coverage Requirement (25%) 869, , ,444 4,905,842 7,654,274 7,653,248 7,652,574 7,651,419 Subordinate Bonds Accrued Debt Service Historical Amortization 4,048,542 4,374,293 3,873,702 3,854,727 3,685,465 2,637,732 2,637,732 2,599,841 Amortization of M&O Projects 992,341 1,051,709 1,051,709 1,051,709 1,051,709 1,051,709 1,051,709 Future Amortization - 905,539 1,183,015 1,460,492 1,859,737 2,243,612 1,840,824 1,563,347 Operating Reserve Requirement 1,555, , ,872 1,885,515 2,159, , , ,265 Reserve and Contingency Fund Deposit 380, Total Terminal Building Requirement $ 39,290,989 $ 41,231,444 $ 42,367,086 $ 71,365,938 $ 94,238,344 $ 94,174,869 $ 95,917,694 $ 97,878,487 Less: Rentals from Unenclosed Airline Operations Space $ (331,053) $ (331,053) $ (331,053) $ (326,431) $ (321,809) $ (321,809) $ (321,809) $ (321,809) Federal Reimbursement (234,000) (234,000) (234,000) (234,000) (234,000) (234,000) (234,000) (234,000) Net Terminal Building Requirement $ 38,725,936 $ 40,666,391 $ 41,802,033 $ 70,805,507 $ 93,682,535 $ 93,619,060 $ 95,361,885 $ 97,322,678 Rentable Space (enclosed) Airline Rentable Space 191, , , , , , , ,735 Nonairline Rentable Space 86,078 86,078 86, , , , , ,873 Total Rentable Space 278, , , , , , , ,608 Average Rental Rate (per square foot per year) $ $ $ $ $ $ $ $ Airline Rented Space 187, , , , , , , ,834 Airline Terminal Rentals (enclosed space) $ 26,177,961 $ 27,489,669 $ 28,257,341 $ 38,273,330 $ 43,810,373 $ 43,780,689 $ 44,595,716 $ 45,512,675 Airline Unenclosed Operations Space Rentals Unenclosed operations space 27,588 27,588 27,588 27,203 26,817 26,817 26,817 26,817 Rate per square foot $ $ $ $ $ $ $ $ $ 331,053 $ 331,053 $ 331,053 $ 326,431 $ 321,809 $ 321,809 $ 321,809 $ 321,809 Total Airline Terminal Rentals $ 26,509,013 $ 27,820,722 $ 28,588,394 $ 38,599,760 $ 44,132,182 $ 44,102,498 $ 44,917,525 $ 45,834,484 Source: Jacobs Consultancy. Note: 1. Assuming fixed rate of $12 per square foot per year.

214 Exhibit F-2 Landing Fee Revenues Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. A-126 Forecast DBO 1 DBO Airfield Requirement Operating Expenses $ 16,178,353 $ 16,889,307 $ 17,631,889 $ 18,479,526 $ 19,292,587 $ 20,291,863 $ 21,184,990 $ 22,117,914 Capital Outlays 824, , , , , , , ,352 Senior Bonds Debt Service 1,356,774 1,954,554 2,015,482 2,166,923 2,316,529 2,316,956 2,316,420 2,315,719 Coverage Requirement (25%) 339, , , , , , , ,930 Historical Amortization 1,707,647 1,740,309 1,740,309 1,740,309 1,458,882 1,458,882 1,458,882 1,458,882 Future Amortization - 725,212 2,509,343 2,786,820 3,186,065 3,569,940 3,167,152 2,889,675 Amortization of M&O Projects 640, , , , , , , ,470 Reliever Airport Deficit (MHR & SAC) 5,540,485 6,154,426 6,548,824 6,960,881 7,238,290 7,676,178 8,121,976 8,603,597 Operating Reserve Requirement 355, , , , , , , ,231 Reserve and Contingency Fund Deposit 160, Airfield Requirement $ 27,103,483 $ 29,288,455 $ 32,304,346 $ 33,905,737 $ 35,278,959 $ 37,159,136 $ 38,080,596 $ 39,239,771 Nonairline Airfield Revenues (820,365) (850,721) (883,283) (917,522) (953,193) (990,196) (1,028,738) (1,068,875) Net Airfield Requirement $ 26,283,118 $ 28,437,734 $ 31,421,063 $ 32,988,215 $ 34,325,766 $ 36,168,940 $ 37,051,858 $ 38,170,896 Total Landed Weight (1,000 pound units) 7,714,284 7,840,038 8,044,584 8,285,122 8,539,926 8,797,901 9,070,515 9,358,048 Landing Fee Rate Per 1,000 pound unit $ 3.41 $ 3.63 $ 3.91 $ 3.98 $ 4.02 $ 4.11 $ 4.08 $ 4.08 Signatory Airline Landing Fee Requirement $ 26,283,118 Final Airfield Settlement /1 (2,982,054) Credit of Prepaid Revenues /2 (3,275,158) Net Landing Fee Requirement $ 20,025,906 Total Landed Weight (1,000 pound units) 7,714,284 Effective Signatory Airline Landing Fee Rate $ 2.60 Source: Jacobs Consultancy. Note: 1. Reflecting credit from prior year carryforward. 2. Indicating ten months of prepaid revenues transferred from FY2008.

215 A-127 Exhibit F-3 Airline Cost Per Enplaned Passenger Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Actual Estimate Forecast DBO 1 DBO Scheduled Airline Payments Terminal Rental $ 8,683,987 $ 10,024,141 $ 11,124,001 $ 11,822,000 $ 26,509,013 $ 27,820,722 $ 28,588,394 $ 38,599,760 $ 44,132,182 $ 44,102,498 $ 44,917,525 $ 45,834,484 Southwest Adjustments /1-1,875,470 - Parking Position Fee 1,322,237 1,474,170 1,478, ,000 3,261,855 3,336,616 3,480,286 7,252,240 10,072,076 10,208,871 10,352,741 10,499,531 Loading Bridge Use Fee 628,401 1,465, ,473 1,683,900 2,031,431 1,968,440 2,008,085 3,781,591 4,815,239 4,982,519 5,056,122 5,136,713 Landing Fee 16,861,922 17,250,215 15,477,726 21,442,782 20,025,906 28,437,734 31,421,063 32,988,215 34,325,766 36,168,940 37,051,858 38,170,896 Total Scheduled Airline Payments $ 27,496,547 $ 32,089,135 $ 28,719,840 $ 35,548,682 $ 51,828,206 $ 61,563,512 $ 65,497,828 $ 82,621,806 $ 93,345,263 $ 95,462,828 $ 97,378,246 $ 99,641,625 Cargo Airline Landing Fees (1,754,807) (1,441,411) (1,340,794) (2,668,021) (2,491,727) (3,538,369) (3,909,571) (4,104,564) (4,270,989) (4,500,326) (4,610,183) (4,749,420) Passenger Airline Payments $ 25,741,740 $ 30,647,724 $ 27,379,046 $ 32,880,660 $ 49,336,479 $ 58,025,142 $ 61,588,257 $ 78,517,242 $ 89,074,274 $ 90,962,502 $ 92,768,062 $ 94,892,205 Enplaned Passengers 4,986,171 5,150,229 5,307,289 5,366,200 5,432,300 5,545,300 5,722,200 5,917,200 6,123,200 6,335,200 6,556,200 6,783,000 Airline Cost per Enplanement $ 5.16 $ 5.95 $ 5.16 $ 6.13 $ 9.08 $ $ $ $ $ $ $ Sources: Historical data - Sacramento County Airport System; forecast - Jacobs Consultancy.

216 A-128 Exhibit G Application of Revenues Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast DBO 1 DBO Revenues Airline Revenue $ 51,828,206 $ 61,563,512 $ 65,497,828 $ 82,621,806 $ 93,345,263 $ 95,462,828 $ 97,378,246 $ 99,641,625 Nonairline Revenue 90,678,451 92,630,343 94,526, ,114, ,997, ,638, ,907, ,061,036 Interest Income 4,123,398 5,048,333 5,213,606 6,689,106 7,756,380 7,847,354 8,234,141 8,325,829 Final Airline Settlement 3,660, Operating Reserve Account Release - 2,713, Prepaid Revenues 3,275, Revenues $ 153,566,074 $ 161,955,572 $ 165,238,333 $ 190,425,086 $ 210,098,744 $ 215,948,610 $ 225,520,004 $ 232,028,489 Application of Revenues and Rate Covenant 6.04 (a) Operating Expenses $ 107,971,779 $ 97,118,239 $ 100,364,454 $ 111,408,687 $ 123,264,356 $ 129,356,365 $ 135,536,126 $ 141,488,354 Senior Debt Service Fund 17,433,606 19,094,371 19,224,450 40,368,924 54,771,856 54,776,431 58,028,456 58,026,869 Senior Debt Service Reserve Fund Subordinate Debt Service Fund 24,617,251 42,856,310 43,497,895 43,717,420 43,719,145 43,717,433 43,720,678 43,721,740 Available PFC Revenues Existing PFC authorizations (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Expected PFC authorizations - LOI Bonds (622,059) (2,717,582) (2,722,692) (2,718,809) (2,715,399) (2,721,392) (2,720,182) (2,720,967) Expected PFC authorizations - PFC Bonds (6,954,960) (24,088,831) (24,088,831) (24,228,831) (24,216,341) (24,219,119) (24,236,361) (24,202,266) Available Grant Revenues (9,834,093) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) Subordinate Debt Service Reserve Fund Operating Reserve Account 5,262, ,554 2,761,058 2,963,917 1,523,002 1,544,940 1,488,057 Capital Outlays 3,193,445 2,071,200 2,114,048 1,508,669 1,454,954 1,503,152 1,553,279 1,605,410 Reserve and Contingency Fund 1,000, Deposit to Capital Improvement Fund 18,704,549 43,671,762 42,723,827 34,377,748 27,643,660 28,789,659 28,857,202 29,419,800 Total Application of Revenues $ 153,566,074 $ 161,955,572 $ 165,238,333 $ 190,425,086 $ 210,098,744 $ 215,948,610 $ 225,520,004 $ 232,028,489 Source: Jacobs Consultancy.

217 A-129 Exhibit H Debt Service Coverage and Rate Covenant Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast DBO 1 DBO Rate Covenant per Section 6.04 (b)(i) Revenues $ 153,566,074 $ 161,955,572 $ 165,238,333 $ 190,425,086 $ 210,098,744 $ 215,948,610 $ 225,520,004 $ 232,028,489 Operating Expenses (107,971,779) (97,118,239) (100,364,454) (111,408,687) (123,264,356) (129,356,365) (135,536,126) (141,488,354) Net Revenues [A] $ 45,594,295 $ 64,837,333 $ 64,873,879 $ 79,016,400 $ 86,834,388 $ 86,592,245 $ 89,983,877 $ 90,540,136 Transfer [B = D * 25%] 4,358,401 4,773,593 4,806,113 10,092,231 13,692,964 13,694,108 14,507,114 14,506,717 Net Revenues + Transfer [C = A + B] $ 49,952,696 $ 69,610,926 $ 69,679,992 $ 89,108,631 $ 100,527,352 $ 100,286,353 $ 104,490,991 $ 105,046,853 Accrued Debt Service on Senior Obligations [D] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 40,368,924 $ 54,771,856 $ 54,776,431 $ 58,028,456 $ 58,026,869 DEBT SERVICE COVERAGE (>1.25) C / D DEBT SERVICE COVERAGE w/o Transfer A / D Rate Covenant per Section 6.04 (b)(ii) Net Revenues [A] $ 45,594,295 $ 64,837,333 $ 64,873,879 $ 79,016,400 $ 86,834,388 $ 86,592,245 $ 89,983,877 $ 90,540,136 Transfer [E = H * 10%] 1,743,361 1,909,437 1,922,445 4,036,892 5,477,186 5,477,643 5,802,846 5,802,687 Net Revenues + Transfer [F = A + E] $ 47,337,655 $ 66,746,770 $ 66,796,324 $ 83,053,292 $ 92,311,574 $ 92,069,888 $ 95,786,723 $ 96,342,823 Accrued Debt Service of Senior Obligations [D] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 40,368,924 $ 54,771,856 $ 54,776,431 $ 58,028,456 $ 58,026,869 Debt Service on Subordinate Obligations [G] 24,617,251 42,856,310 43,497,895 43,717,420 43,719,145 43,717,433 43,720,678 43,721,740 LESS: Available PFC Revenues Existing PFC authorizations (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Expected PFC authorizations - LOI Bonds (622,059) (2,717,582) (2,722,692) (2,718,809) (2,715,399) (2,721,392) (2,720,182) (2,720,967) Expected PFC authorizations - PFC Bonds (6,954,960) (24,088,831) (24,088,831) (24,228,831) (24,216,341) (24,219,119) (24,236,361) (24,202,266) LESS: Available Grant Revenues (9,834,093) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) (7,737,548) Accrued Debt Service of Sr. & Sub. Obligations [H = D + G] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 40,368,924 $ 54,771,856 $ 54,776,431 $ 58,028,456 $ 58,026,869 DEBT SERVICE COVERAGE (>1.10) F / H DEBT SERVICE COVERAGE w/o Transfer A / H Source: Jacobs Consultancy.

218 Exhibit H-1 Scenario Analysis: Base Case with $4.50 PFC Debt Service Coverage and Rate Covenant Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast DBO 1 DBO Rate Covenant per Section 6.04 (b)(i) Revenues $ 153,696,146 $ 161,569,971 $ 164,852,755 $ 193,632,068 $ 216,939,944 $ 222,786,352 $ 232,358,414 $ 238,848,637 Operating Expenses (107,971,779) (97,118,239) (100,364,454) (111,408,687) (123,264,356) (129,356,365) (135,536,126) (141,488,354) Net Revenues [A] $ 45,724,367 $ 64,451,732 $ 64,488,301 $ 82,223,381 $ 93,675,588 $ 93,429,987 $ 96,822,287 $ 97,360,284 Transfer [B = D * 25%] 4,358,401 4,773,593 4,806,113 11,325,348 16,483,978 16,483,805 17,299,903 17,292,567 Net Revenues + Transfer [C = A + B] $ 50,082,768 $ 69,225,325 $ 69,294,414 $ 93,548,729 $ 110,159,567 $ 109,913,792 $ 114,122,190 $ 114,652,850 Accrued Debt Service on Senior Obligations [D] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 45,301,394 $ 65,935,914 $ 65,935,221 $ 69,199,611 $ 69,170,267 A-130 DEBT SERVICE COVERAGE (>1.25) C / D DEBT SERVICE COVERAGE w/o Transfer A / D Rate Covenant per Section 6.04 (b)(ii) Net Revenues [A] $ 45,724,367 $ 64,451,732 $ 64,488,301 $ 82,223,381 $ 93,675,588 $ 93,429,987 $ 96,822,287 $ 97,360,284 Transfer [E = H * 10%] 1,743,361 1,909,437 1,922,445 4,530,139 6,593,591 6,593,522 6,919,961 6,917,027 Net Revenues + Transfer [F = A + E] $ 47,467,728 $ 66,361,169 $ 66,410,746 $ 86,753,520 $ 100,269,180 $ 100,023,509 $ 103,742,248 $ 104,277,310 Accrued Debt Service of Senior Obligations [D] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 45,301,394 $ 65,935,914 $ 65,935,221 $ 69,199,611 $ 69,170,267 Debt Service on Subordinate Obligations [G] 27,378,521 34,676,432 35,318,927 35,537,890 35,539,155 35,538,561 35,540,606 35,543,243 LESS: Available PFC Revenues Existing PFC authorizations (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Expected PFC authorizations - LOI Bonds (3,382,093) (3,358,077) (3,330,784) (3,280,967) (3,223,022) (3,172,774) (3,110,572) (3,051,193) Expected PFC authorizations - PFC Bonds (6,954,960) (13,148,407) (13,148,407) (13,288,407) (13,275,917) (13,278,694) (13,295,937) (13,261,842) LESS: Available Grant Revenues (9,835,329) (9,857,601) (9,890,912) (9,936,285) (9,990,360) (10,047,719) (10,107,511) (10,169,250) Accrued Debt Service of Sr. & Sub. Obligations [H = D + G] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 45,301,394 $ 65,935,914 $ 65,935,221 $ 69,199,611 $ 69,170,267 DEBT SERVICE COVERAGE (>1.10) F / H DEBT SERVICE COVERAGE w/o Transfer A / H Source: Jacobs Consultancy.

219 Exhibit H-2 Scenario Analysis: Low Traffic with $6.00 PFC Debt Service Coverage and Rate Covenant Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast DBO 1 DBO Rate Covenant per Section 6.04 (b)(i) Revenues $ 151,282,477 $ 158,944,680 $ 162,033,525 $ 188,634,230 $ 209,640,793 $ 215,334,506 $ 224,419,678 $ 230,757,543 Operating Expenses (107,971,779) (97,118,239) (100,364,454) (111,408,687) (123,264,356) (129,356,365) (135,536,126) (141,488,354) Net Revenues [A] $ 43,310,698 $ 61,826,441 $ 61,669,071 $ 77,225,544 $ 86,376,437 $ 85,978,141 $ 88,883,552 $ 89,269,190 Transfer [B = D * 25%] 4,358,401 4,773,593 4,806,113 10,620,710 14,889,113 14,889,692 15,704,023 15,700,653 Net Revenues + Transfer [C = A + B] $ 47,669,100 $ 66,600,034 $ 66,475,184 $ 87,846,253 $ 101,265,550 $ 100,867,833 $ 104,587,575 $ 104,969,842 Accrued Debt Service on Senior Obligations [D] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 42,482,839 $ 59,556,452 $ 59,558,770 $ 62,816,094 $ 62,802,611 A-131 DEBT SERVICE COVERAGE (>1.25) C / D DEBT SERVICE COVERAGE w/o Transfer A / D Rate Covenant per Section 6.04 (b)(ii) Net Revenues [A] $ 43,310,698 $ 61,826,441 $ 61,669,071 $ 77,225,544 $ 86,376,437 $ 85,978,141 $ 88,883,552 $ 89,269,190 Transfer [E = H * 10%] 1,743,361 1,909,437 1,922,445 4,248,284 5,955,645 5,955,877 6,281,609 6,280,261 Net Revenues + Transfer [F = A + E] $ 45,054,059 $ 63,735,878 $ 63,591,516 $ 81,473,827 $ 92,332,083 $ 91,934,018 $ 95,165,161 $ 95,549,451 Accrued Debt Service of Senior Obligations [D] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 42,482,839 $ 59,556,452 $ 59,558,770 $ 62,816,094 $ 62,802,611 Debt Service on Subordinate Obligations [G] 24,716,795 40,381,610 41,023,228 41,242,733 41,244,441 41,242,769 41,245,971 41,247,090 LESS: Available PFC Revenues Existing PFC authorizations (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Expected PFC authorizations - LOI Bonds (670,025) (2,739,182) (2,744,324) (2,740,422) (2,736,995) (2,743,028) (2,741,775) (2,742,616) Expected PFC authorizations - PFC Bonds (6,954,960) (21,514,614) (21,514,614) (21,654,614) (21,642,124) (21,644,901) (21,662,144) (21,628,049) LESS: Available Grant Revenues (9,885,671) (7,815,466) (7,815,466) (7,815,466) (7,815,466) (7,815,466) (7,815,466) (7,815,466) Accrued Debt Service of Sr. & Sub. Obligations [H = D + G] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 42,482,839 $ 59,556,452 $ 59,558,770 $ 62,816,094 $ 62,802,611 DEBT SERVICE COVERAGE (>1.10) F / H DEBT SERVICE COVERAGE w/o Transfer A / H Source: Jacobs Consultancy.

220 Exhibit H-3 Scenario Analysis: Low Traffic with $4.50 PFC Debt Service Coverage and Rate Covenant Sacramento County Airport System (for the Fiscal Year ending June 30) This exhibit is based on information from the sources indicated and assumptions provided by, or reviewed with and approved by, Airport System management, as described in the accompanying text. Inevitably, some assumptions used to develop the forecasts will not be realized and unanticipated events and circumstances could occur. Therefore, the actual results will vary from those forecast, and the variations could be material. Forecast DBO 1 DBO Rate Covenant per Section 6.04 (b)(i) Revenues $ 151,407,860 $ 158,584,725 $ 161,673,593 $ 191,418,595 $ 215,638,467 $ 221,329,082 $ 230,414,880 $ 236,736,151 Operating Expenses (107,971,779) (97,118,239) (100,364,454) (111,408,687) (123,264,356) (129,356,365) (135,536,126) (141,488,354) Net Revenues [A] $ 43,436,081 $ 61,466,486 $ 61,309,139 $ 80,009,908 $ 92,374,111 $ 91,972,717 $ 94,878,754 $ 95,247,797 Transfer [B = D * 25%] 4,358,401 4,773,593 4,806,113 11,765,748 17,480,769 17,480,126 18,297,327 18,287,513 Net Revenues + Transfer [C = A + B] $ 47,794,483 $ 66,240,079 $ 66,115,252 $ 91,775,655 $ 109,854,881 $ 109,452,843 $ 113,176,081 $ 113,535,310 Accrued Debt Service on Senior Obligations [D] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 47,062,990 $ 69,923,077 $ 69,920,503 $ 73,189,308 $ 73,150,052 A-132 DEBT SERVICE COVERAGE (>1.25) C / D DEBT SERVICE COVERAGE w/o Transfer A / D Rate Covenant per Section 6.04 (b)(ii) Net Revenues [A] $ 43,436,081 $ 61,466,486 $ 61,309,139 $ 80,009,908 $ 92,374,111 $ 91,972,717 $ 94,878,754 $ 95,247,797 Transfer [E = H * 10%] 1,743,361 1,909,437 1,922,445 4,706,299 6,992,308 6,992,050 7,318,931 7,315,005 Net Revenues + Transfer [F = A + E] $ 45,179,442 $ 63,375,923 $ 63,231,584 $ 84,716,207 $ 99,366,419 $ 98,964,767 $ 102,197,685 $ 102,562,802 Accrued Debt Service of Senior Obligations [D] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 47,062,990 $ 69,923,077 $ 69,920,503 $ 73,189,308 $ 73,150,052 Debt Service on Subordinate Obligations [G] 27,378,521 32,745,769 33,388,263 33,607,227 33,608,492 33,607,898 33,609,943 33,612,580 LESS: Available PFC Revenues Existing PFC authorizations (7,206,139) (8,312,349) (8,948,824) (9,032,231) (9,049,856) (9,039,374) (9,026,586) (9,060,959) Expected PFC authorizations - LOI Bonds (3,331,752) (3,332,560) (3,326,134) (3,282,390) (3,227,523) (3,179,895) (3,120,875) (3,064,752) Expected PFC authorizations - PFC Bonds (6,954,960) (11,217,743) (11,217,743) (11,357,743) (11,345,253) (11,348,031) (11,365,273) (11,331,178) LESS: Available Grant Revenues (9,885,671) (9,883,117) (9,895,562) (9,934,862) (9,985,859) (10,040,598) (10,097,209) (10,155,691) Accrued Debt Service of Sr. & Sub. Obligations [H = D + G] $ 17,433,606 $ 19,094,371 $ 19,224,450 $ 47,062,990 $ 69,923,077 $ 69,920,503 $ 73,189,308 $ 73,150,052 DEBT SERVICE COVERAGE (>1.10) F / H DEBT SERVICE COVERAGE w/o Transfer A / H Source: Jacobs Consultancy.

221 APPENDIX B COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR FISCAL YEARS ENDED JUNE 30, 2006 AND 2007 AND CERTAIN UNAUDITED FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006

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223 ComprehensiveAnnualFinancialReport Forthe SacramentoCountyAirportSystem ADepartmentoftheCountyofSacramento,California FortheFiscalYearsEnded June30,2007and2006 Preparedby: SacramentoCountyAirportSystem FinanceandAdministrationDivision PatriceDutcher,CPA ChiefofAccounting ClaireStetson AccountingManager

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225 SacramentoCountyAirportSystem TableofContents FortheFiscalYearsEndedJune30,2007and2006 Page INTRODUCTORYSECTION AIRPORTLOCATIONSANDSERVICEAREA...3 CERTIFICATEOFACHIEVEMENT...4 TRANSMITTALLETTER...5 ORGANIZATIONALCHART...14 LISTOFPRINCIPALOFFICIALS...15 FINANCIALSECTION INDEPENDENTAUDITOR SREPORT...18 MANAGEMENT SDISCUSSIONANDANALYSIS(REQUIREDSUPPLEMENTALINFORMATION)...20 BASICFINANCIALSTATEMENTS: StatementsofNetAssets...26 StatementsofRevenues,ExpensesandChangesinNetAssets...27 StatementsofCashFlows...28 NotestotheBasicFinancialStatements...30 STATISTICALSECTION NETASSETS...51 CHANGESINNETASSETS...52 TOTALANNUALREVENUESANDTOTALANNUALEXPENSES...54 SCHEDULEDAIRLINESRATESANDCHARGES...56 SCHEDULEDAIRLINESCOSTPERENPLANEDPASSENGER...57 DEBTSERVICECOVERAGE...58 RATIOOFANNUALDEBTSERVICETOTOTALEXPENSES...59 DEBTPERENPLANEDPASSENGER...59 OUTSTANDINGDEBT...60 SERVICEAREAPOPULATION...61 POPULATION/PERSONALINCOME...62 PRINCIPALEMPLOYERSFORTHECOUNTYOFSACRAMENTO...63 ACTIVITYSTATISTICS...64 MAJORCARRIER/REGIONALAIRLINESERVICE...65 PRINCIPALCUSTOMERS...67 AIRPORTSYSTEMEMPLOYEES...67 BONDDISCLOSURESECTION ANNUALREPORT...70 HISTORICALENPLANEDPASSENGERS...72 AIRLINEMARKETSHARESOFENPLANEDPASSENGERS...73 AIRPORTSYSTEMSCHEDULEDAIRLINES...74 MAINTENANCEANDOPERATIONEXPENSES...74 HISTORICALAIRCRAFTLANDEDWEIGHT...75 AIRLINEMARKETSHARESOFAIRCRAFTLANDEDWEIGHT...76 AIRLINEANDNONAIRLINEREVENUES...77 APPLICATIONOFAIRPORTREVENUES...78 AUTHORIZEDPFCAPPLICATIONS...79

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227 INTRODUCTORY IntroductorySection Thissectioncontainsthefollowingsubsections: AirportLocationsandServiceArea CertificateofAchievement TransmittalLetter OrganizationalChart ListofPrincipalOfficials SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

228 INTRODUCTORY IntentionallyBlank SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

229 AirportLocationsandServiceArea SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

230 SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

231 County Executive Terry Schutten Sacramento County Airport System G. Hardy Acree, Director of Airports County of Sacramento Sacramento International Airport Mather Airport Executive Airport Franklin Field December6,2007 ToThePublic: TheComprehensiveAnnualFinancialReportfortheSacramentoCountyAirportSystem(AirportSystem), forthefiscalyearsendedjune30,2007and2006,isherebysubmitted.responsibilityforboththeaccuracy ofthedata,andthecompletenessandfairnessofthepresentation,includingalldisclosures,restswiththe Airport System. To the best of our knowledge and belief, the enclosed data are accurate in all material respects and are reported in a manner designed to present fairly the financial position and results of operations of the funds of the Airport System. All disclosures necessary to enable the reader to gain an understandingoftheairportsystem sfinancialactivitieshavebeenincluded. The Government Finance Officers Association (GFOA), under its certificate program, requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management s Discussion and Analysis (MD&A). This letter of transmittal is designedtocomplementmd&aandshouldbereadinconjunctionwithit.theairportsystem smd&acan befoundpriortothereportoftheindependentauditor. TheCountyofSacramentoisrequiredtoundergoanannualsingleauditinconformitywiththeprovisions ofthesingleauditactamendmentsof1996andu.s.officeofmanagementandbudgetcirculara133, AuditsofStates,LocalGovernmentsandNonprofitOrganizations. TheAirportSystem,asadepartment of the County, is included in the scope of the County s audit. Information related to this single audit, includingthescheduleofexpendituresoffederalawards,findingsandquestionedcosts,andindependent auditor sreportoninternalcontrolsandtestsofcompliancewithapplicablelaws,regulations,andcontracts andgrantsisincludedinthecounty scomprehensiveannualfinancialreport. PROFILEOFTHEGOVERNMENT TheAirportSystemwascreatedbySacramentoCountyCodein1963asadepartmentwithintheCountyof Sacramento.ThepurposeoftheAirportSystemistoprovidefortheefficientplanning,developmentand operation of public air transportation facilities in Sacramento County and adjoining areas. The Airport SystemservestheSacramentoArea,asixcountyprimaryareaconsistingofSacramento,ElDorado,Placer, Yuba,Sutter,andYolocounties,aswellasalargesecondaryareasurroundingtheprimaryarea.Inaddition topromotingtheefficientuseanddevelopmentofairtransportation,theairportsystemisresponsiblefor assuringresidents of Sacramentoand the immediate surrounding areas of minimal environmentalimpact fromairnavigationandtransportation. TheAirportSystemconsistsofSacramentoInternationalAirport(International),ExecutiveAirport,Mather Airport, and Franklin Field. International is the principal air carrier airport serving the County of Sacramento and a wide region surrounding the County. Executive Airport is a general aviation reliever airportwithnoscheduledairlineservice.matherairportservesasanaircargoandgeneralaviationfacility. FranklinFieldisageneralaviationrelieverairstripusedprimarilyfortraining. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

232 INTRODUCTORY ECONOMICCONDITIONSANDOUTLOOK Thenationwidedemandforaviationisafunctionofdomesticandforeignpopulationandeconomicgrowth, airlineindustrydevelopments,andairportandairspacecapacity.airlinetrafficatairportsthatprincipally service origindestination passengers is most responsive to local economic and population growth. As a predominantly origindestination mediumhub airport, International is dependent upon the regional economyandpopulationforthetravelerswhoproduceitsrevenuebase. Population Continued expansion of passenger trafficat International isa result of thegrowing number of businesses andpeoplerelocatingtothegreatersacramentoregion(eldorado,placer,sacramento,sutter,yolo,and Yuba counties) along with the ongoing increase in air service being offered. Almost 2.3 million people residedinthegreatersacramentoregionin2006,anincreaseofapproximately224,000residentssince2002. TheGreaterSacramentoRegion spopulationisexpectedtogrowto2.4millionby2010andisexpectedto surpassthegrowthrateofnearlyallothermetropolitanareasincaliforniaaswellasthestateingeneral. Employment EmploymentopportunitiescontinuetohelpstimulatepopulationgrowthintheGreaterSacramentoRegion. Despite statewide and national economic instability over the past four years, nonfarm employment opportunitiesinthegreatersacramentoregionincreasedbyover32percentsince1994toalmost900,000 jobs according to the Sacramento Area Commerce and Trade Organization (SACTO). The stability is partiallyattributedtotheavailablelaborforceandthelocationofthecaliforniastatecapitolintheheartof theregion. Government employment, the largest single employment sector in the Greater Sacramento Region, comprises over 26 percent of the region s employment (232,000 jobs in 2004). Federal, State, and local agenciesallrequireawidevarietyofskillstokeeptheregionandstaterunning. AccordingtoSACTO,TransportationandUtilitiesisthesecondlargestsector(17percent)ofemploymentin thegreatersacramentoregion.itisfollowedbytheprofessionalandbusinessservicessector(11percent). Growth in the Professional andbusiness sector(43percent) issecond only to growth in the Construction sector(132percent). Housing Affordable housing is a major attraction for businesses and the workers they employ. According to the CaliforniaAssociationofRealtors,themedianpriceforasinglefamilyhomeinSacramentoCountyinMay 2007 was $349,500. The California median price for a single familyhome was $591,180 during the same month,demonstratingthecounty saffordabilityincomparisontothestateasawhole. BusinessGrowth TheGreaterSacramentoRegionisoneofthemostattractivelocationsinwhichtodobusinessinthewestern UnitedStates.Fewinlandmetropolitanareascanboastamajorairport,anairportspecializingprimarilyin air cargo, a deepwater port, a transcontinental rail line and several interstate freeways. Comparatively inexpensivebusinesscosts,plentifulskilledlabor,abundantwatersupply,qualityoflifeandproximityto thesanfranciscobayareacreateanoutstandingbusinessclimate. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

233 INTRODUCTORY The Greater Sacramento Region also continues to benefit from business relocation and expansion. Many largecomputerandelectronicscompaniesrelocatedtothearea.thesecompaniesinclude:intelcorporation (6,500 employees), HewlettPackard (4,000 employees), and Electronic Data Systems (2,015 employees). Biotechnologyandhealthcarecompaniesarealsobeginningtodevelopinthearea. AccordingtoSACTO,over100companiesthathavesomeoralloftheirbusinessactivitiesinvolvedinthe biotech industry are presently located in the Greater Sacramento Region. These companies include Affymetrix,Lipomics,CalgeneLLC,NovozymesBiotechinc.,andVolcanoTherapeutics.Oneoftheregion s advantages in this sector is the proximity to the University of California, Davis and UC Davis Medical Center,whichhaverespectedandsuccessfulbiotech,agricultural,andmedicalprogramsincludingresearch anddevelopment. AirService An integral component in a region s economic growth is the availability of accessible, affordable, and convenient air transportation service. International Airport, as the chief point of entry for many of the Greater Sacramento Region s business, government, and leisure travelers, as well as some air cargo shipments,iswellsuitedtomeetthesedemandsforeconomicactivity. PassengerTraffic During fiscal year 2007, total passengers increased 3.1 percent at International, assisted in part by the additionofnonstopservicetokeymarkets.almost10.3milliontotalpassengers(enplaninganddeplaning) choseinternationalduringfiscalyear2007. FourteenmajorcarriersservingSacramentohadover170dailydeparturesinJune2007,withUnitedExpress a regional carrier adding 15 flights to that number. The busiest carrier at International is Southwest Airlines (82 daily nonstop flights), followed by United Express (15 daily nonstop flights), Express Jet (13 dailynonstopflights),unitedairlines(12dailynonstopflights),andu.s.airways(9dailynonstopflights). Approximately119,000operations(takeoffsandlandings)occurredatInternationalduringfiscalyear2007 onparallelrunwaysthatcanaccommodateupto400,000operationsperyear. ApproximatelytwothirdsofthepassengertrafficatInternationalisconcentratedinthe12gateTerminalA. Theterminalhasanultimatebuildoutpotentialof22gates.SouthwestAirlines,servingoverfivemillion passengersinfiscalyear2007,comprisesthemajorityofpassengertrafficinterminala.usairways,the airport s thirdlargest carrier, served over 600,000 passengers in fiscal year Other airline tenants in TerminalAincludeAirCanadaJazz,DeltaandHawaiianAirlines. The 14gate Terminal B complex houses United Airlines, the second largest carrier at International (more than 900,000 passengers) and Alaska Airlines, the fifthlargest carrier (over 500,000 passengers). Other airlinetenantsinterminalbincludeamerican,continental,expressjet,horizon,jetblue,aloha,frontier, andmexicana. Passenger traffic at International is expected to increase over the coming years with the addition of new carriers, additional flights, and the execution of the Sacramento International Airport Master Plan and Terminal Modernization Program that will enable International to be positioned to handle growth effectively. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

234 INTRODUCTORY AirCargoTraffic Air cargo is comprised of airfreight and airmail. Airfreight services facilitate business activity for many sectorsinthesacramentoareaincludingthefollowing:banking,computer,entertainment,healthcare,high technology, and telecommunications. Local companies that are supported by airfreight activity include American Express, Bank of America, Corporate Express, HewlettPackard, IBM, Intel, Lucent, NEC Electronics and Oracle, as well as the U.S. Postal Service. In addition, growth of online purchasing has increasedthenumberofcustomerswhoutilizeairfreightonaregularbasis.suchactivitiesaredrivingthe demand for shipments of justintime airfreight, a business strategy that has helped companies decrease inventorytosalesratiosandimprovecustomerservice. Duringfiscalyear2007,airlinesandfreightonlycarrierstransportedover313millionpoundsofaircargo (airfreightandairmailcombined)throughbothmatherairportandinternational,comparedto281million poundsthepreviousyear. Master Plan 2020 OnFebruary17and24,2004theSacramentoCountyBoardofSupervisorsdirectedtheCounty sdepartment ofenvironmentalreviewandassessmenttoinitiatetheenvironmentalreviewprocessonthedraftsofthe MatherAirportMasterPlanandSacramentoInternationalAirportMasterPlanandTerminalConceptE2for therecommendedterminalmodernizationprogram,respectively.sacramentocountyairportsystemstaff andconsultantsworkedwiththecommunitythroughanextensiveseriesofpublicworkshopsandmeetings during the master planning process. Future demands for service at each airport were assessed and alternativesfornewandexpandedfacilitiesweredevelopedandevaluatedineachmasterplan. The Sacramento International Airport Master Plan work effort was temporarily suspended following September11,2001andresumedDecember2002.Thecompleteddraftofthemasterplanenteredthedesign phase mid fiscal year The County Board of Supervisors approved the Sacramento International AirportMasterPlanonAugust7,2007andcertifiedthattheFinalEnvironmentalImpactReportrequiredby the California Environmental Quality Act (CEQA) is adequate and complete. The Airport System now awaits final environmental review by the federal government in accordance with the National EnvironmentalProtectionAct(NEPA)beforebeginningconstruction.TheplanpreparesInternationalfor thefuturewithathreephasedcapitalimprovementprogram(cip)thathasananticipatedcompletiondate of Nearterm and immediateterm plans include airfield improvements and the construction of the newterminalcomplexwithexpectedcompletionin2011. TheMatherAirportMasterPlanbeganJune2001andalsowasaffectedbytheeventsofSeptember11,2001, buthasenteredtheenvironmentalreviewphase.thedraftplanincludesextensionofthenorthrunway. UponcompletionoftheenvironmentalreviewprocessforMatherAirport,theBoardofSupervisorswilltake formalactiontoapprovethemasterplan. FutureConstruction TheAirportSystem s$635millioncipforfiscalyear2008isanticipatedtobefinancedbyretainedearnings, airport revenue bonds, Passenger Facility Charge revenues, and federal and State grants. The program s priorities are based on public safety, regulatory requirements, customer service and operational enhancements. A new CIP for fiscal years has been developed, with an estimated cost of approximately $1.3 billion. The largest component of the CIP, the new Terminal Modernization Program, is currently undergoing federal review for environmental impact. Future bond issues together with other funding sources such as Passenger Facility Charge proceeds, federal grants and Airport System cash flows from operationswillbeusedforthenewterminalprogram. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

235 INTRODUCTORY MAJORINITIATIVES During fiscal year 2007, certain facility expansion and upgrade projects at International proceeded to a limiteddegreependingcompletionofenvironmentalreviewoftheairport sdraftmasterplanandterminal Concept E2 for the recommended Terminal Modernization Program. Projects the Airport System did undertakeincluded:eastapronexpansion,addinganewtaxiway(c3)andreconstructingtaxiwayc2,air cargobuildingreroof,conceptualdesignofcertainelementsoftheterminalmodernizationprogram,i5 Airport Boulevard landscaping, Prichard Lake restoration and mitigation plan, Mather Hangar upgrades andexecutiveaprontiedownandhangarpavementrehabilitationandnorthcommercialramppavement improvements. Project Financing The primary funding sources for capital outlay expenses during fiscal year 2007 were AirportSystemcashflowsfromoperations,FederalAviationAdministration(FAA)AirportImprovement Program(AIP)grants,proceedsfromtheSeries1992and2006RevenueBonds,andPFCrevenues. TheAirportSystemreceived$12.7millioninfederalAIPgrantfundsforprojectsatInternational,Executive, Franklin Field, and Mather airports. In addition, the Airport System has received $0.69 million in State matchinggrantsandothermiscellaneousintergovernmentalfunds.fundingfromthesegrantswasusedto help finance apron and runway rehabilitation, preparation of an environmental assessment for the Draft Master Plan and Terminal Concept E2 for the recommended Terminal Modernization Program at InternationalAirport,airfieldimprovementprojectsatExecutive,preparationoftheExecutiveAirportand Franklin Field Master Plans, Mather Airport taxiway and runway rehabilitation, and Hangar 4260 improvementsatmather. BeginningApril1,1993,theAirportSystemwasauthorizedbytheFAAtoadda$3.00PassengerFacility Charge (PFC) to the price of all tickets purchased for travel out of International. PFCs are imposed on enplanedpassengersbyairportoperators collectedbyairlines forthepurposeofgeneratingrevenuefor airportprojectsthatincreasecapacity,increasesafetyormitigatenoiseimpact.onoctober31,2001,asa resultoftheairportsystem srequesttoincreasethefee,thefaaauthorizedtheairportsystemtoincrease the $3.00 fee to $4.50 per enplaned passenger, but only for certain eligible projects. This increase was approvedthroughfebruary1,2003,atwhichtime theratereturnedto$3.00perenplanedpassenger.on June25,2003,theFAAapprovedtheAirportSystem srequesttoincreasethelevelto$4.50ontheremaining eligibleprojects,effectiveseptember1,2003. TheAirportSystemhasreceivedapprovalfromtheFAAforPFCapplicationsauthorizing$285millionin PFCcollections.TomaximizePFCfinancingpotential,theAirportSystemobtainedFAAauthoritytoissue PFCbackedbonds,forwhichPFCreceiptscouldbeusedforrepayment.TheAirportSystemalsoreceived FAAauthorityinMarch2000tousePFCreceiptsforpartialrepaymentofrevenuebonddebtservicerelating toeligibleconstructioncostsofterminala.injuly1996,theairportsystemissued$57.3millioninpfcand SubordinatedRevenueBonds,theproceedsofwhichfinancedtheprojectsapprovedunderPFCapplication numbers4and5. Duringfiscalyear2007,theAirportSystemreceived$27.2millioninPFCreceipts,bringingthetotalPFC receiptsandinterestreceivedundertheapprovedapplicationsto$214.5million.infiscalyear2007,pfc revenues provided full or partial funding for: Terminal B rehabilitation, apron and runway 16R34L rehabilitation,andbonddebtservicepayments. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

236 INTRODUCTORY Concession Program Concession revenues derived from retail and food/beverage operations located in airportterminalfacilitieshavegrowntorepresentamajorsourceofnonairlinerevenues,contributingtothe financingofairportoperations.spaceinterminalawasdesignedtomaximizeconcessionservicesoffered toairportcustomerswhilemaximizingrevenuetotheairportsystem.terminalaincludesapproximately 25,000squarefeetofspaceforretailandfood/beverageconcepts.Thisincludesa13,000squarefoot,mall likeretailcenterthatcontainssevenshops:pgatourgolfshop,nelson sbooksandnews,kidzoo,details women s accessories, Capital Marketplace gifts and souvenirs, Hometown Favorites, InMotion and the recent addition of Vino Volo. Also included is a 12,000 squarefoot food court with a wide range of food choices.foodcourtrestaurantsincludeburgerking,californiapizzakitchen,capitolbrewingcompany, Cinnabon,LaSalsa,ManchuWok,Starbuck scoffeeandtcbytreats.javacityandhometurfbarare situatedatotherlocationsthroughouttheterminal. During fiscal year 2007 gross sales for Terminal A retail shops were $8,797,178, providing $979,280 in concessionrevenuestotheairportsystem.duringfiscalyear2007,grosssalesforterminalafood/beverage outletswere$15,041,529,providing$2,261,001inconcessionrevenuestotheairportsystem. Duringfiscalyear2007,grosssalesforTerminalB1andB2retailshopswere$3,384,571,providing$412,233 in concession revenues to the Airport System. Gross sales for Terminal B1 and B2 food/beverage outlets were$8,076,043,providing$973,541inconcessionrevenuestotheairportsystem. Tospurconcessionsales,a streetpricing policyisinplacetokeepbothfoodandmerchandisepricesat InternationalcomparabletothoseatsimilarstoresandrestaurantsintheSacramentoarea.Theconcession fees received from the concession program are increasing the revenue base of the Airport System, a self supportingenterprise. Air Quality Improvements During fiscal year 2007, the Airport System continued its efforts to reduce emissionsthroughtheuseofvehiclespoweredbycleanfuelsatinternational.in2001,thefaaannounced that it would fund up to $2 million for the Inherently LowEmission Airport Vehicle (ILEAV) program, designedtosubstantiallyreduceozoneandcarbonmonoxidelevelsatinternational.thisprogramhasbeen replacedbythevoluntaryairportlowemissionprogram(vale).inaddition,acompressednaturalgas (CNG)refuelingstationisonlineatInternationaland25CNGbuseshavebeenpurchasedinthelastfive years. The ongoing operation of International s consolidated rental car facility reduces roadway congestion and vehicleemissions(beforethenewrentalcarfacilityopenedeachcompanyprovidedindividualshuttlebus serviceforitscustomerstoandfromtheterminalfacilities).twosolarphotovoltaicarrays whichcreate emissionfreeelectricitydirectlyfromthesun arenowinoperation.allofinternational sjetbridgesnow featureelectricpower,eliminatingtheneedforaircrafttoutilizepollutingauxiliarypoweredunits. ExecutiveAirport TheongoingfocusatExecutivewillcontinuetobeinfrastructureimprovementsinorder toensuretheoperationalandfinancialviabilityoftheairport. MatherAirport Theprimaryfocusisonaircargo,whilealsoservinggeneralaviationusers. Cargocarriersshippedover155millionpoundsoffreightthroughMatherinfiscalyear2007.Othertenants at Mather include government agencies, an aviation law firm, afixed Base Operator (FBO), a fullservice aviation flight school, a rental car agency, a fullservice aircraft maintenance facility, two major air cargo companiesandcontractedaircargofeederaircraft.. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

237 INTRODUCTORY ComparedtoInternational,Matherofferscargocarrierslowercostsandmorespaciousfacilities,including longerrunwaysandmorecargo,warehouseandofficespace.atinternational,therampspaceutilizedby formercargocarriersthathaverelocatedtomatherisprovidingextracapacitytomeetthegrowingdemand forpassengeraircarriertransportationinthesacramentoarea. Future Fiscalyear2007wasanotheryearofgrowthintermsofpassengerswitha3.1%increaseover2006. During fiscal year 2008, the Airport System will work to continue development and expansion of airline service to existing and new locations, including Philadelphia and Charlotte on the East Coast as well as Calgary,CanadaandCancun,Mexico.AkeygoalwillalsobetomaintaintheAirportSystem scommitment to providing excellent service to customers while continuing to be a good neighbor to the surrounding community. FINANCIALINFORMATION ManagementoftheAirportSystemisresponsibleforestablishinginternalcontrolsdesignedtoensurethat the assets of the Airport System are protected from loss, theft or misuse and to ensure that adequate accounting data are compiled to allow for the preparation of financial statements in conformity with accountingprinciplesgenerallyacceptedintheunitedstates.theinternalcontrolsaredesignedtoprovide reasonable,butnotabsolute,assurancethattheseobjectivesaremet.theconceptofreasonableassurance recognizes that: (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuationofcostsandbenefitsrequiresestimatesandjudgmentsbymanagement. For financial accounting purposes and in compliance with Governmental Accounting Standards Board Pronouncements,theSacramentoCountyAirportSystemisaccountedforasaselfsufficiententerprisefund withinthecountyofsacramento.theairportsystem saccountingrecordsaremaintainedusingtheaccrual basisofaccounting. Single Audit As a recipient of federal funds and state financial assistance, the Airport System also is responsibleforensuringthatadequateinternalcontrolsareinplacetoensurecompliancewithapplicable lawsandregulationsrelatedtothoseprograms.theseinternalcontrolsaresubjecttoperiodicevaluationby managementandtheinternalauditstaffofthecounty. AspartoftheCounty ssingleaudit,testsaremadetoevaluatetheeffectivenessofcertaininternalcontrols, includingthatportionrelatedtofederalawardprograms,aswellastodeterminethattheairportsystem hascompliedwithapplicablelawsandregulations.the singleauditiscompletedandtherewere no noted significant deficiencies in the Airport System s internal controls or significant violations of applicable laws and regulations. The fiscal year audit is in progress and is anticipated to be completedinthespringof2008. TheAirportSystemwasauthorizedtoimposeaPassengerFacilityCharge(PFC)atInternationaleffective April1,1993.LegislationauthorizingthecollectionofPFCsrestrictsuseofPFCrevenuetoacquisitionof specifiedassetsandprescribesreportingandcontrolrequirements.atleastannuallyduringtheperiodin whichthepfciscollected,held,orused,theairportsystemmustprovideforanauditofitspfcaccounts. Theauditmustbeconductedbyanindependentcertifiedpublicaccountant.Thescopeoftheauditmust includeevaluationoftheairportsystem sinternalaccountingcontrolstoaccountforthecollectionanduse of PFCs. The auditor must also issue an opinion on whether the quarterly reports fairly represent the transactionswithinthepfcaccounts.theauditcanbeperformedseparatelyforthepfcaccount,oraspart ofthesingleaudit.forfiscalyear2007,theauditoftheairportsystem spfcaccountswasperformedasa separateaudit.theauditiscompletedandtherewerenonotedmaterialweaknessesintheairportsystem s internalaccountingcontrolsorinstancesofnoncompliancewithapplicablepfcregulations. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

238 INTRODUCTORY Budgetary Controls The Airport System prepares an annual budget to serve as an approved plan for operational control and performance evaluation. State law does not require the formal adoption of an appropriated budget for government enterprise activities. Each year the Airport System prepares an operationsbudgetandacapitalbudget,whichispresentedtothecountyboardofsupervisorsforreview andapproval.thebudget,asapprovedbytheboard,servesastheairportsystem sbasisforoperations. The Airport System and County impose controls that require the use of requisitions, purchase orders, contracts and specific approval for purchases of goods and services. Procedures have been established whichverifyexpensesandensurebudgetedamountsarenotexceeded.monthlycomparisonsofactualto budgetedrevenuesandexpensesmayidentifysignificantvariancesthatwouldrequiretheairportsystem totakecorrectiveaction. CertainAirportSystembudgetaryandreportingproceduresarestipulatedintheRateOrdinanceadopted September26,2000,andtheairlineagreement.ThebudgetaryandreportingproceduressetforthintheRate Ordinanceparallelthoseproceduresagreedtoinnegotiationswiththeairlinesandcontainedintheairline agreement.therateordinancedefinesthecostbaseandthemethodologytobeusedinthecalculationof airlinerentalrates,feesandcharges. CashManagement AllAirportSystemcashandinvestmentsaremaintainedintheCountyTreasurer spool andfiscalagentpool.thecountytreasurerisresponsibleformanagingtheinvestmentofpooledcashfund resources. Cashtemporarilyidleduringtheyearwasinvestedincertificatesofdeposit,timecertificates,moneymarket funds,commercialpaper,repurchaseagreements,bankers acceptances,mediumcorporatenotesandu.s. Treasury investments. The average yield on investments during fiscal year 2007 was 5.05 %. This is comparabletoyieldratesof5.01%foroneyearu.s.treasurynotesduringthesameperiod. TheCounty sinvestmentpolicyistominimizecreditandmarketriskswhilemaintainingacompetitiveyield on its portfolio. Accordingly, bank balances were either insured by the federal deposit insurance corporation, for accounts less than $100,000, or collateralized. During the fiscal year, all collateral on depositswasheldeitherbythecounty,itsagentorafinancialinstitution strustdepartmentinthecounty s name. Risk Management The County maintains allrisk blanket property insurance coverage, which provides limitsofliabilityof$1.471billionperoccurrenceannually.thispolicycoversrealandpersonalpropertyof theairportsystemandcontainsadditionalboilerandmachinerycoverageintheamountof$100millionper occurrence annually. The Airport System, through the County, maintains an airport operations and hangarkeepersliabilityinsurancepolicy,whichprovideslimitsofliabilitycoverageforupto$500million annually.currentpremiumchargesareexpensedintheyearincurred. The Airport System participates in the County s selfinsurance program for crime, pollution, workers compensationandunemploymentclaims.annualpremiumsarebasedprimarilyuponclaimsexperience. Currentpremiumsarechargedtoexpenseintheyearincurred. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

239 INTRODUCTORY AWARDSANDACKNOWLEDGEMENTS Independent Audit The financial statements of the Sacramento County Airport System are audited each yearbyanindependentcertifiedpublicaccountant.theaccountingfirmofmaciasgini&o Connell,LLP was selected to perform the fiscal year 2007 audit. The independent auditor s report on the financial statementsisincludedinthefinancialsectionofthisreport. Awards TheGovernmentFinanceOfficersAssociationoftheUnitedStatesandCanada(GFOA)awardeda CertificateofAchievementforExcellenceinFinancialReportingtotheSacramentoCountyAirportSystem for its comprehensive annual financial report for the fiscal year ended June 30, The Certificate of Achievement is a prestigious national awardrecognizing conformance with the highest standards for preparationofstateandlocalgovernmentfinancialreports. InordertobeawardedaCertificateofAchievement,agovernmentunitmustpublishaneasilyreadableand efficientlyorganizedcomprehensiveannualfinancialreport,whosecontentsconformtoprogramstandards. Suchareportmustsatisfybothgenerallyacceptedaccountingprinciplesandapplicablelegalrequirements. ACertificateofAchievementisvalidforaperiodofoneyearonly.TheSacramentoCountyAirportSystem hasreceivedacertificateofachievementforeachofthelast18years(fiscalyearsended ).we believe our current report continues to conform to the Certificate of Achievement Program requirements, andwearesubmittingittothegfoa. Acknowledgments The preparation of the Comprehensive Annual Financial Report on a timely and efficientbasiswasmadepossiblebythededicatedserviceofstaffintheaccountingsection.eachmemberof thesectionhasoursincereappreciationforthecontributionsmadeinthepreparationofthisreport. We also wish to thank staff of the Sacramento County Department of Finance for their cooperation and assistance.andinclosing,withouttheleadershipandsupportofthecountyexecutiveandtheboardof Supervisors,preparationofthisreportwouldnothavebeenpossible. SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

240 INTRODUCTORY SacramentoCountyAirportSystem OrganizationalChart SacramentoCountyAirportSystem 2007ComprehensiveAnnualFinancialReport 14

241 INTRODUCTORY SacramentoCountyAirportSystem ListofPrincipalOfficials AtJune30,2007 ELECTED: COUNTYBOARDOFSUPERVISORS RogerDickinson...District1 JimmieYee...District2 SusanPeters...District3 RobertaMacGlashan...District4 DonNottoli...District5 APPOINTED: TerrySchutten...CountyExecutive SACRAMENTOCOUNTYAIRPORTSYSTEM G.HardyAcree...DirectorofAirports LauraHawkeswood... InterimAirportChiefOperatingOfficer LisaJ.Stanton...ActingAirportChiefAdminstrativeOfficer Vacant...DeputyDirector,FinanceandAdministration CherylMarcell...DeputyDirector,MarketingandPublicRelations StevenL.Baird... DeputyDirector,InformationTechnologyandTelecommunications FrederickGreco...DeputyDirector,Maintenance LeonardH.Takayama... DeputyDirector,SpecialProjects Vacant...DeputyDirector,Operations PatriceA.Dutcher,CPA... ChiefofAccounting SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

242 INTRODUCTORY IntentionallyBlank SacramentoCountyAirportSystem 2007ComprehensiveAnnualFinancialReport 16

243 FINANCIAL FinancialSection Thissectioncontainsthefollowingsubsections: IndependentAuditorsReport Management sdiscussionandanalysis(unaudited) BasicFinancialStatements SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport

244 FINANCIAL SacramentoCountyAirportSystem ComprehensiveAnnualFinancialReport